2022 (8) TMI 236 - AT - Insolvency and Bankruptcy

Tribunal upholds order under Section 66 of IBC during moratorium

The Tribunal upheld the Adjudicating Authority's decision to pass an order under Section 66 of the IBC during the moratorium period. The order required ... Moratorium under Section 14(1)(a) - Fraudulent trading / liability under Section 66 - Harmonious construction of statutory provisions - Non-obstante clause in Section 60(5)(a)Moratorium under Section 14(1)(a) - Fraudulent trading / liability under Section 66 - Non-obstante clause in Section 60(5)(a) - Harmonious construction of statutory provisions - Competence of the Adjudicating Authority to pass orders under Section 66 during the moratorium declared under Section 14(1)(a) and sustainability of the impugned order directing contribution and criminal prosecution. - HELD THAT: - Section 14(1)(a) prohibits institution or continuation of suits or proceedings against the corporate debtor in courts, tribunals or other fora and the execution of their judgments or orders; it does not operate as a bar on the Adjudicating Authority exercising its statutory powers within the insolvency or liquidation proceedings. Section 66 empowers the Adjudicating Authority to direct persons knowingly party to fraudulent trading to make contributions to the assets of the corporate debtor during the corporate insolvency resolution process or liquidation process. Reading Section 14(1)(a) and Section 66 independently but harmoniously avoids rendering Section 66 otiose and gives effect to the remedial purpose of the Code. The non-obstante provision in Section 60(5)(a) further enables the Adjudicating Authority to pass orders on applications or proceedings by or against the corporate debtor notwithstanding anything to the contrary in any other law. Applying these principles, an order under Section 66 imposing joint and several liability on the resolution professional, suspended directors and related parties for alleged fraudulent trading, and directing contribution to the corporate debtor and institution of criminal proceedings, is within the Adjudicating Authority's competence despite the moratorium.The impugned order under Section 66, passed during the moratorium, is sustainable; the appeal is dismissed and the Adjudicating Authority's order is confirmed.Final Conclusion: The Tribunal held that the moratorium under Section 14(1)(a) does not preclude the Adjudicating Authority from exercising powers under Section 66 (read with Section 60(5)(a)) to deal with fraudulent trading by the resolution professional, suspended directors or related parties; the order directing contribution and criminal prosecution was affirmed and the appeal dismissed. Issues Involved:1. Legality of the order passed under Section 66 of IBC during the moratorium under Section 14 of IBC.2. Competence of the Adjudicating Authority to pass orders against the resolution professional and related parties during the insolvency resolution process.Detailed Analysis:1. Legality of the Order Passed During Moratorium:The appellant contended that the Adjudicating Authority committed a serious error by issuing directions during the moratorium imposed under Section 14 of IBC. Section 14 (1) (a) of IBC prohibits the institution or continuation of suits or proceedings against the corporate debtor, including the execution of any judgment, decree, or order in any court, tribunal, arbitration panel, or other authority. However, the Tribunal clarified that this prohibition does not extend to the passing of orders by the Adjudicating Authority during the insolvency resolution process or liquidation process against resolution professionals, suspended directors, or related parties. The Tribunal emphasized that Section 66 of IBC empowers the Adjudicating Authority to pass appropriate orders when fraudulent transactions are identified, regardless of the moratorium under Section 14.2. Competence of the Adjudicating Authority:The Tribunal examined whether the Adjudicating Authority was competent to pass the impugned order under Section 66 of IBC during the moratorium. Section 66 allows the Adjudicating Authority to hold individuals liable for fraudulent trading or wrongful trading during the insolvency resolution process or liquidation process. The Tribunal noted that Section 14 and Section 66 serve different purposes and must be read independently to achieve the objectives of the IBC. Section 14 aims to prevent fictitious claims by third parties, while Section 66 aims to prevent fraudulent trading or business by the corporate debtor through its resolution professional or suspended directors. The Tribunal concluded that there is no inconsistency or repugnancy between these sections, and they must be construed harmoniously to make the statute effective and workable.Conclusion:The Tribunal held that the Adjudicating Authority was within its rights to pass the impugned order under Section 66 of IBC during the moratorium period. The order directed the respondents to contribute Rs. 2687.27 lacs to the assets of the corporate debtor and to institute criminal prosecution against the respondents for fraudulent activities. The Tribunal found no illegality in the order and dismissed the appeal, confirming the Adjudicating Authority's decision. The appeal was deemed devoid of merit, and the order was upheld without costs.