2025 (12) TMI 116 - AT - IBC

Directors liable under Sections 66(1), 66(2) IBC for cheque encashment during Section 14 moratorium, interim moratorium irrelevant

NCLAT upheld the Adjudicating Authority's order under Section 66(2) IBC directing suspended directors to jointly and severally refund Rs. 91,00,000 to the ... Maintainability of Appeal filed by the suspended directors - Direction to Appellants to contribute to the assets of the CD under Section 66 of the Insolvency and Bankruptcy Code, 2016 - Appellant contends that the application under Section 66 of the Code is not maintainable as it seeks recovery, rather than attributing fraudulent trading or wrongful trading - whether the Appeal by the suspended directors is maintainable in this case under Section 66(2) of the Code to jointly and severally refund to the Corporate Debtor? Violation of the moratorium under Section 14 of the Code or not - HELD THAT:- Under the circumstances the Corporate Debtor’s issuance of cheques cannot be considered as in ordinary course of business and in the backdrop that Section 7 proceedings were going on and judgment was reserved invites suspicion. Section 14(1) of the Code prohibits any recovery or enforcement of payment from the assets of the Corporate Debtor once moratorium commences - In SREI Equipment Finance Ltd. v. Amit Gupta, [2019 (4) TMI 737 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], which has been relied upon by the Respondent and supports their case, this Appellate Tribunal held that cheques cannot be encashed after the moratorium starts, regardless of the date of issuance. Notably, in SREI Equipment Finance [2019 (4) TMI 737 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] and Sunil Guttee [2025 (6) TMI 27 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI - LB], this Hon’ble Tribunal was dealing with cheques issued against pre- existing liabilities. Even then, it was held that the encashment of cheques during moratorium is impermissible. The present case reveals a more serious infraction, as the cheques were issued without any underlying liability or subsisting obligation - In this case also there is no evidence provided by the appellant that the cheques were handed over to Darshan Developers- Appellant 1, prior to initiation of the CIRP and furthermore we note that there was no balance in the account of the CD on the date of issue of the cheques. Once CIRP begins cheques cannot be encashed as moratorium has already kicked in. Thus, the encashment of both cheques on 06.08.2020, during moratorium, clearly falls foul of Section 14. The Corporate Debtor’s accounts were operated using funds credited after CIRP had begun. These funds could only be utilized by the Resolution Professional in accordance with the Code. Case satisfies Section 66(2) of the Code or not - HELD THAT:- There is no ambiguity in the language of Section 66(1) and Section 66(2) which are clear and plain provisions without any conflict and can be invoked independently. Hence, there arises no occasion to read the heading of Section 66 into the two distinct provisions. The Impugned Order allowed the prayers under Section 66(2) of the Code. The facts and surrounding circumstances further demonstrate that the cheques in question were issued in anticipation of future credits that were expected to be received in the Corporate Debtor’s bank accounts after the commencement of CIRP, rather than against any existing balance or legitimate liability. The bank statements reveal that as on the date of issuance the Corporate Debtor’s accounts had negligible balances of ₹ 8,398 and ₹ 9,151.56 respectively, making it impossible for the cheques to have been honoured on that date. Significantly, on 04.08.2020, i.e., one day after commencement of CIRP, fresh credits of ₹ 50,00,000/- and ₹ 41,00,000/- were deposited into the same accounts, and these exact sums were utilized for honouring the two cheques issued to M/s Darshan Developers. In this backdrop, it becomes clear that the Appellants authorised and facilitated transfer of ₹ 91 lakh to M/s Darshan Developers, with no commercial justification, while being fully aware of the distressed financial condition of the Corporate Debtor. Hence, Appellants failed to exercise due diligence to minimise losses to creditors as mandated under Section 66(2) of the Code. The appellants’ conduct satisfies the ingredients of Section 66(2) of the Code. Violation of Section 95 and 96 of IBC - HELD THAT:- Section 96(1)(b) IBC cannot be read to mean that any future liability or obligation is contemplated to be stayed, more so a stay of proceedings under Section 66 IBC. Section 66 of IBC is intended to prevent fraudulent trading or business by corporate debtor through its corporate insolvency resolution professional or suspended