NCLAT Reinforces Section 14 Moratorium Protections under IBC: SM Milkose Limited v. Parvinder Kumar Bhatt

Introduction

The case of SM Milkose Limited And Another v. Parvinder Kumar Bhatt And Others adjudicated by the National Company Law Appellate Tribunal (NCLAT) on August 27, 2021, delves into pivotal issues surrounding the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the provisions of Section 14 which imposes a moratorium during the Corporate Insolvency Resolution Process (CIRP). The appellant, SM Milkose Limited, acting as the successful Resolution Applicant, contested an order by the National Company Law Tribunal (NCLT), New Delhi, arguing that the Committee of Creditors (COC), dominated by the Bank of India holding 90% voting rights, had improperly earmarked 25% of the corporate debtor's receipts during the moratorium period for the repayment of its loans. This commentary explores the nuances of the judgment, analyzing its implications on future insolvency proceedings.

Summary of the Judgment

The NCLAT, presided over by Member Alok Srivastava, quashed the impugned order of the NCLT dated December 23, 2020. The Tribunal held that the actions taken by the COC to divert 25% of the corporate debtor's receipts to the Bank of India during the moratorium period contravened Section 14 of the IBC. It emphasized that the approved Resolution Plan, which stipulated a full and final settlement of Rs. 9 crores to the Bank of India, superseded any interim decisions made during the CIRP. The Tribunal directed the Resolution Professional to ensure that all receivables during the CIRP are managed in strict adherence to the IBC and the approved Resolution Plan, thereby invalidating the COC's earlier decision to allocate additional funds to the Bank of India.

Analysis

Precedents Cited

The judgment extensively referenced the UCO Bank v. G. Ramachandran case, where the Appellate Tribunal underscored that during the moratorium period under Section 14, no creditor can unilaterally appropriate the corporate debtor's receipts. Additionally, the Kalparaj Dharmashi v. Kotak Advisories Limited decision by the Supreme Court was pivotal. In this case, the Court highlighted that the appellate authorities should respect the commercial judgments of the COC and not interfere unless there is a clear statutory mandate, reinforcing the sanctity of the approved Resolution Plan.

Legal Reasoning

The Tribunal's legal reasoning hinged on the explicit provisions of Section 14 of the IBC, which prohibits the alienation of the corporate debtor's assets during the CIRP unless notified by the Central Government. The COC's decision to earmark 25% of the receivables directly violated these provisions, as there was no such notification or statutory exemption. Furthermore, the Tribunal emphasized that the approved Resolution Plan holds paramount authority over any interim resolutions, ensuring that all stakeholders operate within the framework of the sanctioned plan.

Impact

This judgment has profound implications for future insolvency proceedings. It reinforces the strict adherence to the moratorium provisions under the IBC, ensuring that COCs cannot bypass statutory mandates to favor specific creditors, regardless of their voting power within the committee. The decision also underscores the finality of the approved Resolution Plan, limiting the scope for alterations based on interim decisions made during the CIRP. This fortifies the legal framework governing insolvencies, promoting fairness and transparency in the distribution of the corporate debtor's assets.

Complex Concepts Simplified

Section 14 of the Insolvency and Bankruptcy Code (IBC)

Section 14 introduces a moratorium upon the initiation of the CIRP, which halts all pending court proceedings against the corporate debtor and restricts the transfer or disposal of the debtor's assets. This ensures that the debtor can operate without external pressures while a resolution plan is formulated.

Corporate Insolvency Resolution Process (CIRP)

The CIRP is a structured process under the IBC aimed at reviving financially distressed companies or facilitating their orderly shutdown. It involves the identification of creditors, formulation of a Resolution Plan, and its approval by the COC and the NCLT.

Committee of Creditors (COC)

The COC comprises financial and operational creditors of the corporate debtor. They hold significant decision-making power, including the approval or rejection of Resolution Plans. However, their decisions must align with the statutory provisions of the IBC.

Resolution Plan

A Resolution Plan outlines the strategy to rehabilitate the corporate debtor, satisfying the claims of all creditors. Once approved by the COC and sanctioned by the NCLT, it becomes binding, guiding the distribution and utilization of the debtor's assets.

Conclusion

The NCLAT's decision in SM Milkose Limited And Another v. Parvinder Kumar Bhatt And Others serves as a critical reaffirmation of the protective provisions embedded within the IBC, particularly Section 14. By invalidating the COC's unilateral decision to divert corporate receivables, the Tribunal reinforced the supremacy of the approved Resolution Plan and the non-negotiable nature of the moratorium. This judgment not only ensures that all stakeholders adhere strictly to the legal framework during insolvency proceedings but also fortifies the integrity and fairness of the CIRP mechanism. Moving forward, stakeholders involved in insolvency resolutions must exercise due diligence in aligning their decisions with statutory mandates, thereby fostering a more equitable and transparent insolvency process.