Fraudulent Transactions Do Not Constitute Financial Debt Under Section 5(8) IBC : NCLAT Rejects CIRP Admission for Unauthorized Disbursements

The National Company Law Appellate Tribunal (NCLAT) has reaffirmed that fraudulent transactions, even if documented, cannot create a binding financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The judgment underscores that disbursements made into unauthorized or fraudulent accounts do not qualify as financial debt, and the Adjudicating Authority is justified in dismissing a Section 7 petition when fraud permeates the transaction. This ruling clarifies the limits of the doctrine of indoor management and the summary jurisdiction of the National Company Law Tribunal (NCLT) in insolvency proceedings.

Background & Facts

The Dispute

The appellant, Progfin Private Limited, a Non-Banking Financial Company (NBFC) and a wholly owned subsidiary of Desiderata Impact Ventures Private Limited (DIVPL), had extended a loan facility of Rs. 15 crore to the corporate debtor, GBL Chemical Limited (GBLC), a wholly owned subsidiary of Ganesh Benzoplast Limited (Ganesh Benzo). Ganesh Benzo acted as the corporate guarantor for the loan, while two personal guarantees were executed by Ramakant Pilani (Director of GBLC and CEO of Ganesh Benzo) and Rishi Pilani (Director of GBLC). The loan was disbursed between 27.10.2023 and 09.02.2024 into an account maintained at State Bank of India (SBI), purportedly belonging to GBLC.

Key Facts

• Loan Facility: Rs. 10 crore initially sanctioned on 21.10.2023, later enhanced to Rs. 15 crore via an addendum dated 30.01.2024.
• Transaction Documents:
  • Facility Agreement dated 21.10.2023 (later filed as 26.10.2023 in the Company Petition).
  • Corporate Guarantee Deed dated 21.10.2023 (later filed as 26.10.2023 in the Company Petition).
  • Supplemental Corporate Guarantee and Addendum to Facility Agreement dated 30.01.2024.
  • Board Resolutions of GBLC (17.10.2023 and 25.01.2024) and Ganesh Benzo (16.10.2023 and 24.01.2024) authorizing Ramakant Pilani to execute the agreements.
• Disbursement and Repayment: The appellant disbursed Rs. 15 crore into the SBI account of GBLC, and GBLC made partial repayments totaling Rs. 4.56 crore to the appellant by 08.02.2024.
• Default and Recall Notice: On 15.04.2024, the appellant issued a recall notice demanding repayment of Rs. 15.44 crore, invoking the corporate and personal guarantees.

Procedural History

• 17.04.2024: GBLC and Ganesh Benzo denied liability, alleging that the loan documents were forged and the SBI account was fraudulently opened by Ramakant Pilani.
• 05.04.2024: Respondent filed Commercial Suit No. 1169 of 2024 before the Bombay City Civil Court, alleging fraud.
• 05.05.2024: Respondent filed FIR No. 103 of 2024 at Cuffe Parade Police Station regarding the fraudulent bank account and related transactions.
• 05.07.2024: Respondent filed Commercial Suit No. 21035 of 2024/Commercial Suit No. 60 of 2025 before the Bombay High Court, which granted interim relief.
• 20.07.2024: Appellant filed a Section 7 petition before the NCLT, Mumbai, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Ganesh Benzo.
• 01.09.2025: NCLT dismissed the Section 7 petition, holding that the transaction documents were fraudulent and the disbursements did not enure to the benefit of GBLC.
• Present Appeal: Appellant filed Company Appeal (AT) (Ins) No. 1565 of 2025 before NCLAT, challenging the NCLT order.

Relief Sought

The appellant sought admission of the Section 7 petition, initiation of CIRP against Ganesh Benzo, and inclusion of the Rs. 15.44 crore debt as a financial debt under Section 5(8) of the IBC.

The Legal Issue

The central question before the NCLAT was whether disbursements made into a fraudulent or unauthorized bank account, backed by forged transaction documents, can constitute a financial debt under Section 5(8) of the IBC, thereby warranting admission of a Section 7 petition.

