Bank of India & Ors. Vs, Bhuban Madan, Resolution Professional of Ferroy Alloys Corporation Limited - Recovery of credit facilities by Banks during moratorium.

NCLAT (28.05.2021) in Bank of India & Ors. Vs,  Bhuban Madan, Resolution Professional of Ferroy Alloys Corporation Limited [COMPANY APPEAL (AT) (Insolvency) No. 590 of 2020] held that; 

• that the Creditors may chose not to file claim if the NFB Facilities have not matured and decide to submit claim on its maturity after the completion of moratorium period subject to survival of the ‘Corporate Debtor’.

• This Tribunal in a catena of Judgements has held that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to recovery of amount.

• the Banks cannot freeze accounts nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of moratorium for its day-to-day functioning. Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the moratorium period.

• “… Once Moratorium has been declared, it is not open to any person including ‘Financial Creditor’ and the Appellant Bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”…

• We are of the view that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

• We hold that as ‘Claims’ are already preferred by the Appellant Banks and filed before the RP, they are not entitled to recover the amounts otherwise available in the Credit Accounts or Working Capital Accounts of the ‘Corporate Debtor’

Chronology of the events;

1. 13.09.2011 - CD was granted fund based & non fund based credit facilities by applicant banks.

2. 06.07.2017 - NCLT, Kolkata passed an order for commencement of Corporate Insolvency Resolution Process (CIRP) against M/s. Ferro Alloys (Corporate Debtor) under S. 7 of the Code, filed by Rural Electrification Corporation. K.G. Somani was appointed as the Interim Resolution Professional (IRP).

• Appeals preferred before NCLAT were dismissed.

• The Supreme Court dismissed the Appeal on 11.02.2019.

3. 18.07.2017 - Consortium of Appellant Banks, led by Bank of India, submitted their ‘Claims’.

4.  27.07.2017 -  NCLAT vide Orders dated 27.07.2017 and 09.08.2017 and NCLT Kolkata vide Order dated 10.11.2017, had directed all banks having accounts of the Corporate Debtor to ensure that Corporate Debtor remains a ‘going concern’. Erstwhile RP had also sent various emails to the Appellant banks requesting that working capital limits as on Insolvency Commencement Date should be made available to the Corporate Debtor during the whole course of CIR Process.

5. 08.04.2019 - The COC passed a Resolution in its 22nd meeting to replace the Resolution Professional.

6. 08.07.2019 - NCLT, Cuttack allowed the Application and Mr. Bhuvan Madan was appointed as the RP, who requested the Banks to reverse the amounts remitted by the previous RP during the CIRP.

7. 27.08.2019 -  RP filed an Avoidance Application  CA (IB) 92/CTB/2019 under S. 14 r.w. S. 17 & S.60 (5) of the Code seeking reversal of amounts received by the Appellants Banks during the CIRP.

8. 30.01.2020 - NCLT, Cuttack approved the Resolution Plan submitted by Sterlite Power Transmission Limited.

9. 02.03.2020 - NCLT Cuttack allowed the Application filed by the Respondent (RP) and directed the Appellant Banks to reverse the amounts within 5 weeks.

 

Excerpts of the order;

# 1. This Appeal is preferred by M/s. Bank of India, Central Bank of India, Syndicate Bank and State Bank of India, against the Impugned Order dated 02.03.2020 passed by the Learned Adjudicating Authority (National Company Law Tribunal, Cuttack Bench, Cuttack), whereby the Learned Adjudicating Authority has allowed the Application filed by the Resolution Professional under Section 14 read with Section 17 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as the ‘Code’) with the following directions:-

• “11. (i) Central Bank of India (Respondent No. 1) is directed to reverse the due amount i.e. to the tune of Rs. 1,419.89 lakhs.

• (ii) Syndicate Bank (Respondent No. 2) is directed to reverse the due amount i.e. to the tune of Rs. 326.87 lakhs.

• (iii) Bank of India (Respondent No. 3) is directed to reverse the due amount i.e. to the tune of Rs. 1.827.17 lakhs.

• (iv) State Bank of India (Respondent No. 4) is directed to reverse the due amount i.e. to the tune of Rs. 599.78 lakhs.

• (v) This order shall be complied by all the respondents, within five weeks of receipt of this order.”

Facts in brief:

# 2. Vide Order dated 06.07.2017, the Learned Adjudicating Authority has admitted the Section 7 Application. This Order of Admission was challenged vide Company Appeal (AT) (Insolvency) No. 92 of 2017 and this Tribunal has dismissed the Appeal and concurred with the finding of the Adjudicating Authority. Appeals challenging the Admission Order were dismissed by NCLAT on 08.01.2019 and Supreme Court on 11.02.2019. Subsequently, the ‘Resolution Plan’ was approved on 30.01.2020.

