Periyar Agro's ₹14.3 Crore Stock Could Not Have 'Vanished Like Water'; NCLT Kochi Orders Directors To Pay ₹38 Crore

The National Company Law Tribunal (NCLT) at Kochi has recently directed the suspended directors of Periyar Agro Food Industries Private Limited to jointly pay over ₹38 crore to the Corporate Debtor after holding that they had carried on the company's business with intent to defraud creditors.

Holding that stock worth ₹14.30 crore could not have “vanished or evaporated like water” without leaving any documentary or financial trail, a coram of Judicial Member Vinay Goel held that the suspended directors had failed to satisfactorily explain the disappearance of stock.

It also found no explanation for the non-realization of ₹23.84 crore in trade receivables reflected in the company's books.

“In the absence of any supporting material to substantiate their defence, the only reasonable inference that can be drawn is that such assets have been dealt with in a manner prejudicial to the interests of the creditors. The conduct of the Respondents, therefore, falls within the ambit of carrying on the business of the Corporate Debtor with intent to defraud its creditors or for a fraudulent purpose, thereby attracting the provisions of Section 66(1) of the Insolvency and Bankruptcy Code, 2016.” it held

The matter arose from an application filed by the Resolution Professional of Periyar Agro Food Industries Private Limited alleging that the suspended directors had carried on the business of the Corporate Debtor with intent to defraud creditors.

Periyar Agro Food Industries, which manufactures wheat-based products under the brand “Taj Gold”, was admitted into the corporate insolvency resolution process in December 2021 in a plea moved by ITC Limited alleging a default of ₹1.39 crore.

During the insolvency process, the Committee of Creditors directed a forensic audit after certain irregularities surfaced in the company's financial affairs.

According to the Resolution Professional, the Corporate Debtor's financial statements reflected closing stock worth ₹17.53 crore as on March 31, 2021, while the stock position on the insolvency commencement date was shown as “Nil”.

The RP alleged that the company ought to have maintained stock worth ₹14.30 crore, which had allegedly been sold or misappropriated by the suspended directors.

The RP further alleged that trade receivables amounting to ₹23.84 crore shown in the books were fictitious and created through bogus sales to maintain drawing power under overdraft facilities.

The suspended directors denied fraudulent intent. They contended that the discrepancies were attributable to business realities during the pandemic period, including labour shortages, perishability of goods and disruptions in the food industry.

Rejecting the defence, the Tribunal held that once substantial assets reflected in the company's books are found missing or unsubstantiated, the burden shifts to the suspended management to explain what happened to them.

“Once such substantial assets are reflected in the financial statements prior to the initiation of the Corporate Insolvency Resolution Process, and the same are found to be non-existent or unsubstantiated as on the insolvency commencement date, the burden shifts upon the Respondents to satisfactorily explain the manner in which such stock and receivables have been dealt with or have ceased to exist.” it held

The Tribunal observed that the respondents had failed to produce invoices, GST returns, e-way bills, debtor confirmations or proof of payments to substantiate their case.

“The absence of such statutory and commercial records further weakens the defence of the Respondents and reinforces the inference that the transactions are not genuine.” it held.

The Tribunal also rejected the respondents' plea to cross-examine the RP. It reiterated that insolvency proceedings are summary in nature and cross-examination can be allowed only in exceptional cases.

Accordingly, the Tribunal directed the directors to jointly and severally pay ₹14.30 crore towards the value of closing stock and ₹23.84 crore towards trade receivables within one month.

Failing this, the amounts will carry simple interest at 12% per annum from the date of the order till realisation. The cross-examination application was dismissed with ₹5,000 in costs to be deposited with the National Defence Fund within five days.

For Applicant: Advocate Akhil Suresh and K Parameswaran Nair, RP

For Respondents: Advocate Sherry Samuel Oommen