Arguments Presented

For the Appellant

1. Validity of Transaction Documents: The appellant contended that the Facility Agreement, Corporate Guarantee, and Board Resolutions were validly executed by Ramakant Pilani, who was duly authorized as the Director of GBLC and CEO of Ganesh Benzo.
2. Doctrine of Indoor Management: The appellant relied on the doctrine of indoor management, arguing that it was entitled to presume the validity of the transaction documents and the authority of Ramakant Pilani.
3. Debt and Default Established: The appellant asserted that the disbursement of funds into GBLC’s account and partial repayments clearly established debt and default, satisfying the twin tests under Section 7 of the IBC.
4. Precedents Cited:
   • Innoventive Industries Limited v. ICICI Bank (2018) 1 SCC 407: Once debt and default are established, the Adjudicating Authority must admit the Section 7 petition.
   • M. Suresh Kumar Reddy v. Canara Bank (2023) 8 SCC 387: Inter se disputes between the company and its director do not extinguish the company’s liability.
   • Tulip Hotel Private Ltd. v. JC Flowers Asset Reconstruction Pvt. Ltd. in CA(AT)(Ins) No. 1146 of 2023: Unilaterally prepared expert reports cannot be relied upon to deny admission of a Section 7 petition.

For the Respondent

1. Fraudulent Transaction Documents: The respondent argued that the Facility Agreement, Corporate Guarantee, and Board Resolutions were forged, as evidenced by discrepancies in dates, missing signatures, and fictitious board meeting dates.
2. Unauthorized Disbursements: The funds were disbursed into a fraudulent SBI account opened by Ramakant Pilani without authorization, and the money was subsequently transferred to third-party accounts via forged invoices.
3. No Financial Debt Created: The respondent relied on Ocean Deity Investment Holdings Limited v. Suraksha Asset Reconstruction Limited in CA(AT)(Ins) No. 795 of 2021, contending that fraudulent transactions do not create a financial debt under Section 5(8) of the IBC.
4. Pending Litigations: The respondent highlighted ongoing civil suits and criminal proceedings (FIRs) against Ramakant Pilani and others, including employees of the appellant, for fraud and forgery.
5. Precedents Cited:
   • Phoenix ARC Private Limited v. Spade Financial Services Ltd. (2021) 3 SCC 475: Collusive transactions do not create financial debt.
   • Anjani Technoplast v. Shubh Gautam in Civil Appeal No. 8427 of 2022: Attempts to weaponize the IBC based on non-existent debt must be dismissed.
   • MRF Limited v. Manohar Parikkar (2010) 11 SCC 374: The doctrine of indoor management does not protect parties acting in collusion or with negligence.

The Court's Analysis

The NCLAT conducted a detailed examination of the transaction documents, Board Resolutions, and surrounding circumstances to determine the validity of the financial debt and default.

1. Discrepancies in Transaction Documents:

   • The appellant filed multiple versions of the Facility Agreement and Corporate Guarantee with varying dates (21.10.2023 and 26.10.2023) and missing signatures.
   • The Facility Agreement dated 26.10.2023 (filed with the Company Petition) lacked the appellant’s signature, while the version dated 21.10.2023 (filed in the appeal) was signed.
   • The Corporate Guarantee dated 21.10.2023 (filed in the appeal) bore the stamp of DIVPL and the appellant’s signature, whereas the version dated 26.10.2023 (filed with the Company Petition) lacked both.

2. Invalid Board Resolutions:

   • The Board Resolutions relied upon by the appellant (16.10.2023, 17.10.2023, 24.01.2024, and 25.01.2024) were found to be fabricated, as no board meetings were held on these dates.
   • The Director’s Report and Form MGT-7 of GBLC and Ganesh Benzo confirmed that no meetings were held on the purported dates of the Board Resolutions.

