Description
The Ahmedabad Bench of the National Company Law Tribunal (NCLT) has held that directors, promoters, and certain third-party entities of Kanoovi Foods Pvt. Ltd. are liable for fraudulent and wrongful trading under Section 66 of the Insolvency and Bankruptcy Code, 2016, after a forensic audit revealed large-scale siphoning and diversion of funds. The Bench comprising Judicial Member Shammi Khan and Technical Member Sanjeev Sharma passed the order in an application originally filed by the liquidator and later pursued by HDFC Bank Ltd., seeking directions against persons responsible for fraudulent transactions to contribute to the assets of the corporate debtor. The case arose from the Corporate Insolvency Resolution Process initiated against Kanoovi Foods Pvt. Ltd. in 2019, which ultimately led to liquidation in January 2021. During the CIRP, a forensic audit was commissioned to examine the financial affairs of the company and identify any instances of preferential, fraudulent or wrongful transactions. The audit report, along with its addendum, formed the foundation of the present proceedings. The forensic audit conducted by D.G. Thakarar & Associates revealed that the promoters and directors had siphoned off funds amounting to ₹44.43 crore, along with additional fraudulent transactions of ₹2.63 crore. The findings indicated diversion of funds through multiple channels, including advances to suppliers, transfers to related entities, fictitious receivables, and unsecured loans. The audit further highlighted suspicious transactions such as unpaid fabric sales worth ₹11.20 crore to Ruchita Chemicals LLP and questionable imports involving a Hong Kong entity, where discrepancies in documentation and business activity suggested fraudulent intent. It also recorded that significant receivables remained unrecovered and funds were routed through intermediary entities without commercial justification. The Tribunal noted that despite being given sufficient opportunity, most of the respondents failed to appear or produce records to rebut the allegations. Drawing an adverse inference, the Bench observed that the absence of documentary evidence and failure to explain the transactions strengthened the case of fraudulent conduct. The Tribunal examined the scope of Section 66 of the IBC and reiterated that liability for fraudulent trading arises only when business is carried on with intent to defraud creditors, while wrongful trading under Section 66(2) applies where directors continue operations despite knowing insolvency is unavoidable and fail to minimise losses. Relying on precedents including Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd., the Bench emphasised that clear and cogent evidence of intent is required. Applying these principles, the Tribunal found that the forensic audit findings, when read with surrounding circumstances such as absence of records, routing of funds through related parties, and non-recovery of substantial receivables, established a deliberate pattern of conduct aimed at defrauding creditors. The Bench held that the promoters and directors had knowingly carried on the business with fraudulent intent and failed to exercise due diligence once insolvency became apparent. Accordingly, Respondents 5 to 10 were held jointly and severally liable under Sections 66(1) and 66(2) of the Code. The Tribunal also considered the role of third-party entities, including Terlin Engineerings OPC Pvt. Ltd., Ruchita Chemicals LLP, Craigmore Trading DMCC, and Gahena Enterprises Pvt. Ltd. It held that Section 66(1) extends liability to any person who knowingly participates in fraudulent conduct. Based on the fund flow analysis and lack of commercial substance, these entities were found to have acted as conduits in the diversion of funds rather than independent commercial counterparties. Rejecting the defence of Ruchita Chemicals LLP regarding an alleged prior settlement, the Tribunal noted the absence of supporting bank records or valid documentation and held that private arrangements cannot override statutory liability under Section 66, which is intended to protect creditors. In view of the established fraudulent conduct, the Tribunal quantified the total liability at ₹58.27 crore and directed the responsible directors and parties to contribute the said amount to the assets of the corporate debtor for the benefit of creditors. The application was accordingly allowed, fastening liability on both the directors and the identified third-party entities involved in the diversion of funds.