Collusion Allegations Alone Cannot Establish Fraudulent Insolvency Proceedings: NCLT Chandigarh

The National Company Law Tribunal (NCLT) in Chandigarh has held that allegations of collusion, related-party dealings, and disputes among shareholders or directors are not enough to establish that insolvency proceedings were initiated fraudulently.

A bench of Judicial Member Khetrabasi Biswal and Technical Member Kaushalendra Kumar Singh rejected an application filed by Dr Vijay Vohra, a promoter shareholder and director of A.P.J. Laboratories Ltd.

He had sought action against Himalaya Food International Ltd., alleging that the insolvency proceedings initiated by the company were fraudulent and driven by a malicious intent.

Explaining the scope of the law, the bench held: “Section 65 of the Code is a penal provision and can be invoked only where there is clear material to establish that insolvency proceedings were initiated fraudulently or with malicious intent for purposes other than insolvency resolution. Mere allegations of collusion, related party transactions, or internal disputes among shareholders/directors do not ipso facto satisfy the threshold under Section 65.”

Vohra alleged that the debt had been fraudulently engineered through collusive transactions and board resolutions. He also claimed that an employee of the financial creditor had briefly served as a director of the corporate debtor for execution of documents relating to the credit facility. According to him, material facts concerning the removal of charges over the company's assets had also been withheld.

The tribunal noted that Vohra did not dispute the transfer of funds from the financial creditor to the corporate debtor. It further recorded that the amounts had been reflected as long-term borrowings in the company's balance sheets over several financial years.

Referring to those disclosures, the bench observed, “The consistent reflection of the debt in statutory financial statements filed with the Registrar of Companies constitutes a clear acknowledgment of liability by the Corporate Debtor. Such acknowledgments, being public documents, carry evidentiary value in insolvency proceedings.”

The bench also noted that the loan agreement forming the basis of the transaction had never been challenged. Nor had it been declared void or invalid by any competent forum.

Another argument raised by Vohra was that the creditor and debtor were related parties because of common directors and family relationships. The bench held that this alone could not justify an inference of fraud.

“It is now well settled that related party financial transactions are not per se prohibited under the Code, provided the debt is genuine, disbursed, and remains due and payable,” the bench observed.

The tribunal found that no documentary evidence had been produced to substantiate the allegations of fraud. It also held that removal of a charge over assets does not automatically establish repayment or discharge of the underlying debt.

Finding that the allegations were unsupported by sufficient material, the bench dismissed the application.

For Applicant: Advocate Vishav Bharti Gupta

For Respondent: Advocates Aalok Jagga, Sahil Lohan, Aryaman Jagga, APS Madaan,