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Citation Codes
Equivalent Citations
citation codes
Case Number
Disposition

allowed

Judges
  • Kishore Vemulapalli, Member (Judicial)
  • Prabhat Kumar, Member (Technical)
Acts
  • COMPANIES ACT 2013
  • Section 160 and 91 of the Criminal Procedure Code, 1973,
  • Section 14 of the Code;
  • Section 82 of APCGST Act, 2017,
  • Code, 2016 (Act No. 31 of 2016),
  • Section 35 of the Code,
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Disposition

allowed

Judges
  • Kishore Vemulapalli, Member (Judicial)
  • Prabhat Kumar, Member (Technical)
Acts
  • COMPANIES ACT 2013
  • Section 160 and 91 of the Criminal Procedure Code, 1973,
  • Section 14 of the Code;
  • Section 82 of APCGST Act, 2017,
  • Code, 2016 (Act No. 31 of 2016),
  • Section 35 of the Code,
See more information ...
Smart Summary

Structured Summary of the Opinion — IA-616/2023 (Liquidator of Talwalkars Healthclubs Limited)

Factual and Procedural Background

This interlocutory application (IA-616/2023), filed on 24/11/2022 by the Liquidator, Sh. Gajesh Labhchand Jain, of M/s Talwalkars Healthclubs Limited (the "Corporate Debtor"), seeks directions to defreeze numerous bank accounts maintained with Axis Bank (Respondent No. 2). The freeze/attachment was imposed by several authorities including the Economic Offence Wing (Respondent No. 1), Income Tax Department (Respondent No. 3), and multiple GST authorities (Respondents No. 4, 5 and 6).

Procedural history (as stated in the opinion): Talwalkars Healthclubs Limited is a listed public company incorporated on 23.04.2016. The Adjudicating Authority initiated corporate insolvency resolution process (CIRP) on 09.03.2021; since no resolution plans were received, liquidation proceedings were initiated on 28.04.2022 and the Applicant was appointed liquidator pursuant to that order.

The Bank accounts of the Corporate Debtor maintained with Axis Bank were specifically enumerated in the record (a long list of account numbers appears in the opinion). The continued debit freeze on those accounts was alleged to be adversely affecting the realization value and hindering the liquidator in performing statutory duties.

Respondent No. 1 issued an order dated 12.04.2022 directing Axis Bank to freeze the accounts, alleging diversion/misappropriation of loan proceeds aggregating to Rs. 237.80 Crores which was under investigation. The Applicant issued letters requesting revocation and provided information sought under notices issued under Sections 160 and 91 CrPC, but no de-freezing action was taken. Axis Bank informed the Applicant that other statutory authorities had also placed holds on the accounts; not all such orders were shared with the Applicant.

The Applicant wrote to Respondents No. 3–6 informing them of liquidation and requesting revocation of freezes. Respondent No. 6 replied claiming an outstanding demand of Rs. 60,000 and stated the account would be defrozen only after recovery. The Applicant stated Respondent No. 6's claim had been filed via Form C dated 19.07.2022 and admitted by the liquidator; Respondent No. 3 had also filed and had a claim admitted in the liquidation for Rs. 1,41,78,69,532.

Legal Issues Presented

  1. Whether freezing or debit-freezing of the Corporate Debtor's bank accounts by investigating/tax authorities is permissible in the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016.
  2. Whether the Adjudicating Authority (under its residuary jurisdiction under Section 60(5) of the Code) can direct de-freezing of bank accounts and transfer funds to the liquidation account so that they form part of the liquidation estate.

Arguments of the Parties

Applicant (Liquidator) — Key contentions

  • The debit freeze impedes value maximization and the liquidator's statutory duties under the Code (Section 35 duty to take custody/control of assets).
  • Respondent No. 6's demand of Rs. 60,000 has been filed as Form C dated 19.07.2022 and admitted by the liquidator as an operational creditor; Respondent No. 3's claim for Rs. 1,41,78,69,532 has also been admitted in liquidation.
  • The Applicant relied on Section 35 of the Code (duty of liquidator) and invoked an exception in Section 82 of the APGST Act, 2017 (which the opinion reproduces) to argue the Code's regime governs treatment of assets in liquidation and there is an exception that affects creation of charge.
  • The Applicant relied on precedents — Anish Niranjan Nanavaty v. HDFC Bank (I.A. 309/MB/2021 in CP (IB)3025(MB)/2019) to argue freezing accounts during moratorium is prohibited under Section 14; and Mr. Hemant Mehta v. Commissioner of State Tax, Company Appeal (AT) (Insolvency) No. 328 of 2022 to contend the Adjudicating Authority can exercise Section 60(5) jurisdiction to de-freeze accounts and transfer funds to the liquidation account.

