The Indore Bench of the National Company Law Tribunal (NCLT) has clarified that where a bank, after commencement of CIRP, debits the corporate debtor’s own cash credit account to satisfy letters of credit that were already outstanding before the insolvency commencement date, and for which the bank had already lodged its claim in CIRP, such debit amounts to recovery of pre-CIRP dues during the moratorium and is impermissible under Section 14 of the IBC. The Tribunal further held that any approval or acquiescence by the IRP/RP cannot cure or legitimise such a prohibited recovery.
Applying that principle, the Tribunal held that the liquidator had made out a case only to the extent of INR 16.49 crores, being the amount relatable to the five letters of credit outstanding as on the insolvency commencement date and later appropriated by debiting the corporate debtor’s cash credit account.
The Coram of Brajendra Mani Tripathi (Judicial Member) and Man Mohan Gupta (Technical Member) confined itself only to the narrowed claim concerning the five pre-CIRP LCs. On the bank’s defence based on judgments concerning performance bank guarantees and margin money for letters of credit, the Tribunal found that the present case involved direct debit from the corporate debtor’s own cash credit account.
The Tribunal noted that when a creditor bank applies credits received in the corporate debtor’s own account, after the insolvency commencement date, towards discharge of its own pre-CIRP dues, it amounts in substance to recovery of pre-CIRP debt during the moratorium period. The bench relied on the reasoning adopted in earlier insolvency rulings where similar recoveries from the corporate debtor’s account during CIRP were treated as impermissible preferential recovery and ordered to be reversed. It also drew a distinction between pre-CIRP LCs and LCs opened during CIRP, and accepted that this distinction was legally significant.
A key observation of the Tribunal was that even if the erstwhile IRP had authorised or acquiesced in these debit entries to maintain business continuity, such approval could not validate a recovery that Section 14 itself prohibits. The Tribunal made it clear that neither the IRP nor the RP can legally permit one creditor to recover its own pre-CIRP dues from the assets of the corporate debtor during moratorium in a manner that gives it preference over similarly placed creditors.
The Tribunal also rejected the bank’s objections on maintainability, non-joinder and limitation. It held that seeking reversal of wrongly appropriated amounts was part of the liquidator’s duty to protect and preserve the assets of the corporate debtor under Section 35(1)(d), and no prior approval of the Stakeholders’ Consultation Committee was shown to be mandatory for filing such proceedings. It further held that impleading the erstwhile IRP or LC beneficiaries was unnecessary because the relief sought was only against the bank in relation to entries in the corporate debtor’s own account.
Briefly, an application was filed by the liquidator of Bhatia Global Trading Ltd. against Bank of India under Section 60(5) read with Section 35 of the Insolvency and Bankruptcy Code, 2016. The liquidator sought reversal of amounts allegedly appropriated by the bank from the corporate debtor’s cash credit account during CIRP, on the ground that such appropriation gave the bank priority over other financial creditors. CIRP against the corporate debtor had commenced on May 23, 2017, which triggered the moratorium under Section 14 of the Code.
Bank of India had lodged a claim of about INR 43 crore at the commencement of CIRP, out of which around INR 40 crore was admitted. The liquidator’s case was that the bank later treated its dues as cleared and did not file any claim in liquidation, which according to the liquidator showed that the bank had effectively recovered its dues during CIRP itself. The application originally sought reversal of about INR 40 crore appropriated from the cash credit account, though the bank stated that the debits were made with the authorisation of the erstwhile IRP for operational continuity and for honouring letters of credit.
During the proceedings, the liquidator narrowed the claim and pressed relief only for INR 16.49 crores, which related to five letters of credit that were already outstanding on the insolvency commencement date, having been issued between Feb 28, 2017 and May 18, 2017, that is, before CIRP began. The balance amount, roughly INR 24 crore, related to LCs opened during CIRP for running the company as a going concern, and that part was not pressed. The liquidator argued that for these five pre-CIRP LCs, the bank should not have recovered amounts by debiting the corporate debtor’s own cash credit account during moratorium, especially when the bank had already lodged its claim in CIRP for those dues.
