NCLT Kochi: Sale of Corporate Debtor’s Property can’t be termed “fraudulent” merely on an unsupported claim of security interest

NCLT Kochi: Sale of Corporate Debtor’s Property can’t be termed “fraudulent” merely on an unsupported claim of security interest

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The National Company Law Tribunal (NCLT) Kochi Bench has held that a corporate debtor’s asset sale cannot be declared a fraudulent transaction under Section 66 of the Insolvency and Bankruptcy Code (IBC) merely because a creditor asserts a security interest—without placing cogent, contemporaneous evidence proving such security and the requisite fraudulent intent.

What the Tribunal decided

  • Mere assertion of “security interest” is insufficient to attack a sale as fraudulent under Section 66 IBC; the applicant must establish, with reliable documentation, the creation and existence of security (e.g., registered charge, perfected lien) and demonstrate fraudulent intent or knowing participation in carrying on business to defraud creditors.
  • Section 66 carries no statutory presumption; unlike Section 43 (preferential transactions), Section 66 demands proof of intent to defraud, which cannot rest on doubts, surmises, or a bare forensic observation without corroborating material.
  • If the grievance truly concerns priorities or treatment of a claimed security, the appropriate route may lie under Sections 43–51 (preferential, undervalued, extortionate) or through the liquidation framework (Section 52, verification of security interest), rather than stretching Section 66.

Why the claim failed

  • No adequate proof of security interest: The applicant did not furnish convincing evidence of a duly created and perfected security over the asset that was sold (e.g., registered charge or other verifiable encumbrance aligned with statutory requirements and records).
  • Higher evidentiary burden under Section 66: The Kochi Bench reiterated that Section 66 requires clear proof that the business was carried on with intent to defraud or for a fraudulent purpose, and that persons were “knowingly parties” to such conduct; a forensic report or unsupported assertions do not suffice on their own.
  • Alternate statutory pathways exist: The Bench noted that transactions raising priority or preference concerns may be examined under Sections 43–46 IBC where presumptions and different tests apply, rather than invoking Section 66 without meeting its stricter mens rea threshold.

How the law frames “fraudulent” versus “avoidance” actions

  • Section 66 (fraudulent trading/wrongful trading): Requires proof of intent to defraud or knowledge of carrying on business for a fraudulent purpose; no legal presumption assists the applicant.
  • Sections 43–46 (preference/undervalued): Engage different elements and, in case of Section 43, include legal presumptions once ingredients are shown, without needing to prove fraudulent intent.
  • Practice point: Composite applications pleading Sections 43, 45, and 66 together risk conflating distinct tests; the Tribunal has cautioned that each ground needs its own pleading, evidence, and analysis.

Security interest claims: evidentiary expectations

  • Demonstrate creation and perfection: Registration of charge with ROC/CERSAI or other recognized proof; unregistered or belated filings are often fatal to “secured creditor” status in insolvency prioritization.
  • Show linkage to the specific asset: Identify the encumbered asset and trace how the asserted security attached; generic references in sanction letters or unsupported claims are typically inadequate.
  • Engage Section 52 processes in liquidation: A secured creditor seeking to stand outside liquidation must notify and have the liquidator verify security before realization; disputes on relinquishment or verification are resolved within that framework, not by stretching Section 66.

Consistency with broader jurisprudence

  • Kochi Bench has previously dismissed Section 66 applications where intent to defraud was not established and where forensic/transaction audit reports lacked corroboration, directing parties to appropriate avoidance routes if applicable.
  • Tribunals have also emphasized that unregistered charges generally cannot found secured status in CIRP/liquidation, aligning with NCLAT and Supreme Court-affirmed positions that non-registration precludes treatment as a secured creditor.

Practical takeaways

  • For applicants/RPs:
    • Choose the correct statutory tool—use Sections 43–46 for preferences/undervaluations; reserve Section 66 for cases where evidence shows fraudulent intent or knowing participation.
    • Substantiate security claims—file charge registrations, CERSAI extracts, ROC records, and asset-level linkage before seeking avoidance or injunctive relief.
    • Do not rely solely on forensic reports—corroborate with bank trails, board minutes, agreements, delivery/stock records, and independent confirmations.
  • For secured creditors:
    • Perfect charges promptly and keep records current; late or post-facto filings are unlikely to confer secured status in insolvency outcomes.
    • In liquidation, follow Section 52—notify, get verification, and proceed as per liquidator’s process; disputes on relinquishment or priority should be addressed in that channel, not via Section 66 shortcuts.
  • For tribunals:
    • Maintain the higher threshold under Section 66—require specific pleadings and proof of fraudulent intent, separate from avoidance frameworks.
    • Direct parties to the appropriate avoidance provisions where facts indicate preference/undervaluation rather than fraud.

In sum, NCLT Kochi underscored that alleging fraud in an asset sale demands hard evidence—both of a valid, perfected security interest and of fraudulent intent—beyond bare assertions; where the grievance is about priority or preference, the IBC provides specific routes that should be pursued with proper proof.

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