NCLT Holds Kanoovi Foods Directors, Third Parties Liable For ₹58.27 Cr Siphoning Under Section 66 IBC

The Ahmedabad Bench of the National Company Law Tribunal (NCLT) on 20 April, held a forensic audit in Kanoovi Foods Pvt. Ltd. established diversion of funds and fraudulent as well as wrongful trading, attracting liability under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC), against promoters, directors, and associated third parties.

A Bench comprising Judicial Member Shammi Khan and Technical Member Sanjeev Sharma directed the company to restore Rs. 58.27 crore to the assets of the corporate debtor for the benefit of creditors, including HDFC Bank Ltd. It observed:

“The failure of the Respondents to produce relevant records or to rebut the allegations despite opportunity warrants drawing of adverse inference against them.”

Devang P. Sampat, the liquidator of Kanoovi Foods, filed the application in January 2022. HDFC Bank later substituted him in October 2023.

Sampat alleged that the suspended management siphoned and diverted funds, carried on business with intent to defraud creditors, and executed transactions without commercial substance. A forensic audit conducted by D.G. Thakarar & Associates identified multiple instances of fund diversion.

The audit showed that promoters and directors siphoned Rs. 44.43 crore and carried out fraudulent transactions worth Rs. 2.63 crore. The transactions included advances to suppliers, transfers to related parties, unsecured loans, and fictitious receivables.

The audit also recorded unpaid fabric sales of Rs. 11.20 crore to Ruchita Chemicals LLP (Respondent 2) and flagged suspicious imports of micro-SD cards from a Hong Kong entity due to mismatched documentation, indicating possible fraud. 

Respondent No. 2 challenged the application and called it erroneous, illegal, and not maintainable.

The applicant submitted that Respondent No. 2 approached the Tribunal without clean hands.

The NCLT rejected the defence of Ruchita Chemicals LLP, which claimed an amicable settlement in 2016. The Tribunal held that the record lacked bank evidence or valid documentation and therefore could not defeat statutory liability under Section 66, which protects creditors rather than private arrangements.

The Tribunal relied on Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd. (2025) and reiterated that Section 66 requires clear proof of intent to defraud creditors. It further held that mere irregularities or poor accounting do not satisfy the threshold, and wrongful trading under Section 66(2) requires proof that directors continued business despite knowing insolvency was inevitable and failed to minimise losses.

The Bench held that the forensic audit findings, when read with surrounding circumstances, established fraudulent intent:

“The findings of the forensic audit, when read in conjunction with (i) absence of contemporaneous records, (ii) routing of funds through related entities, (iii) non-recovery of substantial receivables, and (iv) unexplained diversion of funds for non-business purposes, cumulatively establish a pattern of conduct evidencing deliberate intent to defraud creditors, satisfying the threshold under Section 66 of the Code as laid down in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd.”

On this basis, the Tribunal concluded that the fund flow analysis, forensic audit findings, and lack of rebuttal evidence established deliberate intent to defraud creditors.

The directors (Respondents 5–10) became jointly and severally liable under Sections 66(1) and 66(2) after the Tribunal found that they knowingly carried on business with fraudulent intent and failed to exercise due diligence to minimise losses once insolvency became apparent.

The Bench quantified liability at Rs. 58.27 crore and directed the directors to deposit the amount with HDFC Bank within 45 days.

It also examined the role of third-party entities, including Terlin Engineerings OPC Pvt. Ltd. (Respondent 1), Ruchita Chemicals LLP, Craigmore Trading DMCC, and Gahena Enterprises Pvt. Ltd. (Respondent 3). It held that liability under Section 66(1) extends to third parties where evidence shows knowing participation in fraudulent transactions.

On the basis of fund flow analysis and lack of commercial substance, the Tribunal found that these entities acted as conduits in the diversion scheme rather than passive counterparties.

Accordingly, the NCLT allowed the application and fastened liability on both the directors and the identified third-party entities.

For Appellants: Advocate Tarak Damani

For Respondents: Advocate Mandeep Singh Saluja for R2