# 3. While so, an Application CA(IB) 92/CTB/2019 was filed by the Resolution Professional seeking direction against the Appellant Banks and Financial Institutions to reimburse all the amounts appropriated by them after the Insolvency Commencement Date, together with the amount appropriated towards interest payments and further to resume the working capital limits as available to the ‘Corporate Debtor’ as on the Insolvency Commencement Date.

Submissions on behalf of the Learned Counsel for the Appellant.

- The ‘Corporate Debtor was granted fund based (Cash Credit Hypothecation Facility ‘CCHF’) and non-fund based facilities (Bank guarantee/LC Facility) of credit through a consortium of lenders comprising the Appellant Banks namely Bank of India (the lead Bank), State Bank of India, Central Bank of India and Syndicate Bank since 13.09.2011. The ‘Corporate Debtor’ created the first charge over its Fixed Assets and Current Assets.

-  This Tribunal vide an Order dated 09.08.2017 directed the Resolution Professional to keep the Company as a going concern and also directed the bankers to co-operate with the Resolution Professional in this regard.

-  The Consortium of Banks submitted their claims on 18.07.2017

-  That all the member banks allowed operation in the account as per the direction of the Hon’ble NCLAT’s order dated 09.08.2017. [Minutes of COC meetings, Annexure R-2, R-3 Pg 20-34 of Rejoinder]

-  The Bills under Lender of Credit (LC) facility maturing during the CIRP were also honored by the erstwhile RP from the revenue generated by the ‘Corporate Debtor Company’ which was making good profits and had accumulated enough cash balance. Hence, the erstwhile RP chose to reduce the utilization of the fund based facilities and had squared off the Cash Credit Facilities with all the Banks.

-  Mr. Bhuvan Madan, the Resolution Professional, had requested the Banks to reverse the amounts remitted by the previous IRP while discharging his duties as per the provisions of IBC. The lenders consortium noted that the operation in the accounts was allowed as per the directions of this Tribunal vide an Order dated 09.08.2017 and the credit was received in the normal course of business. It was the commercial decision of the erstwhile RP to reduce the fund based exposure to the minimum and to hold liquidity cash without any earning to reduce the interest expenses. The ‘Corporate Debtor’ made a profit of Rs. 54.92 Crs., as on 31.03.2018 and Rs. 27.43 Crs. as on 31.03.2019, which shows that the ‘Corporate Debtor’ had enough liquidity to maintain the Company as a going concern. 

-  The Respondent filed CA (IB) No. 92/CTB/2019 alleging that the amount received by the Appellants were preferential transactions as defined under Section 43 of the IBC and that the Appellant has violated Section 14 of IBC. Since, amount received by the Appellants were directly remitted by the Respondent and there was a conscious business decision to reduce the interest expenses as a prudent business manager would do, the amount remitted by the erstwhile RP and received by the Appellant during CIRP does not qualify to be treated as preferential transaction and hence, the amount of such credit is not reversible. . . . . .

-  The Adjudicating Authority in the Impugned Order did not make any observation with respect to preferential transactions under Section 43 of IBC.

-   As per the document detailing the implementation of ‘Resolution Plan’, the total liquidation value is Rs. 305.23 Crs. The liquidation value of the WC consortium is Rs. 210.100 Crs. and the cash available for distribution among all creditors is Rs. 44.47 Crs. So, the share and the cash component ought to be 68.85 per cent of Rs. 45.47 Crs. which is Rs. 31.30 Crs. whereas the distribution pattern allocated is Rs. 4.69 Crs. for the Secured Creditors

-  As per the security holding the Bank should have got Rs. 31.30 Crs. but only Rs. 4.69 Crs. was allocated which is against the spirit of IBC. The admitted claim amount of dissenting Secured Creditors is Rs. 27.54 Crs. against the cash component arrived at Rs. 31.30 Crs. and therefore, the total admitted claim of the dissenting Creditors can be met from the available cash components and no amounts need be reversed. The sharing pattern was never made a part of the ‘Resolution Plan’ and the RP put his own interpretation in devising the distribution pattern which is against the spirit of the Code.

