Accounting Discrepancies Alone Cannot Establish Fraudulent Trading Under IBC: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai Bench, has held that accounting discrepancies, in the absence of evidence of fraudulent intent or diversion of assets, are insufficient to establish fraudulent or wrongful trading under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC).

While directing the former whole-time director to contribute ₹51.80 lakh to the corporate debtor, the bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar observed that accounting discrepancies, in the absence of material showing fraudulent intent or diversion of assets, were insufficient to attract Section 66 of the Insolvency and Bankruptcy Code, 2016.

It observed, “The discrepancies pointed out in these transactions primarily relate to accounting and recording of entries. Such accounting discrepancies, in the absence of material showing fraudulent intent or diversion of the assets of the Corporate Debtor, are not sufficient to attract Section 66 of the Code.”

The application under Section 66 of the IBC was filed by CA Kshitiz Gupta, the erstwhile Resolution Professional of Viztar International Private Limited. Gupta challenged eight categories of transactions, including bad-debt write-offs, accounting adjustments, discrepancies in bank records, and payments to related parties.

The NCLT partly allowed the application. It rejected the allegations concerning most of the challenged transactions but held that payments of ₹51.80 lakh to three persons associated with the erstwhile management attracted Section 66(2) of the IBC.

The tribunal observed that writing off bad debts is an internal accounting procedure. Such a write-off does not, by itself, establish an intention to defraud creditors or indicate that efforts to recover the debts have been abandoned.

It clarified that the issue was not whether the write-offs were commercially prudent. Rather, it was whether they were made with an intention to deceive creditors or without exercising due diligence to minimise their losses.

The NCLT further held that discrepancies in bank records and accounting entries could not establish fraudulent or wrongful trading under Section 66 of the IBC without evidence of fraudulent intent or diversion of funds.

The NCLT found that payments totalling ₹51.80 lakh had been made to three persons associated with the erstwhile management. There was no documentary evidence to substantiate the stated business purposes of these payments.

Given the corporate debtor's deteriorating financial position and the absence of supporting records, the Tribunal held that the payments attracted Section 66(2) of the IBC.

Accordingly, the NCLT directed former whole-time director Sachin Adhikari to contribute ₹51.80 lakh to the corporate debtor within 30 days. If the amount remains unpaid, the outstanding balance will attract interest at 12% per annum.