3. Fraudulent Disbursements and Litigations:

   • The respondent discovered the fraud on 12.04.2024 and immediately denied the validity of the transaction documents via a letter dated 17.04.2024.
   • The respondent filed FIR No. 103 of 2024 on 05.05.2024, leading to a charge-sheet naming an SBI employee as an accused.
   • The funds disbursed by the appellant were transferred to third-party accounts (Cardier Foods and Beverages Private Limited and Yamuna Tradelink) via forged invoices, as confirmed by a forensic audit report prepared by KPMG.
   • Additional FIRs (No. 0315 of 2024 and No. 0581 of 2025) were filed against Ramakant Pilani and an employee of the appellant for issuing unauthorized cheques and using fake email IDs.

4. Adjudicating Authority’s Findings:

   • The NCLT, in its impugned order, held that the disbursements were made into a fraudulent account, and the transaction documents were forged.
   • The NCLT relied on Radha Exports (India) Pvt. Ltd. v. K.P. Jayaram (2020) 10 SCC 538, which held that disputes involving forged documents cannot be adjudicated in summary proceedings under Section 7 of the IBC.

5. Applicability of Precedents:

   • The NCLAT distinguished the appellant’s reliance on Innoventive Industries and M. Suresh Kumar Reddy, noting that these cases involved undisputed debt and default, unlike the present case where fraud permeated the transactions.
   • The NCLAT applied the ratio in Ocean Deity Investment Holdings Limited, holding that fraudulent disbursements do not create a financial debt under Section 5(8) of the IBC.
   • The NCLAT also relied on Phoenix ARC Private Limited v. Spade Financial Services Ltd., which held that collusive transactions do not create financial debt.

6. Doctrine of Indoor Management:

   • The appellant argued that the doctrine of indoor management protected it from internal irregularities of GBLC and Ganesh Benzo.
   • The NCLAT rejected this contention, holding that the doctrine does not apply when the circumstances surrounding the transaction are suspicious or when the party seeking protection is complicit in the fraud.
   • The NCLAT relied on MRF Limited v. Manohar Parikkar and Mahima Datla v. Renuka Datla (2022) 10 SCC 258, which held that the doctrine of indoor management is not a shield for collusive or negligent parties.

"The doctrine of indoor management protects outsiders dealing or contracting with a company, whereas doctrine of constructive notice protects the insiders of a company or corporation against dealings with the outsiders. However, suspicion of irregularity has been widely recognised as an exception to the doctrine of indoor management. The protection of the doctrine is not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry."

The Verdict

The NCLAT dismissed the appeal, upholding the NCLT’s order dated 01.09.2025. The Tribunal held that:

1. The disbursements made into a fraudulent bank account did not constitute a financial debt under Section 5(8) of the IBC.
2. The transaction documents were forged, and the Board Resolutions were fabricated, rendering the debt non-binding on GBLC and Ganesh Benzo.
3. The doctrine of indoor management did not protect the appellant, as it was complicit in the fraudulent transactions.
4. The Adjudicating Authority was justified in dismissing the Section 7 petition, given the fraudulent nature of the transactions and the pending litigations.

What This Means For Similar Cases

Fraudulent Transactions Vitiate Financial Debt

• Financial debt under Section 5(8) of the IBC requires valid disbursement of funds to the borrower for their use. Disbursements into unauthorized or fraudulent accounts do not create a binding financial debt.
• Practitioners must ensure that disbursements are made into accounts duly authorized by the corporate debtor, and any suspicion of fraud must be thoroughly investigated before initiating CIRP.

Doctrine of Indoor Management Has Limits

• The doctrine of indoor management does not protect parties acting in collusion or with negligence. If the circumstances surrounding a transaction are suspicious, the doctrine cannot be invoked to shield the financial creditor from allegations of fraud.
• Financial creditors must conduct due diligence to verify the authenticity of transaction documents and the authority of signatories before disbursing funds.

Summary Jurisdiction of NCLT Cannot Adjudicate Fraud

• The NCLT’s summary jurisdiction under Section 7 of the IBC is not equipped to adjudicate disputes involving forged documents or fraudulent transactions. Such disputes must be resolved through civil courts or criminal proceedings.
• Financial creditors cannot rely on the IBC to legitimize fraudulent transactions or bypass ongoing litigations alleging fraud.