Liability For Fraudulent Trading Under IBC Cannot Be Determined Mechanically: NCLT Amaravati

The National Company Law Tribunal (NCLT), Amaravati, has held that liability for fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code cannot be determined through a mechanical or formula-based approach and must instead rest on a detailed examination of financial records and transactions.

A Bench of Judicial Member Kishore Vemulapalli and Technical Member Umesh Kumar Shukla observed that fixing liability based merely on contractual percentages or competing claims without proper reconciliation would be impermissible.

“This Adjudicating Authority is of the considered view that determination of liability under Section 66 cannot be reduced to a mechanical application of a contractual percentage on gross receipts, nor can it be conclusively restricted to the differential figure asserted by the suspended Directors in the absence of a comprehensive and verified reconciliation,” the tribunal said.

It added that the exercise must necessarily involve scrutiny of “actual inflows received during the relevant period, credits made to the TRA, [and] the net shortfall, if any,” attributable to deviations from the agreed mechanism.

The ruling came in proceedings arising from the insolvency of Saradambika Power Plant Pvt Ltd, where the Corporate Insolvency Resolution Process (CIRP) was initiated on April 18, 2022, at the instance of Indian Renewable Energy Development Agency Ltd (IREDA), followed by a liquidation order on February 3, 2023.

The application under Section 66, originally filed in December 2022, alleged that the suspended directors had routed power sale proceeds outside the designated Trust and Retention Account (TRA), in breach of the agreed financing structure.

A transaction audit recorded that Rs 57.21 crore in power sale proceeds between 2015 and 2017 was routed through an SBI Chimur account instead of the TRA.

However, the tribunal held that liability cannot be conclusively fixed on that basis alone without proper verification and reconciliation of accounts.

The tribunal further held that neither the liquidator's reliance on contractual percentages nor the figures put forth by the suspended directors could be accepted without proper reconciliation.

Accordingly, the tribunal partly allowed the application and directed further scrutiny of financial records to ascertain the actual extent of liability