Fraudulent Diversion of ₹1.20 Cr Corporate Debtor Funds via Unauthorised Accounts Proved: NCLAT Upholds NCLT Order u/s 66 [Read Order]

The National Company Law Appellate Tribunal (NCLAT), Chennai, has upheld an order of the Kochi Bench of the National Company Law Tribunal (NCLT) directing two suspended directors of. to jointly and severally repay ₹1.20 crore to the liquidation estate on finding that they fraudulently diverted the said amount via unauthorised accounts.

The liquidation proceedings arose after the failure of the Corporate Insolvency Resolution Process (CIRP) initiated against Axiomata Elevators Pvt. Ltd. in November 2019. Following liquidation in October 2022, the appointed liquidator, Mr Renahan Vamakesan, identified a series of transactions that, in his view, were designed to siphon off funds and defraud creditors.

These included diversion of ₹60.08 lakh from the corporate debtor’s bank account without vouchers, cash withdrawals of ₹35.01 lakh, diversion of ₹15.55 lakh through an unauthorised Axis Bank account, ₹9.72 lakh through a People’s Urban Co-operative Bank account, and ₹4.36 lakh from the sale of a company vehicle misrepresented as scrap. Collectively, these transactions amounted to ₹1.20 crore, which the NCLT ordered to be repaid with interest at 12% per annum if not settled within a month.

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The appellants challenged the order on multiple grounds. They argued that Section 66 requires proof of fraudulent intent, which the liquidator had failed to establish. They contended that withdrawals were made in the ordinary course of business and that the absence of vouchers alone could not render them fraudulent.

They further claimed that the liquidator had not appointed a forensic auditor, citing the NCLT Mumbai Bench’s decision in Jayesh Sanghrajka v. Divine Investments, and that without such an audit, transactions could not be conclusively classified as fraudulent.

Additionally, they alleged a violation of natural justice, asserting that they were denied an adequate opportunity to present evidence before the NCLT and that the order was non-speaking.

The liquidator, however, countered that the appellants had deliberately opened unauthorised accounts in the corporate debtor’s name during CIRP, diverted customer payments, and misrepresented the sale of assets.

He emphasised that customers themselves confirmed payments intended for the corporate debtor had been redirected to these accounts, with tax deductions credited to the debtor’s PAN, proving diversion.

He also highlighted the appellants’ obstructive conduct, including attempts to remove files and break open the debtor’s office lock, as further evidence of fraudulent intent. Importantly, he argued that Section 66 does not mandate a forensic audit and that the liquidator’s own findings, supported by records and customer confirmations, were sufficient.

Section 66 of the Insolvency and Bankruptcy Code, 2016, deals with fraudulent trading and wrongful trading. It empowers the Adjudicating Authority (NCLT) to hold directors, partners, or any persons personally liable if they carried on the business of the corporate debtor with the intent to defraud creditors or for fraudulent purposes during CIRP or liquidation

The bench comprising Sharad Kumar Sharma (Judicial Member) and Jatindranath Swain (Technical Member), after examining the record, upheld the NCLT’s findings. It noted that the appellants had failed to produce any evidence before the NCLT to justify the transactions, and that their attempt to introduce documents at the appellate stage did not meet the strict conditions under Order XLI Rule 27 of the CPC.

The Tribunal emphasised that additional evidence cannot be admitted in an appeal merely to fill gaps left by negligence at trial. It also rejected the argument that directors are free to carry on parallel business during CIRP, holding that diversion of receivables through accounts opened in the corporate debtor’s name clearly constituted fraud.

In conclusion, the NCLAT held that the NCLT had rightly determined the transactions to be fraudulent under Section 66 IBC, and that the appellants’ conduct evidenced intent to defraud creditors. The appeal was dismissed as lacking merit, and the order directing repayment of ₹1.20 crore to the liquidation estate was upheld. Pending interlocutory applications were also closed.

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