The has issued a significant directive holding the former directors of personally liable for uncovered during the company’s . The has ordered the directors to contribute approximately ₹16.84 crore to the ’s assets. This decision follows a rigorous investigation into the company’s financial records, which revealed that the management had systematically inflated stock valuations and generated fictitious sales to secure and maintain credit facilities from lenders.
The proceedings were initiated under the , following the admission of the into the on . The Resolution Professional (RP) for the case, after conducting a detailed , sought relief under Section 66(1) and , which address instances where the business of a is carried out with an intent to defraud creditors. The application was subsequently prosecuted by the financial creditor, , following the approval of the resolution plan.
The conducted by highlighted a series of alarming discrepancies between the company’s actual financial health and the figures reported in its books of account. The investigation revealed that in the , the company’s revenue from operations surged significantly, providing the necessary justification to persuade its lender, , to restructure existing credit facilities and sanction additional working capital. However, the subsequent audit indicated that these transactions were largely non-genuine.
The tribunal observed that the purchase and sale transactions during that period involved entities with highly suspicious credentials. The audit noted that these purchases led to a threefold increase in inventory levels. Curiously, the vendors involved in these transactions never claimed the outstanding balances, which allowed the company to eventually write back these payables. Similarly, the company reported substantial write-offs in trade receivables and inventory during the , which the tribunal categorized as clear indicators of fraudulent conduct.
The bench, comprising Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar, emphasized that the legal standard of '' sufficiently supported the conclusion that the business was conducted to defraud creditors. In its order, the tribunal noted, “It is pertinent to note that the purchases during FY 2019-20 led to a three-fold increase in Inventory holding; the parties from whom purchases were made had not claimed outstanding from the , leading to its write-back; and the also had to write off receivables arising from sale transactions.”
The respondents, who served as directors of Barracks Retail, argued that their actions were taken in the ordinary course of business and that they had exercised due diligence throughout their tenure. They claimed that the transfer of company funds—specifically a withdrawal of ₹23.15 lakh by one of the directors during a period of financial distress—was meant to settle critical business expenses. However, the tribunal rejected this defense, noting that the directors failed to provide any supporting documentation, such as invoices or proof of payment, to validate these claims.
The tribunal highlighted that the directors were fully aware of the company’s deteriorating financial condition. The court found that as the company’s operational revenue plummeted, the directors failed to take any reasonable steps to minimize potential losses to creditors. Under , which concerns , directors can be held liable if they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency and failed to take adequate steps to protect the creditors.
Regarding the specific financial impact, the tribunal determined that the loss to the caused by the write-offs of inventory and sundry debtors should be adjusted against the write-back of trade payables. The court concluded that the directors were jointly or severally liable to contribute ₹1660.62 lakh to the assets of the company. Additionally, the tribunal held one director personally liable for the separate withdrawal of ₹23.15 lakh.
The court further elucidated the necessity of its findings, stating, “The Appellant has a duty to establish to the satisfaction of this Tribunal that a person is knowingly carrying on the business with the , with an dishonest intention to defraud the Creditors.” The bench clarified that while the law allows for a degree of flexibility in , the sheer scale of the unexplained write-offs and the suspicious timing of the credit restructuring clearly met the threshold for fraudulent trading under the IBC.
The tribunal did, however, offer limited relief to the directors regarding a separate claim of ₹42.50 lakh allegedly paid to . Because the applicant failed to provide cogent evidence regarding this specific transaction and because the financial statements for that year were incomplete, the court declined to impose additional liability for this specific amount.
The operative order directs the respondents to deposit the combined contribution of ₹16.84 crore within 30 days. To ensure compliance, the tribunal stipulated that any delay beyond this 30-day period will attract interest at an annual rate of 12%. This ruling reinforces the accountability of corporate leadership, underscoring that statutory protections for directors do not extend to actions involving the intentional falsification of accounts to mislead creditors during an insolvency process. The case now transitions into the next stage of the resolution process, with the contributed funds intended to bolster the recovery for the company’s stakeholders.
fraudulent trading - corporate insolvency
