NCLAT upholds cancellation of residential unit allotments made by suspended management on CIRP commencement date

NCLAT dismissed appeals challenging cancellation of residential unit allotments made by corporate debtor on CIRP commencement date. Appellants received allotment letters dated 19.09.2019 (same day CIRP commenced) but made payments only in December 2019-January 2020. NCLAT held suspended management lacked authority to allot units after CIRP commencement under moratorium. IRP's cancellation was protective administrative act, not adjudicatory decision requiring show-cause notice. Allotments were void ab initio as issued without IRP approval and payments not received in designated account on allotment date.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

• Whether allotments of residential units made by the Corporate Debtor ("CD") on 19.09.2019, the date of commencement of the Corporate Insolvency Resolution Process ("CIRP"), were valid and binding on the CD and the Appellants.
• Whether the Interim Resolution Professional ("IRP") had the authority to cancel such allotments made on the date of CIRP commencement without issuing any show-cause notice or adjudicatory proceedings.
• Whether the payments made by the Appellants towards the allotments, which were made several months after the CIRP commencement and in accounts other than the designated U.P. RERA bank accounts, could validate the allotments.
• Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC") prohibits any allotment or transfer of assets by the Suspended Management after the commencement of CIRP.
• Whether the IRP was required to initiate proceedings under Section 45 of the IBC for avoidance of undervalued transactions before cancelling the allotments.
• Whether the Appellants' claims of allotment and payments made could be sustained in view of the moratorium and the facts on record.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Allotments Made on 19.09.2019 (Date of CIRP Commencement)

Legal Framework and Precedents: The CIRP commencement date is critical as per the IBC, moratorium under Section 14(1) prohibits the transfer or disposal of assets by the Corporate Debtor without the prior approval of the IRP/RP or the Adjudicating Authority. Allotments made by the Suspended Management post commencement of CIRP are generally void ab initio. The authority to manage the affairs of the CD vests with the IRP from the date of CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal noted that the allotment letters dated 19.09.2019, the same day CIRP commenced, were issued by the Suspended Management without any approval or consent of the IRP. The Tribunal held that the Suspended Management had no authority to allot units on or after the date of CIRP commencement. The IRP's control over the CD's assets commenced on 19.09.2019, and any allotment on that date by the Suspended Management was invalid.

Key Evidence and Findings: The allotment letter for Unit No. E-2401 was dated 19.09.2019. The application for allotment was dated 20.08.2019, prior to CIRP commencement. However, the payment of booking amount was made only on 18.12.2019, nearly three months after CIRP commencement. The Tribunal found no evidence of payment on or before 19.09.2019. The Appellants failed to produce any receipt for the alleged cheque dated 01.09.2019, and the only payment receipt was for a cheque dated 16.12.2019, encashed on 18.12.2019. The payments were also made to bank accounts other than the designated U.P. RERA accounts specified in the allotment application.

Application of Law to Facts: The Tribunal applied the moratorium provisions and held that any allotment on 19.09.2019 by the Suspended Management was void as it contravened Section 14 of the IBC. The absence of payment on or before the date of allotment further invalidated the allotments. Payments made months later could not validate or ratify the allotments.

Treatment of Competing Arguments: The Appellants argued that the allotments were bonafide, supported by Builder Buyer Agreements and payments made subsequently. The IRP contended that allotments without payment and outside designated accounts were void. The Tribunal sided with the IRP, emphasizing the moratorium and the absence of payment at the relevant time.

Conclusion: The allotments dated 19.09.2019 were invalid and void ab initio, and payments made after CIRP commencement did not confer any right on the Appellants.

Authority of IRP to Cancel Allotments Without Adjudicatory Proceedings

Legal Framework and Precedents: The role of IRP/RP is primarily administrative and supervisory during CIRP. Adjudicatory powers, including declaring undervalued transactions void, lie with the Adjudicating Authority under Section 45 of the IBC. Cancellation of allotments by the IRP without adjudication may be challenged as beyond jurisdiction.

Court's Interpretation and Reasoning: The Tribunal clarified that the IRP did not exercise adjudicatory powers but acted within his duty to protect the assets of the CD under the moratorium. The IRP found the allotments to be unauthorized and void due to non-compliance with payment terms and moratorium provisions, and accordingly communicated cancellation to the Appellants. The IRP did not initiate any proceedings under Section 45 for undervalued transactions as the transaction was not consummated within the relevant period prior to CIRP commencement.

Key Evidence and Findings: The IRP's letter dated 10.09.2022 communicated cancellation citing the moratorium and undervaluation. The IRP's reply to the Applications confirmed no Section 45 proceedings were initiated. The Tribunal noted that the IRP's cancellation was a protective administrative act, not an adjudicatory decision.

Application of Law to Facts: The Tribunal held that the IRP was duty-bound to protect CD's assets and prevent unauthorized allotments. The cancellation letter was a communication of invalidity of allotments rather than an adjudication. Hence, the IRP acted within powers vested by the IBC and moratorium.

Treatment of Competing Arguments: The Appellants contended that cancellation without show-cause or adjudication was illegal. The IRP argued the cancellation was necessary to protect CD's assets and was not an adjudicatory act. The Tribunal accepted the IRP's position.