Respondent No. 1 (Economic Offence Wing) — Stated position

  • Respondent No. 1 asserted that the Corporate Debtor availed various loan facilities and transferred loan amounts to other accounts; transfers amounting to Rs. 237.80 Crores were under investigation. To prevent further diversion, Respondent No. 1 directed Axis Bank to debit-freeze the listed accounts pursuant to orders dated 12.04.2022.

Respondent No. 6 (GST Authority) — Stated position

  • Respondent No. 6 claimed an outstanding demand of Rs. 60,000 for belated filing of GST returns and stated the bank account would be defrozen only after recovery of this demand.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Anish Niranjan Nanavaty v. HDFC Bank, I.A. 309/MB/2021 in CP (IB)3025(MB)/2019 Applicant relied on this decision to contend that freezing the account of the Corporate Debtor during the moratorium period is prohibited under Section 14 of the Insolvency and Bankruptcy Code, 2016. The opinion records the Applicant's reliance on this decision; the decision was used to support the argument that account freezes during moratorium are impermissible. The Bench noted the moratorium date and found the Respondent No. 1's freeze came after the moratorium had commenced.
Mr. Hemant Mehta v. Commissioner of State Tax, Company Appeal (AT) (Insolvency) No. 328 of 2022 (Hon'ble NCLAT) Applicant relied on this decision to contend the Adjudicating Authority is duty-bound to exercise residuary jurisdiction under Section 60(5) of the Code to order de-freezing of accounts and transfer funds to the liquidation account. The Bench considered the facts of that NCLAT decision similar to the present matter and followed the NCLAT's approach, directing Axis Bank to revoke attachments pursuant to orders/letters issued by Respondents No. 3–6 without further delay.

Court's Reasoning and Analysis

The Bench's reasoning, drawn directly from the opinion, proceeded in the following steps:

  1. The Bench noted Respondent No. 1 was investigating alleged misappropriation/diversion of borrowings and, during that investigation, considered it appropriate to freeze the Corporate Debtor's bank accounts to prevent further diversion.
  2. The Bench observed timing: the investigative order freezing accounts was passed on 12.04.2022, while the moratorium under Section 14 of the Code in respect of the Corporate Debtor came into force on 11.01.2021. On that basis the Bench held that Respondent No. 1 "could not have sought debit freeze of the Bank account during the moratorium period."
  3. The Bench also acknowledged the protective intent of the Investigating Officer's action (to prevent further diversion) and noted that such an action was in the interest of creditors and public interest.
  4. The Bench explained that the Code provides remedies for recovery where diversion from the Corporate Debtor to another person has taken place—specifically through the avoidance transactions provisions—so the preference is to allow recoveries under the Code rather than permitting continued freezes that impede liquidation duties and value maximization.
  5. Relying on the Hon'ble NCLAT decision in Mr. Hemant Mehta (which had revoked a Commercial Tax Authority's freeze of accounts of a corporate debtor in liquidation), the Bench found the facts analogous and directed Axis Bank to revoke attachments imposed pursuant to orders/letters of Respondents No. 3–6.
  6. On the basis of the foregoing, the Bench concluded it would be appropriate to order revocation of the debit freeze on the accounts maintained by the Corporate Debtor with Axis Bank in terms of orders passed by Respondent No. 1, and to direct Axis Bank to revoke attachments pursuant to orders/letters issued by Respondents No. 3–6.

Holding and Implications

Core Ruling: The Application is allowed and Axis Bank (Respondent No. 2) is directed to defreeze the accounts of the Corporate Debtor pursuant to order(s)/letters of Respondent Nos. 1, 3, 4, 5 and 6.

Immediate consequences for the parties (as stated in the opinion):

  • Axis Bank must revoke the debit freeze/attachments on the listed accounts arising from the orders/letters of the named authorities without further delay.
  • This will enable the liquidator to access the funds/accounts for the liquidation process and to carry out duties under Section 35 of the Code.

