Appeal restores funds transferred during moratorium; emphasizes IRP control u/ss 60(5)(b), 68, 70, 74 IBC

NCLAT allowed the appeal and set aside the NCLT order dismissing the RP's application under Section 60(5)(b) r/w Sections 68, 70 and 74 IBC and Rule 11 NCLT Rules. It held that upon admission of CIRP, declaration of moratorium and appointment of IRP, all powers of the board stand suspended and vest in the IRP, and any transfer of the Corporate Debtor's assets by the suspended board is prohibited. The Tribunal rejected the Respondent's plea of routine transfer and directed restoration of the amount unlawfully transferred to a related-party entity during the moratorium period.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, after initiation of corporate insolvency resolution process, appointment of the interim resolution professional and declaration of moratorium, the suspended board of directors retained competence and jurisdiction to transfer a sum of Rs. 41,70,000/- from the corporate debtor to a related party.

1.2 Whether the plea of routine business practice, necessity to run the hospital during the Covid-19 pandemic, and the alleged delay in the interim resolution professional taking physical control of the corporate debtor's affairs could validate or justify the impugned post-moratorium transfer.

1.3 Whether dismissal of a prior, similar interlocutory application seeking restoration of other sums withdrawn from the corporate debtor's accounts barred or controlled the adjudication of the present claim for restoration of Rs. 41,70,000/-.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Competence of suspended directors to transfer funds after initiation of CIRP and declaration of moratorium

Legal framework

2.1.1 The Court examined Sections 14, 17 and 18 of the Insolvency and Bankruptcy Code, 2016. Section 14(1)(b) prohibits "transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein" during moratorium. Section 17(1)(a)-(b) vests management of the affairs of the corporate debtor in the interim resolution professional from the date of his appointment and suspends the powers of the board of directors, to be exercised instead by the interim resolution professional. Section 18 enumerates the duties of the interim resolution professional, including monitoring assets, managing operations, and taking control and custody of assets.

Interpretation and reasoning

2.1.2 The Court held that, upon admission of the insolvency application, initiation of CIRP, appointment of the interim resolution professional, and declaration of moratorium, the entire management and control of the corporate debtor, including its assets, stands transferred to the interim resolution professional. The powers of the board of directors are suspended by operation of law.

2.1.3 On this construction, the "suspended board of directors" loses competence and jurisdiction to deal with the assets of the corporate debtor in any manner, particularly to transfer assets, which is expressly prohibited by Section 14(1)(b) read with Section 17(1)(b).

2.1.4 Applying this to the facts, the Court noted that CIRP was initiated and moratorium declared on 27.05.2020. The impugned transfer of Rs. 41,70,000/- to Rancan Impex Pvt. Ltd. occurred between 30.05.2020 and 02.06.2020. During this period, the board's powers stood suspended and the corporate debtor was bound by the moratorium.

2.1.5 The Court recorded that the interim resolution professional had promptly communicated the commencement of CIRP, the moratorium, and the requirement to desist from unauthorized transactions to the directors and concerned functionaries of the corporate debtor, including through WhatsApp and email.

Conclusions

2.1.6 The Court concluded that the suspended directors had no competence or jurisdiction to effect the transfer of Rs. 41,70,000/- to Rancan Impex Pvt. Ltd. after 27.05.2020. The transfer was in violation of the statutory moratorium under Section 14 and the vesting of management in the interim resolution professional under Section 17, and therefore could not be sustained.

2.2 Effect of "routine practice", Covid-19 exigencies, and timing of IRP's physical control on the validity of post-moratorium transfer

Legal framework

2.2.1 The Court relied on Sections 14, 17 and 18 of the Code to examine whether any factual justification could override the statutory prohibitions and transfer of management authority.

Interpretation and reasoning

2.2.2 The respondent argued that transfers to and from Rancan Impex Pvt. Ltd. were part of a normal business practice for meeting working capital requirements and that, in the context of Covid-19 lockdown and the need to run a superspecialty hospital as a going concern, such funding and repayment were necessary for salaries and essential expenses.

2.2.3 The Adjudicating Authority had accepted that the interim resolution professional did not take "control" of the corporate debtor till around the first week of July 2020 and, given the lockdown, the suspended management had to continue operations and incur expenses, thereby treating the transfer as justified.

2.2.4 The Court rejected this reasoning as "totally erroneous", holding that the legal effect of admission of CIRP, appointment of the interim resolution professional and declaration of moratorium is not dependent on when the interim resolution professional physically or practically takes over the corporate debtor. The statutory vesting of powers and suspension of the board, together with the prohibition on asset transfers, operate from the insolvency commencement date.

2.2.5 The Court distinguished between (i) permissible incurring of expenses necessary for running the hospital as a going concern, with respect to which the resolution professional had raised no dispute in relation to Rs. 25,32,534/-, and (ii) the separate transfer of Rs. 41,70,000/- to a related party, which could not be justified as an operational necessity in the face of moratorium and loss of competence of the suspended board.

2.2.6 The contention that the impugned transfer was "routine" or part of a regular funding arrangement with the related party was held irrelevant once moratorium was in force, since Section 14(1)(b) renders such transfers impermissible unless effected in conformity with the Code and under the authority of the interim resolution professional.

Conclusions

2.2.7 The Court concluded that neither the past course of dealings with the related party, nor the exigencies of Covid-19, nor the alleged delay in the interim resolution professional's physical assumption of control could validate or cure the illegality of the transfer of Rs. 41,70,000/- made after the insolvency commencement date and during moratorium.

2.2.8 The transfer was held to be in violation of the Code and not protected by any necessity or business-usage based justification.

2.3 Relevance of prior dismissal of similar interlocutory application to the present restoration claim

Legal framework

2.3.1 The Court considered the effect of the earlier dismissal of I.A. No. 1255 of 2021, in which restoration of Rs. 55,29,506/- withdrawn from other bank accounts during the CIRP period had been refused by the Adjudicating Authority.

Interpretation and reasoning

2.3.2 It was noted that the Adjudicating Authority relied on its earlier order as a basis to dismiss the present application seeking restoration of Rs. 67,02,532/-, including Rs. 41,70,000/- transferred to Rancan Impex Pvt. Ltd.

2.3.3 The Court held that the earlier decision had no bearing on the adjudication of the present application concerning Rs. 41,70,000/-, because, in the present matter, once CIRP was initiated and moratorium declared, with management vested in the interim resolution professional, any transfer of assets by the erstwhile board was impermissible under Sections 14 and 17.

2.3.4 The Court emphasised that the correct legal position, as derived from Sections 14, 17 and 18, must govern the present controversy, irrespective of what was held in the earlier interlocutory application, especially when the earlier reasoning conflicted with the statutory scheme.

Conclusions

2.3.5 The Court concluded that the prior dismissal of a similar interlocutory application did not preclude or constrain granting relief in the present matter. The impugned order, to the extent it relied on the earlier I.A., was unsustainable.

2.4 Final determination and relief

2.4.1 The Court held that the impugned order of the Adjudicating Authority suffered from "patent illegality" as it failed to correctly apply Sections 14, 17 and 18 of the Code and erroneously treated the suspended board as competent to effect the transfer post-moratorium.

2.4.2 The appeal was allowed, the impugned order dated 21.02.2022 was set aside, and the Tribunal upheld the resolution professional's entitlement to seek restoration of the amount of Rs. 41,70,000/- transferred to the related party during the moratorium period.

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