Act of financial creditor-Bank to adjust corporate debtor’s credit balance in cash towards debit balance couldn’t be justified

Case Details: Bank of India v. Bhuban Madan - [2021] 129 taxmann.com 413 (NCLAT- New Delhi)

Judiciary and Counsel Details

• • Anant Bijay Singh, Judicial Member and Ms. Shreesha Merla, Technical Member
  • Rajiv Ranjan, Sr. Adv, Dr.Sudhir Bisla and Rahul Adlakha, Advs, for the Appellant. 
  • Abhinav Vashisht, Sr. Adv, Rajat Bector, Ms. Charu Bansal, Ms. Malak Bhatt, Saurav Panda and Ms. Anannya Ghosh, Advs for the Respondent.

Facts of the Case

The corporate debtor had been granted fund-based (cash credit facility) and non-fund-based facilities (letter of credit) by a consortium of banks (appellants in the instant case) in 2011. On an application filed by another financial creditor, the corporate debtor was admitted into CIRP by the NCLT and an Interim Resolution Professional (IRP) was appointed vide such an order of admission, who was later confirmed as the Resolution Professional (RP).

The moratorium period envisaged by section 14 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 9-8-2017, 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 honored 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 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 which allowed the same and directed the appellant-banks to reverse such remittances as made to them during the moratorium period.

NCLAT Held

On appeal by appellant banks to the NCLAT, it was held that merely because the corporate debtor had enough liquidity to run the company as a going concern, the act of financial creditor banks to adjust credit balance in cash credit account towards debit balance could not be justified.

Since claims were already preferred by appellant banks (the financial creditor) and filed before RP, they would not be entitled to recover amounts otherwise available in credit accounts or working capital accounts of ‘corporate debtor’ as adjusting of ‘claims’ during CIRP, out of funds of ‘corporate debtor’ results in unjust enrichment of banks and further, crediting amounts towards non-fund and fund based accounts during the moratorium period is against provisions of section 14 of the Code.

Hence, it was viewed that there was no illegality or infirmity in the Order of the Adjudicating Authority. Therefore, this appeal failed and was accordingly dismissed.

Case Review

• • Rural Electrification Corporation v. Ferro Alloys Corporation Limited. [2021] 129 taxmann.com 412 (NCLT – Cuttack) (para 17) affirmed.

List of Cases Referred to

• • Indian Overseas Bank v. Dinkar T. Venkasubramaniam Resolution Professional for Amtek Auto Ltd. [2017] 88 taxmann.com 132/[2018] 145 SCL 138 (NCL-AT – New Delhi) (para 3)
  • MSTC Ltd. v. Adnunik Metalliks Ltd. [2019] 103 taxmann.com 299/153 SCL 175 (NCL-AT – New Delhi) (para 3)
  • Liberty House Group Pte. Ltd. v. State Bank of India [Co. Appeal (AT) (Insolvency) Nos. 53 & 54 of 2019, dated 15-7-2019] (para 3)
  • ICICI Bank Ltd. v. Shailendra Ajmera [Co. Appeal (AT) (Insolvency) No. 370 of 2019, dated 22-8-2019] (para 3)
  • Bank of Baroda v. Sundaresh Bhatt [Co. Appeal (AT) (Insolvency) No. 635 of 2019, dated 20-2-2020] (para 3)
  • IMR Metallurgical Resources AIR. v. Ferro Alloys Corpn. Ltd. [2020] 118 taxmann.com 544 (NCL -AT – New Delhi) (para 5)
  • Rai Bahadur Shree Ram & Co. (P.) Ltd. v. Bhuvan Madan [2020] 118 taxmann.com 489/162 SCL (NCL-AT – New Delhi) (para 6)
  • Andhra Bank v. F.M. Hummerle Textile Ltd. [Co. Appeal (AT) (Insolvency) No. 61 of 2018, dated 13-7-2018] (para 9).