The opinion follows the approach taken by the Hon'ble NCLAT in Mr. Hemant Mehta and does not, on the face of the record, purport to lay down any wider or novel legal principle beyond applying the Code and the referenced authority to the facts at hand. The opinion does not explicitly state that it is constituting a new precedent.

Annex — Statutory Provision Reproduced in the Opinion

“Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016), any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

(This quotation is reproduced in the opinion as Section 82 of the APGST Act, 2017 and was relied upon by the Applicant in submissions.)

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    Gajesh Labchand Jain Applicant v. Axis Bank Limited And Others (s).

    Prabhat Kumar, Member (Technical):— This Interlocutory Application no IA-616/2023 is filed on 24/11/2022 by the Liquidator, Sh. Gajesh Labhchand Jain of M/s Talwalkars Healthclubs Limited (Corporate Debtor) seeking directions for defreezing of bank accounts maintained with Axis Bank (i.e. Respondent No. 2), which came to be attached by following authorities to recover the dues—

    a. ECONOMIC OFFENCE WING i.e. Respondent No. 1

    b. INCOME TAX DEPARTMENT i.e. Respondent No. 3

    c. GST DEPARTMENT, SECUNDERABAD i.e. Respondent No. 4

    d. GST DEPARTMENT, BENGALURU i.e. Respondent No. 5

    e. GST DEPARTMENT, VISHAKHAPATNAM i.e. Respondent No. 6

    2. Talwalkars Healthclubs Limited (THL or Corporate Debtor) is a listed public company incorporated on 23.04.2016 under the Companies Act, 2013, with the Registrar of Companies, Maharashtra, Mumbai. This Adjudicating Authority vide order dated 09.03.2021 initiated the corporate insolvency resolution process (CIRP) for the Corporate Debtor. However, since no resolution plans were received, this Adjudicating Authority vide order dated 28.04.2022 initiated liquidation proceedings for the Corporate Debtor. Pursuant to said order, the Applicant was appointed as the liquidator of the Corporate Debtor and has been working diligently in accordance with applicable law.

    3. The Corporate Debtor maintains following accounts with Respondent No. 2:

    Sr. No. Account number 1 918020063714539 2 918020051650069 3 918020063715150 4 918020052273643 5 918020063717541 6 918020052347087 7 918020063718388 8 918020052280340 9 918020063724646 10 918020052328811 11 918020063723931 12 918020052272459 13 918020063718764 14 918020052338889 15 918020063719385 16 918020052270822 17 575010200005074 18 575010200005067 19 918020052321807 20 917020021975773 21 917020021977601 22 918020052339125 23 918020052827594 24 918020053146179 25 918020063721537 26 918020053323745 27 918020063722307 28 918020052344321 29 918020063722750 30 918020052329144 31 918020063723135 32 918020052827415 33 918020063707667 34 918020052350119 35 918020063708275 36 918020052469048 37 918020063723562 38 918020052321946 39 918020063708754 40 918020052827491 41 918020063708550 42 918020052310726 43 918020052822025 44 918020056305036 45 918020054475995 46 918020037117076 47 918020054476040 48 918020037903880 49 918020037736046 50 918020054475869 51 918020054523492 52 918020054006560 53 916020036877793 54 918020040303912 55 918020054476134 56 918020054804762 57 918020037854306 58 918020054475937 59 918020054641626 60 918020054476095 61 918020054262090 62 918020054475762 63 918020089815643 64 918020063721338 65 918020053324094 66 918020063720275 67 918020052316410 68 918020019577275 69 918020021668705 70 918020063708567 71 918020052340659 72 918020063721951 73 918020052827538 74 918020063708877 75 918020052347003 76 918020063715710 77 918020052316229 78 918020063711404 79 918020052276529 80 918020063713617 81 918020052278428 82 918020063713756 83 918020052274976 84 918020052271087 85 918020052280081 85 918020063714377 86 918020038997222 87 918020063715024 88 918020052338960 89 918020063715341 90 918020052329018 91 918020063715930 92 918020052276862 93 918020063719709 94 918020052275173 95 918020063716962 96 918020052280230 97 918020063717431 98 918020052316290 100 918020063718072 101 918020052339044 102 918020063718557 103 918020052344091 104 918020063718832 105 918020052321496 106 918020063720107 107 918020052293618 108 918020063721977 109 918020052270961 110 918020063709922 111 918020052347045 112 918020052278729 113 918020063712672 114 918020052346945 115 918020063713743 116 918020052311839 117 918020063710113 118 918020052192955 119 918020063710252 120 918020052321632 121 918020063711019 122 918020052278583 123 918020063711488 124 918020052827374 125 918020063724091 126 918020053324023 127 918020063721045 128 918020052827431 129 918020063712216 130 918020051870302 131 918020063712614 132 918020052328918 133 918020063713297 134 918020052943931 135 918020063714364 136 918020063714364 137 918020052350229 138 918020063715167 139 918020052827444 140 918020063718544 141 918020052821996 142 918020063718719 143 918020052350041 144 918020063709595 145 918020063713963 146 918020063711860 147 918020063711983 148 918020063713963 149 918020052280081 150 918020052819922 151 918020052822087 152 918020063716548 153 918020052821970 154 918020063707777 155 918020052822041 156 918020063710689 157 918020052047936 158 918020063717099 159 918020052349986 160 918020063708864 161 918020052827457 162 918020063713471 163 918020052340594 164 918020063710537 165 918020052275115 166 918020063717082 167 918020052293838 168 918020063712371 169 918020052827484 170 918020063711200 171 918020052827512 172 918020063709207 173 918020052276684 174 918020063709430 175 918020052293760 176 918020063710045 177 918020063710552 178 918020063710223 179 918020052827477 180 918020063712999