directors, during insolvency resolution process or liquidation process. Furthermore, Section 96(1)(b) IBC does not bar the Adjudicating Authority to pass appropriate orders in the pending proceedings against the suspended directors and related parties, before the Adjudicating Authority, during the insolvency resolution process or liquidation process. On the other hand, Section 66 of IBC empowers the Tribunal to pass appropriate orders when the suspended directors carried on trading or business of the Corporate Debtor with the intention to defraud the creditors. It is found that the Adjudicating Authority, gives a clear that the Appellants knew that commencement of CIRP was imminent and that they did not exercise due diligence in minimizing the potential loss to its creditors, and therefore, passed the Impugned Order under Section 66 of IBC. Hence, it is concluded that due to interim moratorium under Section 96(1)(b) IBC, the Adjudicating authority could not have passed the Impugned Order under section 66 is unsustainable. There are no infirmity in the orders of the Adjudicating Authority. Further the Appeal by the suspended directors for setting aside directions under Section 66(2) of the Code to jointly and severally refund a sum of ₹ 91,00,000/- to the Corporate Debtor is not maintainable. The orders of the Adjudicating Authority upheld - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether encashment of the two cheques of Rs. 50,00,000/- and Rs. 41,00,000/- after commencement of CIRP constituted a violation of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016. 1.2 Whether Section 66(1) and Section 66(2) of the Insolvency and Bankruptcy Code, 2016 form a single composite provision requiring proof of intent to defraud, or operate as distinct, independently invocable provisions. 1.3 Whether, on the facts, the conduct of the directors satisfied the ingredients of Section 66(2) of the Insolvency and Bankruptcy Code, 2016, warranting a direction to contribute Rs. 91,00,000/- to the assets of the corporate debtor. 1.4 Whether the interim moratorium under Sections 95 and 96 of the Insolvency and Bankruptcy Code, 2016, in respect of a personal insolvency application against one director, barred the adjudicating authority from passing an order under Section 66. 1.5 Whether the adjudicating authority had jurisdiction under Section 66 to direct payment of interest at 12% per annum on the amount ordered to be contributed. 1.6 Whether the subsequent application under Section 66 (I.A. No. 1099 of 2024) amounted to impermissible re-litigation in view of the earlier order in I.A. No. 3921 of 2022. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Violation of moratorium under Section 14 by encashment of cheques Legal framework: 2.1.1 The Court considered Section 14(1)(b) of the Code, which prohibits, during moratorium, 'transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.' The Court relied on precedents holding that cheques cannot be encashed after moratorium commencement, irrespective of the date of issuance. Interpretation and reasoning: 2.1.2 It was undisputed that: (i) the Section 7 petition had been reserved for orders on 19.02.2020; (ii) the cheques dated 31.07.2020 aggregating Rs. 91,00,000/- were issued when the corporate debtor's bank balances were negligible (Rs. 8,398/- and Rs. 9,151.56/-); (iii) CIRP and moratorium commenced on 03.08.2020; (iv) credits of Rs. 50,00,000/- and Rs. 41,00,000/- came into the corporate debtor's accounts on 04.08.2020; and (v) the cheques were encashed on 06.08.2020 using these post-moratorium credits. 2.1.3 The beneficiary (Darshan Developers) admitted that the cheques were handed over on 31.07.2020. The Court held that, in any event, encashment of the cheques after moratorium commencement was determinative. 2.1.4 Relying on earlier decisions (including SREI Equipment Finance Ltd. v. Amit Gupta and Sunil Guttee v. Avil Menezes), the Court reiterated that once moratorium begins, no person can recover any amount from the account of the corporate debtor; even cheques issued earlier cannot be encashed post-moratorium. 2.1.5 The Court further noted that, unlike those precedents which involved cheques for pre-existing liabilities, the present cheques were issued without proof of any subsisting obligation, aggravating the infraction. Conclusions: 2.1.6 The encashment of the cheques on 06.08.2020, using post-moratorium credits, was held to be a clear breach of Section 14, and the transaction could not be treated as being in the ordinary course of business. 2.2 Relationship between Section 66(1) and Section 66(2) of the Code Legal framework: 2.2.1 The Court addressed the contention that Section 66(1) and 66(2) are part of a single remedial scheme and that the requirement of 'intent to defraud creditors' under Section 66(1) must also be read into Section 66(2). 