Powers of board of directors/partners to be exercised by interim resolution professional- Sec 17 IBC

Section 17 further declares that the powers of the Board of Directors or partners are to be exercised by the Interim Resolution Professional. The financial institutions are to act on the instructions of the Interim Resolution Professional. Section 14 is emphatic, subject to the provisions of subsection (2) and (3). The impact of the moratorium includes the prohibition of transferring, encumbering, alienating or disposing of by the Corporate Debtor of any of its assets. (Para 18)

SANDEEP KHAITAN, RESOLUTION PROFESSIONAL FOR NATIONAL PLYWOOD INDUSTRIES LTD. V/s JSVM PLYWOOD INDUSTRIES LTD.

CRIMINAL APPEAL NO.447 OF 2021

Decided on April 22, 2021

A two-judge bench consisting of Justice Uday Umesh Lalit and Justice K.M. Joseph decided on this case. The court decided to allow the appeal for Respondent No. 1 to be allowed to operate its account subject to it remitting an amount of Rs. 32.50 lakhs into the account of the Corporate Debtor.

The appeal is directed against the order dated 04.02.2021 passed by the Hon’ble High Court of Guwahati. In the impugned order, the High Court has allowed an interlocutory application filed by the Respondent No. 1 to allow it to operate its bank account maintained with the ICICI Bank Bhubaneswar and to unfreeze the bank account of its creditors over which the lien has been created and the accounts were frozen pursuant to the lodging of an FIR by the appellant before us. It was made subject to conditions. An application under Section 7 of the Insolvency and Bankruptcy Code, 2016, hereinafter referred to as the IBC was admitted on 26.08.2019 against one National Plywood Industries Limited (NPIL). The Appellant was appointed as the Interim Resolution Professional. A moratorium also came to be passed by the very same order within the meaning of Section 14 of the IBC. The Appellant came to be appointed as the Resolution Professional by an order dated 08.11.2019. In the meantime, Respondent No.1 claiming to be an operational creditor lay the claim for the amounts due to it from the Corporate Debtor before the Appellant vides communication dated 22.11.2019. It would appear that the former Managing Director of the Corporate Debtor challenged the order of the NCLT, Guwahati, admitting the application under Section 7. The NCLAT by order dated 24.11.2019 dismissed the appeal interalia holding that the application under Section 7 was not barred by limitation. Civil Appeal No. 9142 of 2019 filed by the former Managing Director of the Corporate Debtor came to be however allowed by this Court by an order dated 20.01.2020. The NCLT was directed to consider the matter in accordance with the law. It would appear that on 28.01.2020 interlocutory application 7 of 2020 filed by the former Managing Director of the Corporate Debtor seeking an injunction restraining the Respondents therein from interfering in the operation of the Corporate Debtor and to disperse the cost of the CIRP was disposed of interalia. It is the case of the Appellant that the former Managing Director of the Corporate Debtor in conspiracy with Respondent No.1 engaged in an illegal transaction to the tune of Rs. 32.50 lakhs without authority from the Appellant and in violation of Section 14 of the IBC. He complains that initially, the Managing Director made a transaction of Rs. 500. Thereafter, he proceeded by 4 consecutive transactions to transfer a sum of Rs. 32.50 lakhs to Respondent No. 1. It is also complaint of the Appellant that the former Managing Director proceeded to transfer another sum of Rs. 3.29 lakhs from another account and the amount was transferred to his close associate. On 23.04.2020, the Appellant filed a cyber complaint. This was followed on the same date by filing an application under Section 19 read with Section 23 (2) of the IBC alleging non-corporation by the previous management of the Corporate Debtor. On 27.04.2020, the Appellant got lodged an FIR. On 04.05.2020 the ICICI Bank created a lien upon the bank account of Respondent No. 1 based on the allegedly illegal transaction. The next development to be noticed is the order dated 20.05.2020 passed by the NCLT, Guwahati. The order is passed in I.A. No. 37 of 2020. The relief sought therein was for direction to the Directors of the Corporate Debtor to hand over the management of the company. The order reflects the controversy relating to the payment of Rs. 32.50 lakhs violating the moratorium. Tribunal finds that the directors of the Corporate Debtor were not giving maximum assistance. Based on its findings the tribunal issued directions to the suspended Board of the Corporate Debtor to cooperate with the Appellant. The Auditors were to complete the audit expeditiously interalia. More importantly, the Directors were directed to refund the amount withdrawn less the amount if any paid to the alleged supplier as the cost of raw materials. The interlocutory application was posted before the regular bench for hearing after lifting the lockdown.

The key issue here was whether the order dated 04.02.2021 passed by the Hon’ble High Court of Guwahati was enough or there were changes needed in the impugned order.

The court observed that

“The provisions of the IBC contemplate resolution of the insolvency, if possible, in the first instance and should it not be possible, the winding up of the Corporate Debtor. The role of the insolvency professional is neatly carved out. From the date of admission of application and the appointment of Interim Resolution Professional, the management of the affairs of the Corporate Debtor is to vest in the Interim Resolution Professional. With such appointment, the powers of the Board of Directors or the partners of the Corporate Debtor as the case may be are to stand suspended. Section 17 further declares that the powers of the Board of Directors or partners are to be exercised by the Interim Resolution Professional. The financial institutions are to act on the instructions of the Interim Resolution Professional. Section 14 is emphatic, subject to the provisions of subsection (2) and (3). The impact of the moratorium includes the prohibition of transferring, encumbering, alienating or disposing of by the Corporate Debtor of any of its assets.” (Para 18)

The court held that “It would appear to us that having regard to the orders passed by the NCLT admitting the application, under Section 7, and also the ordering of moratorium under Section 14 of the IBC and the orders which have been passed by the tribunal otherwise, the impugned order of the High Court resulting in the Respondent No. 1 being allowed to operate the account without making good the amount of Rs 32.50 lakhs to be placed in the account of the Corporate Debtor cannot be sustained. The Learned Counsel for the Appellant has also no objection in the Respondent No. 1 being allowed to operate its account subject to it remitting an amount of Rs. 32.50 lakhs into the account of the Corporate Debtor. In such circumstances, Appeal is allowed. The Impugned order is modified as follows:

i. The Respondent No.1 is allowed to operate its account subject to it to first remitting into the account of the Corporate Debtor, the amount of Rs 32.50 lakhs which stood paid to it by the management of the Corporate Debtor. The assets of the Corporate Debtor shall be managed strictly in terms of the provisions of the IBC. The Appellant as RP will bear in mind the provision of Section 14 (2A) and the object of IBC. We however make it clear that our order shall not be taken as our pronouncement on the issues arising from the FIR including the petition pending under Section 482 of the Cr.P.C.

ii. We also make it clear that the judgment will not stand in the way of the Respondent No.1 pursuing its claim with regard to its entitlement to a sum of Rs.32.50 lakhs and any other sum from the Corporate Debtor or any other person in the appropriate forum and in accordance with law. There will be no order as to costs.” (Para 25)

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Saptarshi Mukhopadhyay