Negative Cash Balances, Salary Mismatches Alone Don't Prove Fraud: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad has held that accounting lapses such as a small negative cash balance, salary mismatches, and routing of funds through non-consortium banks do not, by themselves, amount to fraudulent or wrongful trading under the Insolvency and Bankruptcy Code.

A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Kumar Sharma said that every irregularity in accounts cannot be treated as fraud.

On the issue of a negative cash balance, the tribunal observed that such an entry “seriously undermines the reliability and genuineness of the Corporate Debtor's books of accounts; they do not independently establish fraudulent trading under Section 66 of the IBC, 2016."

The order came in proceedings linked to the liquidation of Greendiamz Biotech Limited. The liquidator, Bhavi Shreyans Shah, had asked the tribunal to hold the company's suspended directors personally liable for transactions totalling over Rs. 14.33 crore.

The plea relied on a transaction audit report that flagged several red flags, including a negative cash balance of Rs. 70,908 over two financial years, discrepancies in employee salaries, and the alleged sale of a property said to be mortgaged to a lender.

The liquidator argued that cash cannot physically be negative and that the entries raised suspicion of manipulation of the books. He also questioned salary payments that did not appear to match employees' roles and alleged that funds were routed through other banks to bypass lender oversight.

The directors countered that the negative cash figure was a clerical mistake caused by unreconciled entries. They said salaries were paid to genuine employees and explained that funds were routed through other accounts only after consortium accounts were frozen to pay statutory dues and keep operations running.

The tribunal accepted the directors' explanations on these issues. On the routing of funds, it noted that the amounts were used towards salaries, electricity bills, and other operational expenses at a time when the consortium bank accounts were not operational and declined to treat this conduct as fraudulent trading.

"No material shows these differences resulted in siphoning funds or personal gains to the suspended directors," it said.

That said, the tribunal made it clear that the directors could not escape liability altogether. It held them responsible for preferential transactions amounting to Rs. 2.98 crore and fraudulent write-offs of research and development expenses of Rs. 7.06 crore.

Terming these transactions prejudicial to creditors, the tribunal directed that the respondents were “jointly and severally liable to contribute” an aggregate sum of Rs. 10.05 crore to the corporate debtor.

The amount, the tribunal said, shall carry interest at the rate of 12% per annum from the date of the transaction till its realisation.

For Applicant: Advocate Arjun Sheth