NCLT Ahd. (2026.01.20) in Shreenathji Rasayan Private Limited Vs. Mr. Shrenik Ashokkumar Morakhia & Ors. [LA. No. 74/NCLT(AHM)/2021 in CP(IB) No. 463/7/NCLT/AHM/2019 ] held that;
Thirdly, the Hon’ble NCLAT in Praful Satra and Ors. v. Vaishali Patrikar, (2025) ibclaw.in 996 NCLAT in Patrikar, Company Appeal (AT) (Insolvency No.) 348 of 2025 (paragraph 56) has categorically held that interim moratorium under Section 96 or Section 124 of the IBC does not bar continuation of proceedings under Section 66, since such proceedings are not proceedings “in respect of any debt” but are proceedings to determine liability arising out of fraudulent and wrongful trading.
The Hon’ble Appellate Tribunal has observed that Section 66 proceedings are intended to ensure accountability of persons who controlled the Corporate Debtor and cannot be frustrated by initiation of personal insolvency.
Excerpts of the Order;
# 14. We have heard the learned counsel for the Applicant and the learned counsel for Respondent Nos. 1 to 3 at length and have perused the application, amended memo, replies, affidavits, written submissions. For proper adjudication, the following issues arise:
i. Whether Respondent Nos. 1 to 4 was persons in control of the Corporate Debtor and owed statutory duties under Section 66 of the IBC?
ii. Whether the material on record establishes that the business of the Corporate Debtor was carried on fraudulently or wrongfully so as to attract Section 66 of the IBC?
iii. Whether this Tribunal has jurisdiction to continue and decide the present proceedings notwithstanding personal insolvency proceedings initiated against some of the Respondents?
iv. Whether the reliefs sought in the amended IA against Respondent Nos. 1 to 4 deserve to be granted?
Observation and Directions of this Tribunal
# 15. This Interlocutory Application being I.A. No. 74 of 2021 arises out of Company Petition No. CP (IB) 463/7/NCLT/AHM/2019 and was originally filed by the Resolution Professional of Morakhia Copper & Alloys Private Limited (hereinafter referred to as “Corporate Debtor”) under Sections 43, 60(5), 66, 67, 68, 69, 70, 71 and 235A of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
# 16. CIRP of the Corporate Debtor was commenced by this Tribunal on 19.02.2020 on an application filed under Section 7 of the Code. During the pendency of this application and in view of subsequent legal developments, including the judgment of the Hon’ble Supreme Court in Glukrich Capital Pvt. Ltd. v. State of West Bengal & Ors., the Applicant amended the pleading.
# 17. Pursuant to the specific order dated 20.11.2024, the scope of the present proceedings now stands confined only to Respondent Nos. 1 to 4, being persons alleged to be in control and management of the Corporate Debtor. The reliefs pressed are restricted to (i) contribution of Rs. 2,00,000/- by Respondent No. 2 and Rs. 4,96,000/- by Respondent No. 3 with interest, (ii) consequential directions under Section 236 of the Code, and (iii) costs.
# 18. Accordingly, this Tribunal proceeds to examine the issues framed.
# 19. Findings on Issue No. I: –
19.1. It is not in dispute that Respondent Nos. 1 to 3 were the erstwhile whole-time directors of the Corporate Debtor and that Respondent No. 4 was actively involved in its affairs and functioning. The pleadings further disclose that another Morakhia group company, namely Gloabtel Convergence Limited, had already undergone insolvency proceedings pursuant to admission order dated 04.02.2019 of the Hon’ble NCLT, Mumbai Bench. Thus, Respondent Nos. 1 to 4 were well conversant with the insolvency regime and consequences of non-compliance.
19.2. After commencement of CIRP on 19.02.2020, this Tribunal was constrained to pass a specific protective order dated 20.05.2020, directing Respondent Nos. 1 to 3 to maintain status quo and to extend full cooperation to the RP, and restraining them from taking any action in respect of the Corporate Debtor without prior permission of the Resolution Professional.
QUOTE
“Further, in order to ensure effective implementation of the Corporate Insolvency Resolution Process by the Resolution Professional the Respondent nos. 1 to 3 are directed to maintain status quo as of today in respect of the Corporate Debtor and they shall provide all necessary cooperation to the Resolution Professional and shall not take any action with regards to Corporate Debtor without prior permission of the Resolution Professional until further order.”
19.3. The very necessity of such an order demonstrates that Respondent Nos. 1 to 4 continued to exercise influence and control over the Corporate Debtor’s affairs even after commencement of CIRP.
19.4. Accordingly, this Tribunal holds that Respondent Nos. 1 to 4 were persons in management and control of the Corporate Debtor and squarely fall within the ambit of persons against whom proceedings under Section 66 of the IBC can be maintained.
# 20. Findings on Issue No. II
20.1. The amended material placed on record reveals the following admitted and documented factual circumstances:
A. Financial position prior to CIRP
20.2. The audited financial statements of the Corporate Debtor as on 31.03.2019 disclose that the Corporate Debtor had outstanding trade receivables and short-term loans aggregating to approximately Rs. 78,48,82,494/-, whereas the aggregate claims admitted during CIRP were around Rs. 106,49,68,003/-.A substantial portion of these receivables related to group entities and related parties and had remained unrecovered for several years.
