“Explore an IBC case study on the breach of moratorium. Understand the legal implications, actions taken by NCLT, and the responsibilities of an Interim Resolution Professional. Get insights into sections 17 and 18 of the Insolvency and Bankruptcy Code, 2016. Stay informed on corporate insolvency resolution process intricacies.”
The Hon’ble NCLT (AA) vide order dated 14.06.2017 admitted the application under section 10 of the Insolvency and Bankruptcy Code, 2016 (Code) filed for initiating Corporate Insolvency Resolution Process (CIRP) of M/s. XYZ Private Limited and appointed Mr. X as Interim Resolution Professional (IRP). Mr. X was replaced by Mr. Y as Resolution Professional (RP) vide the AA’s order dated 20.09.2017. The CD was ordered into liquidation vide order of AA dated 11.01.2018 and Mr. Y was appointed as liquidator.
An application was filed by the liquidator of the CD under section 60(5), 68 and 74 of the Code and has been disposed of by AA vide order dated 27.04.2021 by directing the suspended directors of the CD and Bank of India to contribute to the assets of the CD, a sum of Rs.79,65,090 (Rupees seventy nine lacs, sixty five thousand, ninety only) which was withdrawn during the moratorium period. The AA in the said order has also observed that this transaction took place during tenure of Mr. X as IRP. It was, thus, noted that there has been breach of moratorium as prescribed under section 14 of the Code during his tenure as IRP. It is further observed by the AA that fee of Mr. X for the tenure of the IRP was also paid by the suspended directors from the said account of Bank of India from where the transactions of Rs.79,65,090 (Rupees seventy nine lacs, sixty five thousand, ninety only) had taken place. Bank of India had submitted before the AA that Mr. X did not inform the admission order passed by AA and his appointment as IRP to it. This was also observed by the AA which stated that if IRP had taken efforts to peruse the records, he could have intimated all the concerned bank authorities including the Bank of India, about his appointment as IRP.
As per the provisions of sections 17 and 18 of the Code, the management of the affairs of the CD vests in the IRP from the date of appointment of IRP till appointment of RP. As such, it was his duty to ensure compliance of moratorium declared by the AA under section 14 of the Code. Withdrawal of a sum of Rs.79,65,090 (Rupees seventy nine lacs, sixty five thousand, ninety only) by the suspended management from the CD’s account during his tenure as IRP when the moratorium was in force, prima facie, indicates that he has failed to perform his duty as IRP in terms of sections 17 and 18 of the Code.
In this regard, submission of Mr. X was that he has performed his duties as an IRP of the CD for the period from 14.06.2017 to 20.09.2017, until the time he was replaced by the RP. That he has conducted CIRP of the CD in strict compliance with the provisions of the Code, Rules and Regulations formulated by the IBBI and professional ethics. Since all the records/documents were kept in the premises, which was under the physical possession of the Financial Creditor (FC), he did not have an opportunity to verify the records including the Provisional Balance Sheet. So that the details of banks and the funds lying with them mentioned in the Balance Sheet had not come to his knowledge at all. As per the information gathered from the Promoters, he had given instruction to close the bank accounts in the following banks.
1. State Bank of India — Tiruppur,
2. IDBI Bank Ltd — Tiruppur
3. Karur Vysya Bank — Dindigul
He submitted that had it been known to him regarding the bank accounts with Bank of India, Tiruppur by the CD, he would have given instruction to the Bank to close the accounts or he would have authorised the payments, if it were within the purview of the rules and regulations of the Code. Due to the facts mentioned above, he submitted that he may not be held responsible for the acts which did not come to his knowledge at all. It may be true that his fees as IRP, paid by the suspended directors of CD, came from M/s Bank of India, Tiruppur. Since the said payment was made through net banking mode, he submitted that he was under the impression that the suspended promoters made the payment from their personal bank account. In view of the said, he submitted that he had not breached the moratorium as prescribed under section 14 of the Code and not violated the alleged provisions
However, the AA in its order dated 27.04.2021 noted inter alia that “——the Corporate Debtor itself in the Provisional Balance sheet filed as on 28.02.2017 has disclosed the details of banks in which they are maintaining the accounts wherein the name of the 3rd Respondent is also disclosed therein. In such circumstances, immediately after the admission of the petition by this Tribunal on 14.06.2017, if the 4th Respondent had taken efforts to peruse the records, he could have intimated all the concerned bank authorities including the 3rd Respondent Bank about his appointment as IRP and under the circumstances, the present impugned transactions could have been avoided.”
Solution: Section 17 of the Code provides as follows:
17. Management of affairs of corporate debtor by interim resolution professional. –
(1) From the date of appointment of the interim resolution professional, –
(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;
(b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;
(c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional;
(d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.
(2) The interim resolution professional vested with the management of the corporate debtor, shall-
(a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;
(b)take such actions, in the manner and subject to such restrictions, as may be specified by the Board;
(c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;
(d) have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified; and
(e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.
The above provisions clearly specify the duties vested with IRP from the date of appointment. Section 17(1)(b) clearly provides that the powers of the board of directors of the CD are suspended and be exercised by IRP which was Mr. X in the given case. Further under section 18(f) of the Code, Mr. X being IRP of the CD from 14.06.2017 to 20.09.2017 was required to take control and custody of any asset over which the CD has ownership rights, as recorded in the balance sheet of the CD.
AA in its order dated 27.04.2021 observed that CD itself in the provisional balance sheet filed as on 28.02.2017 has disclosed the details of banks in which they are maintaining the accounts wherein the name of the Bank of India was also disclosed. Mr. X should have obtained the details of bank accounts from the available records as mandated under section 18(f) of the Code which has also been observed by AA. Such lack of due diligence has led to withdrawal of Rs. 79,65,090 (Rupees seventy nine lacs, sixty five thousand, ninety only) from the bank account of CD by the suspended directors of the CD, after imposition of moratorium by the AA on 14.06.2017.
In light of above facts and observations by the AA, the submissions of Mr. X, that the details of bank accounts and the funds lying therein had not come to his knowledge at all, are not tenable. Mr. X is in violation of sections 14(1)(b), 18(f), 208(2)(a) and (e) of the Code, regulations 7(2)(a) and (h) of IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) and clauses 1, 2, 5, 12 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct). [Please refer DC Order No. IBBI/DC/157/2023, dated 12th April, 2023]
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