2018 (8) TMI 1936 - Tri - Insolvency and Bankruptcy

Directors violated Insolvency Code transferring funds during moratorium without consent, ordered to refund funds promptly.

The tribunal found that the directors violated Sections 14 and 17 of the Insolvency and Bankruptcy Code by transferring funds during the moratorium ... CIRP process - Violation of section 17 of the Code and moratorium declared under section 14 of the Code by the RP and the directors of suspended board of directors of corporate debtor - direction to corporate debtor to recall the funds allegedly diverted by the directors during the period of moratorium. Whether the Directors of the suspended board of directors of the corporate debtor had transferred the funds of the corporate debtor in violation of section 14 of the Code or in disobedience of the direction issued by the IRP? - HELD THAT:- The RP has no power to permit the directors to operate the corporate debtor independently and that the fund transfer by the corporate debtor subsequent to the declaration of moratorium i.e from 15.01.2018 is illegal and in violation of sections 14 and 17 of the Code. Being found that the fund transfer to the creditors referred to in Annexure R-6 is found in violation of the Moratorium declared in the case in hand those funds to the tune of ₹ 25,78,23,428/- is to be recalled, otherwise the entire CIRP process could be a mockery. However, on going through the list of transfer of fund in the name of the creditors it is understood that certain transfers are related to payment of professional fees to one of its employee of the corporate debtor to whom allegations also leveled by the financial creditors and the audit fee payable to the auditor. Being satisfied that transfer of fund by the corporate debtor is illegal the interim relief as sought for is to be allowed in the case in hand - Accordingly interim relief as prayed for is allowed. Issues Involved:1. Violation of Section 17 and Section 14 of the Insolvency and Bankruptcy Code, 2016.2. Allegations against the Interim Resolution Professional (IRP) for delaying the CIRP process.3. Transfer of funds by directors during the moratorium period.4. Request for recalling diverted funds.5. Compliance with CIRP Regulations by the IRP.Detailed Analysis:1. Violation of Section 17 and Section 14 of the Insolvency and Bankruptcy Code, 2016:The primary issue revolves around whether the directors of the suspended board of the corporate debtor transferred funds in violation of Section 14 (moratorium) and Section 17 (management of affairs by IRP) of the Insolvency and Bankruptcy Code, 2016. The tribunal found that the directors indeed transferred funds without the consent of the IRP, which is a violation of the moratorium declared under Section 14 and the management vesting under Section 17. The tribunal stated, 'the corporate debtor is bound not to do the management and the affairs of the company without permission of the RP.'2. Allegations against the Interim Resolution Professional (IRP) for delaying the CIRP process:The financial creditors alleged that the IRP, Mr. Rajesh Kumar Kejriwal, delayed the CIRP process to enable the directors to divert funds. The tribunal noted that the IRP failed to adhere to several provisions of the CIRP Regulations, such as issuing a public announcement and verifying claims within the stipulated time. The tribunal observed, 'there is undue delay in issuing public announcement and taking over the management of the affairs of the corporate debtor by the RP.'3. Transfer of funds by directors during the moratorium period:The directors transferred funds amounting to Rs. 25,78,23,428/- during the moratorium period. The tribunal found that these transfers were not for day-to-day operations but were preferential payments to certain creditors, which is illegal under the moratorium. The tribunal stated, 'the transfer is amount to preferential payment to the creditors subsequent to the date of declaration of Moratorium by the corporate debtor and therefore the transfer of fund is illegal and improper.'4. Request for recalling diverted funds:The tribunal allowed the request for recalling the diverted funds, directing the creditors who received the funds to refund the amounts to the corporate debtor's account within 15 days. The tribunal ordered, 'Creditors named in the Annexure R-6 list (except employees and auditor) are hereby directed to refund the money to the account of the corporate debtor which have been received by them within 15 days of receipt of the order.'5. Compliance with CIRP Regulations by the IRP:The tribunal found that the IRP did not comply with several CIRP Regulations, including the timely issuance of public announcements and the verification of claims. The tribunal noted that the IRP's actions or inactions facilitated the directors in diverting funds. The tribunal stated, 'The Resolution Professional has not taken over all the assets of the company/corporate debtor immediately after his appointment. He did not take over the management and the affairs of the corporate debtor immediately after his appointment.'Conclusion:The tribunal concluded that the directors' transfer of funds during the moratorium was illegal and in violation of Sections 14 and 17 of the Insolvency and Bankruptcy Code, 2016. The IRP's failure to comply with CIRP Regulations contributed to the issue. The tribunal directed the refund of the diverted funds to the corporate debtor's account to continue the CIRP process without interruption.