20.3. This clearly indicates that long before commencement of CIRP, the Corporate Debtor’s funds were being diverted, blocked, or siphoned off without commercial prudence.
B. Events immediately after commencement of CIRP
20.4. CIRP commenced on 19.02.2020. Within weeks thereafter, the RP, on examination of records, emails, ERP data and bank statements, detected multiple irregularities. Demand letters were issued in early June 2020 to various parties calling upon them to pay amounts due to the Corporate Debtor.
20.5. The list of dates shows that by 09.10.2020, the RP had recorded findings of forgery, diversion of funds and misuse of corporate assets involving Respondent Nos. 1 to 3 and persons acting at their instance.
C. Monetary diversions relevant to the amended reliefs
20.6. The amended pleadings, confined now to Respondent Nos. 1 to 4, specifically bring out that:
i. Respondent No. 2 is liable to account for and restore a sum of Rs. 22,00,000/-,
ii. Respondent No. 3 is liable to account for and restore a sum of Rs. 4,96,000/-,
Being amounts received, routed, or diverted during the period when they were controlling the affairs of the Corporate Debtor, without justification and to the detriment of the creditors. These figures are not isolated entries but form part of a larger pattern of fund diversion and non-recovery
D. Conduct during CIRP
20.7. Despite initiation of CIRP and despite the order of this Tribunal dated 20.05.2020, Respondent Nos. 1 to 4 failed to extend meaningful cooperation, and material on record shows continued interference in affairs, failure to safeguard receivables, and acts which had the effect of diminishing the value of the Corporate Debtor’s assets.
20.8. Section 66 of the IBC requires the Tribunal to consider whether persons in control carried on business with intent to defraud creditors or failed to exercise due diligence to minimise potential loss. In the present case, the long-standing diversion of receivables, coupled with post-CIRP conduct and the need for repeated Tribunal intervention, clearly establish absence of due diligence and a course of conduct prejudicial to creditors.
20.9. The Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited & Ors., (2020) ibclaw.in 06 SC,
NCLT formed the opinion that when the directors of the corporate debtor were fully aware that they were in the twilight zone and insolvency was imminent, they ought to have exercised due diligence in minimizing the potential loss to the creditors but they entered such transactions which ex facie gave benefits to the related party
20.10. Applying the said principle, this Tribunal finds that Respondent Nos. 1 to 4, despite being aware of the financial distress and despite commencement of CIRP, failed to act with due diligence and permitted diversion of funds and misuse of corporate assets, thereby diminishing the insolvency estate, which squarely attracts Section 66 of the Code.
20.11. The burden under the proviso to Section 66(2), to demonstrate that due diligence was exercised, squarely lay upon Respondent Nos. 1 to 4. Except for bare denials and technical objections, no material has been placed on record to show that any genuine steps were taken to safeguard the assets of the Corporate Debtor or to mitigate creditor loss.
20.12. Accordingly, this Tribunal holds that the ingredients of Section 66 of the IBC are satisfied against Respondent Nos. 1 to 4.
# 21. Findings on Issue No. III:-
21.1. At the outset, it is necessary to note that the competence of the Adjudicating Authority to inquire into allegations of fraud and fraudulent trading is no longer res integra. The Hon’ble Supreme Court in Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2020) ibclaw.in 12 SC has categorically held that the NCLT is empowered to examine allegations of fraud, including fraudulent trading under Section 66 of the Code. Therefore, the jurisdiction of this Tribunal to entertain and decide the present application is beyond doubt.”
21.2. During the pendency of the present Interlocutory Application, it has been brought on record that bankruptcy proceedings have been admitted against Respondent Nos. 1 to 3 by separate orders dated 22.08.2025, pursuant to which an interim moratorium under Section 124 of the Code has come into operation in respect of the said Respondents.
21.3. The Respondents contend that by virtue of the interim moratorium, the present proceedings cannot continue. This Tribunal is unable to accept the said contention.
21.4. Firstly, the present Application is not a proceeding for recovery or enforcement of any “debt” within the meaning of Part III of the Code. It is an application under Section 66, which empowers the Adjudicating Authority to examine fraudulent and wrongful trading and to determine the liability of persons who were in control of the Corporate Debtor to make contribution to its assets. Proceedings under Section 66 are in the nature of accountability proceedings, intended to protect the insolvency estate and the interests of creditors, and do not partake the character of debt recovery proceedings.
21.5. Secondly, the present Application was instituted much prior to initiation of the personal insolvency proceedings and arises out of acts allegedly committed by Respondent Nos. 1 to 4 at a time when CIRP was imminent and after commencement of CIRP on 19.02.2020. The foundation of the present proceedings is the alleged fraudulent and wrongful conduct in the management of the Corporate Debtor, and not enforcement of any personal liability.
