Remuneration Paid To Directors For Managerial Services Not Fraudulent Without Proof Of Intent To Defraud: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that remuneration paid to directors for their managerial services cannot be treated as fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code (which deals with fraudulent or wrongful trading carried on with intent to defraud creditors) in the absence of proof of such intent.

Setting aside an order of the Ahmedabad bench of the National Company Law Tribunal in the CIRP of Doshion Water Umbrella (Cuddalore) Pvt. Ltd., the appellate tribunal said there was no cogent evidence to show fraudulent intent behind the payments.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra observed that Section 66 can be invoked only when fraudulent intent is established with clear evidence.

“The degree of proof and evidence required should be of unimpeachable nature and beyond reasonable doubt. Mere suspicion or presumption of fraud would not suffice to attract the provisions of Section 66," the tribunal said.

It added that payments made for legitimate services in the ordinary course of business cannot be treated as fraudulent in the absence of evidence of intent to defraud.

“Thus, when payments were made to the Appellants for legitimate services rendered by them in the ordinary course of business with full disclosure of accounts of the Corporate Debtor, the same cannot be said to fall within the purview of Section 66 of IBC as the essential element to attract Section 66 is to establish by way of cogent evidence the intent to defraud which remains unfulfilled.”

The appeal was filed by Rakshit Dhirajlal Doshi and Ashit Doshi, suspended directors of Doshion Water Umbrella (Cuddalore) Pvt. Ltd.

A transaction audit during the corporate insolvency resolution process flagged Rs 23.64 lakh paid as managerial remuneration and another Rs 2.78 lakh payment as suspicious transactions.

The NCLT accepted the liquidator's plea and directed the refund of Rs 26.42 lakh.

Before the appellate tribunal, the directors argued that the remuneration was for managerial services rendered to keep the company running. They also pointed out that similar remuneration claims for later periods had been admitted by the resolution professional.

The NCLAT noted that the company's ledger entries reflected outstanding remuneration dues to the directors for FY 2019–2020. It also observed that payment on the same grounds were made 15 months back on March 31, 2021

In these circumstances, the tribunal held that the payments could not be treated as fraudulent in the absence of clear evidence showing an intent to defraud creditors.

However, it held that a cheque of Rs 2 lakh drawn on June 30, 2022 and cleared after the commencement of CIRP could not be permitted.