NCLAT Sets Aside NCLT Order on JSK Marketing Lease Dispute, Remands for Fresh Adjudication on Fraudulent Trading Claim
NCLAT remands to NCLT Mumbai a disputed Master Lease Agreement between Orix Leasing and JSK Marketing, directing fresh consideration of fraud and moratorium violation claims with opportunity to file additional documents.
The National Company Law Appellate Tribunal's Principal Bench at New Delhi has set aside an order of the National Company Law Tribunal, Mumbai Bench, in the insolvency proceedings of JSK Marketing Limited, and remanded the matter for fresh adjudication. The dispute centres on a Master Lease Agreement executed between Orix Leasing and Financial Services India Limited and the corporate debtor, under which equipment worth several crores was allegedly financed and supplied — but was never found by the resolution professional. Two cross-appeals, one by Orix Leasing challenging adverse findings made against it and another by assignee FINVIN Investor Private Limited seeking stronger recovery directions, were disposed of together. The Appellate Tribunal found that documents placed before it for the first time had a material bearing on the defence and could not be ignored without a fresh hearing.
The Insolvency Proceedings and the Lease Transaction
JSK Marketing Limited entered into a Master Lease Agreement with Orix Leasing on 7 September 2018. Under the agreement, Orix Leasing was to pay the supplier — Pratiksha Tradelinks — for equipment and machinery, which were then to be delivered to JSK Marketing. The corporate debtor was obliged to pay quarterly lease rentals to Orix Leasing. A security deposit of Rs. 74,49,947 was placed by the corporate debtor with Orix Leasing. Personal guarantees of Rs. 5 crores were furnished by Kunal Jiwarajka and Laxmidevi Jiwarajka.
JSK Marketing defaulted on lease payments. Orix Leasing issued a demand notice on 6 August 2019 for Rs. 34,26,479 and, on the corporate debtor's failure to pay, filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016. The CIRP of JSK Marketing was initiated by the NCLT, Mumbai Bench, on 23 September 2019.
After the CIRP commenced, the Interim Resolution Professional made repeated attempts to locate the leased machinery and equipment. The IRP informed the Committee of Creditors at its second meeting on 17 December 2019 that the machines were not traceable. Kunal Jiwarajka, a director of the corporate debtor, replied that most machinery had technical faults and had been returned to the supplier. No documentation was provided to support this claim. Pratiksha Tradelinks did not respond to the IRP's emails at all.
Orix Leasing, in an email dated 29 June 2020, acknowledged that the security deposit of Rs. 74,49,947 had been adjusted against outstanding lease rent as on 31 October 2019 — a date after the CIRP commencement date of 23 September 2019 and therefore within the moratorium period.
The Application Before NCLT and the Impugned Order
The IRP filed I.A. No. 1319 of 2020 before the NCLT, Mumbai Bench, under Sections 43, 66, 67 and 70 of the Code. The application alleged that the entire lease transaction was designed to defraud creditors: that the machinery was never genuinely delivered to the corporate debtor, that the security deposit was appropriated during the moratorium, and that Orix Leasing, Pratiksha Tradelinks, and the suspended directors acted in concert to siphon funds from the corporate debtor.
The NCLT rejected the application by its order dated 4 June 2024. It held that since Orix Leasing was a third party, proceedings under Section 66 of the Code were not maintainable against it, relying on the Supreme Court's decision in Gluckrich Investment Private Limited v. State of West Bengal. It also held that the transaction did not fall within Section 43. However, the NCLT simultaneously recorded a finding that the Master Lease Agreement appeared to be a fraudulent document entered into to defraud creditors, and directed the Resolution Professional to ascertain the total amount paid under the MLA and take appropriate steps to recover it from all respondents by filing fresh applications.
This created an internal contradiction that both appellants seized upon. Orix Leasing objected that despite the NCLT holding no recovery order could be passed against it as a third party, the direction to the RP to recover amounts from it by fresh proceedings remained. FINVIN objected that despite findings of fraud and moratorium violation, no concrete recovery direction had been issued.
