NCLT Mumbai Refuses To Treat Securities Transactions By A Securities Trading Company As Fraudulent Under IBC

The National Company Law Tribunal (NCLT) Mumbai bench has recently refused to treat a loss-making share transaction by Laxmiramuna Investments Pvt. Ltd. as fraudulent trading. It held that the company was engaged in securities trading as part of its ordinary business and that no intent to defraud creditors had been established.

"Indubitably, the corporate debtor is engaged in business of securities sale/purchase, and the transaction auditor has also observed in its report about the business of corporate debtor comprising of 'investment and trading of stocks, bonds, and other financial instruments'. It is also noted that the said transaction took place on 18.1.2023 and the book value for determination of impugned loss is calculated basis 31.3.2022 financial statements. In view of trading and investment of stocks, being one of primary business of the corporate debtor and nominal loss determined on basis of 10 months old financial statements, we are of considered view this transactions can not be classified as fraudulent transactions falling under section 66 of the IBC.”, the tribunal held.

The bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar dismissed an application originally filed by the Resolution Professional. It was later prosecuted by the successful resolution applicant consortium. The application sought to avoid multiple transactions as preferential and fraudulent under Sections 43 and 66 of the Insolvency and Bankruptcy Code.

One of the principal allegations concerned a share transaction with Zarmin Tradelinks Pvt. Ltd. on January 18, 2023. The applicant alleged that the corporate debtor purchased 50,000 shares of Sethia Infrastructure Pvt. Ltd. at ₹29 per share against a book value of ₹22.18. It also sold 17,000 shares of Raghini Infrastructure Pvt. Ltd. at ₹85.30 per share. The transaction allegedly resulted in a net loss of ₹19,700.

The applicant argued that the absence of valuation reports, commercial justification, and supporting documentation showed the transaction was designed to prejudice creditors.

Rejecting the contention, the tribunal held that the alleged loss had been calculated using financial statements that were nearly ten months old at the time of the transaction.

“Accordingly, the impugned transaction lacks necessary element of fraud, and fails to meet the necessary ingredients of section 66 of IBC, as the intent to defraud creditors is completely missing except a bald assertion to that effect.”

The tribunal also rejected allegations concerning repayment of unsecured loans to Partani Appliances Ltd. It also rejected challenges to a stamp duty payment of ₹1.21 lakh, ₹1.10 lakh in company cash seized by the Enforcement Directorate, and the recording of a long-term capital loss of ₹1.06 crore.

On the alleged preferential repayment, the tribunal held that the applicant failed to show that the creditor had been placed in a more beneficial position than it would have occupied in the insolvency distribution waterfall.

The tribunal held that the stamp duty payment did not disclose any fraudulent intent.

On the cash seized by the Enforcement Directorate from a director's residence, it held that this by itself did not establish fraud. It noted that the applicant could seek release of the amount.

The tribunal also held that the applicant had failed to independently verify the listed share transaction underlying the long-term capital loss entry. It said incorrect accounting classification alone could not justify an inference of fraud.

Dismissing the application, the tribunal held;

“In view of aforesaid discussion, we are of considered view that the present application is based on surmises and conjectures, this fails to meet the necessary ingredients of section 43 and 66 of IBC.”