Suspended Management Cannot Disburse Funds Of Corporate Debtor Post-CIRP Commencement Without Authorisation Of IRP: NCLAT New Delhi

The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member) and Arun Baroka (Technical Member) have held that after commencement of Corporate Insolvency Resolution Process (CIRP) once moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) kicks in, no person can unilaterally recover any amount from the account of the Corporate Debtor. The Tribunal held that the suspended management of the Corporate Debtor is also strictly prohibited from directly or indirectly deploying the funds of the Corporate Debtor unilaterally, without the authorisation of the Interim Resolution Professional (IRP). Further, in view of moratorium which precludes any such recovery, cheques cannot be encashed after the moratorium starts. Brief Facts M/s. Sunil Hitech Engineering Limited (Corporate Debtor) entered into Corporate Insolvency Resolution Process (CIRP) on 07.09.2018. The NCLT passed the order on 07.09.2018, which was uploaded on 10.09.2018. The Tribunal also appointed an IRP on the same date. On 14.09.2018, the IRP issued a notice to the Suspended Management informing them of the takeover of the Corporate Debtor's management. The Adjudicating Authority appointed a Resolution Professional (RP) on 27.11.2018. The RP discovered that the Appellant and Respondent No. 6, the CFO of the Corporate Debtor, had made unauthorised payments amounting to Rs. 11.01 crore to Respondent Nos. 2 to 5 from 10.09.2018. The RP issued a letter seeking an explanation for the payments. On 09.04.2019, the Appellant and Respondent No. 6 responded that the transactions aimed to keep the Corporate Debtor as a going concern and were made in accordance with the existing Standard Operating Procedures. Dissatisfied with the explanation, the RP filed an Application in the Company Petition seeking directions for the Appellant and Respondent Nos. 2 to 6 to refund the full amount. The Adjudicating Authority allowed the application. Aggrieved by the order, the Appellant filed the appeal. Submissions Counsel for the Appellant submitted that although the impugned transactions took place after the pronouncement of the CIRP commencement order, they were undertaken in the ordinary course of business. She pointed out that Respondent Nos. 2 to 5 were long-term vendors of the Corporate Debtor and clearing their dues was necessary to keep the Corporate Debtor functioning as a going concern. She submitted that the management had approved the payments prior to the initiation of CIRP. It was further submitted that although the cheques were encashed after 10.09.2018, they were dated prior to it. Per contra, Counsel for Respondent No.1 (the RP) submitted that the Appellant and Respondent No.6 violated Section 14(1)(b) of the IBC by making payments from the Corporate Debtor's account after commencement of CIRP. He contended that the CIRP commencement date is the date of pronouncement of the order, i.e., 07.09.2018, and not the date of its upload (10.09.2018). Accordingly, he argued that all post-07.09.2018 transactions stood in breach of the moratorium. He submitted that the impugned payments were made post-commencement of CIRP without the authorization of the IRP. Observations The issue before the Tribunal was whether the payments made by the Appellant after commencement of CIRP constituted a breach of the provisions of moratorium and whether there was any infirmity in the impugned order directing the reversal of the impugned transactions by the Appellant and Respondent No. 2 to 6 to the assets of the Corporate Debtor. The Tribunal observed that as soon as an application of CIRP is admitted under Section 7, 9 or 10 of the IBC, it marks the commencement of insolvency. The moratorium becomes enforceable from the date the CIRP application is admitted or as indicated in the order. Once the moratorium is in effect, it is not open for any Financial or Operational creditor to recover any amount from the account of the Corporate Debtor except by filing claims through the resolution framework. The Tribunal observed that the suspended management of the Corporate Debtor is also strictly prohibited from directly or indirectly deploying the funds of the Corporate Debtor unilaterally, without the authorisation of IRP. The Tribunal noted that the order dated 07.09.2018 stipulated that “the order of moratorium shall have effect from 10.09.2018”. Nine out of twelve impugned payments were made post-moratorium. As for the three cheque transactions dated prior to moratorium, they were encashed by the Respondents after the CIRP commencement date and post the declaration of moratorium. The Tribunal noted that the RP had clarified that all payments made by him had been duly approved by the CoC and were disbursed through the UCO Bank account. However, the impugned payments were made from...

Suspended Management Cannot Disburse Funds Of Corporate Debtor Post-CIRP Commencement Without Authorisation Of IRP: NCLAT New Delhi

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Suspended Management Cannot Disburse Funds Of Corporate Debtor Post-CIRP Commencement Without Authorisation Of IRP: NCLAT New Delhi

Tazeen Ahmed

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INR 1099+GST

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