NCLAT Upholds Order Directing Dagcon's Former Directors To Contribute ₹10.54 Crore For Fraudulent Transactions

The National Company Law Appellate Tribunal (NCLAT) at New Delhi recently held that the former directors of the realty company Dagcon (India) Pvt. Ltd. must contribute Rs 10.54 crore to the company's assets for fraudulent transactions. The tribunal dismissed an appeal filed by suspended director Rana Sarkar and upheld an order of the National Company Law Tribunal at Kolkata.

A bench comprising Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha held,

“The Resolution Professional as well as the Adjudicating Authority has taken into consideration all the relevant facts, evidence and circumstances in order to arrive at a justified conclusion that the transactions in questions are fraudulent and have been made with the intention to defraud the creditors of the CD.”

Dagcon India was admitted into the corporate insolvvency resolution process on November 20, 2019. Bimal Agarwal was appointed as the interim resolution professional and was later confirmed as the resolution professional.

The NCLT allowed an application filed by the resolution professional alleging large scale cash withdrawals, diversion of funds and related party payments, and directed the suspended directors to contribute Rs 10.54 crore to the corporate debtor's assets under Section 66 of the Code.

Before the Appellate Tribunal, the suspended director argued that the NCLT had relied solely on the opinion of the resolution professional and that the transactions were not shown to be fraudulent.

The resolution professional, however, pointed to repeated non cooperation by the suspended directors, including their failure to hand over books of accounts and records despite directions of both the NCLT and the NCLAT.

In the absence of records, the resolution professional obtained bank statements of nearly 20 accounts and appointed a transaction auditor, whose report revealed unexplained cash withdrawals, payments to related parties and advances to directors without justification.

Upholding the findings, the Appellate Tribunal observed that “We do not find any fault in the process adopted by the resolution professional as withdrawal of huge amount of cash prima facie is not a common practice in the corporate world and since no documents are shown to have been provided by suspended Board of management of CD, no alternate was available to the RP except to get the Audit done of the CD. Thus the decision of the resolution professional to appoint a transaction auditor is justified in the facts and circumstances of the case.”

It added that “these transactions, having regard to the timing of withdrawal and non-furnishing of any documentation appears to be per se fraudulent and this huge amount of cash was withdrawn when the corporate debtor was in financial distress and these huge cash withdrawals have not been justified by the appellant or any of the directors of the CD.”

The tribunal further held that once the resolution professional established suspicious transactions, the burden shifted to the directors to justify them, which they failed to do.