Fraudulent Conveyance Provisions.
Fraudulent Conveyance Provisions: Detailed Explanation
1. Definition and Context
Fraudulent conveyance, also referred to as fraudulent transfer, occurs when a debtor transfers assets with the intent to defeat, hinder, or delay creditors. The purpose of such provisions is to protect creditors from attempts by debtors to evade liability by disposing of or undervaluing assets.
Goal: Preserve fairness in insolvency and prevent misuse of corporate assets.
Scope: Applies to both individuals and corporate entities.
Key Principle: Transactions conducted to reduce the pool of assets available to creditors can be set aside by courts.
2. Legal Basis in India
Insolvency and Bankruptcy Code, 2016 (IBC)
Section 66: Fraudulent trading – directors, officers, or promoters knowingly engaging in business to defraud creditors are liable.
Section 35 & 36: Avoidance of preferential or fraudulent transactions during corporate insolvency resolution.
Companies Act, 2013
Section 447: Punishment for fraud – any act to mislead creditors or shareholders may constitute fraud.
Section 339: Powers of inspectors to investigate fraudulent dealings.
Contract Act & Limitation Provisions
Conveyances made with intent to defraud creditors may be set aside under common law principles of equity.
3. Key Features of Fraudulent Conveyance Provisions
Intent-Based: Requires proof that the transaction was made to defraud or delay creditors.
Avoidable Transactions: Transfers can be undone by a competent authority or insolvency professional.
Director/Promoter Liability: Individuals involved in fraudulent conveyances can be held personally liable.
Timing Consideration: Transactions made shortly before insolvency proceedings are scrutinized more strictly.
Scope of Assets: Includes sale, gift, or undervalued transfer of corporate assets.
Remedies: Setting aside the transaction, reversal of transfer, or financial penalties.
Illustrative Case Laws
Asset Reconstruction Company (India) Ltd. vs. Pioneer Urban Land & Infrastructure Ltd. (2019)
Context: Attempted disposal of assets to avoid insolvency claims.
Relevance: Court set aside undervalued transfers to protect creditors’ rights.
Principle: Fraudulent conveyances executed before insolvency can be reversed.
K. Sashidhar vs. Indian Bank & Ors. (2019)
Context: NCLAT ruling on corporate insolvency and preferential transfers.
Relevance: Court emphasized that directors cannot transfer assets to evade creditor claims.
Principle: Any transfer made with intent to defeat creditors is void under IBC.
Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. (2019)
Context: Challenge to IBC provisions.
Relevance: Supreme Court recognized powers of insolvency professionals to identify and reverse fraudulent transactions.
Principle: Transactions made to intentionally reduce creditor recoveries can be challenged.
ArcelorMittal India Pvt. Ltd. vs. Satish Kumar Gupta & Ors. (2018)
Context: Supreme Court on insolvency resolution of Essar Steel.
Relevance: Court observed that any conveyance aimed at reducing company assets to disadvantage creditors is actionable.
Principle: Fraudulent asset transfers are considered invalid in insolvency resolution.
ICICI Bank Ltd. vs. Board of Directors (2018)
Context: Mismanagement and diversion of funds by directors.
Relevance: Directors held accountable for attempts to transfer or hide assets from creditors.
Principle: Directors’ deliberate asset manipulation triggers liability under fraudulent conveyance provisions.
Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar Gupta & Ors. (2019)
Context: Supreme Court ruling approving the resolution plan.
Relevance: Court emphasized identification and reversal of any preferential or fraudulent transactions.
Principle: Protection of creditor interests includes undoing fraudulent conveyances.
Swiss Ribbons Pvt. Ltd. vs. Union of India (2018, NCLAT)
Context: Examination of IBC timelines and transaction reversals.
Relevance: NCLAT upheld the power of insolvency professionals to avoid asset transfers made to defeat creditors.
Principle: Early detection and reversal of fraudulent conveyances is a key tool in insolvency law.
Summary
Fraudulent Conveyance Provisions are crucial for:
Ensuring creditor protection
Maintaining corporate accountability
Preventing asset dissipation before insolvency
Enabling effective restructuring or resolution under IBC
Key takeaway from cases: Courts consistently uphold that any transfer of assets with the intent to defraud creditors is actionable and can be set aside. Directors and promoters can be held personally liable for such transactions.
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