2025 (12) TMI 117 - AT - IBC

Encashment of post-dated cheques during CIRP violates Section 14 IBC; refund of Rs 91 lakh upheld

The appellate tribunal held that encashment of post-dated cheques during the CIRP, funded by credits received after commencement, violated the Section 14 ... Encashment of cheques during the CIRP period constitutes a violation of Section 14 of IBC or not - applicability of doctrine of 'relation back' when sufficient funds were unavailable in the Corporate Debtor's accounts on the date of issuance of the cheques - Existence of pre-existing understanding or agreement regarding payments - Violation of principles of natural justice. Whether payments made by cheque prior to CIRP initiation constitute violation of Section 14 moratorium? - applicability of doctrine of 'relation back' - HELD THAT:- A perusal of the transactions in the bank accounts reveal that both the cheques were encashed on 06.08.2020 out of the proceeds credited in the bank account of the Corporate Debtor on 04.08.2020. Since Corporate Debtor's relevant bank account did not have funds available to honour the cheques on 31.07.2020, the cheques though dated 31.07.2020 are clearly issued in anticipation of receipt of funds in future and were never intended for payment prior to 04.08.2020. It is also noteworthy that the two cheques were issued while the orders were reserved under C.P. (IB) No. 1632/MB/2019 by the Adjudicating Authority. In the facts and circumstances of the case, Adjudicating Authority had directed the Appellants to jointly and severally refund an amount of ₹ 91,00,000/- to the Corporate Debtor i.e., Satra Properties (India) Private Limited and cannot find any infirmity in that order. In the facts and circumstances of the case of absence of sufficient funds, the fact that the payment date cannot be backdated, and cheques honoured during CIRP violate the moratorium, we can conclude that doctrine of relation back is not applicable in this case. Existence of pre-existing understanding or agreement regarding payments - HELD THAT:- The Respondent refutes the existence of any valid internal understanding or agreement that justifies the payments. They allege misrepresentation and fraudulent intent by the Appellants, asserting that the cheques were issued in anticipation of post-moratorium credits, indicating a deliberate attempt to circumvent the CIRP moratorium and favour certain creditors over others. The Respondent submits that no credible documentary proof validates the claimed internal arrangement, rendering the payments void under the moratorium - It is not found that the arguments of the Respondent not to be believed, particularly in the background when the judgement was reserved in the Section 7 proceedings and no funds were available in the CD’s account. Violation of principles of natural justice - HELD THAT:- The Respondent maintains that no violation of natural justice occurred, as the Appellants had ample opportunity to present their case, which was fairly adjudicated. This argument is also not convincing. Therefore, it is not found that Adjudicating Authority has violated any principles of natural justice. The Corporate Debtor’s issuance of cheques cannot be considered as in ordinary course of business and particularly in the backdrop that Section 7 proceedings were going on and judgment was reserved, it invites suspicion. The impugned order doesn’t have any infirmity - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether encashment of cheques during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016, pursuant to cheques dated prior to commencement of CIRP, violates the moratorium, and whether the doctrine of 'relation back' to the cheque date is applicable when sufficient funds were not available in the corporate debtor's account on the cheque date. (2) Whether the impugned payments could be justified as being pursuant to a pre-existing understanding or arrangement and/or in the ordinary course of business so as to defeat the direction to refund. (3) Whether principles of natural justice were violated by the Adjudicating Authority in passing the impugned order without due consideration of the appellants' defence. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Applicability of moratorium under Section 14 to cheques dated prior to CIRP commencement and the doctrine of relation back Legal framework (as discussed) (a) Section 14(1)(b) of the Insolvency and Bankruptcy Code, 2016 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'. (b) Earlier NCLAT precedent holds that even if a cheque 'dates back' to the date of handover, it cannot be encashed after moratorium starts, as no person can recover any amount from the account of the corporate debtor once moratorium has commenced. Interpretation and reasoning (c) The appellants argued that the cheques, both dated 31.07.2020, were issued prior to the CIRP commencement date (03.08.2020) and, by application of the settled doctrine of 'relation back', payment must be deemed to have been made on the cheque date, not on the date of encashment (06.08.2020). On that basis, they contended there was no violation of Section 14. (d) The respondent contended that on 31.07.2020 the corporate debtor's accounts had negligible balances: in the RBL Bank account, approximately Rs. 8,398/-; in the IndusInd Bank account, approximately Rs. 9,151.56/-. The funds used to honour the cheques (Rs. 50,00,000/- and Rs. 41,00,000/-) were credited into those accounts only on 04.08.2020, after the commencement of CIRP and moratorium. (e) The Tribunal examined the bank statements and found as facts that: (i) no material credits occurred on 31.07.2020 to support the cheque amounts; (ii) substantial credits of Rs. 50,00,000/- (from one source) and Rs. 41,00,000/- (from another source) were received on 04.08.2020; and (iii) the exact corresponding amounts were debited on 06.08.2020 on encashment of the two cheques. The balances before and after these transactions confirmed that the cheques were