Outsiders in Fraudulent Transactions: Applying Bilta (UK) Ltd. v. Tradition Financial Services Ltd. in the Indian Context

As per the Insolvency and Bankruptcy Board of India’s newsletter, applications for avoidance of fraudulent transactions involving amounts more than Rs 1.2 lakh crore (i.e. USD 13 billion) are pending for adjudication before the tribunals as of June 2025.

Relatively recently, the Supreme Court of United Kingdom in a landmark decision passed in Bilta (UK) Ltd. v. Tradition Financial Services Ltd.¹ (Bilta UK), held that Section 213(2), UK Insolvency Act, 1986 (IA 1986), does not restrict its scope only to the directors and other “insiders” who were directing or managing the business of the company but also include the “outsiders” or third parties to the company. It was further held that the natural meaning of the term “any persons who were knowingly parties” to the carrying on of the business of the company for fraudulent purpose employed in the Section 213(2) is wide enough to cover not only the “insiders” but also persons who were dealing with the company if they knowingly were parties to the fraudulent business activities in which the company was engaged. Such persons could include those who transacted with the company in the knowledge that by those transactions the company was carrying on its business for a fraudulent purpose.

The above stance taken by the Supreme Court of United Kingdom has sparked a much needed introspection as to whether — provisions of Section 66(1), Insolvency and Bankruptcy Code, 2016 (Code) can be made applicable to the third parties or outsiders to the company undergoing insolvency or liquidation in India. As, contrary to the Supreme Court of United Kingdom, the Supreme Court of India in Gluckrich Capital (P) Ltd. v. State of W.B.² (Gluckrich), held that remedy for avoidance of the fraudulent transaction is not available under Section 66(1) of the Code, against a third party to a company undergoing insolvency. Following the Gluckrich Case, which is rather sub silentio and passed by the Supreme Court in a clarification application sitting in criminal jurisdiction, the insolvency tribunals in India have adopted a simpler approach to limit the application for seeking avoidance of fraudulent transactions only to the related parties of the company undergoing insolvency or liquidation.³

Why it matters?

As per the Insolvency and Bankruptcy Board of India’s newsletter, applications for avoidance of fraudulent transactions involving amounts more than Rs 1.2 lakh crore (i.e. USD 13 billion) are pending for adjudication before the tribunals as of June 2025. With the pro Gluckrich stance of the tribunals, the recovery of proceeds of fraud shall be restricted only from the management and related parties of the company and not from the “outsiders” including transacting parties, which are otherwise cash rich entities specifically floated for fraudulently fishing out the last pile of cash from the company’s account.

Purposive interpretation warranted

The Supreme Court of United Kingdom has rightly applied the purposive interpretation of the term “any persons who were knowingly parties” deployed in the Section 213(2) of the IA 1986 to held that it creates civil liability where a person is knowingly involved in fraud when he or she knowingly becomes a party to the carrying on of business by a company with intent to defraud creditors or for any fraudulent purpose. Liability under Section 213(2) depends upon dishonest participation and it exists to discourage such participation by the outsiders to the company. The court also noted that while other provisions of the Part IV Chapter X of the IA 1986 are targeted toward persons involved in management, promotion and formation of the company, the ambit of Section 213(2) is extended to apply not only to insiders or related parties but also to other persons who were knowingly parties to the frauds.

Provisions of the Section 66(1) of the Code and Section 213(2) of the IA 1986 are pari materia. Under Section 66(1) of the Code, the Insolvency Tribunal, where it finds that any business of the company has been carried on with intent to defraud creditors or for a fraudulent purpose, is empowered to pass an order directing any persons who were knowingly parties to such conduct to contribute to the assets of the company.

Further, Section 66(2) of the Code is designed to make the delinquent directors liable for the potential loss caused to the creditors of the company. While Section 66(1) deals with “fraudulent trading”, Section 66(2) deals with “wrongful trading”. The liability imposed under Section 66(1) is much wider and applicable to “any persons” who were knowingly parties to the carrying on of the business with a dishonest intention to defraud the creditors.⁴

Conclusion

In Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.⁵, the Supreme Court while interpreting other provisions of the Code, held that, it remains trite that an interpretation that defeats the scheme, intent and object of the statutory provision is to be eschewed and for that matter, if necessary, by applying the principles of purposive interpretation rather than literal. Further, it is pertinent to note that excluding a transacting third party who knowingly assisted the company in carrying out a fraudulent transaction from the ambit of Section 66(1) of the Code would also frustrate the principle of pari delicto — where both parties are equally responsible for a fraudulent act, the courts will not assist either, as elucidated by the Supreme Court in Immani Appa Rao v. Gollapalli Ramalingamurthi⁶.

Therefore, in light of the decision of Supreme Court of United Kingdom in Bilta (UK) Case⁷, it would be essential to introspect the pro Gluckrich stance and adopt a purposive interpretation that brings “outsiders” within the ambit of Section 66(1) of the Code. Such an interpretation would strengthen creditor recoveries in long-pending applications for avoidance of fraudulent transactions and open avenues for litigation financing.