Fraud Has No Look-Back Period, Directors Cannot Use Lapse Of Time As Shield : NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi has held that allegations of fraudulent and wrongful trading are not restricted by any fixed look-back period, and directors cannot avoid personal liability merely by arguing that the conduct took place long ago.  It therefore directed the suspended directors of a Kochi-based insolvent company to jointly contribute Rs 11.95 crore to the company's assets.

The tribunal said delay by itself cannot be used as a shield where the conduct complained of is fraudulent .

A coram led by Judicial Member Vinay Goel observed that, unlike other avoidance actions, the law does not prescribe any time window for examining fraudulent trading.

The tribunal observed, “Unlike certain other avoidance transactions where a specific look-back period is prescribed, Section 66 does not contemplate any such limitation. The underlying rationale is founded on the settled legal maxims 'fraud vitiates every transaction' and 'once a fraud, always a fraud'. Any person who has intentionally or dishonestly acted against the interests of creditors cannot be permitted to escape liability merely by taking refuge under the plea of lapse of time” .

The case relates to a company called Thesaurus Projects Pvt. Ltd., which was admitted into insolvency on March 16, 2023, on a petition filed by the Small Industries Development Bank of India. When no resolution plan materialised, liquidation was ordered on July 5, 2023, and K J Vinod was appointed as liquidator.

During the liquidation, the liquidator found that the company had not maintained or filed books of account after March 31, 2017, even though business operations continued. Fixed assets shown in the last audited financials could not be traced, and significant cash withdrawals and fund diversions between 2017 and 2019 were flagged by a forensic audit conducted in 2024 .

The liquidator argued that the conduct of the suspended directors had the effect of keeping cash and assets beyond the reach of creditors and amounted to fraudulent and wrongful trading. He sought directions for personal contribution to the company's assets, pointing out that the relief was compensatory in nature and not tied to undoing any single transaction. The suspended directors did not contest the proceedings, despite service through publication, and the forensic findings remained unrebutted .

Explaining the purpose of the provision, the tribunal said its focus is on accountability when financial distress is evident.

It observed, “The primary object of Section 66 of the IBC, 2016, is to ensure that directors and persons in control of the Corporate Debtor should act with due diligence and are required to take corrective steps at the earliest signs of financial distress. Failure to exercise such due diligence renders them liable under this provision, even in the absence of express dishonest intent.”

Holding that the suspended directors had continued operations without statutory compliance and diverted assets, the tribunal directed them to jointly and severally contribute Rs 11.95 crore to the assets of the corporate debtor. It also permitted the liquidator to take recovery steps in accordance with law.