    4. Presently, the Corporate Debtor is under Liquidation under the Insolvency and Bankruptcy Code, 2016, but the continuation of debit freeze on bank accounts of the Corporate Debtor is adversely affecting realisation value of the Corporate Debtor. In this manner, attachment and debit freeze of bank accounts serve as a hinderance in the achievement of value maximization and also makes it difficult for the Applicant to fulfil his duties as liquidator of the Corporate Debtor.

    5. Pursuant to the orders dated 12.04.2022, Respondent No. 1 directed the Respondent No. 2 to freeze the bank accounts of the Corporate Debtor as listed in the said order. It is alleged by Respondent No. 1 that the Corporate Debtor availed various loan facilities from their Bank and transferred loan amount in other accounts, such transfer amount to Rs. 237.80 Crores is under investigation and directed Respondent No. 2 debit freeze the accounts stated in the said communication.

    6. The Applicant requested for the revocation of the imposition of the debit freeze vide letters dated 16.11.2022 and 07.12.2022 issued to Respondent No. 1. Additionally, the Applicant cooperated and issued a letter to Respondent No. 1 with all the information required by Respondent No. 1 pursuant to the notices dated 11.11.2022 and 15.11.2022 issued under Section 160 and 91 of the Criminal Procedure Code, 1973, by Respondent No. 1 to the Applicant. However, no action to de-freeze the bank accounts has been taken by the Respondents.

    7. The Applicant was also informed by Respondent No. 2 that its bank accounts have been put on hold/debit-freeze/freeze pursuant to orders of various other statutory authorities such as inter alia Respondent No. 3, 4, 5 and 6. However, not all such orders were shared with the Applicant. Accordingly, the Applicant had also issued letters dated 21.11.2022 to Respondent No. 3 informing it regarding the initiation of liquidation proceedings and requesting it to direct Respondent No. 2 to revoke the debit freeze/freeze/lien/attachment from bank accounts of Corporate Debtor, stating that the claim of Income Tax Department for a sum of Rs. 141,78,69,532/- has been admitted vide Form C dated 22.07.2022 filed by the Department and the same shall be dealt with in accordance with the provisions of the I&B Code.

    8. Additionally, the Applicant came across letter dated 21.03.2019 issued by Respondent No. 4 to Respondent No. 2. Further, the Applicant also came across letter dated 24.07.2019 issued by Respondent No. 5 to Respondent No. 2. In both of the letters Respondent No. 2 was informed regarding amount due to government by the Corporate Debtor, and directing it to freeze the account bearing number 916020036877793 and other bank accounts associated with similar PAN. The Applicant also came across third party recovery notice letter dated 26.11.2021 issued by Respondent No. 6 to Respondent No. 2, informing it regarding amount due to government by the Corporate Debtor, and in effect imposed freeze on accounts of the Corporate Debtor.

