Tribunal holds insufficient evidence to prove fraudulent intent or preferential dealings under Insolvency and Bankruptcy Code; Liquidator's application under Sections 43, 45, and 66 dismissed
In a significant ruling dated August 20, 2026, the National Company Law Tribunal (NCLT), Hyderabad Bench, dismissed the application filed by the liquidator of M/s. DQ Entertainment (International) Limited, Mr. Venka Reddy Bathina, seeking to hold the company's erstwhile directors and key management personnel liable for alleged fraudulent, preferential, and undervalued transactions under the Insolvency and Bankruptcy Code, 2016 (IBC).
The liquidator had initiated proceedings under Section 66 of the IBC alleging that the suspended directors and management carried out multiple transactions with fraudulent intent to defraud creditors. These included a disputed loan repayment of Rs. 50 lakhs to the erstwhile CEO, irregular accounting of intangible assets worth Rs. 225.24 lakhs, invocation and conversion of Letters of Credit amounting to Rs. 4,889.70 lakhs for a subsidiary company, self-written off bad debts of Rs. 21.45 lakhs, and an unexplained transfer of Rs. 602.43 lakhs to the Irish subsidiary. The liquidator sought directions for the respondents to contribute over Rs. 57 crore to the Corporate Debtor's CIRP account.
Further, applications under Sections 43 and 45 challenged alleged preferential and undervalued transactions totaling approximately Rs. 2.5 crore, including advance repayments and sale of assets at undervalue.
The respondents, comprising former directors and CFO, denied all allegations, contending that the transactions were in the ordinary course of business, supported by audited financials and proper approvals. They argued the alleged transactions fell outside the statutory look-back periods and no fraudulent intent was demonstrated. The respondents also highlighted the severe financial distress faced by the company due to market slowdowns and the pandemic, which led to operational disruptions.
After detailed scrutiny, the NCLT held that:
- - Mere absence of documentation or unexplained accounting entries does not establish fraudulent intent under Section 66; the applicant must prove fraud with cogent, tangible evidence.
- - The repayment of Rs. 50 lakhs was admitted but recognized as legitimate repayment against an outstanding loan, supported by related party disclosures in audited accounts.
- - The accounting treatment of intangible assets and the transactions involving the Irish subsidiary lacked sufficient material to conclusively establish mala fide intent or diversion of funds.
- - Write-offs of bad debts were explained as commercial decisions arising from contract cancellations and did not amount to fraudulent trading.
- - The alleged preferential transactions, including payments to related parties and consultants, fell outside the relevant look-back periods prescribed under Sections 43 and 46, and hence could not be treated as preferential.
- - The undervalued sale of fixed assets also fell outside the one-year look-back period, and the sale of an Audi car lacked independent valuation evidence to establish undervaluation.
The Tribunal emphasized the high evidentiary threshold required to prove fraudulent trading under Section 66, relying on precedents such as Anuj Jain v. Axis Bank Ltd. and Shibu Job Cheeran v. Ashok Velamur Seshadri. The burden of proof lies squarely on the applicant to establish that transactions were carried out with the intent to defraud creditors. Observations in the transaction audit report without corroborative primary documents were deemed insufficient.
Consequently, the NCLT dismissed both interlocutory applications filed under Sections 43, 45, and 66 of the IBC, holding that the liquidator failed to establish fraudulent intent or preferential/undervalued transactions. No liability was fastened on the suspended directors or management to contribute towards the corporate debtor's assets.
This ruling reiterates the strict standards courts apply in insolvency proceedings to balance creditor protection against unwarranted harassment of directors, ensuring that only well-founded claims of fraudulent or improper transactions succeed.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - An application under Section 66 of the IBC requires the applicant to establish fraudulent intent or transactions carried out to defraud creditors, supported by cogent material evidence. Absence of sufficient material to prove intent or fraudulent purpose will not attract liability under Section 66.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 43, 45, 46, 66
