Suspended Directors Can't Transfer Amount From Corporate Debtor's Account During Stay On CIRP, NCLT Mumbai Directs Refund

The National Company Law Tribunal (“NCLT”), Mumbai Bench, comprising of Ms. Reeta Kohli (Judicial Member) and Shri Sanjiv Dutt (Technical Member), has held that Suspended Directors of Corporate Debtor cannot transfer amounts from the Corporate Debtor's account while there is a stay on CIRP. The NCLAT stayed the CIRP and before vacation of stay the Suspended Directors transferred certain amounts from the Corporate Debtor's account towards loan payment of Group Companies. The Bench directed the Group Companies to revert the amount in the Corporate Debtor's account. “After the stay of the CIRP order, Resolution Professional cannot discharge any function. Stay of admission order/CIRP does not mean that the Corporate Debtor should be put back in the management of day to day affairs of the company and allowed to function as such. Interim Order staying CIRP clearly means that no further process shall be taken in CIRP and the Resolution Professional shall not take any further action. The Corporate Debtor can no longer be permitted to function as it was functioning prior to the date of admission order.” Background Facts On 14.11.2022, the NCLT admitted Arshiya Northern FTWZ Limited (“Corporate Debtor”) into Corporate Insolvency Resolution Process (“CIRP”) and moratorium was imposed. On 07.12.2022, the NCLAT stayed the CIRP and the stay was vacated on 15.02.2023. During the stay period, the Suspended Directors of the Corporate Debtor transferred amounts from the account of Corporate Debtor towards loan payment of group companies. The Resolution Professional filed an application before NCLT alleging that the Suspended Directors of Corporate Debtor in violation of Section 14(b)of IBC proceeded to make a payment of Rs. 1,16,25,000/- towards loan repayment to the Group Companies of the Corporate Debtor. It was prayed that penal order under Section 74 of IBC be passed against Suspended Directors for willfully violating moratorium imposed by NCLT and amounts be reverted to Corporate Debtor. NCLT Verdict The Bench observed that the appeal before the NCLAT was filed by the Holding Company of the Corporate Debtor. Thus, the Corporate Debtor cannot be allowed to raise arguments seeking advantage of the NCLAT stay order dated 07.12.2022. The Bench placed reliance on NCLAT judgment in Ashok Kumar Tyagi v. Uco Bank, 2022 (11) TMI 984, wherein it was held that stay on CIRP process is not the same as quashing of CIRP order. Hence, the former situation does not make the Corporate Debtor in charge of the business in the manner as it was before the applicability of the order initiating CIRP. It was observed that stay on CIRP does not permit the Corporate Debtor to function the way it was functioning prior to initiation of CIRP. Stay on CIRP merely means that no further process or action will be undertaken by Resolution Professional with respect to the CIRP. The act of Suspended Directors of transferring amounts from the account of Corporate Debtor during CIRP stay period is untenable in law. “After the stay of the CIRP order, Resolution Professional cannot discharge any function. Stay of admission order/CIRP does not mean that the Corporate Debtor should be put back in the management of day to day affairs of the company and allowed to function as such. Interim Order staying CIRP clearly means that no further process shall be taken in CIRP and the Resolution Professional shall not take any further action. The Corporate Debtor can no longer be permitted to function as it was functioning prior to the date of admission order. Therefore, pursuant to the aforementioned judgment, the loan repayment and other bank transactions undertaken by the Suspended Directors are untenable in law.” The Group Companies of the Corporate Debtor have been directed to pay back the amounts credited to their accounts, since the payments were made in violation of Section 14 of IBC. The Bench has forwarded a copy of the order to Insolvency and Bankruptcy Board of India (IBBI) to initiate action for passing of penal orders under Section 74 of IBC against Suspended Directors. “It is pertinent to note that penal orders under section 74 of the Code can only be passed by a Special Court constituted under the Companies Act, 2013 as per Section 236 of the Code. For the same, copy of the present order be forwarded to IBBI so as to initiate appropriate action in terms of law against the Respodents.” The application has been disposed of. Case Title: State Bank of India v Arshiya Northern FTWZ Limited Case No.: C.P. No. 1245 of 2021 Counsel for Applicant: PCA Ayush Rajani Counsel for Respondent: Mr. Nausher Kohli Click Here to Read/Download Order

Suspended Directors Can't Transfer Amount From Corporate Debtor's Account During Stay On CIRP, NCLT Mumbai Directs Refund

Pallavi Mishra

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