In its recent decision of Sandeep Khaitan, Resolution Professional for National Plywood Industries Ltd. v. JVSM Plywood Industries Ltd.1, the Supreme Court ruled that the inherent powers of a court under Section 482 of the Code of Criminal Procedure ("CRPC") cannot be exercised to defeat or undermine the statutory dictate of Sections 14 & 17 of the Insolvency and Bankruptcy Code, 2016 ("IBC").
Background
The dispute before the Supreme Court traces its origins to proceedings under the IBC, before the National Company Law Tribunal, Guwahati ("NCLT"). By an order dated 26 August 2019, the NCLT admitted an application under Section 7 of the IBC against one National Plywood Industries Limited ("Corporate Debtor") and passed a moratorium within the meaning of Section 14. Subsequently, by order dated 8 November 2019, Sandeep Khaitan ("Appellant") was appointed as the interim resolution professional.
During pendency of the proceedings, the Appellant found that the former managing director of the Corporate Debtor had diverted a sum of INR 32,50,000/- (Rupees Thirty-Two Lakhs Fifty Thousand) from the accounts of the Corporate Debtor to JSVM Plywood Industries Ltd. ("Respondent No. 1") in violation of the moratorium.
An FIR was lodged by the Appellant on 27 April 2020 in this regard, pursuant to which the bank accounts of Respondent No. 1 and its creditors were frozen along with a lien being created on one such frozen account.
The FIR was challenged by Respondent No. 1 in a petition under Section 482 of the CRPC before the Guwahati High Court ("High Court"). By way of its order dated 04 February 2021 ("Impugned Order") passed in an interlocutory application filed by Respondent No. 1, the High Court allowed Respondent No. 1 to operate its bank account maintained with ICICI Bank and to unfreeze the bank accounts of its creditors over which lien had been created and the accounts frozen pursuant to the FIR. This Impugned Order was subsequently challenged by the Appellant before the Supreme Court.
Contentions of the parties
The Appellant contended that the Impugned Order was contrary to the mandate of Section 14 of the IBC, drawing support from the judgment of the Supreme Court in P. Mohanraj v. M/s Shah Brothers Ispat Pvt. Ltd.2. As per the Appellant, the purpose of the moratorium would be defeated if members of the previous management were permitted to transfer funds of the Corporate Debtor. Further, the Appellant contended that the High Court had overlooked the limits of its powers in passing the Impugned Order while exercising jurisdiction under Section 482 of the CRPC.
On the other side, Respondent No. 1 contended that it had a long-standing business relationship with the Corporate Debtor, being its chief supplier of raw materials. It contended that the sums remitted to its bank accounts merely represented the price of material supplied by it to the Corporate Debtor. It stated that regular substantial supplies to the Corporate Debtor were being continued even after commencement of corporate insolvency resolution procedure ("CIRP"), therefore the Impugned Order did not require any intervention by the Supreme Court.
Findings
The Supreme Court noted that with the declaration of moratorium by the NCLT, all prohibitions within the meaning of Section 14 of the IBC would instantly come into force. It observed that there was no dispute between the parties that the amounts were in fact remitted into the account of Respondent No. 1, subsequent to the date of the Section 14 order of the NCLT.
The Supreme Court observed that the IBC has neatly carved out the role of the insolvency professional. From the date of appointment of the interim resolution professional, the management of affairs of the corporate debtor is to vest in the interim resolution professional and the powers of the board of directors or the partners of the corporate debtor automatically stand suspended. Section 17 of the IBC clarifies that the powers of the board of directors or partners of a corporate debtor are to be exclusively exercised by the interim resolution professional.
The Supreme Court took note of the impact of moratorium under Section 14 of the IBC, which includes prohibition of transferring, encumbering, alienating or disposing of by the corporate debtor of any of its assets, which would also include all amounts lying to the credit in the bank accounts. The Supreme Court noted that the moratorium under Section 14 is emphatic, subject only to the provisions under sub sections (2) (2A) & (3).
The Supreme Court observed that Section 14 (2) permits the supply of essential goods and services, which has been further elaborated under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 20163. Whereas, Section 14 (2A), introduced with effect from 28 December 2019, permits the interim resolution professional to continue the supply of such goods and services which it considers critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern. Therefore, goods and service not expressly covered by Section 14 (2) are also provided for under Section 14 (2A).
The Supreme Court observed that the raw material supply could fall within the provision of Section 14(2A), however this call is to be taken by the interim resolution professional, which is to be guided purely by the object of the IBC and the factual matrix.
The Supreme Court concluded that the High Court in passing the Impugned Order had in fact overlooked the limits of its powers under Section 482 of the CRPC. It held that the words, 'to secure the ends of justice' in Section 482, cannot mean to overlook the undermining of a statutory dictate under the provisions of Section 14 & 17 of the IBC.
The Supreme Court therefore modified the Impugned Order, thus permitting Respondent No. 1 to operate its bank account subject to it first remitting the sum of INR 32,50,000/- (Rupees Thirty-Two Lakhs Fifty Thousand) into the bank account of the Corporate Debtor.
Footnotes
1. 2021 SCC OnLine SC 338
2. 2021 SCC OnLine SC 152
3. Regulation 32
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