Mere Non-Reflection Of Funds In Books Not Proof Of Fraud Under IBC: NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi has dismissed an application filed by the liquidator of Vysali Pharmaceuticals Ltd against its suspended Managing Director, holding that mere non-reflection of amounts in the books of accounts cannot by itself establish fraudulent diversion of funds under Section 66 of the Insolvency and Bankruptcy Code.

A coram of Judicial Member Vinay Goel observed that allegations of fraud must be supported by cogent and credible evidence and cannot be sustained on assumptions or incomplete material.

“Mere non-reflection of the amount in the books of accounts, in the absence of supporting evidence of diversion or fraudulent intent, is insufficient to attract the provisions of Section 66(1) of the Code; it may indicate irregularity or mismanagement in accounting.” it held

The liquidator filed the application under Section 66(1) of the IBC against the suspended Managing Director, seeking repayment of Rs 30 lakhs with 18% interest, alleging fraudulent diversion of funds.

The company was admitted to CIRP in October 2023 and subsequently ordered into liquidation on 03.12.2024, with the applicant appointed as liquidator.

During liquidation, a dispute emerged regarding an agreement for sale of a mortgaged property, under which Rs 50 lakhs was allegedly received, but only Rs 20 lakhs was reflected in the company's books, leaving Rs 30 lakhs unaccounted.

The liquidator alleged that the suspended director had illegally dealt with mortgaged property and siphoned off Rs 30 lakhs, constituting a fraudulent transaction, and sought directions to recover the amount from him.

The director contended that the claim for Rs 30,00,000 with 18% interest is uncertain and unsupported by any independent evidence, as it is based solely on pleadings in a pending civil suit.

The tribunal noted a “fundamental inconsistency” in the liquidator's case, observing that while he had challenged the alleged sale agreement as illegal and unenforceable, it simultaneously relied on the same transaction to seek recovery of Rs 30 lakhs from the director, which was self-contradictory and legally impermissible.

It observed that while Rs 20 lakhs was reflected in the company's books of accounts, the dispute pertained to the remaining ₹30 lakhs allegedly paid through two cheque transactions, and the material on record indicated that these amounts were credited to the company's account and not to the director.

“Despite being the custodian of the books of accounts, bank records, and financial statements of the Corporate Debtor, the Liquidator has failed to point out any material to demonstrate that the said amount was subsequently diverted to the personal account of the Respondent or siphoned off in any manner.” it said

It added “once the amount is shown to have been received in the account of the Corporate Debtor, the burden lies heavily on the Applicant, who is in custody and control of the entire financial records, to establish by cogent evidence that such amount was fraudulently diverted.”

The tribunal held that mere non-reflection of amounts in the books of accounts cannot, by itself, be treated as conclusive proof of siphoning of funds, particularly when the amount is shown to have been credited to the company''s account, observing that it “may indicate mismanagement of accounts.”

It further held, “Mere allegations based on hearsay or hypothetical assumptions, without any concrete evidence tracing the movement of funds or establishing wrongful gain, cannot form the basis for granting the relief as sought in the present Application.”

Examining the scope of Section 66(1) of IBC, the Tribunal observed:

“It requires a clear finding that the business of the Corporate Debtor was carried on with an intent to defraud creditors or for a fraudulent purpose. Such a finding must be based on concrete and credible evidence demonstrating dishonest intention and wrongful conduct. The provision cannot be invoked on the basis of assumptions, accounting discrepancies, or incomplete records.”

Accordingly, the tribunal dismissed the application.

For Applicant: Advocate Vinod P.V and Kizhakkekkara Kuriakose Jose, Liquidator

For Respondent: Advocate Sherry Samuel Oommen