NCLT Mumbai Directs Former Directors To Pay ₹344.58 Crore Over Fraudulent Diversion Of DHFL Loan

On 2 September, the National Company Law Tribunal (NCLT), Mumbai directed two former directors of Notion Real Estate Pvt. Ltd. and Kyata Advisors Pvt. Ltd. to jointly and severally contribute Rs. 344.58 crore to the Corporate Debtor's assets over the diversion of a project loan sanctioned by Dewan Housing Finance Limited (DHFL) for development of a project.

A Bench comprising Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar allowed the Resolution Professional's application under Section 66 of the Insolvency and Bankruptcy Code (IBC), which deals with fraudulent trading by persons involved in the affairs of a corporate debtor. The Tribunal held:

"It is hereby declared that the diversion and utilisation of the loan amount sanctioned by DHFL for the specific purpose of development of the project, for purchase of equity shares, constituted the conduct falling within the ambit of Fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, 2016."

The Corporate Insolvency Resolution Process (CIRP) of Notion Real Estate commenced on 9 January 2024. The Resolution Professional appointed Pipara & Co LLP to conduct a forensic audit, which reported diversion of funds. DHFL had sanctioned a project loan of Rs. 360 crore, of which Rs. 359.99 crore was disbursed under a loan agreement dated 23 May 2016.

The Resolution Professional alleged that Rs. 344.58 crore of the loan was directly transferred to Kyata Advisors Pvt. Ltd. for the purported purchase of equity shares of Darshan Developers Pvt. Ltd. The transactions were allegedly undertaken without board approvals, commercial agreements, valuation reports or other supporting documents.

The Tribunal noted that the loan was sanctioned for project development, but almost the entire disbursed amount was instead used to purchase shares. It also noted that the Corporate Debtor had not generated project revenue from its incorporation until commencement of the insolvency process.

It further noted that the DHFL sanction letter expressly prohibited diversion of loan proceeds to third parties, group entities or related parties without prior approval. It held that the transactions, which were unsupported by agreements and lacked any beneficial outcome, established fraudulent conduct under Section 66(2) of the IBC.

The Bench observed that DHFL's complicity in an intent to defraud creditors could not be conclusively established. However, it found that the transactions were carried out in a fraudulent manner and involved a circular transaction concerning a DHFL group company.

It held that the ingredients of Section 66 were satisfied and found that the transaction was a planned arrangement to siphon funds by using the Corporate Debtor as a conduit.

Accordingly, the NCLT held the two respondents jointly and severally liable to contribute Rs. 344.58 crore to the Corporate Debtor's assets, along with interest at 12% per annum from the date of disbursement until realisation. The amount is to be deposited with the Resolution Professional within 30 days of the order.

For Applicant: Ashish Parwani a/w Ms. Dhwani Shah, Ms. Gitika Makhija Advocates i/b Ms. Pranali Gada, Advocates