Conclusion: The IRP had authority to communicate cancellation of unauthorized allotments as part of asset protection duties during CIRP without initiating formal adjudicatory proceedings.

Effect of Payments Made After CIRP Commencement and in Non-Designated Accounts

Legal Framework and Precedents: Payments towards allotments must be made as per terms of the allotment agreement, including designated bank accounts. Payments made after CIRP commencement and outside designated accounts do not validate allotments made in breach of moratorium.

Court's Interpretation and Reasoning: The Tribunal found that payments by the Appellants were made between December 2019 and January 2020, well after CIRP commencement on 19.09.2019. Further, payments were made in bank accounts other than the specified U.P. RERA accounts. This non-compliance with payment terms rendered the allotments invalid.

Key Evidence and Findings: The payment receipts and ledger entries confirmed payments were made on dates post-dating CIRP commencement and to different bank accounts. The allotment application clearly stipulated payment to designated accounts only.

Application of Law to Facts: The Tribunal applied the moratorium and contractual terms to hold that payments made after CIRP commencement and in non-designated accounts could not validate or ratify the allotments purportedly made on the date of CIRP commencement.

Treatment of Competing Arguments: The Appellants argued payments and Builder Buyer Agreements evidenced valid allotments. The IRP contended payments were not made as per terms and were too late. The Tribunal upheld the IRP's view.

Conclusion: Payments made after CIRP commencement and outside designated accounts did not validate the allotments, which remained void.

Applicability of Section 45 of the IBC (Avoidance of Undervalued Transactions)

Legal Framework and Precedents: Section 45 of the IBC empowers the IRP or liquidator to apply to the Adjudicating Authority to declare undervalued transactions void if such transactions occurred during the relevant period prior to CIRP commencement. The look-back period is one year (or two years for related parties) before CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal observed that the alleged allotments were claimed to have occurred on the CIRP commencement date itself, i.e., 19.09.2019. Hence, they fall outside the look-back period contemplated under Section 45. The IRP did not initiate any Section 45 proceedings as the transactions were not consummated prior to CIRP commencement and thus Section 45 was inapplicable.

Key Evidence and Findings: The IRP's reply confirmed no investigation or application under Section 45 was initiated. The Tribunal also noted that the alleged undervaluation was one of the reasons cited in the cancellation letter but was not the basis for any formal proceedings.

Application of Law to Facts: Since the transactions were claimed to have occurred on the date of CIRP commencement, Section 45's look-back period was not triggered. Therefore, no mandatory proceedings under Section 45 were required or initiated.

Treatment of Competing Arguments: The Appellants contended that undervaluation should have been adjudicated under Section 45. The IRP maintained that Section 45 was not attracted. The Tribunal agreed with the IRP.

Conclusion: Section 45 was not applicable to the transactions alleged on the CIRP commencement date, and no error was committed by the IRP in not initiating proceedings thereunder.

Effect of Moratorium under Section 14 of the IBC

Legal Framework and Precedents: Section 14(1) imposes a moratorium on the institution or continuation of suits or proceedings against the CD and prohibits any transfer, disposal, or alienation of assets without IRP/RP or Adjudicating Authority approval from the date of CIRP commencement.

Court's Interpretation and Reasoning: The Tribunal emphasized that the moratorium commenced on 19.09.2019, the same day the allotments were purportedly made. Therefore, any allotment or transfer of assets by the Suspended Management on or after that date was prohibited and void.

Key Evidence and Findings: The moratorium order was operative from 19.09.2019. The allotment letters were dated the same day, but payments were made later. The Tribunal found the allotments were made in violation of the moratorium.

Application of Law to Facts: The moratorium barred any allotment or transfer of assets by the Suspended Management on 19.09.2019 or thereafter. The allotments were therefore void.

Treatment of Competing Arguments: The Appellants argued that allotments were valid and payments made. The IRP argued moratorium barred such allotments. The Tribunal upheld the moratorium's effect.

Conclusion: The moratorium under Section 14 prohibited allotments on or after CIRP commencement, rendering the allotments void.

3. SIGNIFICANT HOLDINGS

"The allotment letters dated 19.09.2019, the same day CIRP commenced, were issued by the Suspended Management without any approval or consent of the IRP. The Suspended Management had no authority to allot units on or after the date of CIRP commencement."

"The IRP did not exercise adjudicatory powers but acted within his duty to protect the assets of the Corporate Debtor under the moratorium. The cancellation communicated to the Appellants was a protective administrative act and not an adjudicatory decision."

"Payments made by the Appellants towards allotments were made several months after CIRP commencement and in bank accounts other than the designated U.P. RERA accounts. Such payments could not validate or ratify allotments purportedly made on the date of CIRP commencement."

"Section 45 of the IBC, dealing with avoidance of undervalued transactions, is applicable only to transactions occurring during the relevant look-back period prior to CIRP commencement. Transactions alleged on the date of CIRP commencement do not attract Section 45."

"The moratorium under Section 14 of the IBC prohibits any transfer or allotment of assets by the Suspended Management on or after the date of CIRP commencement, rendering such allotments void."

"The Applications filed by the Appellants challenging the cancellation of allotments were rightly rejected by the Adjudicating Authority as the allotments were void ab initio and payments made were not in accordance with the terms and moratorium provisions."

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