The National Company Law Appellate Tribunal has clarified that the systematic deduction of employee salaries for a designated trust fund, followed by prolonged non-deposit and lack of evidentiary justification for its use, constitutes fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, irrespective of personal enrichment. This ruling reinforces the fiduciary duty of directors and expands the scope of what qualifies as intent to defraud creditors.
Background & Facts
The Dispute
The dispute arose from the corporate insolvency resolution process (CIRP) of Golden Tobacco Ltd. (CD), during which the Resolution Professional (RP) filed an application under Section 66 of the Insolvency and Bankruptcy Code, 2016, against two former Executive Directors of the CD. The RP alleged that the appellants, while in control of the company, deducted a substantial sum from employees’ salaries over multiple months for repayment of loans to the GTC Employees, Co-operative Credit Society Ltd. (Society), but failed to deposit the amount with the Society, thereby misappropriating funds held in trust.
Key Facts
- The GTC Employees’ Co-operative Credit Society Ltd. (Society) is a recognized employee welfare body to which salary deductions for loan repayments were routinely made.
- From September 2021 to May 2022, the CD deducted Rs. 6,33,735/- from employees’ salaries for deposit with the Society.
- The amount deducted averaged approximately Rs. 1,00,000/- per month over nine months.
- The appellants, Suniel Dhhandhania and Pawan Kumar Malsaria, were Executive Directors of the CD during this period.
- The appellants resigned on 17.02.2023 and 23.02.2023 respectively.
- The Society filed a claim with the RP for the unpaid amount, which was admitted as an unsecured creditor claim.
- The appellants admitted before the Adjudicating Authority that the amount was not deposited with the Society, citing financial constraints and use of the funds for the CD’s working capital.
- No documentary evidence was produced to substantiate the claim that the deducted amount was used for operational expenses.
- The appellants did not receive salaries themselves during this period.
- The SEBI show cause notice dated 05.12.2022 referenced other alleged fraudulent transactions by the appellants.
Procedural History
- 07.06.2022: CIRP initiated against Golden Tobacco Ltd. by NCLT, Ahmedabad.
- 07.06.2022: Dr. Vichitra Narayan Pathak appointed as Interim Resolution Professional (IRP).
- 19.07.2022: Society notified RP of non-deposit of Rs. 6,33,735/- deducted from salaries between September 2021 and May 2022.
- 25.07.2022: IRP confirmed as Resolution Professional (RP).
- 05.12.2022: SEBI issued show cause notice against appellants for alleged fraudulent conduct.
- 15.01.2023: RP filed IA No. 652/2023 under Section 66 IBC before NCLT, Ahmedabad.
- 17.04.2024: Adjudicating Authority (NCLT, Ahmedabad) passed order directing appellants to contribute Rs. 6,92,679/- to the Society, with 12% p.a. interest from the date of application.
- 17.05.2024: Appellants filed Company Appeal (AT) (Ins) No. 841 of 2024 before NCLAT.
- 16.04.2026: NCLAT delivered judgment dismissing the appeal.
Relief Sought
The appellants sought quashing of the Adjudicating Authority’s order dated 17.04.2024, arguing that no fraudulent intent existed, no personal benefit was derived, and the RP failed to form a requisite opinion under Regulation 35(A) of the CIRP Regulations, 2016. They requested that the liability be set aside.
The Legal Issue
The central question was whether the prolonged, systematic deduction of employee salary contributions for a designated trust fund, followed by non-deposit and failure to substantiate use for corporate purposes, constitutes fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code, even in the absence of personal enrichment by the directors.
Arguments Presented
For the Appellant
The appellants contended that Section 66 requires proof of dishonest intent to defraud creditors, which was absent. They argued:
- The funds were used for the CD’s working capital, not for personal gain.
- Financial distress, not malice, explained the delay in deposit.
- No evidence established that the appellants had any intention to deceive creditors.
- The RP failed to form a formal opinion under Regulation 35(A) before filing the application.
- Reliance was placed on Regen Powertech Pvt. Ltd. v. Wind Construction Pvt. Ltd. and Svenska Handelsbanken v. Indian Charge Chrome, emphasizing the high standard of proof required for fraud.
- They cited Section 447 of the Companies Act, 2013, to argue that fraud requires wrongful gain or loss, which was not present.
