The National Company Law Appellate Tribunal has remanded a critical insolvency proceeding involving alleged fraudulent leasing arrangements, clarifying that third parties may not be categorically shielded from liability under Section 66 of the Insolvency and Bankruptcy Code when knowingly involved in transactions designed to defraud creditors.
Background & Facts
The Dispute
The dispute arises from a Master Lease Agreement (MLA) executed on 07.09.2018 between JSK Marketing Limited (the Corporate Debtor or CD) and Orix Leasing and Financial Services India Ltd. (Respondent No. 1). Under the MLA, Orix Leasing financed the purchase of equipment from Pratiksha Tradelinks (Respondent No. 2) for lease to the CD. The CD deposited a security deposit of Rs. 74,49,947/- with Orix Leasing and was obligated to make quarterly lease payments. The CD defaulted on payments, prompting Orix Leasing to issue a demand notice on 06.08.2019. The Corporate Insolvency Resolution Process (CIRP) was initiated against the CD on 23.09.2019.
Key Facts
- The MLA required Orix Leasing to pay Pratiksha Tradelinks for equipment to be delivered directly to the CD.
- The CD paid Rs. 74,49,947/- as security deposit, which Orix Leasing later adjusted against outstanding lease rentals.
- Orix Leasing filed a claim of Rs. 43,473,004/- in the CIRP.
- The Interim Resolution Professional (IRP) and later Resolution Professional (RP) could not locate the leased equipment despite repeated inquiries.
- Kunal Jiwarajka, a director of the CD, claimed in an email dated 10.01.2020 that the equipment was defective and returned to the supplier.
- Pratiksha Tradelinks and other directors of the CD failed to respond to multiple emails from the RP dated 15.05.2020, 05.08.2020, and others.
- E-way bills and transport records raised suspicion: vehicles listed were allegedly incapable of transporting the equipment, and E-way details could not be verified.
- Orix Leasing admitted via email dated 29.06.2020 that the security deposit of Rs. 74,49,947/- was adjusted against lease rentals as of 31.10.2019 - after the CIRP commencement date of 23.09.2019.
- Orix Leasing initiated arbitration under Section 9 of the Arbitration Act on 09.09.2019 and filed criminal complaints under Section 138 NI Act and Section 95 IBC against Kunal Jiwarajka.
- FINVIN Investor Private Limited, an assignee of the liquidator’s rights under Regulation 37A of IBBI (Liquidation Process) Regulations, 2016, stepped into the shoes of the liquidator via an assignment deed dated 03.06.2024.
Procedural History
- 07.09.2018: Master Lease Agreement executed between CD and Orix Leasing.
- 06.08.2019: Orix Leasing issued demand notice for unpaid lease rentals.
- 23.09.2019: CIRP initiated against CD under Section 7 IBC.
- 07.12.2019: IRP requested documents from Orix Leasing and inquired whether personal guarantees had been invoked.
- 17.12.2019: Second CoC meeting held; RP informed CoC that equipment was untraceable.
- 29.06.2020: Orix Leasing admitted in email that security deposit was adjusted as of 31.10.2019.
- 13.11.2020: IA No. 1319 of 2020 filed by RP under Sections 43, 66, 67, and 70 IBC seeking recovery of security deposit and contribution from parties involved.
- 04.06.2024: Adjudicating Authority (NCLT Mumbai) rejected the IA, but directed RP to ascertain the amount paid under MLA and file fresh applications.
- 03.06.2024: Assignment deed executed between liquidator and FINVIN Investor Pvt. Ltd.
- 15.06.2024: FINVIN filed CA (AT) (Ins) No. 1500 of 2024 challenging the impugned order.
- 15.06.2024: Orix Leasing filed CA (AT) (Ins) No. 1581 of 2024 challenging the same order.
- 27.05.2026: NCLAT delivered judgment disposing of both appeals.
The Parties' Positions
For the Appellant FINVIN Investor Pvt. Ltd.
- Argued that the MLA was a sham transaction designed to siphon funds from the CD.
- Contended that Orix Leasing, as the principal beneficiary of the fraudulent scheme, was a knowing party under Section 66(1) IBC.
- Relied on Royal India Corporation Ltd. v. Nandkishor Vishnupant Deshpande and Tridhaatu Kirti Developers LLP v. Arihant Nenawati to argue that Section 66(1) applies to any person knowingly involved in fraudulent trading, not just directors.
- Asserted that the adjustment of the security deposit during moratorium (post-23.09.2019) was void under Section 14 IBC.
For the Appellant Orix Leasing
- Denied any fraudulent intent, asserting the MLA was genuine and supported by invoices, E-way bills, and signed receipts.
- Argued that the security deposit was adjusted on 28.08.2019 - prior to CIRP commencement - and the 31.10.2019 date was merely an automated system reflection.
- Relied on Gluckrich Investment Pvt. Ltd. v. State of West Bengal and Usha Ananthasubramanian v. Union of India to assert that Section 66(1) cannot be invoked against third parties.
- Highlighted pending arbitration and criminal proceedings as evidence of a genuine dispute.
Relief Sought
- FINVIN sought reversal of the NCLT order and direct liability of Orix Leasing and the directors to contribute the security deposit (Rs. 74,49,947/-) and all amounts paid under the MLA to the CD’s estate.
