Bank's Adjustments From Share and Dividend Accounts During CIRP Are Void, Refundable With Interest: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad has recently held that Mehsana Urban Co-operative Bank, a lender was not entitled to deduct money from the share and dividend accounts of Swastik Ceracon Limited during its insolvency process, declaring the deductions void and directing the bank to return Rs. 56 lakh with 10 per cent interest.

A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma held that the bank's action amounted to an unlawful recovery during a period when such actions are legally barred.

It observed, “The adjustment of the Dividend amount on 15.07.2019, constitutes a prohibited recovery/encumbrance during CIRP, as no prior disclosure of set-off was made in Form C filed by the Respondent with the IRP or the Information Memorandum prepared by the RP and submitted to the CoC, precluding any set-off under general law or insolvency process.”

The insolvency process of Swastik Ceracon began in January 2019, and the bank was part of the committee of creditors. Even after the moratorium and the later approval of the resolution plan in June 2022, the bank transferred money from the company's accounts on five occasions between July 2019 and August 2021 totalling Rs. 56 lakh, and held back Rs. 20.37 lakh from fixed deposits kept as security for guarantees. The resolution applicant then approached the Tribunal seeking a refund.

Swastik argued that the deductions violated the moratorium, during which no recovery action is allowed, and pointed out that the shares were listed as free assets in the insolvency documents without any disclosed right of set-off. The bank questioned NCLT's jurisdiction after the plan was approved and claimed that the law governing co-operative banks allowed it to recover dues from shares and dividends.

Rejecting these objections, the tribunal held that the dispute was directly connected to the implementation of the approved resolution plan and so remained within its power to decide. It also noted that the bank's actions conflicted with the protection available to a company once a plan is implemented.

Referring to the Supreme Court's guidance on set-offs during insolvency, the order noted that insolvency set-off is meant to balance creditors fairly but must be disclosed in advance, and that any adjustments made after the insolvency process without mutual agreement are not allowed because they diminish the value available for all creditors and go against the objectives of the Code.

The tribunal ruled that the deductions from share and dividend accounts must be returned because shares are protected assets under the insolvency framework, but the fixed deposit amounts kept as security for guarantees cannot be refunded. It directed the bank to refund Rs. 56,00,000/- with 10% p.a. interest from the respective adjustment dates, while rejecting the request to refund the margin money