NCLT Kochi Rejects Bid To Claw Back Periyar Agro's Alleged 'Gift' Transfers To Suspended Directors

The National Company Law Tribunal (NCLT) at Kochi has held that payments made to directors through running business accounts cannot be mechanically treated as “gifts” under the Insolvency and Bankruptcy Code without clear proof that they were gratuitous.

Dismissing a Resolution Professional's plea against the suspended directors of Periyar Agro Food Industries Private Limited, the tribunal held that the RP had failed to establish that the transactions qualified as undervalued transactions under Section 45 of the IBC.

A coram of Judicial Member Vinay Goel passed the order.

“At best, the transactions may partake the character of business-related adjustments or financial dealings between the parties; however, they cannot be construed as gratuitous transfers so as to fall within the ambit of Section 45(2)(a) of the Code.”, it observed.

Periyar Agro Food Industries, which manufactures wheat-based products under the “Taj Gold” brand, was admitted into the corporate insolvency resolution process in December 2021 on a Section 9 petition filed by ITC Limited over a default of ₹1.39 crore.

During the CIRP, the Committee of Creditors ordered a forensic audit after irregularities were noticed in the company's financial affairs.

The Resolution Professional alleged that the forensic audit showed excess payments made to the suspended managing director and another director through withdrawals, remuneration, personal expenses, and other running account entries maintained with the company.

According to the RP, ₹22.30 lakh paid to one director and ₹14.62 lakh paid to the other were effectively “gifts” and therefore amounted to undervalued transactions under Sections 45 and 46 of the IBC.

The RP also alleged that several company vehicles had been sold at undervalued prices. According to the forensic audit, the aggregate market value of the vehicles was estimated at ₹88.25 lakh, while the aggregate sale consideration was ₹39.40 lakh, resulting in an alleged loss of ₹48.84 lakh.

The suspended directors denied the allegations. They argued that the financial transactions were part of ordinary business dealings and reflected reciprocal debits and credits in running accounts maintained over time. They also contended that the vehicles were sold at the best available prices considering wear and tear, prior accidents, poor maintenance, financial distress and pandemic-era market conditions.

Rejecting the RP's plea, the tribunal said the payments could not be selectively isolated and characterised as gifts without examining their broader commercial context.

“.the surrounding circumstances indicate that the transactions were intrinsically linked to business operations, including expenses incurred by the Respondents on behalf of the Corporate Debtor, which may not have been fully or contemporaneously reimbursed. In commercial reality, particularly in closely held companies, such financial adjustments through running accounts are not uncommon and cannot, by themselves, be construed as gratuitous transfers.”, it observed.

The tribunal said the RP had failed to establish the essential requirement under Section 45 that the transfers were made without consideration.

It noted that similar transactions had taken place before and after the relevant period and that statutory auditors had not raised any qualification regarding such dealings.

“In the absence of clear evidence demonstrating that the Respondents derived any undue or disproportionate benefit, or that the Corporate Debtor was deliberately deprived of value, the essential ingredients required to attract the provisions of Section 45 of the Code remain unfulfilled.”,it observed.

On the vehicle sale allegations, the tribunal held that a mere comparison between estimated market value and actual sale price was insufficient to establish undervaluation.

“The determination of value in respect of used commercial vehicles is inherently fact-specific and contingent upon several practical considerations, including the age of the vehicle, extent of wear and tear, prior accident history, insurance claims, service and maintenance records, replacement of major components, mileage, operational condition and residual life of the asset.”

The tribunal noted that financially distressed companies often sell assets at the best available price rather than an ideal benchmark value. It also found no evidence that the transactions were sham, collusive, or structured to benefit related parties or defeat creditors' interests.

Accordingly, it held that no liability could be fastened on the suspended directors in relation to the vehicle sales.

The tribunal also rejected a separate application by the directors seeking cross-examination of the RP and production of documents. It held that insolvency proceedings are summary in nature and that no exceptional circumstances or specific points of conflict had been shown to justify oral evidence.

Both applications were dismissed. The tribunal imposed ₹5,000 in costs on the directors in the cross-examination application and directed the amount 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