In a significant ruling that challenges the misuse of , the (NCLAT), New Delhi, has ruled that directors who assume active control over a cannot rely on corporate structure as a shield to evade . The bench, led by Judicial Member Justice N. Seshasayee alongside Technical Members Arun Baroka and Indevar Pandey, upheld an order requiring the recovery of ₹3 crore in unpaid business dues, directly holding the controlling individuals accountable alongside the acquiring entity.
The decision emerges from a complex dispute originating in a Business Purchase Agreement (BPA) executed on . Under the terms of this agreement, moved to acquire the business operations of for a total consideration of ₹3 crore. This amount was specifically earmarked to cover designated liabilities, director bonuses, and the acquisition of the promoters’ shareholding. The agreement was structured with the expectation that incoming revenue generated by the business would gradually discharge these financial obligations.
The Shift in Operational Control Following the execution of the agreement, individuals associated with the acquiring company immediately moved to consolidate their position. Appellants, including Subbarao Siddabattula, assumed directorships within the , effectively taking the reins of its financial and operational management. This period saw the implementation of significant business changes, including the mobilization of fresh capital and the expansion of operational reach.
The situation took a turn for the worse when the entered the (CIRP) in , eventually sliding into by . As the liquidator scrutinized the company’s accounts to satisfy creditors, the outstanding ₹3 crore payment under the original 2017 agreement became a focal point of recovery efforts. When the primary corporate entity failed to honor the payment, the liquidator sought intervention from the (NCLT), Delhi. On , the NCLT ruled that the appellants, alongside Corsalite, were collectively liable for the payment. This decision was subsequently challenged before the NCLAT.
The appellants vehemently contested their , asserting that they were never personal signatories to the agreement. They argued that any action taken by them was strictly in their capacity as representatives of Corsalite, and that the corporate entity remained a distinct legal person. Furthermore, the appellants contended that the liquidator had failed to plead , claiming the dispute was a standard contractual disagreement that fell outside the of the .
The NCLAT dismissed these objections, emphasizing that the protective shroud of a company cannot be exploited when it serves merely as a facade for individual control. The tribunal noted that the appellants had exercised complete command over the 's finances and had personally benefited from its operations. In a stern observation regarding the misuse of corporate form, the bench noted:
“The cannot be invoked where the corporate form is used as a device to conceal the identity of the persons exercising complete control and to evade corresponding liabilities.”
The tribunal further clarified that the unpaid consideration under the BPA formed a critical part of the estate. Under the existing framework, the liquidator holds the mandate to recover all assets and receivables for the benefit of creditors. Therefore, the recovery proceedings were inherently linked to the insolvency process, firmly establishing the tribunal’s jurisdiction under Section 60(5) of the Insolvency and Bankruptcy Code.
Accountability Beyond Signatures The NCLAT’s reasoning turned on the conduct of the individuals rather than the mere technicalities of the agreement. The bench pointed out that the appellants had not acted as passive observers or distant investors. Instead, they had inserted themselves into the highest levels of management, assumed control over treasury functions, and conducted internal share transfers that effectively placed the economic benefit of the acquired business in their own hands.
The court rejected the defense of , noting that an individual who immediately steps into the role of Chairman and after an acquisition cannot later disclaim responsibility for the management decisions of that period. The tribunal found that Corsalite had functioned as a mere vehicle for the appellants to secure the business assets of the without fulfilling the financial obligations attached to the purchase. As the bench observed:
“Once possession, management and commercial benefits under the Agreement have been accepted and enjoyed, the purchaser cannot avoid payment of the agreed consideration by selectively relying upon isolated contractual clauses.”
Final Standing and Next Steps By affirming the NCLT's finding, the NCLAT has reinforced a robust standard for corporate accountability. While the ruling does not apply to every director in every scenario, it establishes that those who exercise actual, day-to-day control over a business cannot use a secondary company as a barrier to hide from established financial dues.
The tribunal ultimately modified the original NCLT order to specifically delineate the scope of liability, ensuring it reached the appellants who held primary responsibility. As the recovery process moves forward, the liquidator is now empowered to pursue the ₹3 crore from the specific entities and individuals identified by the appellate bench. This decision signals to corporate leadership that the enjoyment of commercial benefits, coupled with the exercise of management control, carries an inescapable legal burden when the underlying obligations remain unfulfilled. The proceedings now return to the phase, where the recovery of these assets will form the next critical step in satisfying the claims of the ’s creditors.
Corporate Veil - Insolvency Resolution - Financial Accountability - Business Purchase Agreement - Liquidation Estate