Assessment:

# 8. It is the main case of the Appellant Banks that this Tribunal vide an Order dated 09.08.2017 passed an Interim Order directing the Company to be run as a going concern, engaging all Banks where the Company had accounts, to co-operate with the IRP for operation of the accounts. In compliance of that direction, the erstwhile IRP Mr. K. G. Somani, vide a Letter dated 02.09.2017 requested the Banks to make available the limits which were subsisting as on the date of commencement of the process of Resolution. The LC facility was continued on request of the erstwhile RP and the LC Bills negotiated by the beneficiary Banks were retired by the ‘Corporate Debtor’. The amount was paid by the Company into their Cash Credit Account so that fresh LCs could be opened within the sanctioned limits to purchase necessary raw materials to keep the Company a going concern.

# 9. The Resolution Professional, Mr. Bhuvan Madan after assuming charge as the RP requested the Banks to resume the working capital limits and to reimburse all the amounts which were appropriated. It is the stand of the Appellants that the ‘Corporate Debtor’ did not maintain any Current Account from the date of commencement of the CIRP and hence, the question of appropriation from the Current Account does not arise. Since the Company was a going concern, and generating Profits it did not have any issue in servicing the bills under LC. Since the Company has not been issued any fresh LCs, the liability under LC became NIL. It was strenuously argued by the Learned Counsel for the Appellant that the ratio of ‘Andhra Bank’ V/s. ‘M/s. F.M. Hammerle Textiles Ltd.’ in Company Appeal (AT) (Insolvency) No. 61 of 2018 is squarely applicable to the facts of this case, as it was held in that Order dated 13.07.2018 that the Creditors may chose not to file claim if the NFB Facilities have not matured and decide to submit claim on its maturity after the completion of moratorium period subject to survival of the ‘Corporate Debtor’.

# 10. It is the Respondent's case that during the CIRP of the ‘Corporate Debtor’, the Appellant recovered an amount of Rs. 41.73 Crs. in preference  over the other Creditors. This issue was discussed in the 25th CoC Meeting and it was brought to the Notice of the Appellant Banks by the Resolution Professional vide emails dated 20.07.2019 and 24.07.2019 that the action of the Banks of recovering the receivables from the Cash Credit Account towards repayment of working capital limits has resulted in preferential payment in their favor. We note that ‘Preferential treatment’ in the instant case is not strictly as per what is provided under Section 43 but in terms of giving preference to the Appellants Banks over and above the dues of other Creditors.

# 12. As per Section 17(1)(d) of the I&B Code, the Financial Institutions maintaining the accounts of the ‘Corporate Debtor’ have to act on the instructions of the Interim Resolution Professional in relation to such accounts and furnish all information relating to the ‘Corporate Debtor’. This Tribunal in a catena of Judgements has held that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to recovery of amount. 

# 13. It was also held that the Banks cannot freeze accounts nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of moratorium for its day-to-day functioning. Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the moratorium period. It is seen from the record that payments due under the LCs have been made out of the funds of the ‘Corporate Debtor’ as is established from the reduction of liabilities under non-fund based facilities.

# 14. This Tribunal in Company Appeal (AT) No. 267 of 2017 in ‘Indian Overseas Bank’ V/s. ‘Mr. Dinakar T. Venkatsubramaniam Resolution Professional for Amtek Auto Ltd.’ held as follows:-

• “… Once Moratorium has been declared, it is not open to any person including ‘Financial Creditor’ and the Appellant Bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”…

# 15. It is also noted that the amounts were honoured partly by margin held as FDR and partly by funds of the ‘Corporate Debtor’ deposited in its Cash Credit Accounts. We are of the view that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified. If the Appellant's argument is accepted, then the act of recovering receivables, under the garb of normal course of business will change the status of all the claims which would be in complete violation of Section 14 of the Code.

# 16. The Case of ‘Andhra Bank’ (Supra) has no applicability to the facts of the attendant case as it is seen from the record that the Banks have already included the value of non-fund based in their ‘Claim’ before the IRP. The Code provides that ‘Claims’ filed by the Creditors during the CIRP shall stand crystallized and will not be settled during the CIRP in preference over other Creditors. We hold that as ‘Claims’ are already preferred by the Appellant Banks and filed before the RP, they are not entitled to recover the amounts otherwise available in the Credit Accounts or Working Capital Accounts of the ‘Corporate Debtor’. We are of the considered view that adjusting of the ‘Claims’ by the Appellant Banks during the CIRP out of the funds of the ‘Corporate Debtor’ results in unjust enrichment of the Banks and further, crediting amounts towards non-fund and fund based accounts during the moratorium period is against the provisions of Section 14 of the Code.

# 17. Hence, we are of the view that there is no illegality or infirmity in the Order of the Learned Adjudicating Authority. Therefore, this Appeal fails and is accordingly dismissed. No order as to costs.

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