NCLAT held that a fraudulent journal entry cannot override hypothecation and asset ownership in CIRP, ruling that the machinery in question forms part of the Corporate Debtor’s assets and upholding the rejection of intervention applications and approval of the resolution plan.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), reviewed a set of two appeals on 13-02-2025 and held that machinery recorded as a fixed asset in the corporate debtor’s books, claimed for depreciation under the Income Tax Act, and hypothecated to the financial creditor forms an integral part of the corporate debtor’s assets in the resolution process. Mere journal entries and unsubstantiated claims of lease cannot override such ownership, particularly when the transaction is deemed fraudulent under Sections 49 and 66 of the Insolvency and Bankruptcy Code, 2016.
The present order disposed of two appeals concerning the dispute over the ownership of machinery in the resolution process of Saturn Rings and Forgings Pvt. Ltd. The first appeal was filed by Saturn Ventures & Advisors Pvt. Ltd., whose intervention application challenging the inclusion of the Wagner 630 line in the resolution plan was dismissed. The second appeal was filed by Satish Gopinath, the suspended director of the Corporate Debtor (CD), who contested both the rejection of the intervention application and the approval of the resolution plan. The financial creditor, Bank of India, had initiated a Corporate Insolvency Resolution Process (CIRP) against the CD under Section 7 of the Insolvency and Bankruptcy Code, 2016, which was admitted on 24.12.2021. The Resolution Professional (RP) sought approval of the resolution plan submitted by Agrasen Engineering Industries Pvt. Ltd. and simultaneously filed an application to declare certain transactions by the suspended directors as fraudulent.
The Tribunal considered whether the machinery belonged to the appellant or formed part of the CD’s assets. The appellant contended that the machinery was purchased in 2012 and later installed in the CD’s premises on a lease basis, arguing that as per Section 18 of the Code, third-party-owned assets should be excluded from the resolution process. However, the RP countered that the CD was a 99.99% subsidiary of the appellant company, which also acted as a corporate guarantor for the CD’s loan from the Bank of India. The CD had executed a hypothecation agreement on 06.06.2014, pledging the machinery as security. The RP discovered a journal entry dated 31.03.2020 transferring the machinery to the appellant, which was deemed fraudulent as it was recorded after the initiation of CIRP with an intent to defraud creditors.
The Tribunal found that the machinery had been treated as a fixed asset in the CD’s books, and depreciation had been claimed under the Income Tax Act, indicating ownership. The appellant failed to substantiate its claim of leasing the machinery, as there was no lease deed or evidence of rental payments. Moreover, the financial creditor’s records confirmed that the machinery was part of the CD’s hypothecated assets. The RP initially excluded the machinery from the Information Memorandum (IM) based on the journal entry but later included it upon realizing the fraudulent nature of the transaction. The Tribunal concluded that the machinery belonged to the CD and formed an integral part of its assets. Consequently, the application filed by the RP under Sections 49 and 66 of the Code to annul the transaction was allowed, while the appellant’s intervention application was dismissed. The appeals were accordingly rejected, affirming the inclusion of the machinery in the resolution plan.
Mr. Devansh A. Mohta, Ms. Anne Mathew and Mr. Jai Govind, Advocates represented the Appellant.
Mr. Gaurav Mitra, Mr. Ishan Roy Chowdhary, Ms. Pranati Bhatngar, Ms. Palak Johnson, Advocates appeared for Respondent 1/Resolution Professional.
Ms. Nivedita R Sarda, Ms. Sagrika Joshi and Mr. Ronak Sharma, Advocates appeared for SRA.
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