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NCLAT Holds Removal of During Insolvency as in Santoshi Barrier Film
The at Delhi has delivered a significant ruling under the , affirming that the removal of high-value during corporate insolvency and its replacement with substantially lower-value equipment amounts to . The appellate bench, comprising Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey, upheld an order from the Mumbai bench of the directing two suspended directors of to contribute ₹17.23 crore to the company’s asset pool.
The decision reinforces the liability of directors under and sends a clear message that any unauthorized removal or substitution of will be treated as a .
Hypothecated Assets Disappear
Santoshi Barrier Film had obtained two loans—₹8 crore from and ₹4 crore from (later assigned to )—to purchase two six-colour C.I. Flexographic Press machines. These machines were hypothecated in favour of the lenders as security for the credit facilities.
When the company entered insolvency and a Resolution Professional (RP) took charge, a physical inspection revealed that the financed machines were missing from the premises. Instead, two independent valuers found Rotogravure printing machines at the site, which were assessed to be of substantially lower value. The valuation reports also noted physical indications—such as marks on the floor—that the original machinery had been installed and subsequently removed.
The RP promptly reported the discrepancy, and the NCLT initiated proceedings under against the suspended directors, Dinesh Keshawrao Atkare and Madan Keshawrao Atkare, who were responsible for the company’s management before the insolvency commencement date.
Prevails
The suspended directors contested the findings, arguing that the machines found at the premises were alternative equipment with better specifications. They questioned the credibility of the valuers’ reports and relied on an expert opinion obtained by them, which claimed the replacement machinery was superior.
The NCLAT rejected these defences outright. It observed that there was “no showing that the financial creditors had consented to substitution of the .” The tribunal further noted that the directors’ own expert had not personally inspected the machinery but had based his opinion solely on photographs and comparative features—a methodology the bench found insufficient to rebut the direct evidence from the valuers.
The bench held: “The removal of high-value secured machinery and its replacement by substantially lower-value machinery, if established on the evidence, is not a mere technical irregularity. It directly affects the asset base of the Corporate Debtor and the security and recovery prospects of its creditors.”
Cumulatively, the absence of the original machinery, the presence of lower-value replacements, the lack of any documentation supporting the alleged substitution, and the absence of creditor consent constituted “compelling that valuable assets had been kept beyond the reach of the creditors.”
Without a Series of Transactions
empowers the adjudicating authority to direct any person who was knowingly a party to carrying on the business of the corporate debtor with intent to defraud creditors or for any fraudulent purpose to make such contributions to the assets of the corporate debtor as the authority may deem fit.
The directors argued that under Section 66 requires a series of fraudulent transactions, not just a single instance. The NCLAT rejected this interpretation, clarifying that the provision does not mandate a series of transactions. A single act of removing , if done with fraudulent intent, can trigger liability under the section.
The tribunal also dismissed the directors’ challenge to the quantum of ₹17.23 crore. It noted that the directors had failed to show that the amount was arbitrary or unsupported by the record. Their plea regarding depreciation and the realisable value of the replacement machines did not dislodge the core finding that the financed machinery had been removed.
Additionally, the NCLAT found it significant that the suspended board had delayed handing over possession during the insolvency process. This delay, it said, strengthened the inference drawn from the inspection and valuation material.
for Directors: A Growing Trend
This judgment marks an important development in the jurisprudence surrounding of directors under the IBC. The NCLAT has consistently taken a strict view against actions that deplete the asset base of a corporate debtor during the insolvency process.
For creditors and Resolution Professionals, the ruling provides a powerful tool to recover losses caused by the unauthorized removal or substitution of . It clarifies that such conduct falls squarely within the scope of , and directors cannot escape liability by claiming that the replacement assets were of equivalent or better value, especially when no contemporaneous consent from creditors exists.
Legal experts view the decision as a deterrent against directors attempting to shield assets or engage in transactions that diminish the value available for distribution to creditors. The NCLAT’s emphasis on also lowers the evidentiary burden on the RP and creditors, as direct proof of fraudulent intent is often difficult to obtain.
Costs Imposed as a Further Warning
In addition to upholding the contribution order, the NCLAT imposed costs of ₹5 lakh each on the two appellant-directors, directing that the amount be deposited in the . This punitive measure underscores the tribunal’s disapproval of the conduct and serves as a further warning to other directors.
Conclusion
The NCLAT’s ruling in the Santoshi Barrier Film case is a landmark interpretation of . It affirms that the removal of during insolvency and its replacement with lower-value assets constitutes , attracting for directors. The decision is expected to strengthen the hands of Resolution Professionals and creditors in recovering assets and holding errant directors accountable. It also reinforces the principle that the insolvency process must be conducted with utmost good faith, and any attempt to undermine the asset base will be met with severe consequences under the law.