21.6. Thirdly, the Hon’ble NCLAT in Praful Satra and Ors. v. Vaishali Patrikar, (2025) ibclaw.in 996 NCLAT in Patrikar, Company Appeal (AT) (Insolvency No.) 348 of 2025 (paragraph 56) has categorically held that interim moratorium under Section 96 or Section 124 of the IBC does not bar continuation of proceedings under Section 66, since such proceedings are not proceedings “in respect of any debt” but are proceedings to determine liability arising out of fraudulent and wrongful trading. The Hon’ble Appellate Tribunal has observed that Section 66 proceedings are intended to ensure accountability of persons who controlled the Corporate Debtor and cannot be frustrated by initiation of personal insolvency.
21.7. If the interpretation suggested by the Respondents were to be accepted, it would lead to an anomalous situation where persons responsible for fraudulent trading could defeat proceedings under Section 66 merely by initiating personal insolvency, thereby defeating the very object of the Code.
21.8. In view of the aforesaid, this Tribunal holds that the interim moratorium arising out of bankruptcy proceedings against Respondent Nos. 1 to 3 does not operate as a bar to the continuation and adjudication of the present Interlocutory Application, and this Tribunal fully retains jurisdiction to enquire into the conduct of Respondent Nos. 1 to 4 and to pass appropriate orders under Section 66 of the Code.
# 22. Findings on Issue No. IV:–
22.1. Pursuant to the order dated 20.11.2024, the amended Interlocutory Application confines the reliefs only to Respondent Nos. 1 to 4, who were in control and management of the Corporate Debtor. The reliefs now pressed, inter alia, include directions for restoration of Rs. 2,00,000/- and Rs. 4,96,000/- with interest, consequential action under Section 236 of the IBC, and costs.
22.2. In view of the findings recorded under Issue Nos. 1 and 2, this Tribunal has concluded that Respondent Nos. 1 to 4 were persons in control of the Corporate Debtor and that the business of the Corporate Debtor was carried on fraudulently and without due diligence when insolvency was imminent. The statutory consequences under Section 66(1) and 66(2) of the IBC therefore follow, empowering this Tribunal to direct contribution to the assets of the Corporate Debtor.
22.3. The amended application, supported by financial records and contemporaneous material, identifies the relevant period, the impugned transactions, and the quantified sums of Rs. 2,00,000/- and Rs. 4,96,000/- alleged to have been diverted to the detriment of the Corporate Debtor.
22.4. The Respondents, while denying fraudulent intent, have not disputed their position of control nor produced cogent material to show that the transactions were in the ordinary course of business or undertaken with due diligence. Such denials are insufficient once the foundational facts are established.
22.5. Proceedings under Section 66 are not in the nature of recovery proceedings but are intended to protect the insolvency estate and fix responsibility for wrongful and fraudulent conduct. The limited and quantified reliefs sought against persons in control are within the jurisdiction of this Tribunal.
22.6. The Hon’ble NCLAT in Swapan Kumar Saha v. Ashok Kumar Agarwal (RP) (2025) ibclaw.in 911 NCLAT has clarified that proceedings under Section 66 are remedial and restorative in nature, intended to protect the insolvency estate and to fix accountability of persons who were in control of the Corporate Debtor, and that where diversion of funds and fraudulent conduct are established, the Adjudicating Authority is empowered to direct contribution to the assets of the Corporate Debtor to restore the value depleted by such conduct.
22.7. In the light of the aforesaid findings and the settled legal position, the Tribunal holds that the Applicant has established a case under Section 66 of the Code and that the reliefs sought insofar as they relate to Respondent Nos. 1 to 4, deserve to be granted, subject to the operative directions that follow.
# 23. Therefore, the following directions are necessary to be passed under sections 66 of the Insolvency and Bankruptcy Code, 2016, which are as follows: –
A. The Respondent No. 2 is directed to pay a sum of Rs. 2,00,000/- (Rupees Two Lakhs only) to the Corporate Debtor’s estate, together with interest @ 12% per annum from the date of receipt of the said amount till the date of actual payment.
B. The Respondent No. 3 is hereby directed to pay a sum of Rs. 4,96,000/- (Rupees Four Lakhs Ninety-Six Thousand only) to the Corporate Debtor’s estate, together with interest @ 12% per annum from the date of receipt of the said amount till the date of actual payment.
C. The aforesaid amounts shall be paid within a period of 30 days from the date of this order.
D. The Registry is directed to forward a copy of this order to the Ministry of Corporate Affairs for taking such action as may be considered appropriate in accordance with law, including under Section 236 of the Insolvency and Bankruptcy Code, 2016, in respect of Respondent Nos. 1 to 4.
E. In the event of non-compliance, the Applicant/SRA shall be at liberty to initiate appropriate execution proceedings in accordance with law, including attachment of assets of the defaulting Respondents.
@ 24. Accordingly, I.A. No. 74/NCLT(AHM)/2021 filed by the Applicant/SRA is allowed and disposed of in terms of above directions. No order as to costs.
# 25. A certified copy of this order may be issued, if applied for, upon compliance with all requisite formalities.
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