Decided on 1 March 2023 | NCLAT Chennai
In Shibu Job Cheeran, Suspended Director of Corporate Debtor v. Mr. Ashok Velamur Seshadri, Liquidator of Archana Motors Limited, the National Company Law Appellate Tribunal (“NCLAT“) observed that it must be proven that the former directors of the corporate debtor were aware of the company’s insolvency but continued to conduct business with ulterior motives in order to demonstrate the fraudulent purpose under Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC“).
On an application under Section 9 of IBC by Minsa Tech India Private Limited, Corporate Insolvency Resolution Process was initiated vide order dated 01.07.2019 by the National Company Law Tribunal, Chennai Bench (“NCLT“). Subsequently, upon failure to achieve a resolution, Corporate Debtor, Archana Motors Pvt Ltd. went into liquidation vide order dated 10.01.2020.
During liquidation, an interlocutory application was filed under Section 66 of IBC by the liquidator seeking to declare entries of Rs. 21.37 Crore made in ‘Audited Financial Statement’ in the year 2018 as fraudulent transactions and directing erstwhile directors to contribute for the loss. The specifics of the assets, locations, and copies of the register of fixed assets, valued at Rs. 5.33 crores and included in the subsequent balance sheets, including 2018, were not provided by the erstwhile directors. The NCLT being satisfied of all facts and law, agreed to the prayers and declared the entries as fraudulent transactions and directed erstwhile directors to contribute.
Aggrieved by the order of NCLT, erstwhile directors assailed the order before NCLAT, wherein, the former directors claimed that the floods in Kerala had an impact on corporate debtor’s operations. The corporate debtor’s assets and records were destroyed in August 2018 as a result.
The Liquidator relies on the facts that the previous directors failed to provide item-by-item details of fixed assets as per the balance sheet from 2017–2018, that the vehicles listed in the balance sheet were not available for inspection, that the trade receivables of Rs. 6.19 crores included 4000 customers, but no payment was received, and that the previous directors failed to provide an explanation for the outstanding loan advances of Rs. 4.8 crores and Rs. 4.46 crores as shown in the books. The Liquidator also cited the Commercial Tax Department Trissur’s unfavourable observations of suppressed income of Rs. 2.90 crores and a fall in turnover from Rs. 81 crores to Rs. 6.51 crores from 2013 to 2017. 24 crores worth of assets, of which Rs. 8 crores are physical assets, the remaining assets are uninsured, and the claim is that they were destroyed by floods. The Liquidator added that he had physically visited the “Kannadi Branch” and discovered that it had not been impacted by floods.
According to the facts of the case, the NCLAT found that the former directors could not avoid their obligations towards non-available or non-verifiable assets of Rs. 21.37 crores, as shown in the balance sheet for the financial year 2018, because they have not proven to be truthful in their explanations and submissions. The said assets appear to have been fabricated in the books of accounts with the intention of defrauding the creditors and have proven to be false and fraudulent in origin. As a result, the NCLT’s order of 13.07.2021, which is being challenged was upheld by the NCLAT and the appeal was dismissed.
The NCLAT has shed light on the key components of Section 66 of the IBC, including the conduct of business with the aim to mislead creditors and participation in corporate debtor operations by directors who knew the company was insolvent. Additionally, directors cannot use the defense that they were not involved in day-to-day operations as a means of escape because, in the end, they serve on the board of directors solely to supervise the activities of the company and are therefore liable for such frauds.