The National Company Law Appellate Tribunal, Principal Bench ("NCLAT") on May 28, 2021, in the case of Bank of India (“Appellants”) v. Mr. Bhuban Madan, RP for Ferro Alloys Corporation Ltd. (“Respondent”), decided whether the appropriation of money from the corporate debtor's account during the moratorium period by banks, being the financial creditors to the corporate debtor, would be permissible or not under the provisions of the Insolvency and Bankruptcy Code ('the Code'), specifically under Section 14 of the Code (the moratorium provision) thereof.
 
Brief Facts:
 
Ferro Alloys Corporation Limited ('Corporate Debtor') had been granted fund based (cash credit facility) and non-fund based facilities (letter of credit) by a consortium of banks, being the Appellants in this case, in 2011. On an application filed by another financial creditor, the Corporate Debtor was admitted into Corporate Insolvency Resolution Process ('CIRP') by the National Company Law Tribunal (“NCLT”), Kolkata Bench in July, 2017 and an Interim Resolution Professional ('IRP') was appointed vide such an order of admission, who was later confirmed as the Resolution Professional ('erstwhile RP') prior to his replacement by the instant Respondent, as elaborated hereinbelow. Needless to say, the moratorium period envisaged by Section 14 of the Code commenced upon the Corporate Debtor being admitted into CIRP. The creditors, including the Appellant-banks, filed their claims against the Corporate Debtor before the IRP.

Thereafter, by an order dated August 9, 2017, the  NCLAT directed that all banks with whom the Corporate Debtor maintained accounts were to ensure that the Corporate Debtor remains a 'going concern' and the erstwhile RP also requested the banks that the working capital limits of the Corporate Debtor, as on the insolvency commencement date, should be made available during the course of the CIRP. Accordingly, the Appellant banks allowed continuous operation of the Corporate Debtor's accounts, through which the Corporate Debtor's cash in the normal course of business was also being routed. The letter of credit facility matured during the CIRP period and the erstwhile RP honoured the same from the revenue generated by the Corporate Debtor. The Corporate Debtor also started churning good profits during this period and the erstwhile RP chose to reduce the fund based facilities of the Corporate Debtor, and thereby squared off the cash credit facilities with all the banks.

Thereafter, vide a resolution of the Committee of Creditors ('CoC'), the erstwhile RP was replaced by the Respondent as the Resolution Professional ('RP') for the Corporate Debtor. The RP asked the Appellant-banks to reverse the amounts remitted to them by the erstwhile RP during the moratorium period. Upon refusal by the Appellant-banks to do so, the RP preferred an application seeking such directions before the NCLT, Cuttack Bench, which was pleased to allow the same and directed the Appellant-banks to reverse such remittances as made to them during the moratorium period. The Appellant-banks preferred the appeal before the NCLAT thereafter.        
 
Appellants' submissions/ contentions: 
 
The Appellants contended that since the amounts received by the Appellants were directly remitted by the erstwhile RP and there was a conscious business decision to reduce the interest expenses as a prudent business manager would do, the amounts remitted by the erstwhile RP and received by the Appellants during CIRP do not qualify to be treated as preferential transaction and hence, the amount of such credit is not reversible. Therefore, the amount utilized after the insolvency commencement date is to be treated as Insolvency Resolution Process Cost and need not be reversed. The banks’ remedies in respect of the non-fund based facilities were never invoked and the same was honored by the Corporate Debtor itself. Reversal of such amounts allowing exclusion of non-fund based facilities utilized after the insolvency commencement date and refusal to allow the deduction claimed by the Appellants in respect of such facilities has no legal basis.
 
The Appellants further contended that the admitted claims of the remaining financial creditors of the Corporate Debtor could be easily honoured from the cash component available with the Corporate Debtor and therefore, the impugned order directing reversal of the remitted amounts was unnecessary and uncalled for.  
 
Respondent’s submissions/ contentions:
 
The Respondent contended that once moratorium under Section 14 of the Code has been declared, it is not open to any person, including the financial creditors of the Corporate Debtor, to recover any amount from the account of the Corporate Debtor. It was further submitted that even if certain amounts were remitted into the cash credit account of the Corporate Debtor by the erstwhile RP, the same was not meant to be adjusted against the outstanding dues of the Appellant-banks during the CIRP period.

The Respondent also contended that the appropriation of the amounts by the Appellant-banks constitutes preferential treatment over other creditors, under Section 43 of the Code. It was also contended that such transactions were in violation of Section 17(1)(d) (which provides that financial institutions shall act on the instructions of the resolution professional with respect to working capital facilities during CIRP period) and Section 28 (which provides that the resolution professional during CIRP cannot take certain decisions without prior approval of the CoC) of the Code.       
   
Findings of the Tribunal:
 
The  NCLAT, at the outset, noted that there was no 'preferential treatment' of the Appellant-banks strictly within the meaning of Section 43 of the Code but only in terms of giving preference to such banks over and above the dues of other creditors, and did not elaborate on the issue further.

Thereafter, the  NCLAT observed that it has been held in a catena of judgments that banks cannot debit any amount from the account of the Corporate Debtor after the order of moratorium under Section 14 of the Code has been passed, as the same amounts to recovery of their dues. It was also held that the banks cannot freeze accounts nor can they prohibit the Corporate Debtor from withdrawing the amount as available on the date of moratorium for its day-to-day functioning. The NCLAT went on to hold that Section 14 of the Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the moratorium period.

In this regard, the NCLAT cited its own judgment in Indian Overseas Bank v. Mr. Dinakar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Limited, [Company Appeal (AT) No. 267 of 2017], wherein it had been held as follows:

"… Once Moratorium has been declared, it is not open to any person including ‘Financial Creditor’ and the Appellant Bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues…"  

The  NCLAT therefore concluded that there was no infirmity in the impugned order of the NCLT, Cuttack Bench, whereby the Appellant-banks had been directed to reverse the remittances made to them by the erstwhile RP during the CIRP period, and accordingly dismissed the appeal.
  
Please find attached a copy of the judgment.

This update has been contributed by Soorjya Ganguli (Equity Partner) and Somdutta Bhattacharyya (Principal Associate).

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