Case Note & Summary
The case involves an appeal filed by the Resolution Professional of Think & Learn Private Limited (the corporate debtor) against Aakash Educational Services Limited and its directors. The corporate debtor was undergoing Corporate Insolvency Resolution Process (CIRP). The Resolution Professional filed an application under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT), alleging that the directors of the respondent company had engaged in fraudulent trading by continuing business despite the company being insolvent and by siphoning off funds. The NCLT dismissed the application, holding that there was no evidence to support the allegations. The Resolution Professional appealed to the National Company Law Appellate Tribunal (NCLAT). The respondents raised a preliminary objection that the appeal was not maintainable under Section 61 of the IBC, as the order dismissing the Section 66 application was not an 'order' within the meaning of that section. However, the NCLAT did not decide this issue and proceeded to examine the merits. The NCLAT found that the appellant had failed to provide any specific evidence of fraudulent intent or actual fraud. The allegations were based on general assertions and inferences, which were insufficient to establish fraudulent trading under Section 66. The NCLAT held that the burden of proof lies on the applicant to show that the business was carried on with intent to defraud creditors or for a fraudulent purpose, and that mere continuation of business or inability to pay debts does not attract liability. Consequently, the NCLAT dismissed the appeal, upholding the NCLT's order. The judgment emphasizes that Section 66 requires clear evidence of fraudulent conduct and cannot be invoked based on mere suspicion or lack of profitability.
Headnote
A) Insolvency Law - Fraudulent Trading - Section 66 of the Insolvency and Bankruptcy Code, 2016 - The Resolution Professional sought to hold directors liable for fraudulent trading, alleging that the corporate debtor continued business despite being insolvent and siphoned funds. The NCLT dismissed the application for lack of evidence. The NCLAT upheld the dismissal, holding that mere continuation of business or inability to pay debts does not constitute fraudulent trading without specific evidence of intent to defraud creditors. (Paras 1-7) B) Insolvency Law - Maintainability of Appeal - Section 61 of the Insolvency and Bankruptcy Code, 2016 - The respondents raised a preliminary objection that the appeal against an order dismissing an application under Section 66 is not maintainable as it is not an 'order' under Section 61. The NCLAT did not decide this issue, as it dismissed the appeal on merits. (Para 3) C) Insolvency Law - Burden of Proof - Section 66 of the Insolvency and Bankruptcy Code, 2016 - The burden of proving fraudulent trading lies on the applicant, who must provide clear evidence of fraudulent intent. The NCLAT found that the appellant failed to discharge this burden, as the allegations were vague and unsupported by documents. (Paras 4-6)
Issue of Consideration
Whether the NCLT was correct in dismissing the application under Section 66 of the Insolvency and Bankruptcy Code, 2016 for alleged fraudulent trading by the directors of the corporate debtor, and whether the appeal against such dismissal is maintainable.
Final Decision
The NCLAT dismissed the appeal, upholding the NCLT order. The court held that the appellant failed to provide evidence of fraudulent intent, and mere continuation of business or inability to pay debts does not attract liability under Section 66 of IBC.
Law Points
- Fraudulent trading under Section 66 of IBC requires specific evidence of intent to defraud creditors or fraudulent purpose
- mere allegations insufficient
- burden on applicant to prove
- no automatic liability on directors for business losses
