Principal Bench of NCLAT confirms liability of ex-directors for siphoning funds, fraudulent transactions, and overvaluation of properties under the Insolvency and Bankruptcy Code, 2016.
In a significant judgment delivered on September 10, 2026, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, dismissed the appeal filed by suspended directors of Linkson International Ltd., holding them liable for fraudulent financial practices involving over Rs. 4.37 crore. The judgment came in the appeal challenging the order passed by the National Company Law Tribunal (NCLT), Mumbai Bench, which partly allowed the liquidator's application and directed the appellants to contribute jointly or severally the said amount to the corporate debtor (CD).
The case arose after Punjab National Bank initiated Corporate Insolvency Resolution Process (CIRP) against Linkson International Ltd. under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. Mr. Manish Baldeva was appointed as the Interim Resolution Professional (IRP), later confirmed as the Resolution Professional and Liquidator of the corporate debtor.
The liquidator, empowered under Section 35 of the IBC, commissioned a forensic audit by ADB and Associates to investigate the financial affairs of the CD, focusing on asset status and genuineness of transactions. The forensic audit report submitted in October 2019 revealed extensive malpractices including siphoning and misappropriation of funds amounting to Rs. 527.06 lakhs, fictitious cash expenses of Rs. 103.15 lakhs without supporting documentation, and overvaluation of properties to secure bank loans.
Key findings by the forensic auditors included:
- - The purchase of flats and godowns in Shri Gopal Complex and Megh Complex, Nagpur, were overvalued significantly compared to market rates and government ready reckoner values.
- - Despite the sale deeds executed in 2013, the properties remained in possession and ownership records of the vendors, indicating non-compliance with mutation procedures.
- - The loan disbursed by Nagpur Nagrik Sahkari Bank was routed back to the corporate debtor and its related entities via multiple transfers, revealing a round-tripping scheme designed to defraud creditors.
- - Cash payments alleged to be made as down payments lacked any receipts or acknowledgments and were unsupported by bank practices or documentation.
- - Cash expenses recorded in the CD's books were lump-sum entries without substantiation, indicating fictitious expenses to siphon funds.
The liquidator filed an application under Sections 35, 36, 60(5), 66, and 68 to 72 of the IBC seeking directions against the ex-directors and promoters to contribute to the CD and to recover amounts siphoned off.
The NCLT, after considering the forensic audit and related materials such as sale deeds, bank statements, and sub-registrar records, concluded that the transactions were accommodation deals to facilitate round-tripping of funds. It directed the appellants to pay Rs. 4.37 crore jointly or severally to the corporate debtor within 30 days.
The appellants challenged the order primarily on the grounds that:
- - The order was passed ex parte without giving them a chance to be heard.
- - They were medically incapacitated due to serious illnesses and the COVID-19 pandemic.
- - The forensic audit report was based on incomplete data and no conclusive evidence.
- - The valuation used was based on the government ready reckoner, which does not reflect actual market value.
- - The cooperative bank involved had verified the valuations and sanctioned the loans, negating any fraudulent intent.
- - Mutation of property records is not essential for ownership.
- - Cash payments were necessitated by circumstances in remote, Naxalite-affected areas.
- - Proceedings should have been stayed due to interim moratorium under Sections 94 to 96 of the IBC.
However, the NCLAT bench comprising Mr. Justice Mohammad Faiz Alam Khan and Mr. Arun Baroka upheld the NCLT's findings. The appellate tribunal observed:
- - The forensic audit report, although not conclusive evidence, holds significant evidentiary value in the absence of contradictory material.
- - The appellants failed to disprove the audit findings or produce reliable documentary evidence to discard the report.
- - The non-provision of relevant documents by the erstwhile management itself indicates adverse inference.
- - The timing of transactions, valuation discrepancies, possession issues, and round-tripping of loan funds clearly establish fraudulent accommodation transactions.
- - The appellants' reasons for non-appearance before the NCLT were not found satisfactory.
- - The involvement of the bank and its failure to conduct site visits or proper valuations pointed to possible collusion.
- - The principles of evidence appreciation require parties with special knowledge to prove their case, which appellants failed to do.
The NCLAT thus dismissed the appeal, confirming the liability of the suspended directors to contribute Rs. 4.37 crore to the corporate debtor as a measure to undo the fraudulent transactions and protect creditors' interests. No costs were awarded, and pending interim applications were disposed of.
This judgment reinforces the judiciary's firm stance against fraudulent financial practices under the IBC and underscores the evidentiary weight forensic audits carry in insolvency proceedings. It also highlights the tribunal's readiness to pierce corporate veils to hold directors accountable for misfeasance and fraud, thereby upholding the objectives of timely resolution and creditor protection envisaged under the insolvency regime.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Transactions involving siphoning of funds, misappropriation, and fraudulent financial practices by a corporate debtor and its directors - Forensic audit report upheld as reliable evidence in the absence of contrary material provided by appellants - Appeal dismissed.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 35, 36, 60(5), 61, 66, 68, 69, 70, 71, 72, SARFAESI Act Section 14, 13(4)
