Mere Non-Explanation Of Fund Use Not Enough To Prove Fraudulent Trading Under IBC: NCLT Chennai

The National Company Law Tribunal (NCLT) in Chennai has held that mere non-explanation of fund utilisation or irregular accounting, without clear evidence of intent to defraud creditors, is insufficient to invoke fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code.

Examining the scope of Section 66, the Tribunal held that mere inability to explain fund utilisation in a business context does not meet the statutory requirement unless accompanied by clear evidence of intent to defraud.

" At this juncture this tribunal finds that the applicant has relied on corporate debtor's inability on the utilization of the amount,....this Tribunal holds that mere non-explanation of fund utilization in a business setup and in the absence of concrete evidence demonstrating a deliberate attempt to siphoning off assets for personal gain, and to defraud the creditor we don't find respondent liable under section 66 of the Insolvency Bankruptcy code"

A Bench of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy emphasised that the threshold to establish fraud is high and requires proof of deliberate intent to defraud.

“The burden of proof lies squarely on the Applicant to provide an act is done with an intent to defraud the creditor or for fraudulent purpose and applicant has failed to prove that alleged transactions are with the intent to defraud the creditor ,At this juncture it is relevant for us to refer to the decision,” the Tribunal held.

MPL Cars Private Limited, a Ford dealer, was admitted to the corporate insolvency resolution process on August 13, 2019. Concerns raised by the Committee of Creditors over a sharp decline in business and utilisation of bank loans led the Resolution Professional (RP) to appoint chartered accountants to conduct a forensic audit.

The audit report alleged diversion and misuse of funds by the promoters and suspended directors, including routing transactions through related entities.

Based on these findings, the RP moved the Tribunal under Section 66 seeking contributions to the corporate debtor's assets, alleging fraudulent trading through misuse of inventory funding, routing of transactions through third parties, manipulation of cash accounts, and diversion of funds to group entities.

The suspended directors denied the allegations, attributing the company's financial distress to business losses, including damage caused by a cyclone, and contended that there was no intent to defraud or siphon funds.

Examining the scope of Section 66, the Tribunal held that mere inability to explain fund utilisation in a business context does not meet the statutory requirement unless accompanied by concrete evidence of deliberate siphoning or fraudulent intent.

“To attract Section 66 the Applicant must demonstrate that the business was conducted with a clear intent to defraud creditors or for a fraudulent purpose. The threshold for 'fraud' in this context is high and requires more than a mere routing funds through various heads in the business,” the Bench observed.

On the allegation regarding transactions routed through AB Enterprises, the Tribunal held that such routing, whether for customer bookings or director remuneration, could occur in the ordinary course of business and cannot, by itself, be treated as fraudulent.

"It is observed that while the Applicant highlights suspicious accounting manner simultaneously admitted that it is "not possible to quantify the exact amount”, we are of the considered view that Section 66 of the Insolvency and Bankruptcy Code cannot casted upon if there is no intent to defraud the creditor or for the fraudulent purpose,” the bench added.

While holding that the essential ingredients of Section 66 were not satisfied and declining to fix liability for fraudulent trading, the Tribunal nevertheless issued directions regarding amounts extended to group entities.

It held that such amounts remain assets of the corporate debtor and directed that steps be taken to recover them, including by filing claims before appropriate forums where the entities are under liquidation.

Accordingly, the tribunal disposed of the application with directions.

For Applicant: Advocate M.L Ganesh

For Respondent: Advocate Rishikesh and Ganesh