NCLAT Delhi Holds Fraudulent Account Transfer Not Financial Debt Under IBC, Dismisses Progfin's Appeal

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 30 June held that the mere disbursal of loan funds into a fraudulent bank account does not, by itself, create a binding financial debt under the Insolvency and Bankruptcy Code, 2016.

Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra dismissed Progfin Pvt. Ltd.'s appeal and upheld the National Company Law Tribunal's rejection of its Section 7 application against Ganesh Benzoplast Ltd. (GBL). The Bench held:

“We are inclined to agree with the Adjudicating Authority that mere advancement of monies by the Appellant to a third-party fraudulent account does not ipso facto qualify as a binding financial debt on the Corporate Debtor or the Corporate Guarantor.

In the present facts of the case since the surrounding circumstances resonates with an element of fraud permeating the banking transactions, the Adjudicating Authority cannot be said to have committed any error in denying simpliciter admission of the Section 7 application.”

Progfin, a non-banking financial company and subsidiary of Desiderata Impact Ventures Pvt. Ltd., claimed that it had extended working capital facilities of Rs. 10 crore, later enhanced to Rs. 15 crore, to GBL Chemical Ltd., a subsidiary of GBL.

According to Progfin, the facilities were backed by board resolutions, a corporate guarantee executed by GBL and personal guarantees furnished by directors Ramakant Pilani and Rishi Pilani. It claimed that the loan amount was disbursed into an SBI account in the name of the corporate debtor and that partial repayments were subsequently made.

After alleging default, Progfin issued recall notices, invoked the corporate and personal guarantees and filed a Section 7 application against GBL as the corporate guarantor, contending that the twin requirements of debt and default stood satisfied.

The NCLT dismissed the application, holding that the alleged lending had not enured to the benefit of the corporate debtor and that the board resolutions relied upon by Progfin were fabricated.

Before the Appellate Tribunal, Progfin argued that the facility agreements and guarantees had been validly executed by Ramakant Pilani, who was a director of the corporate debtor and Chief Executive Officer of GBL.

It contended that the board resolutions authorised him to act, that the disbursements were made into the debtor's account and that the partial repayments acknowledged the liability. Further, it invoked the doctrine of indoor management, arguing that it was entitled to rely on Ramakant Pilani's ostensible authority to bind the corporate debtor and GBL.

GBL disputed these claims, submitting that the facility agreements and guarantees existed in multiple versions with differing dates, missing signatures and other discrepancies. It asserted that the board resolutions relied upon by Progfin were fabricated, as the company's records showed that no board meetings had been held on the dates mentioned.

It argued that Progfin was misusing the IBC's summary insolvency process to legitimise a non-existent transaction based on forged documents, noting that FIRs and civil proceedings alleging fraud had already been filed, and that mere advancement of money into a fraudulent third-party account could not constitute financial debt under the IBC.

The NCLAT noted that the record contained multiple versions of the facility agreement and corporate guarantee carrying inconsistencies in dates and signatures. It also found that the board resolutions relied upon by Progfin did not correspond with the company's statutory records, which showed that no board meetings had taken place on the relevant dates.

Further, it noted that GBL had filed FIRs and commercial suits alleging fraud before Progfin instituted the Section 7 proceedings. It held that these surrounding circumstances of alleged fraud constrained the NCLT's summary jurisdiction while examining the existence of debt and default under Section 7. The Bench observed:

“It is therefore entirely misconstrued and misconceived on the part of the Appellant to claim that the Adjudicating Authority had admitted that debt and default stood established in the present matter, and that since these essential twin ingredients stood met, the Section 7 petition ought to have been admitted and not rejected.”

The Bench also noted that the disbursal had been made into a fraudulent bank account opened without authority and that the funds were subsequently diverted to third parties.

Accordingly, the NCLAT upheld the NCLT's order dismissing Progfin's Section 7 application.