2025 (6) TMI 27 - AT - IBC

Corporate debtor's management liable to refund Rs 11.01 crore paid to creditors without IRP authorization during Section 14 moratorium

MR. SUNIL GUTTE Versus MR. AVIL MENEZES, DPRS INFRA DEVELOPERS PVT. LTD., RAYON INFRASTRUCTURE PVT. LTD., NAVNEESH TRADERS PVT. LTD., SHREEHARI ASSOCIATES PVT. LTD., MR. HARSHAVARDHAN KAUSHIK

MR. SUNIL GUTTE Versus MR. AVIL MENEZES, DPRS INFRA DEVELOPERS PVT. LTD., RAYON INFRASTRUCTURE PVT. LTD., NAVNEESH TRADERS PVT. LTD., SHREEHARI ASSOCIATES ... The core legal questions considered by the Tribunal in this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) were:1. Whether the payments made by the suspended management of the Corporate Debtor after commencement of Corporate Insolvency Resolution Process (CIRP) and declaration of moratorium constituted a breach of the moratorium provisions under Section 14 of the IBC.2. Whether the impugned transactions made by the Appellant and others with certain vendors/service providers amounting to Rs. 11.01 crore were unauthorized and liable to be reversed to the assets of the Corporate Debtor.3. Whether the cheques issued prior to CIRP commencement but encashed post-moratorium could be treated as payments made before moratorium and thus permissible under the IBC.4. Whether the Resolution Professional (RP) acted arbitrarily or selectively in seeking reversal of payments made to certain vendors while not doing so for others.Issue-wise Detailed AnalysisIssue 1: Breach of Moratorium by Payments Made Post-CIRP CommencementRelevant Legal Framework and Precedents: The IBC defines 'insolvency commencement date' as the date of admission of the application for CIRP (Section 5(12)). Section 13 mandates the Adjudicating Authority to declare a moratorium immediately upon admission of the application (Section 13(1)(a)). Section 14(1)(b) prohibits the Corporate Debtor from transferring, encumbering, alienating, or disposing of any assets or legal rights from the insolvency commencement date until the completion of CIRP. This moratorium is intended to preserve the Corporate Debtor's assets intact during the resolution process.Court's Interpretation and Reasoning: The Tribunal emphasized the plain language of Sections 13 and 14 of the IBC, holding that moratorium becomes effective from the date of admission of the CIRP application, which in this case was 10.09.2018 as per the Adjudicating Authority's order. The Tribunal rejected the Appellant's contention that payments made to maintain the Corporate Debtor as a going concern were permissible. It held that the statutory embargo on any transfer of assets during moratorium is absolute and cannot be overridden by equitable considerations or business exigencies.Key Evidence and Findings: The impugned payments were made in two phases: the first phase (10.09.2018 to 14.09.2018) and the second phase (27.09.2018 to 10.10.2018). The total impugned transactions amounted to Rs. 11.01 crore, primarily made via RTGS and cheques. The Adjudicating Authority had declared moratorium effective from 10.09.2018. The payments were made from the Corporate Debtor's bank accounts without prior approval of the Interim Resolution Professional (IRP).Application of Law to Facts: Since the payments were made after moratorium took effect, they contravened Section 14(1)(b). The Tribunal found that the Appellant and Respondent No.6 (Chief Financial Officer) acted without authorization from the IRP, who had exclusive control over the Corporate Debtor's assets post moratorium. The Tribunal held that the payments were unauthorized and liable to be reversed to protect the Corporate Debtor's assets.Treatment of Competing Arguments: The Appellant argued that payments were routine, necessary to maintain the Corporate Debtor as a going concern, and made under prior management approval before the IRP took charge. The Tribunal rejected these contentions, stating that the moratorium provisions are mandatory and absolute, and no exception exists for payments made in the ordinary course of business post moratorium. The argument that the IRP failed to stop encashment of cheques was also rejected as it did not absolve the suspended management from compliance with the moratorium.Conclusions: The Tribunal upheld the Adjudicating Authority's finding that the payments made post moratorium were unauthorized and in breach of Section 14(1)(b) of the IBC.Issue 2: Legality of the Cheque Payments Issued Before CIRP but Encashed After MoratoriumRelevant Legal Framework and Precedents: The Tribunal relied on the IBC moratorium provisions and precedent decisions, including the Tribunal's own ruling in SREI Equipment Finance Ltd. vs Amit Gupta, which held that even if a cheque is dated prior to moratorium, its encashment after moratorium commencement violates the moratorium.Court's Interpretation and Reasoning: The Tribunal noted that three cheques were dated 06.09.2018 and 08.09.2018, i.e., before the moratorium effective date of 10.09.2018. However, these cheques were encashed only after the moratorium commenced. The Adjudicating