NCLAT Delhi: Set-Off With Refund Of Claim Between Expiry Of CIRP And Before Passing Liquidation Order Amounts To Violation Of Moratorium Under IBC

The National Company Law Appellate Tribunal ('NCLAT') Delhi, comprising Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member), and Mr. Arun Baroka (Technical Member) held that the set-off/adjustment of demand with refund by Income Tax Department during the intervening period when the Corporate Insolvency Resolution Process ('CIRP') timeline period has expired but before passing of Liquidation Order under Section 33 of Insolvency and Bankruptcy Code, 2016 ('IBC') amounts to violation of moratorium under Section 14 of the IBC. Background Facts: The Resolution Professional ('RP') of Kotak Urja Pvt. Ltd. (Corporate Debtor) informed the Income Tax Department (Respondent) that the Corporate Debtor was admitted into the CIRP on 18.11.2019. On 20.01.2020, following the said notice, the Income Tax Department filed its claim of Rs. 11.59 crores which has been admitted by the RP. On 10.02.2021, the Income Tax Department adjusted an amount of Rs. 90.42 lakhs received as a tax refund against outstanding tax demands. However, the said adjustment was done after the CIRP ended on 21.12.2020. Subsequently, the RP filed an application for the liquidation of the Corporate Debtor on 18.05.2021, as decided by the Committee of Creditors (“CoC”). During the pendency of the liquidation, the RP sent letters to the Income Tax Department on requesting a refund of the adjusted amount. At the time of the set-off, no resolution plan had been approved, nor had any liquidation order been issued. The RP then filed an Interim Application before NCLT Mumbai seeking directions for the Income Tax Department to refund the Rs. 90.42 lakhs adjusted against the Corporate Debtor's alleged tax liability. On 03.08.2022, the liquidation order was passed and on 01.02.2023, the Income Tax Department submitted a claim of Rs. 10.69 crore to the Liquidator, which was admitted. The RP has filed the appeal against NCLT Mumbai's Order dated 16.06.2023 whereby it dismissed the RP's application for directions to the Income Tax Department for the refund. NCLAT Verdict: The NCLAT Delhi allowed the appeal and held that the set-off/adjustment of demand with refund by the Income Tax Department during the intervening period when the CIRP timeline period has expired but before passing of Liquidation Order under Section 33 of IBC amounts to a violation of moratorium under Section 14 of the IBC. The Appellate Tribunal noted that the moratorium under the IBC functions to safeguard and protect the Corporate Debtor's assets from being diminished or dissipated, ensuring that no individual creditor can initiate actions to enforce their claims to the detriment of others. Further on a bare reading of Section 14(1)(a), (b), and (c) of the IBC, NCLAT highlighted that any adjustment of any tax refund amounts during the moratorium period is not allowed as per the provisions of IBC. Regarding the duration of the moratorium under the IBC, it was noted that Section 14(4) of the IBC explicitly states that the moratorium order takes effect from the date the CIRP commences and continues until the CIRP is completed. Moreover, the proviso to this section clarifies that the moratorium ends once the Adjudicating Authority confirms the resolution plan as approved by the CoC or until the Adjudicating Authority passes a liquidation order requiring the assets of the Corporate Debtor to be gathered and distributed among its creditors. NCLAT observed that the CIRP period had concluded on 21.12.2020. However, the CIRP process continued until the liquidation order was issued on 03.10.2022. At the time when the set-off was conducted, neither a resolution plan had been approved nor had a liquidation order been passed. Further, the Supreme Court in its decision in Bharti Airtel Ltd vs. Vijaykumar V. Iyer and Ors. ruled that set-offs initiated by any entity against a company undergoing CIRP violate the fundamental principles and provisions of IBC. It referenced Section 238 of the IBC, emphasizing that the provisions relating to CIRP in Chapter II, Part II of the IBC do not recognize the principle of insolvency set-off. Additionally, the insolvency set-off described in Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) does not apply to CIRP. NCLAT noted that it is well-established that Regulation 29 of the Liquidation Regulations is applicable only after a liquidation order is passed by the Adjudicating Authority, not before. Further, even if the CIRP period had ended without an approved resolution plan and the liquidation order had not yet been passed, creditors of the Corporate Debtor could not claim the benefit of set-off during this interim period by arguing that the moratorium had ceased. Thus, NCLAT highlighted that NCLT Mumbai made a significant error in determining that the moratorium had ended during the gap between the expiration ...

NCLAT Delhi: Set-Off With Refund Of Claim Between Expiry Of CIRP And Before Passing Liquidation Order Amounts To Violation Of Moratorium Under IBC

Sachika Vij

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