The Two Appeals and the Arguments
CA (AT) (Ins) No. 1581 of 2024 was filed by Orix Leasing. It argued that the MLA was a genuine, valid, and legally executed agreement supported by communications and documents. It submitted that the security deposit was adjusted on 28 August 2019 — before the CIRP commencement date — and that the foreclosure statement reflecting a date of 1 October 2019 was merely a product of the automated quarterly system under the MLA. Orix Leasing also pointed to parallel proceedings it had initiated: a petition under Section 9 of the Arbitration Act before the Patiala House Courts in which a receiver was appointed on 9 September 2019, proceedings under Section 138 of the Negotiable Instruments Act before the CMM, Dwarka, and a Section 95 petition against Kunal Jiwarajka as personal guarantor in CP IB No. 210 of 2021. It argued these demonstrated a genuine commercial dispute, not a sham transaction.
CA (AT) (Ins) No. 1500 of 2024 was filed by FINVIN Investor Private Limited. FINVIN had entered into an assignment agreement with the liquidator on 3 June 2024 under Regulation 37A of the IBBI (Liquidation Process) Regulations, 2016, by which the PUFE applications and assets of the corporate debtor — including IA No. 1319 of 2020 — were assigned to FINVIN. FINVIN argued that the expression “any persons who were knowingly parties” in Section 66(1) of the Code was wide enough to cover Orix Leasing as the principal beneficiary of the fraudulent transaction. It relied on this Appellate Tribunal's decisions in Royal India Corporation Ltd. v. Nandkishor Vishnupant Deshpande and Shri Baiju Trading and Investment Pvt. Ltd. v. Arihant Nenawati to argue that a knowing party to fraudulent conduct could be directed to contribute under Section 66(1). FINVIN also argued that the appropriation of the security deposit on 15 October 2019 was void under Section 14 of the Code, citing the Supreme Court's decision in Central Transmission Utility of India Ltd. v. Sumit Binani.
How the Appellate Tribunal Reasoned
The Appellate Tribunal, per Justice Mohd. Faiz Alam Khan, examined the record and the fresh documents placed before it at the appellate stage. These included invoices issued by Pratiksha Tradelinks for the supply of each machine separately, each accompanied by an annexure bearing the signature of Kunal Jiwarajka on behalf of the corporate debtor and a representative of Orix Leasing acknowledging receipt. The invoices also reflected GST numbers. E-way bills pertaining to the transportation of the machines were also placed on record.
The Tribunal observed that the NCLT had been guided by the non-appearance of Pratiksha Tradelinks and the suspended directors, by the false statements made by the directors about defective machinery being returned to the supplier, and by the fact that no machinery was found with the corporate debtor. However, the documents now placed before the Appellate Tribunal — which had not been filed before the NCLT — had a direct bearing on whether the machinery was in fact supplied to the corporate debtor. The Tribunal held that the NCLT had presumed non-supply merely because the suspended board did not hand over the machinery to the RP, without the benefit of these documents.
The Tribunal also noted that the NCLT had not discussed the parallel proceedings initiated by Orix Leasing, including the receiver appointment and the personal guarantor proceedings, despite these facts having been placed in written submissions before the NCLT. It observed that either these documents were not filed before the NCLT or were not noticed by it.
On the legal question of whether a third party can be directed to contribute under Section 66(1) of the Code, the Tribunal declined to decide the issue at this stage. It kept the question expressly open for reconsideration by the NCLT on remand, noting the competing positions taken by the parties based on Gluckrich on one side and Royal India Corporation on the other.
The Tribunal concluded that the question of whether the MLA was a sham document and whether the machines were actually supplied could only be effectively adjudicated after considering the fresh documents. A remand was therefore necessary.
Order
The NCLAT set aside the impugned order dated 4 June 2024 passed by the NCLT, Mumbai Bench, in IA No. 1319 of 2020 in CP (IB) No. 1545/MB/2019. The matter was remanded to the NCLT for fresh consideration, with directions to afford all parties an opportunity to file documents in support of their claims or defences. IA No. 1319 of 2020 was revived on the board of the NCLT. The question of whether a third party may be directed to contribute to the assets of the corporate debtor under Section 66 of the Code was kept open.
The parties were directed to appear before the NCLT on 1 July 2026. The Appellate Tribunal requested the NCLT to make sincere efforts to dispose of IA No. 1319 of 2020 within two months of the parties' appearance. Both appeals were disposed of with no order as to costs.