SM Milkose Ltd. Vs. Parvinder Kumar Bhatt - Sub-section (b) of section 14(1) prohibits “transferring, encumbering, alienating or disposing of by the Corporate Debtor, any of its assets or any legal right or beneficial interest therein.

NCLAT (27.08.2021) in SM Milkose Ltd. Vs. Parvinder Kumar Bhatt, Deputy Zonal Manager, Bank of India.  [Company Appeal (AT) (Ins.) No. 84 of 2021 ] held that; 

• Section 14 of the IBC, particularly sub-section (b) of section 14(1) prohibits “transferring, encumbering, alienating or disposing of by the Corporate Debtor, any of its assets or any legal right or beneficial interest therein”.

• This provision prohibits the corporate debtor, and the resolution professional who is managing the affairs of the corporate debtor during CIRP, from transferring any of the corporate debtor’s assets to creditors. The amounts received by the corporate debtor during the currency of the CIRP are assets of the corporate debtor whose transfer to chosen creditor in priority without the process of Resolution Plan would be prohibited.

• That any commercial decision of the COC of approving the resolution plan or rejecting the same has to be respected and the statute has not invested jurisdiction or authority, either with NCLT or NCLAT regarding same.

• In UCO Bank versus G Ramachandran case (referred supra) wherein it has been held that during CIRP no business majority in the COC can take advantage of its position in apportioning any part of the receipts to the corporate debtor to itself.

Excerpts of the order;

# 1. This appeal has been preferred by the Appellant No.1, the successful Resolution Applicant who has stepped into shoes of Corporate Debtor – Appellant No. 2, aggrieved by the order dated 23.12.2020 passed by the Adjudicating Authority (NCLT, New Delhi) in IA No. 3047 of 2020 in (IB) No. 334 (ND)/2017. The Appellant No. 1 has submitted that the impugned order disregards the provisions of section 14 of the Insolvency and Bankruptcy Code, 2016 (hereinafter called IBC) according to which no accruals can be alienated from the account of the Corporate Debtor upon imposition of moratorium after the initiation of the Corporate Insolvency Resolution Process (CIRP).

 

# 2. The Appellant’s case is that CIRP was initiated and moratorium was imposed on the assets of Corporate Debtor M/s. Applied Electro Magnetic Private Limited vide order dated 26.10.2017 in Company Petition No. IB-334(ND)/2017.

 

# 3. The Appellant No.1 has submitted and argued that the officers of Respondent No. 4 Bank which is 90% voting rights holder in the Committee of Creditors (COC), took a decision to keep the Corporate Debtor going concern so as to save invocation of the bank guarantees in the first meeting of the COC. Accordingly, an interim finance of Rupees 15 lakhs was sought from SM. Finlease Limited, another financial creditor of the Corporate Debtor. In the same COC meeting, the respondent Bank of India (hereinafter called the “Bank”) sought and it was agreed to earmark 25% of the receipts received during such operation of the Corporate Debtor during the moratorium period towards repayment of loan of the respondent Bank and kept in a separate current account. This action, according to the Appellant No. 1, is not in accordance with law as under no circumstances can any creditor divert to itself the receipts of the Corporate Debtor during the moratorium period as per the mandate of Section 14 of IBC, and claims that such a decision was taken under the influence of Respondent Bank which holds 90% voting rights in the COC.

 

# 4. Appellant No. 1 has further stated that it submitted a resolution plan dated 4.4.2018 which proposed to give 15% of the total amount claimed by the Respondent No. 4 Bank of India, being a secured financial creditor, equal to Rs.6.22 crores. This amount of Rs.6.22 crores was considered inadequate and unacceptable to the Bank of India and its officials put forward a condition to the Resolution Applicant for retention of the monies received by the Bank prior to 1.4.2018, over and above Rs.6.22 crores offered under the Resolution Plan, whereupon the Bank would agree to approve the Resolution Plan. Thus a revised Resolution Plan was drawn up by the Resolution Applicant, wherein the Respondent Bank was permitted to retain amounts received by the Corporate Debtor and kept in the separate account in the same bank (Bank of India) prior to 1.4.2018 during the currency of moratorium. This arrangement was specifically mentioned in the revised Resolution Plan submitted on 4.5.2018 to the COC.

 

# 5. The Appellant No. 1 has further claimed that since the Respondent Bank wanted a still larger amount from the resolution of the Corporate Debtor, the officials of the Bank sent an email dated 29.6.2018 seeking resolution amount of Rs. 9 crores. The Resolution Applicant in the 8th meeting of the COC accepted the resolution amount of Rs. 9 crores proposed by the Respondent Bank. In the final version of the Resolution Plan which was approved by the COC and thereafter by the Adjudicating Authority, there was no mention of any retention of the amount received during the moratorium period by the Bank which was kept in the separate current account of the Bank of India.

 

# 6. The Appellant No. 1 has stated that the Respondent Bank received a total sum of Rs. 1,68,23,462 in the separate bank account, which includes Rs. 88,16,071 received during the period 23.1.2018 to 3.3.2018 and Rs. 80,07,391 received during the period 3.4.2018 to 23.8.2018. Appellant No. 1 has further stated that while the Bank has taken Rs. 80,07,391 from this account as part of the resolution amount of Rs. 9 crores, it is refusing to part with Rs. 88,16,071 and has dishonest intention of appropriating this amount over and above the sum of Rs. 9 crores which is the share of the Respondent Bank in the successful Resolution Plan. Hence Appellant No. 1 along with the erstwhile Resolution Professional requested that the Respondent Bank be directed to give Rs. 88,16,071 to the Appellant No. 1 who is the successful Resolution Applicant. The Appellant No. 1 has also sought NOC for removal of charge from the Respondent Bank which is not being given on one pretext or the other and which is being used to arm twist the successful Resolution Applicant to pay amounts over and above what is approved in the Successful Resolution Plan.

