Fraud Proceedings Under IBC Cannot Be Turned Into 'Battlefield' For Private Disputes: NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi has recently observed that fraud proceedings under the Insolvency and Bankruptcy Code cannot be turned into a “battlefield” for settling private disputes or creating fresh controversies to prolong adjudication under the Code.

The observation came in a case concerning Section 66 of the Insolvency and Bankruptcy Code, which deals with fraudulent trading and transactions, where Resolution Professional K. Parameswaran Nair had alleged fraudulent trading and transactions by Samson and Sons Builders and Developers Private Limited.

The coram of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy observed, “The platform provided under Section 66 of the Insolvency and Bankruptcy Code, 2016, cannot be converted into a battlefield for settling private disputes amongst the respondents or for creating fresh controversies with a view to prolonging and warding off the adjudication of the issues arising under the Code.”

"The IBC is a special legislation founded upon a timebound and summary mechanism, and proceedings thereunder cannot be permitted to lose their statutory focus by permitting parties to enlarge the scope of the enquiry beyond what is necessary for deciding the application before this Adjudicating Authority.", it added.

The tribunal made the observation while allowing an application by Mohan Kumar and Sreekala Mohan to place additional documents on record in the pending proceedings. They were facing allegations in the main Section 66 proceedings concerning the Merryland Project and had denied the allegations, claiming to be bona fide purchasers.

The two sought to place several documents on record, including an agreement dated October 16, 2015, for purchase of an apartment in the “Samson and Sons Sanctuary–Vazhayila, Nightingale” project. They claimed to have paid ₹80 lakh under the agreement, with another ₹5 lakh payable when the apartment keys were handed over.

According to them, the project was later abandoned, and the amount was not refunded.

They claimed that the company later offered them alternative land in Kowdiar Village for ₹90.51 lakh, after which they paid another ₹10.51 lakh.

They also relied on land-tax and mutation records, along with an Income Tax Department letter concerning withdrawal of the attachment over the property.

The Resolution Professional initially disputed their claims, including the alleged 2015 agreement and ₹80 lakh payment. During the June 15 hearing, however, he said he had no objection to the documents being taken on record, subject to proof, relevance and admissibility.

The other parties opposed the application, with one alleging that the 2015 agreement was forged and raising objections over the property title, transactions and pending civil proceedings.

The tribunal noted that the application was only for placing documents on record and did not require it to decide independent civil rights or private disputes between the parties.

It observed that the contesting parties, particularly the party raising the detailed objections, had attempted to turn the proceedings into a forum for adjudicating their inter se disputes. The objections covered disputed questions of title, alleged forgery, validity of transactions and pending civil proceedings.

The tribunal held that such objections could not be used to expand the scope of the Section 66 proceedings. It noted that the IBC is based on a “time-bound and summary mechanism” and that parties cannot enlarge the enquiry beyond what is necessary to decide the application before the adjudicating authority.

The tribunal also noted that the Resolution Professional, as the dominus litis or master of his own case, had no objection to the documents being taken on record subject to proof, relevance and admissibility. The other parties therefore could not prevent their production merely because they apprehended that the documents might support another party's defence.

Their right, the court held, was to dispute the evidentiary value, genuineness, admissibility and legal effect of the documents when the main application was adjudicated.

At the same time, the tribunal clarified that taking the documents on record did not give them any evidentiary value or amount to accepting their genuineness. All concerned parties would have an opportunity to raise objections and produce counter-documents on those issues.

The tribunal further observed that its jurisdiction under the IBC was confined to issues arising under the Code and did not extend to adjudicating every collateral or independent dispute that parties might seek to introduce. Allowing such disputes to derail the Section 66 proceedings would frustrate the time-bound insolvency process.

The tribunal accordingly allowed the application and permitted certain documents as evidence to be taken on record as part of Mohan Kumar and Sreekala Mohan's counterstatement in the Section 66 proceedings. 

For Applicants: Advocates Bijoy P Pulipra

For Respondents: Advocates Akhil Suresh, Rohan Kumar, Sankar P Panicker and Sherry Nainan Oommen