'Assets',Have Proved To Be `Fictitious’/`Fraudulent’, Created In The`Books Of Accounts’,With An Intent To `Defraud’ The‘Creditors’;NCLAT Chennai

Background Facts

Archana Motors Pvt. Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) on 01.07.2019. Subsequently, the Adjudicating Authority ordered liquidation of the Corporate Debtor on 10.01.2020.

The Liquidator filed an application before the Adjudicating Authority, seeking (i) Declaration that the entries of Rs. 21.37 crore made in the audited financial statement of 2018 as fraudulent transactions; (ii) To impose liability on Promoter and Directors of Corporate Debtor for payment of Rs. 21.37 Crore loss suffered by the Corporate Debtor; and (iii) Direction to Promoter and Directors to pay Rs. 21.37 crores to the Liquidator for distribution under Section 53 of IBC.

The Liquidator argued that various items shown in the Financial Statement of the Corporate Debtor for the Financial Year 2017-18 and 2018-19 are fictitious in nature. The Promoters and Directors failed to furnish the details of the assets, locations and the copies of the assets register of fixed assets, valuing to Rs. 5.33 crores, which were reflected in the consecutive Balance Sheets including 2018.

On 13.07.2021, the Adjudicating Authority declared the entries of Rs. 21.37 crores as fraudulent transactions and the Promoter and Directors were held liable to pay the amount to the Liquidator.

The Promoters and Directors of the Corporate Debtor (“Appellants”) challenged the order dated 13.07.2021 before the NCLAT. The Promoters and Directors argued that the Corporate Debtor’s entire business was affected by the floods in Kerala in August 2018. Consequently, the assets and the records of the Corporate Debtor were destroyed.

NCLAT Verdict

The Bench observed that Section 66 of IBC empowers the Adjudicating Authority to pass suitable orders, if it is found that any person has conducted the business of Corporate Debtor with an intention to defraud its Creditors or other stakeholders.

For an application under Section 66 of IBC to succeed, it must be established that (i) Business of the Corporate Debtor has been carried out with an intent to defraud the creditors; (ii) Directors participated in carrying on business of the Corporate Debtor despite knowing likely insolvency of the Corporate Debtor.

The Bench observed that the Promoters/Directors did not make any claim before insurance company or State Authorities regarding loss suffered to fixed assets due to floods. The Liquidator and Adjudicating Authority gave ample opportunities to the Promoters and Directors and yet the details were not furnished.

“Therefore, this ‘Appellate Tribunal’, is of the considered opinion that the ‘Appellants’, have not turned out to be clean in their explanations and submissions, and therefore cannot avoid their responsibilities towards nonavailable / non-verifiable Assets of Rs. 21.37 crores, as shown in the `Balance Sheet’ for the Financial Year 2018. These `Assets’, have proved to be `Fictitious’ / `Fraudulent’, in nature and seems to have been created in the `Books of Accounts’, with an intent to `Defraud’ the ‘Creditors’.”

The Bench upheld the order of the Adjudicating Authority and dismissed the appeal.

Case Title: Mr. Shibu Job Cheeran & Ors. v Mr. Ashok Velamur Seshadri

Case No.: Company Appeal (AT) (CH) (Ins.) No. 350 of 2021

Counsel for Appellants: Dr. K.S. Ravichandran, PCS, Ms. S. Manjula Devi, Advocate.

Counsel for Respondent: Mr. S. Sathiyarayanan, Advocate Ms. D. Pavithra, Advocate.

Click Here To Read/Download Order