 

# 16. We have considered the detailed arguments of both the parties and also perused the relevant records and documents submitted by the parties. The basic issue that is relevant in this case is that whether the COC can take a decision regarding payments to a particular financial creditor during the CIRP and whether any amounts that belong to the corporate debtor can be adjusted towards the claim of any particular financial creditor during the moratorium period imposed under Section 14 of the IBC.

 

# 25. Section 14 of the IBC, particularly sub-section (b) of section 14(1) prohibits “transferring, encumbering, alienating or disposing of by the Corporate Debtor, any of its assets or any legal right or beneficial interest therein”. It is quite clear about how accruals to the corporate debtor are to be treated during the currency of CIRP. This provision prohibits the corporate debtor, and the resolution professional who is managing the affairs of the corporate debtor during CIRP, from transferring any of the corporate debtor’s assets to creditors. The amounts received by the corporate debtor during the currency of the CIRP are assets of the corporate debtor whose transfer to chosen creditor in priority without the process of Resolution Plan would be prohibited. Therefore, such a condition as was prescribed in the first COC meeting regarding apportioning of the accruals in the separate bank account of corporate debtor to the Bank of India would not be legal and against the provision in sub-section 3 of section 14, which allows only such transactions which may be notified by the central government, in consultation with any financial regulator, to be exempted from the rigour of moratorium. The accruals in the separate bank account in the Bank of India during the CIRP are not notified by the Central Government and hence they are the assets of the corporate debtor.

 

# 26. Hon’ble Supreme Court, in Kalparaj Dharmashi Vs. Kotak Advisories Ltd. has made it very clear that any commercial decision of the COC of approving the resolution plan or rejecting the same has to be respected and the statute has not invested jurisdiction or authority, either with NCLT or NCLAT regarding same. Thus the approval of the Resolution Plan in the 8th COC meeting and thereafter by the Adjudicating Authority assumes finality and cannot be tinkered with.

 

# 27. We also note the judgment rendered by this tribunal in UCO Bank versus G Ramachandran case (referred supra) wherein it has been held that during CIRP no business majority in the COC can take advantage of its position in apportioning any part of the receipts to the corporate debtor to itself.

 

# 28. In the present case, the Resolution Plan, which was approved by the Adjudicating Authority, included Bank of India’s share as Rs. 9 crores only as full and final settlement with no conditions attached. Therefore ,the condition stipulated by the COC in its first meeting regarding the receipts by the corporate debtor during the CIRP period and apportioning of 25% of the accruals due to the operations of corporate debtor are not part of the final resolution plan and this has no legs to stand on vis a vis’ the approved resolution plan and the share of Bank of India contained therein.

 

# 29. An important issue that has become evident in this case is the absence of monitoring of the implementation of the successful resolution plan. Regulation 38 sub-regulation 2 of The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is quite clear about the implementation aspect of a resolution plan. This provision reads as hereunder:-

• “38. Mandatory contents of the resolution plan

• (1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.

• Xxxxx

• (2) A resolution plan shall provide:

-  (a) the term of the plan and its implementation schedule;

-  (b) the management and control of the business of the corporate debtor during its term; and

- (c) adequate means for supervising its implementation.

• (3) A resolution plan shall demonstrate that –

-  (a) it addresses the cause of default;

-  (b) it is feasible and viable;

-  (c) it has provisions for its effective implementation;

-  (d) it has provisions for approvals required and the timeline for the same; and

-   (e) the resolution applicant has the capability to implement the resolution plan.”

 

# 30. Therefore, we consider it necessary that the erstwhile Resolution Professional be made responsible for proper monitoring of the implementation of the successful resolution plan to ensure its complete and proper implementation and to ensure that issues such as the one raised in this appeal do not cause unnecessary delays and obstructions in the implementation of the resolution plan. The erstwhile Resolution Professional shall oversee the Successful Resolution Plan’s implementation in accordance with the provisions of IBC and the order we propose to pass.

 

# 31. In view of aforesaid discussion and for the above reasons cited in preceding paragraphs, we hold that the amounts received towards interim finance during pendency of CIRP for which account was opened in the branch of Respondent No.4- Bank have to be held as amounts received by the Corporate Debtor during CIRP and are to be utilised as per the provisions of IBC, Rules and Regulations and the Resolution Professional is responsible for due utilisation of the same, strictly as per the provisions of IBC, Rules and Regulations and the Resolution Plan which was approved by the Adjudicating Authority.

 

# 32. For the above reasons, the impugned order cannot be maintained. We pass the following order:-

 

ORDER

The impugned order is quashed and set aside. The Resolution Professional is directed to take account of the amounts received by Corporate Debtor during CIRP in the account opened with Respondent No.4- Bank, which decision to open the account was taken in the first CoC meeting. The Resolution Professional will ensure that all receipts of Corporate Debtor during CIRP are duly accounted for and applied as per provisions of IBC and Approved Resolution Plan. The Resolution Professional will take steps to ensure utilisation of the amounts received in the account keeping in view provisions of the IBC, Rules and Regulations and the approved Resolution Plan to ensure proper utilisation and dispensation of the amounts. Balance, if any, shall enure to the benefit of the Successful Resolution Applicant who has stepped into the shoes of the Corporate Debtor.

 

# 33. The Resolution Professional will ensure completion of this process within one month of this order. Resolution Professional shall be at liberty to move Adjudicating Authority for further directions and orders for due enforcement of this Order.

 

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