- Orix Leasing sought quashing of the NCLT order and a declaration that it cannot be held liable under Section 66 IBC as a third party.
The Legal Issue
Can a third party, such as a financial lessor, be held liable under Section 66(1) of the Insolvency and Bankruptcy Code for fraudulent trading if it is found to be a knowing participant in a scheme designed to defraud creditors, even if it is not a director or promoter of the corporate debtor?
Arguments Presented
For the Appellant/Petitioner
FINVIN Investor Pvt. Ltd. argued that Section 66(1) imposes liability on "any person" who is a knowing party to fraudulent trading, without restricting it to directors or promoters. It relied on Royal India Corporation Ltd. and Tridhaatu Kirti Developers LLP to establish that NCLAT has previously held third parties liable under Section 66(1) when they are integral to the fraudulent design. It emphasized that Orix Leasing, by accepting a security deposit and adjusting it post-moratorium, benefited from a transaction where equipment was never genuinely delivered. The adjustment of funds during moratorium violated Section 14 IBC, and the lack of documentation from suppliers and directors confirmed the fraudulent intent.
For the Respondent/State
Orix Leasing contended that Gluckrich Investment Pvt. Ltd. unequivocally bars proceedings under Section 66 against third parties. It argued that the existence of arbitration proceedings, E-way bills, signed receipts, and GST invoices proves the transaction’s genuineness. It further asserted that the failure of directors to produce equipment does not equate to fraud by a third-party financier. The adjustment of the security deposit, it claimed, occurred before CIRP, and any delay in documentation was procedural, not fraudulent.
The Court's Analysis
The NCLAT undertook a detailed analysis of Section 66(1) and its distinction from Section 66(2). It affirmed that Section 66(1) applies to "any person" knowingly party to fraudulent trading, while Section 66(2) is limited to directors or partners. The Tribunal noted that Gluckrich dealt with transit anticipatory bail in a criminal context and was not a precedent on civil liability under IBC. It cited Royal India Corporation and Aaj Ka Anand Publications to hold that third parties can be liable under Section 66(1) if they are knowingly involved in the fraudulent scheme.
"The expression 'any person' occurring in Section 66(1) is wide enough to cover a knowing party to the fraudulent conduct, even if not a director or promoter."
The Tribunal found that the Adjudicating Authority erred in rejecting the IA solely on the basis that Orix Leasing was a third party, without examining whether it was a knowing participant. The NCLAT observed that the RP had pleaded sufficient facts - including non-delivery of equipment, forged receipts, non-cooperation of directors, and post-moratorium adjustment of security deposit - to warrant a full hearing.
Crucially, the NCLAT noted that Orix Leasing had submitted critical documents - invoices, E-way bills, and signed delivery receipts - only at the appellate stage, which were not before the Adjudicating Authority. The Tribunal held that these documents could materially affect the determination of whether the transaction was genuine or fraudulent.
"The failure to consider these documents before the Adjudicating Authority renders the order incomplete and legally unsustainable."
The NCLAT also found that the Adjudicating Authority had recorded a prima facie finding that the MLA was a sham, yet failed to order any contribution, instead directing the RP to file fresh applications - a procedural evasion inconsistent with the statutory mandate under Section 66(1).
The Tribunal concluded that the issue of whether Orix Leasing qualifies as a "knowing party" under Section 66(1) must be decided afresh, with full opportunity to present evidence. It also left open the question of whether the security deposit adjustment during moratorium could be challenged under Section 14 IBC, noting that such claims require separate applications.
The Verdict
The NCLAT set aside the order dated 04.06.2024 passed by the Adjudicating Authority. The matter is remanded to the National Company Law Tribunal, Mumbai Bench, for fresh adjudication of IA No. 1319 of 2020. The Adjudicating Authority is directed to permit all parties to file additional documents, including those submitted to NCLAT on appeal, and to decide whether Orix Leasing and the directors are liable under Section 66(1) of the IBC to contribute to the CD’s estate. The Tribunal directed the Adjudicating Authority to dispose of the matter within two months of the parties’ next appearance on 01.07.2026.
What This Means For Similar Cases
Third Parties Are Not Immune Under Section 66(1)
- Practitioners must now argue that Section 66(1) applies to any person knowingly involved in fraudulent trading - including financiers, suppliers, or intermediaries - if they benefit from or enable the fraud.
- Merely being a third party does not confer immunity; the focus is on knowledge and participation.
- Evidence of coordination between the corporate debtor and third parties (e.g., shared addresses, common directors, non-delivery despite invoices) strengthens the case for liability.
Documentary Evidence Is Critical
- In cases involving asset disappearance, the burden shifts to the third party to prove delivery and genuineness through contemporaneous documentation (E-way bills, signed receipts, GST records).
- Post-CIRP submissions without prior disclosure may be viewed with suspicion.
- Courts will not accept vague assertions of fraud without corroborative evidence from both sides.
Procedural Compliance Is Non-Negotiable
- Adjudicating Authorities must not reject applications on technical grounds when substantive allegations of fraud are made.
- If a finding of fraud is recorded, the authority must either order contribution or provide clear reasons why it cannot.
- Failure to consider evidence submitted at appellate stage renders the original order legally defective and warrants remand.