Authority found that the cheques were deliberately ante-dated to create an impression of pre-moratorium payment, a finding the Tribunal endorsed due to lack of evidence from the Appellant explaining the delayed encashment.Key Evidence and Findings: The Respondents admitted receipt of payments post moratorium. The Appellant failed to provide evidence that the cheques were physically handed over before moratorium. The Tribunal found that encashment after moratorium is a breach regardless of cheque date.Application of Law to Facts: The Tribunal applied the moratorium provisions strictly, holding that the date of encashment is determinative for compliance with moratorium, not the date of cheque issuance.Treatment of Competing Arguments: The Appellant relied on a precedent that payment date corresponds to cheque handover date and argued the onus to explain delayed encashment was on recipients. The Tribunal distinguished the precedent on facts and held that the statutory moratorium prohibits any recovery post commencement, thus overriding such arguments.Conclusions: The Tribunal upheld the Adjudicating Authority's direction to reverse cheque payments encashed after moratorium, holding them to be in breach of Section 14(1)(b).Issue 3: Whether Payments Were Authorized by the Interim Resolution ProfessionalRelevant Legal Framework: Sections 17 and 18 of the IBC vest the IRP with management and control of the Corporate Debtor's operations and assets upon commencement of CIRP. The suspended management's powers are suspended, and no payments can be made without IRP's approval.Court's Interpretation and Reasoning: The Tribunal observed that the IRP had confirmed that payments made by him were approved by the Committee of Creditors and disbursed through the designated bank account. The impugned payments, however, were made from a different bank account without IRP's authorization. The Appellant informed the IRP about these payments only after they were made, confirming lack of prior approval.Key Evidence and Findings: The RP's email correspondence established that the impugned payments were unauthorized. The Appellant's own letter admitted the payments were made before IRP took charge and without IRP's consent.Application of Law to Facts: The Tribunal held that payments made without IRP's authorization after moratorium declaration violate the IBC framework and are liable to be reversed.Treatment of Competing Arguments: The Appellant contended that the officers acted under prior board directions and to maintain business continuity. The Tribunal rejected this, holding that the moratorium suspends the board's powers and vests exclusive control in the IRP, rendering such payments unauthorized.Conclusions: Payments made without IRP's authorization post moratorium were illegal and subject to reversal.Issue 4: Allegation of Arbitrary Selection of Vendors for Reversal of PaymentsCourt's Interpretation and Reasoning: The Appellant argued that the RP selectively sought reversal from certain vendors while not doing so for others. The Tribunal rejected this argument, holding that illegality cannot be condoned on grounds of parity or selective enforcement. The Tribunal emphasized that equality cannot be claimed in enforcing an illegal act.Conclusions: The selective action by the RP did not invalidate the legality of the reversal of impugned payments.Significant Holdings'From a bare reading of Section 14(1)(b), the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be no transfer, encumbrance, alienation or disposal of the assets or any legal right or beneficial interests by the Corporate Debtor during the moratorium.''Merely by advocating the criticality of clearing payments in the ordinary course of business to make the Corporate Debtor continue running as a going concern cannot constitute sufficient mitigating circumstances for not giving effect to the statutory provisions of moratorium as contained in Section 14.''Howsoever, noble, genuine or well-meaning may have been the motive for the Appellant in releasing payments ... the statutory provision of moratorium as it stands, puts a clear and unambiguous embargo on releasing such payments.''No action violating moratorium can be countenanced. Even for argument's sake, if we agree that in the present case, the date depicted on the three cheques co-relates with the date of cheque handing over, nonetheless, in view of the specific statutory provision of moratorium which precludes any such recovery, the cheques cannot be encashed after moratorium starts.''We cannot allow equality to be claimed in wrong or illegal actions and encourage the claim of parity or equality for enforcing a wrong or illegal order.'The Tribunal affirmed the Adjudicating Authority's order directing the Appellant and Respondent Nos. 2 to 6 to be jointly and severally liable to refund Rs. 11.01 crore to the Corporate Debtor's assets. It also upheld the referral of the matter to the Insolvency and Bankruptcy Board of India for initiation of proceedings under Section 74(1) of the IBC for breach of moratorium.