    9. On 21.11.2022, the Applicant issued letters to Respondent No. 4, 5, and 6 informing them regarding the initiation of liquidation proceedings for the Corporate Debtor, and requesting it to direct Respondent No. 2 to revoke the freeze imposed on bank accounts of Corporate Debtor.

    10. Respondent No. 6 has filed reply claiming an outstanding of Rs. 60,000/- for belated filing of GST returns and the Bank account shall be defrozen only after recovery of this Demand.

    11. The Applicant liquidator has submitted that the Respondent No. 6 has already filed its claim vide Form C dated 19.07.2022 before the Applicant-Liquidator for a sum of INR 60,000/- (Indian Rupee Sixty Thousand Only), as an operational creditor. The same has already been admitted by the Applicant-Liquidator in the ongoing liquidation proceedings of the Corporate Debtor. Notably, Respondent No. 3 has also submitted a claim amounting to INR 1,41,78,69,532 (Indian Rupee One Hundred Forty-One Crore Seventy-Eight Lakh Sixty-Nine Thousand Five Hundred Thirty-Two only) to the Applicant-Liquidator, which has been admitted in the ongoing liquidation proceeding of the Corporate Debtor.

    12. It is further submitted by the Applicant that in accordance with Section 35 of the Code, it is the bounden duty of the Applicant-Liquidator to take into his custody or control all the assets, property, effects and actionable claims of the Corporate Debtor. Also, in accordance with Section 82 of APCGST Act, 2017, an exception has been created with regards to the Code and it does not in any manner mandates the creation of charge over property of the Corporate Debtor. Rather it creates an exception for the same. Section 82 of APGST Act is reproduced below for ready reference:

    “Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016), any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

    13. The Applicant has also relied upon the decision in the case of Anish Niranjan Nanavaty v. HDFC Bank I.A. 309/MB/2021 in CP (IB)3025 (MB)/2019 to contend that freeze of the account of the Corporate Debtor during the moratorium period is prohibited under Section 14 of the Code; and the decision in the case of Mr. Hemant Mehta v. Commissioner of State Tax. Company Appeal (AT) (Insolvency) No. 328 of 2022 to contend that adjudicating authority is duty bound to exercise the residuary jurisdiction vested in its Section 60(5) of the Code to order de-freezing of the account and transfer the funds lying therein to the liquidation account so to form part of the liquidation estate. It is submitted that in the case of Mr. Hemant Mehta (Supra), the Hon'ble NCLAT had directed to de-freeze the Bank accounts.

    14. This Bench heard the counsel and perused the materials available on record.

    15. This Bench finds that Respondent No. 1 is investigating into misappropriation of borrowings by Corporate Debtor from the lenders. Pending such investigation, the investigating authority considered it appropriate to freeze the bank accounts so as to avoid further diversion. This Bench finds that this order was passed on 12.04.2022, while moratorium u/s 14 of the Code in the case of Corporate Debtor came into force on 11.01.2021, hence Respondent No. 1 could not have sought debit freeze of the Bank account during the moratorium period. This Bench is of the considered view that the action of the Investigating Officer was to protect further diversion of funds lying in the account of Corporate Debtor, in the interest of its creditors as well as in public interest. At this juncture, this Bench feels that the provisions of the Code take into account the interest of creditors and if any diversion has taken place from the account of the Corporate Debtor to another person, the same is recoverable from such person under the provisions of avoidance transactions under the Code. Hence, it would be appropriate to order revocation of debit freeze on accounts maintained by the Corporate Debtor with Respondent No. 2 in terms of order passed by Respondent No. 1.

    16. In the case of Mr. Hemant Mehta (Supra), the Hon'ble NCLAT had revoked the order of Commercial Tax Authority freezing the account of the Corporate Debtor who was in liquidation. This Bench feels that facts of that case and the present case vis-à-vis Respondent No. 3 to 6 are similar and following the decision of Hon'ble NCLAT, this Bench directs the Axis Bank to revoke the attachment of Bank account pursuant to orders/letters issued by Respondent No. 3 to 6 without any further delay.

    17. In view of the above, this Application is allowed with direction to the Respondent No. 2 to defreeze the accounts of the Corporate Debtor pursuant to order(s) of Respondent No. 1, 3, 4, 5 & 6.

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    Comments

    Gajesh Labchand Jain Applicant v. Axis Bank Limited And Others (s).
    (May 18, 2023)