Directors found guilty of unauthorized fund withdrawal during insolvency process, face fines and legal actions

The Tribunal found the directors guilty of unauthorized withdrawal of funds during the Corporate Insolvency Resolution Process, violating the moratorium order and engaging in fraudulent trading under Sections 66(1) and 74(1) of the Insolvency and Bankruptcy Code. The application was deemed maintainable, and the directors were ordered to refund the withdrawn amount. Failure to comply would result in fines. The directors' contempt of orders and breach of undertakings were noted, leading to potential further legal actions.

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Issues Involved:
1. Unauthorized withdrawal of funds during the Corporate Insolvency Resolution Process (CIRP).
2. Violation of moratorium order under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.
3. Maintainability of the application under Sections 66(1) and 74(1) of IBC.
4. Contempt of Tribunal’s orders and breach of undertakings by the directors.
5. Non-joinder of necessary parties.
6. Imposition of penalties and further legal actions.

Issue-wise Detailed Analysis:

1. Unauthorized Withdrawal of Funds During CIRP:
The resolution professional filed an application under Sections 67, 68, 69, 70, 72, and 74 of the IBC, 2016, seeking directions against the suspended board of directors for withdrawing Rs. 6,72,12,170.22 from the corporate debtor’s bank account without consent. The directors deposited back Rs. 1,22,00,000, leaving a balance of Rs. 5,50,12,170.22. The unauthorized withdrawal was in violation of the moratorium order dated 27.09.2019 and the NCLAT order dated 23.10.2019.

2. Violation of Moratorium Order Under Section 14 of IBC:
The directors’ actions contravened the moratorium order under Section 14 of IBC. The NCLAT had directed that bank cheques could only be issued with the approval of the Interim Resolution Professional (IRP). Despite this, the directors withdrew funds, leading to a violation of the moratorium and the orders of the NCLAT.

3. Maintainability of the Application Under Sections 66(1) and 74(1) of IBC:
The directors challenged the maintainability of the application, arguing that the sections cited did not apply to the allegations. However, the Tribunal found the application maintainable under Sections 66(1) and 74(1) of IBC, which deal with fraudulent trading and contravention of moratorium orders, respectively. The Tribunal noted that the directors’ actions fell within these provisions.

4. Contempt of Tribunal’s Orders and Breach of Undertakings:
The directors had given undertakings to return the withdrawn amount but failed to comply. The NCLAT observed that the directors acted illegally by withdrawing funds post-moratorium and not honoring their undertakings. This led to the dismissal of their appeal and initiation of contempt proceedings. The Tribunal emphasized that the directors’ deliberate disobedience of orders and breach of undertakings justified contempt action.

5. Non-joinder of Necessary Parties:
The directors contended that the application was bad for non-joinder of Pack Power and Pooja Trading, to whom they claimed to have paid Rs. 2 crore. The Tribunal dismissed this contention, noting that there was no supporting evidence for the payment, and the suppliers were neither necessary nor formal parties to the application.

6. Imposition of Penalties and Further Legal Actions:
The Tribunal found the directors guilty of violating the moratorium under Section 14 of IBC. As per Section 74(1), the directors were liable for punishment, including imprisonment and fines. However, the Tribunal could only impose fines and directed the resolution professional to approach the IBBI or file a criminal complaint for further legal actions. The Tribunal ordered the directors to refund Rs. 5,50,12,170.22 within two weeks, failing which they would be liable to pay a fine of Rs. 1 lakh each.

Conclusion:
The Tribunal concluded that the directors’ unauthorized withdrawal of funds during the CIRP violated the moratorium order and constituted fraudulent trading under Sections 66(1) and 74(1) of IBC. The application was found maintainable, and the directors were directed to refund the withdrawn amount or face penalties. The Tribunal also highlighted the directors’ contempt of the NCLAT’s orders and breach of undertakings, warranting further legal actions.

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