Supreme Court Stays NCLAT Order Reviving IL&FS Plea Over ₹1,080 Crore SREI Group Linked Transactions

The Supreme Court on Monday stayed the operation of the National Company Law Appellate Tribunal (NCLAT) order reviving Infrastructure Leasing & Financial Services Ltd. (IL&FS)'s plea seeking to unwind six alleged circuitous lending transactions worth ₹1,080 crore involving SREI Infrastructure Finance Limited (SIFL) group entities.

The case arose from six lending transactions worth ₹1,080 crore undertaken between March 2017 and March 2018, which IL&FS alleged were structured to circumvent RBI restrictions on fresh lending to group companies.

IL&FS claimed that its subsidiary IFIN lent funds to SREI group entities which in turn routed corresponding amounts to IL&FS group companies.

A Division Bench of Justices Vikram Nath and Sandeep Mehta after hearing the parties, stayed the NCLAT order.

Senior Advocate Shyam Divan, appearing for SREI, challenged IL&FS's attempt to reopen the transactions, relying upon the findings of the NCLT that IL&FS had consciously treated the transactions as independent, valid and enforceable for several years.

Referring to the relevant portion of the NCLAT order, Divan submitted that IL&FS had taken a conscious position after the restructuring of its Board in 2018 and subsequent audits and investigations, and had proceeded against various entities on the basis that the transactions were standalone.

He argued that IL&FS could not, after having elected to treat the transactions as independent for years, subsequently contend that they constituted one composite fraudulent arrangement liable to be collapsed.

Divan also relied on the insolvency resolution process of SIFL. He submitted that SIFL's information memorandum had included receivables from IL&FS group entities as assets and that the resolution plan submitted by National Asset Reconstruction Company Ltd. (NARCL) was approved by the NCLT Kolkata Bench and subsequently upheld by the Supreme Court.

He pointed out that IL&FS had not challenged the inclusion of the receivables in the information memorandum during the CIRP or sought any relief concerning the transactions at that stage.

“There has to be some finality and these are ₹1,000 crores which are receivable.”, Divan said.

Divan argued that the resolution plan had vested the relevant rights and receivables in NARCL and that IL&FS could not now seek to extinguish or re-characterise those assets through proceedings under the Companies Act.

He further submitted that allowing IL&FS to reopen the transactions would undermine the finality of an approved resolution plan.

On the other side, Senior Advocate Gopal Sankaranarayanan, appearing for IL&FS argued that the central question before the Supreme Court was whether the NCLT, while exercising jurisdiction under Sections 241 and 242 of the Companies Act, could examine whether the transactions were fraudulent and consequently liable to be unwound.

“The question before your Lordships is only this. Does the NCLT have the power while dealing with oppression and mismanagement cases to exercise its power to determine that there has been a fraudulent transaction?”

Sankaranarayanan submitted that the transactions were structured to circumvent RBI restrictions on intra-group lending. He relied upon regulatory and investigative material, including the RBI inspection report, the Serious Fraud Investigation Office report and forensic audit material, which allegedly identified arrangements through which funds were routed between the two groups.

Sankaranarayanan submitted that the question of whether the transactions were fraudulent could not be shut out merely because IL&FS had earlier treated them as standalone transactions.

He also disputed the reliance placed on the chronology concerning the SIFL resolution process, pointing out that IL&FS's application seeking to collapse the transactions was filed on July 18, 2023, while approval of the resolution plan took place subsequently in August 2023.

Sankaranarayanan therefore argued that the NCLT should examine the transactions on merits rather than reject the application at the threshold.

After hearing the parties, the Supreme Court stayed the operation of the NCLAT order while considering the challenge.