Directors Cannot Evade Liquidation Duties By Claiming One Director Managed Company Affairs: NCLT Kochi
The National Company Law Tribunal (NCLT) at Kochi has recently held that directors cannot avoid their statutory obligations during liquidation merely by claiming that one director alone managed the company's affairs.
“Having admitted their position as directors of the Corporate Debtor, they cannot evade the obligations cast upon them under the provisions of the Code merely by contending that Respondent No. 1 was principally managing the affairs of the Company,” a coram of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy observed.
The tribunal directed six directors of Goodwin Packpet Private Limited to deposit ₹2.07 lakh, representing the cash balance reflected in the company's financial statements. The amount must be deposited with interest within 30 days.
However, the tribunal declined to direct the company's former Managing Director, Murali Narayanan, to deposit ₹12.61 lakh shown as receivable from Goodwin Traders, his proprietorship concern. It held that the liquidator must pursue appropriate legal remedies to recover the disputed amount.
The liquidator filed an application under Sections 19(2) and 34(3) of the Insolvency and Bankruptcy Code, 2016, seeking recovery of ₹2,07,826 reflected as cash-in-hand in the company's financial statements. He also sought a direction requiring Narayanan to deposit ₹12,61,608 shown as receivable from Goodwin Traders.
The liquidator's submissions recorded ₹25.39 lakh in outstanding sundry debtors as of January 11, 2021, including the amount due from Goodwin Traders. He submitted that the debtor details and the cash balance had not been handed over.
Narayanan contended that the outstanding amount from Goodwin Traders had already been repaid. He relied on a bank statement showing a payment of ₹35 lakh on October 30, 2018, and disputed the cash balance. The other directors maintained that Narayanan had principally managed the company's affairs.
Two directors based abroad also argued that they were merely investors and had neither participated in the company's management nor held custody of its records.
The tribunal rejected the latter defence, observing that the financial statements had been prepared in the ordinary course of business. The directors had not produced material to substantiate their claim that the cash entry was false or fabricated.
It further observed that entries in a company's balance sheet bind the company and its management. Possession of company assets by one director could be treated as permissive custody on the company's behalf, it held, adding that the other directors could not distance themselves from that responsibility.
“The responsibility of Respondent Nos. 1 to 6 in respect of the assets of the Corporate Debtor is joint and several,” the tribunal observed.
It directed all six directors to deposit ₹2,07,826 into the company's liquidation account within 30 days, with interest at 12% per annum or the rate applicable to a State Bank of India term deposit, whichever is higher.
The tribunal distinguished this amount from the ₹12.61 lakh receivable. While the cash-in-hand had to be accounted for and handed over to the liquidator, the disputed receivable could not be summarily recovered under Sections 19(2) and 34(3) of the IBC.
The liquidator must pursue an appropriate legal remedy to recover the receivable, the tribunal ruled. It partly allowed the application.
For Applicant: Advocate Shankar P Panicker and Balakrishnan Baburajan, Liquidator
For Respondents: Advocate Rahul Venugopal