Fraudulent Inventory Write-Off To Conceal Non-Existent Stock Attracts Section 66 Liability: NCLT Mumbai

The Mumbai Bench of the National Company Law Tribunal (NCLT) on 7 May held that the write-off of inventory worth Rs. 10,83,69,000 by Nagraj Alloys Private Limited during CIRP was a fraudulent transaction intended to conceal non-existent stock and defraud creditors, thereby attracting liability under Section 66(1) of the Insolvency and Bankruptcy Code, 2016.

Technical Member Prabhat Kumar and Judicial Member Sushil Mahadeorao Kochey allowed the application filed by the Resolution Professional, Hasti Mal Kachhara, and directed Respondents No. 1 to 3, including the former director, to contribute Rs. 10,83,69,000 to the assets of the corporate debtor. The Bench held:

“This constitutes an act carried out with an intent to defraud the creditors so that the corporate debtor is not made to hand over the inventory claimed in the books in case insolvency process commences and squarely falls within section 66(1) of IBC. Since, the Respondent No. 3 was also director of the corporate debtor during the relevant time of write off and accumulation of inventory, he is also liable for the same.”

The Resolution Professional moved the application under Sections 43 and 66 of the IBC to avoid alleged preferential and fraudulent transactions undertaken prior to commencement of CIRP. Pursuant to the insolvency proceedings, creditors appointed transaction auditors, Khanzode & Shenwai, Chartered Accountants, who submitted their report on 12 August 2024 identifying one preferential and one fraudulent transaction.

The auditor flagged the write-off of inventory of Rs. 10,83,69,000 in FY 2020–21. The suspended management offered only oral explanations and failed to produce documentary evidence. The directors claimed that the inventory was destroyed in fire incidents in 2016 and 2019 and stated that insurance claims had been lodged.

They also challenged the audit, alleging lack of independent verification by the Resolution Professional and questioning the credibility of unsigned or incomplete documents.

Rejecting these objections, the Tribunal held that the management itself supplied information to the transaction auditor and was aware of the material relied upon. It noted that explanations were specifically sought from the suspended director during the audit.

The Tribunal found inconsistencies in the fire defence. It observed that despite the alleged 2016 fire, financial statements for FY 2016–17 still disclosed inventory of Rs. 2.93 crore as on 31 March 2017. Similarly, after the alleged fire of 10 September 2019, audited accounts for FY 2019–20 still reflected an inventory of Rs. 11.59 crore as on 31 March 2020.

It further noted that the insurance claim of Rs. 5,53,108 for the 2019 incident could not justify the alleged loss exceeding Rs. 10 crore. It also recorded that inventory details were not disclosed in Form 3CD under the Income Tax Act, indicating suppression of quantitative information.

The Tribunal additionally observed that no proper stock records were maintained and quantitative inventory data was unavailable from FY 2017–18 onwards. It concluded that the write-off was undertaken with fraudulent intent to defeat creditor claims and directed Respondents No. 1 to 3 to contribute Rs. 10,83,69,000 to the corporate debtor's assets.

Accordingly, the NCLT held the transaction to be fraudulent under Section 66(1) of the IBC and fastened personal liability on the responsible directors, directing restoration of the written-off amount to the corporate estate.