2.2.2 The Court relied on a recent appellate decision (Swapan Kumar Saha v. Ashok Kumar Agarwal) and on Section 67 of the Code, which expressly refers to orders under 'sub-section (1) or sub-section (2) of Section 66', to interpret the provisions disjunctively. 2.2.3 The Court also cited Supreme Court authority (Forage & Co. v. Municipal Corpn. of Greater Bombay) for the principle that headings cannot control or cut down the plain, unambiguous text of a statutory provision, and can be used only where there is ambiguity. Interpretation and reasoning: 2.2.4 The Court found no ambiguity in the text of Sections 66(1) and 66(2). It held that each sub-section is self-contained, with distinct ingredients and mechanisms, and may be invoked independently. 2.2.5 The Court rejected the argument that both sub-sections necessarily require proof of 'intent to defraud' as a common mens rea. Section 66(2) instead turns on knowledge (or constructive knowledge) that there was no reasonable prospect of avoiding CIRP, coupled with failure to exercise due diligence to minimise loss. Conclusions: 2.2.6 Section 66(1) and Section 66(2) operate independently. The requirement of fraudulent intent under Section 66(1) cannot be imported into Section 66(2). The impugned order, having been passed under Section 66(2), had to be tested only against the ingredients of Section 66(2). 2.3 Satisfaction of ingredients of Section 66(2) on the facts Legal framework: 2.3.1 The Court identified two cumulative requirements under Section 66(2): (a) the director knew or ought to have known that there was no reasonable prospect of avoiding commencement of CIRP; and (b) the director failed to exercise due diligence in minimising potential loss to creditors. 2.3.2 The Court referred to the Supreme Court's exposition in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd on the nature of inquiry under Section 66, particularly the power to direct persons who were knowingly parties to wrongful trading to contribute to the assets of the corporate debtor. Interpretation and reasoning: 2.3.3 The Section 7 petition against the corporate debtor had been filed in April 2019, and the admission order was reserved on 19.02.2020. The Court held that by 31.07.2020, when the cheques were issued, the directors were fully aware that admission of CIRP was imminent and that there was no reasonable prospect of avoiding it. 2.3.4 The cheques were issued two days before the admission order, despite negligible account balances, and were honoured only from funds credited after moratorium. The Court held this demonstrated an intention to dissipate assets in anticipation of CIRP rather than to protect creditor interests. 2.3.5 The Court examined the MOU of 17.12.2019 with Shreeniwas Developers. It noted that it provided for an interest-free facility up to Rs. 20 crores at a time when the corporate debtor was already under severe financial distress and faced multiple insolvency proceedings. The Court considered such extension of interest-free financial accommodation, in these circumstances, to be a design to dissipate the corporate debtor's assets. 2.3.6 The Court emphasised that the impugned payments were made not to the joint venture partner (Shreeniwas Developers) but to a third party, Darshan Developers, who was not a party to the MOU, and whose partner was a close relative (first cousin) of one of the appellants. This strengthened the inference of asset dissipation rather than bona fide business necessity. 2.3.7 The Court rejected reliance on authorities stressing the need for specific pleading and proof of fraud under Section 66(1), holding them distinguishable because the present case was examined under Section 66(2), and the pleadings in I.A. No. 1099 of 2024 sufficiently alleged knowledge of imminent CIRP and lack of due diligence. 2.3.8 The Court also rejected the argument that absence of personal benefit or that funds were paid to a third party exonerated the directors. Section 66(2) focuses on wrongful conduct causing loss to creditors, not on whether the director personally received the funds. Conclusions: 2.3.9 The Court held that: (i) the directors knew, or ought to have known, that CIRP was unavoidable; and (ii) they failed to exercise due diligence to minimise creditor losses and instead facilitated dissipation of Rs. 91,00,000/- post-moratorium to a related third party. The ingredients of Section 66(2) were therefore satisfied, justifying a direction to jointly and severally contribute Rs. 91,00,000/- to the assets of the corporate debtor. 