Principal Bench affirms NCLT's finding of fraudulent trading by suspended directors for swapping hypothecated high-value machinery with lower-value assets, imposing hefty costs for frivolous appeal.
In a significant ruling dated September 17, 2026, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, dismissed the appeal filed by Dinesh Keshawrao Atkare and Madan Keshawrao Atkare challenging the National Company Law Tribunal (NCLT), Mumbai Bench-I order directing them to contribute Rs. 17,23,05,603.50 to the assets of the Corporate Debtor under Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC). The case centered on allegations that the appellants, suspended directors of the corporate debtor, fraudulently removed high-value C.I. Flexographic Press machinery-financed through loans and hypothecated in favor of secured creditors-and replaced them with substantially lower-value Rotogravure Printing Machines to the detriment of creditors.
The NCLT had found that the machinery originally purchased with secured loan proceeds was not present at the corporate debtor's premises during the Corporate Insolvency Resolution Process (CIRP). Instead, machines of a different type and significantly lower value were installed, without documented consent from the financial creditors. The appellants contended that this single transaction did not amount to fraudulent trading under Section 66 and argued estoppel based on prior acceptance by financial creditors and contradictory expert reports. They also challenged the quantum of contribution, claiming depreciation and realizable value were not considered.
The NCLAT, after analyzing extensive documentary evidence including purchase invoices, hypothecation agreements, independent valuation reports by IBBI-empaneled mechanical engineers, inspection reports, and circumstantial evidence, upheld the NCLT's findings. It held that:
- The cumulative evidence sufficiently established fraudulent trading or wrongful trading as defined under Section 66 of the IBC, justifying the direction for contribution by the appellants.
- A single fraudulent transaction is adequate to invoke Section 66 jurisdiction if it evidences intent to defraud creditors.
- The absence of contemporaneous consent or documentation authorizing substitution of machinery coupled with the replacement by substantially lower-value assets indicates bad faith and fraudulent intent.
- Contrary to the appellants' assertions, expert valuation reports were consistent and credible, while the appellants' expert did not personally inspect the machinery and relied on photographs only.
- The adjudicatory authority is not required to conduct a forensic-level investigation but can draw inferences from the totality of circumstances and available evidence.
- The amount directed as contribution was not arbitrary and reflects the value of hypothecated machinery removed, with depreciation and market realizable value arguments insufficient to negate the finding of fraud.
- Delay and resistance by the suspended directors in handing over possession of assets during CIRP further corroborated fraudulent conduct.
Consequently, the NCLAT confirmed the NCLT's order directing the appellants to pay Rs. 17,23,05,603.50 to the corporate debtor's assets and allowed the liquidator to proceed with liquidation. Additionally, the tribunal imposed costs of Rs. 5,00,000 each on the appellants for filing a frivolous appeal and wasting judicial time, directing the amount be deposited in the Prime Minister's National Relief Fund.
This judgment reiterates the robust powers of adjudicating authorities under Section 66 of the IBC to hold directors accountable for fraudulent or wrongful trading, emphasizing that circumstantial evidence and expert valuation reports can substantiate claims of asset misappropriation even without direct proof of criminal intent. It also clarifies that the jurisdiction under Section 66 is not limited to multiple transactions but extends to single acts causing creditor harm.
The case cited precedents such as Piramal Capital and Housing Finance Ltd. v. 63 Moons Technologies Ltd. and Anuj Jain v. Axis Bank Limited, reinforcing the principle that fraudulent trading is a matter of inference based on facts and patterns rather than requiring explicit direct proof.
Legal practitioners and corporate stakeholders should note the stringent scrutiny on directors' conduct during insolvency and the judiciary's willingness to impose heavy financial liability and costs to deter fraudulent asset manipulation.
Bottom Line:
Section 66 of Insolvency and Bankruptcy Code, 2016 - Adjudicating Authority empowered to direct contribution to Corporate Debtor's assets for fraudulent or wrongful trading, based on cumulative evidence including documentary records, valuation reports, and circumstantial findings.
Statutory provision(s):
Section 66, Insolvency and Bankruptcy Code, 2016; Section 61, Insolvency and Bankruptcy Code, 2016; Section 13(4), SARFAESI Act
