NCLT Ahmedabad Orders Steel Konnect Directors To Repay ₹20.25 Crore For Operating Hidden Account

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has directed suspended directors of Steel Konnect (India) Pvt. Ltd. and a related company to contribute Rs 20.25 crore to the corporate debtor's assets after finding they operated a concealed bank account and diverted company funds, including during the insolvency process.

The order was passed by Judicial Member Shammi Khan and Technical Member Sanjeev Sharma.

The application was filed by liquidator Kedarram R. Laddha seeking reversal of the transactions and action against the suspended directors and other respondents under the Insolvency and Bankruptcy Code.

Steel Konnect was admitted into the corporate insolvency resolution process on April 19, 2017, after defaulting to financial creditors. An Interim Resolution Professional was initially appointed and later replaced by Resolution Professional Ramchandra D. Choudhary.

During the insolvency process, it emerged that suspended directors Vivek Vijay Gupta and Varun Vijay Gupta had concealed multiple bank accounts from the Resolution Professional despite repeated queries.

One such account, maintained with Lakshmi Vilas Bank, now DBS Bank India Ltd., reflected debit transactions aggregating Rs 20.25 crore between February and August 2017 that were not reflected in the company's regular books of account.

The liquidator argued that once the insolvency process commenced, the suspended directors could no longer operate the company's accounts and that financial institutions were required to act only on the instructions of the Resolution Professional.

The tribunal found that the suspended directors continued operating the undisclosed account even after the insolvency process began.

“Such concealment of accounts by the suspended management clearly demonstrates lack of cooperation and deliberate suppression of material information from the Resolution Professional. ,” the tribunal said.

The tribunal held that transactions carried out after commencement of the insolvency process amounted to unauthorised depletion of company assets.

“The transactions were clearly intended to defeat the interests of creditors and frustrate the CIRP process,” the bench observed.

The tribunal also noted that Rs 10.64 crore was transferred to Dharam Paul Metal Pvt. Ltd., which was alleged to be a related or sister concern of the corporate debtor, without any material showing commercial justification.

“In absence of any material demonstrating legitimate consideration or bona fide business purpose for the transfer of funds to Respondent No. 4, and considering that the said entity is a related/sister concern, this Tribunal holds that Respondent No. 4 being a recipient of funds without demonstrable consideration, is liable as a beneficiary of fraudulent transactions. Hence, Respondent No. 4 is liable to contribute to the assets of the Corporate Debtor," the bench said.

The tribunal found that credits in the undisclosed account largely arose from unaccounted sales, while debits were routed to related parties, amounting to fraudulent and wrongful trading.

“It is pertinent to note that Section 66 of the Code empowers this Authority to pass appropriate orders where it- is established that the business of the Corporate Debtor has been carried on with an intent to defraud creditors or for any fraudulent purpose, or where the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvency and failed to exercise due diligence." the bench observed.

Accordingly, the tribunal directed Vivek Vijay Gupta, Varun Vijay Gupta, and Dharam Paul Metal Pvt. Ltd. to jointly and severally contribute Rs 20.25 crore to the assets of Steel Konnect within 45 days, along with interest at 12% per annum from July 1, 2020, until realisation.

The tribunal also allowed the liquidator to initiate execution and criminal proceedings in case of non-compliance, while dismissing reliefs sought against DBS Bank India Ltd.