2.4 Effect of interim moratorium under Sections 95 and 96 on proceedings under Section 66 Legal framework: 2.4.1 The Court considered Section 96(1)(b), which provides that, upon filing an application under Section 94 or 95, an interim moratorium commences and: (i) any legal action or proceeding pending 'in respect of any debt' shall be deemed stayed; and (ii) creditors shall not initiate any legal action or proceeding 'in respect of any debt.' 'Debt' is defined in Section 3(11) as a liability or obligation in respect of a claim which is due from any person. Interpretation and reasoning: 2.4.2 The Court held that the interim moratorium under Section 96 applies only to proceedings 'in respect of any debt' that is due on the date of commencement of interim moratorium, and cannot be extended to future liabilities or to proceedings of a different character. 2.4.3 Proceedings under Section 66 were characterised as actions to address fraudulent or wrongful trading and to protect the corporate insolvency process by compelling contribution to the corporate debtor's assets, rather than actions 'in respect of a debt' owed by the director as on that date. 2.4.4 The Court held that Section 96(1)(b) does not bar the adjudicating authority from passing appropriate orders under Section 66 against suspended directors or related parties during the CIRP or liquidation process. Conclusions: 2.4.5 The pendency of an application under Section 95 and the resulting interim moratorium under Section 96 did not preclude the adjudicating authority from passing the impugned order under Section 66. The contrary contention was held unsustainable. 2.5 Power to award interest under Section 66 Legal framework: 2.5.1 The argument raised was that Section 66, being quasi-penal and silent on interest, does not authorise imposition of interest on contributions directed to be made, and must therefore be strictly construed. 2.5.2 The Court examined the language of Section 66(1) and 66(2), which empower the adjudicating authority to order persons found liable 'to make such contributions to the assets of the corporate debtor as it may deem fit.' Interpretation and reasoning: 2.5.3 The Court construed the phrase 'such contributions ... as it may deem fit' as conferring a broad discretion on the adjudicating authority to fashion appropriate relief, including recovery of the asset dissipated and its time value. 2.5.4 In the present case, the direction to pay interest at 12% per annum was treated as part of quantifying the contribution, including the time value of money wrongfully taken from the corporate debtor during CIRP, and not as a separate punitive imposition outside the statute. Conclusions: 2.5.5 The direction to refund Rs. 91,00,000/- with interest at 12% per annum was held to be within the scope of the adjudicating authority's power under Section 66. The challenge to jurisdiction to award interest was rejected. 2.6 Alleged re-litigation in view of earlier order in I.A. No. 3921 of 2022 Legal framework and prior order: 2.6.1 In I.A. No. 3921 of 2022, the adjudicating authority had directed Respondent Nos. 1 and 2 (Darshan Developers and another) to refund Rs. 91,00,000/- to the corporate debtor, and recorded that no prayer had been made under Section 66 against the then Respondent Nos. 3 to 7 (including the present appellants). It expressly granted liberty to file an appropriate application under Section 66 seeking their contribution. Interpretation and reasoning: 2.6.2 The Court held that the earlier order did not adjudicate Section 66 liability of the directors; on the contrary, it preserved liberty to initiate a distinct application under Section 66 against them. 2.6.3 I.A. No. 1099 of 2024 was filed pursuant to that liberty to specifically invoke Section 66 in respect of the directors. The Court found that this was not an attempt to reopen an issue already decided, but to pursue a remedy explicitly left open. Conclusions: 2.6.4 The plea that I.A. No. 1099 of 2024 constituted re-litigation or violated principles of finality and judicial discipline was rejected. The application under Section 66 was held to be competent and in line with the earlier liberty granted. 2.7 Overall conclusion on the appeal 2.7.1 Having found (i) a clear violation of moratorium and dissipation of assets post-CIRP; (ii) that Section 66(2) operates independently and its ingredients were satisfied; (iii) that the interim moratorium under Sections 95 and 96 did not bar proceedings under Section 66; (iv) that the adjudicating authority could include interest within the 'contribution' directed; and (v) that the Section 66 application did not amount to re-litigation, the Court upheld the adjudicating authority's order. 2.7.2 The appeal by the suspended directors against the directions under Section 66(2) to jointly and severally refund Rs. 91,00,000/- with interest to the corporate debtor was dismissed, and the order of the adjudicating authority was affirmed.