For the Respondent
The RP, through counsel, argued that:
- The appellants admitted to deducting the amount and not depositing it.
- The deduction occurred over nine consecutive months, indicating a pattern, not an isolated lapse.
- The appellants held the funds in trust; their failure to deposit constituted breach of fiduciary duty.
- Under Section 447, fraud does not require wrongful gain - intent to deceive or injure creditor interests suffices.
- The RP formed a prima facie opinion based on the admitted facts and filed the application in good faith.
- The cumulative effect of non-deposit over time, coupled with lack of evidence, demonstrated fraudulent intent under Section 66.
The Court's Analysis
The NCLAT undertook a rigorous analysis of Section 66(1) and Section 66(2) of the IBC, alongside binding precedents. The Tribunal emphasized that fraudulent trading under Section 66(1) requires proof that the business was carried on with intent to defraud creditors or for any fraudulent purpose.
"The expression 'Party to the carrying on business', indicates 'taking positive steps', in carrying on 'company's business', in a 'fraudulent manner'. The intent to 'defraud', is to be judged, by its 'effect' on a 'Person', who is the 'object of conduct', in question."
The Court noted that while personal enrichment is not mandatory to establish fraud under Section 447 of the Companies Act, 2013 - which informs the interpretation of IBC - the intent to deceive or injure creditor interests is sufficient. The appellants’ admission that they withheld Rs. 6.34 lakh over nine months, without depositing a single rupee, and their failure to produce any records to substantiate the use of funds for working capital, was decisive.
The Tribunal rejected the argument that financial distress excuses the breach of fiduciary duty. It held:
"When the appellants have admitted to have deducted the amount in question from the salaries of the workmen and employees over a long period of time, the onus was on them to establish that this amount was utilized as the working capital for the CD. However, they have failed in their duty to establish so. No reliable evidence or material has been placed on record which may substantiate their claim."
The Court distinguished between wrongful trading under Section 66(2) - which concerns negligence - and fraudulent trading under Section 66(1) - which requires dishonesty. It found that the repeated, deliberate non-deposit of trust funds, despite the appellants’ position of authority and the clear fiduciary obligation, satisfied the threshold of dishonest intent.
The Tribunal also dismissed the argument that Regulation 35(A) was violated, noting that the RP acted upon a formal claim from the Society and formed a reasonable opinion based on admitted facts.
The Verdict
The appeal was dismissed. The NCLAT upheld the Adjudicating Authority’s order dated 17.04.2024. The appellants are liable to contribute Rs. 6,92,679/- to the GTC Employees’ Co-operative Credit Society Ltd. within 15 days of the judgment, along with 12% per annum interest from the date of the RP’s application (15.01.2023) until realization. No costs were awarded. The order is final and binding.
What This Means For Similar Cases
Trust Funds Are Not Corporate Slush Funds
- Practitioners must treat salary deductions for employee welfare funds (e.g., co-operative societies, provident trusts) as fiduciary obligations, not corporate cash reserves.
- Non-deposit, even if claimed as working capital use, constitutes prima facie fraud under Section 66 if uncorroborated by records.
Pattern of Conduct Trumps Single-Instance Defense
- Isolated delays may be excused; systematic, multi-month non-compliance creates a rebuttable presumption of fraudulent intent.
- Directors must maintain auditable records to justify diversion of trust funds - silence is fatal.
No Personal Gain? Irrelevant Under IBC
- Fraud under Section 66 does not require directors to personally benefit.
- Intent to deceive creditors or injure their interests - even through omission - suffices, as clarified by reference to Section 447 of the Companies Act, 2013.
- This expands liability exposure for directors in financially distressed companies who manage employee-related trust obligations.
RP’s Opinion Is Sufficient If Based on Admitted Facts
- Resolution Professionals need not conduct exhaustive investigations before filing Section 66 applications.
- A prima facie opinion based on admitted facts and credible claims from creditors is legally adequate.
- Courts will not second-guess the RP’s decision if the underlying conduct is objectively suspicious.
High Standard of Proof Applies - But Not Impossible
- While fraud requires a high standard of proof, it is not beyond reach.
- Admissions, patterned conduct, and absence of documentation collectively satisfy the burden.
- Practitioners should advise clients to document all fund usage - especially when dealing with employee trust monies - to avoid Section 66 exposure.