effectively funded entirely by post-moratorium credits. (f) On these facts, the Tribunal held that the cheques, though dated 31.07.2020, were clearly issued in anticipation of future receipts, and were never realistically payable prior to 04.08.2020. There were no funds in the relevant accounts as on the cheque date sufficient to honour them. (g) The Tribunal distinguished the authorities relied upon by the appellants on 'relation back' on the ground that those decisions were not concerned with a situation where the drawer's account was insufficient on the cheque date, nor with the supervening statutory bar of a moratorium under the Code. In those cases there was an underlying debt and no question of insufficiency of funds as at the date of cheque issuance. (h) Relying on its own earlier decisions, the Tribunal reiterated that: (i) once moratorium starts, no person can unilaterally recover any amount from the corporate debtor's account; (ii) even if the cheque date 'relates back' for certain purposes, encashment of a cheque after moratorium is statutorily impermissible; and (iii) cheques cannot be encashed post-moratorium, and if they are, the resolution professional is entitled to seek recovery, with the payee relegated to filing a claim in the CIRP. (i) The Tribunal rejected the contention that the doctrine of relation back operates irrespective of the sufficiency of funds. It held that, in the insolvency context and in the presence of a clear statutory moratorium, the doctrine cannot be used to backdate depletion of assets that in fact occurred after CIRP commencement using funds credited post-moratorium. (j) The Tribunal also noted the timing: the cheques were issued while orders in the Section 7 petition were reserved, and were cleared only after CIRP commenced, out of funds received post-moratorium, reinforcing the inference that the transactions were not bona fide pre-moratorium disbursements. Conclusions (k) The encashment of both cheques on 06.08.2020, funded entirely by credits received on 04.08.2020 after commencement of CIRP and moratorium, amounted to a transfer/disposal of assets of the corporate debtor during moratorium in breach of Section 14(1)(b). (l) In circumstances where there were no sufficient funds in the corporate debtor's accounts on the cheque date, and where the actual depletion of assets occurred post-moratorium, the doctrine of relation back to the cheque date is inapplicable. (m) The cheques cannot be treated as valid pre-moratorium payments; the amounts were recoverable, and the direction to refund Rs. 91,00,000/- to the corporate debtor was legally sustainable. Issue (2): Effect of alleged pre-existing understanding / ordinary course of business Interpretation and reasoning (n) The appellants asserted that the payments were made pursuant to a pre-existing internal understanding and a series of documents (joint venture agreement, supplemental deed, deed of confirmation, and memorandum of understanding) between them, the corporate debtor and a third-party developer, and were transactions in the ordinary course of business. They relied on ledger entries sent by the erstwhile resolution professional purportedly showing amounts paid on behalf of the third party to the appellants. (o) The respondent disputed the existence of any valid agreement or internal understanding justifying the cheques, alleged misrepresentation and fraudulent intent, and contended that the cheques were issued only to utilise post-moratorium credits to favour the appellants over other creditors. (p) The Tribunal noted that the Adjudicating Authority had already recorded a categorical finding that no money was due and payable to the appellant concern from the corporate debtor, and that the payment was merely an accommodation on a returnable basis. The Appellate Tribunal found no reason to differ from this finding. (q) In light of the absence of sufficient funds on the cheque date, the proximity to the reserved judgment in the Section 7 proceedings, and the utilisation of post-moratorium credits, the Tribunal held that the corporate debtor's issuance and clearance of these cheques could not be regarded as transactions in the ordinary course of business. (r) The Tribunal considered the respondent's assertion of mala fides and found it plausible in the factual background, particularly when there were no available funds in the corporate debtor's accounts on the cheque date and the cheques were nevertheless honoured using funds received after moratorium commenced. Conclusions (s) The alleged pre-existing understanding or arrangement, even assuming its existence, did not justify depletion of the corporate debtor's assets during the moratorium period. (t) The payments in question were not in the ordinary course of business, involved no subsisting debt to the appellants, and were in substance accommodation transactions; hence, the direction to refund the sums to the corporate debtor was appropriate. Issue (3): Alleged violation of principles of natural justice Interpretation and reasoning (u) The appellants argued that the Adjudicating Authority failed to consider their reply and submissions and thus violated principles of natural justice, rendering the impugned order arbitrary and unreasoned. (v) The respondent countered that the Adjudicating Authority had recorded and considered the appellants' contentions, and that the appellants were granted full opportunity of hearing. (w) The Tribunal, on examining the impugned order and the record, found that the Adjudicating Authority had taken note of the appellants' submissions and dealt with the issues, even though the final view went against them. Conclusions (x) There was no breach of principles of natural justice. The appellants were heard, their contentions were considered, and the order cannot be set aside on that ground. (y) In view of the above findings on all issues, the appeal was dismissed and the direction to jointly and severally refund Rs. 91,00,000/- to the corporate debtor was affirmed.