2025 (7) TMI 570 - AT - IBC

CIRP - Non-refund of amount including income tax refund which belonged to the corporate debtor - amount received as a tax refund can be treated as receivables or not - submission of the appellant is that it had security interest as per the hypothecation deed and it has not relinquished its security hence the amount was not required to be transferred - HELD THAT - The submission of the appellant cannot be agreed upon amount having been received during the CIRP process amount in the corporate debtor s account amount belonged to the corporate debtor even though as receivable from the Income Tax Refund and the appellant bank could not have denied the transferring of the amount in the corporate debtor s account maintained by the RP. The liquidation with respect to corporate debtor commenced subsequently only on 21.09.2022. The issue before the adjudicating authority while deciding the I.A. No. 2967/2021 did not pertain to issue of realisation of security interest by the appellant. The Indian Bank could not have refused to transfer the amount in the corporate debtor account and it was not open for the appellant to put condition for transfer into any account of its choice when the CIRP account was maintained in the Yes Bank and all amounts belonging to the corporate debtor were parked in the said account Indian Bank was obliged to transfer the amount in the bank as indicated by the RP. The action of the appellant in not transferring the account in the corporate debtor s account cannot be approved and it is to be noticed that even after passing of the order on 21.12.2021 bank continued persisted in not transferring the account leading to filing of the contempt application against the bank which has been also allowed by the order impugned. Adjudicating authority however has not taken any action regarding contempt but has issued direction to transfer the amount. The manner in which the appellant is to realise its security out of its claim which has been filed before the liquidator were not the question which were required to be considered in I.A.2967/2021 which was allowed on 20.12.2021. Appellant has prayed for recall of the said order by filing the I.A. No.2481/2023. There was no ground in I.A. No. 2481/2023 to recall the order dated 20.12.2021 hence the adjudicating authority did not commit any error in rejecting I.A. No. 2481/2023 filed by the appellant. Appellant has to comply with the order dated 20.12.2021 and 19.12.2024. The question of realisation of its security and claim which the appellant is entitled to receive are the question which need to be considered and examined by the liquidator in accordance with the law. There are no error in any of the impugned orders filed by the appellant and allowing the application filed by the liquidator - appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Income Tax Refund amount of Rs. 4,65,58,425.87/- received by the corporate debtor during the Corporate Insolvency Resolution Process (CIRP) is to be treated as receivables belonging to the corporate debtor and hence to be transferred to the CIRP/liquidation account maintained by the Resolution Professional (RP)/liquidator.

- Whether the Indian Bank, having a hypothecation deed over receivables of the corporate debtor, was justified in withholding the Income Tax Refund amount instead of transferring it to the CIRP/liquidation account.

- Whether the order dated 20.12.2022 directing the Indian Bank to transfer the Income Tax Refund amount to the liquidation account was passed ex-parte and whether it was liable to be recalled.

- Whether the Indian Bank's failure to comply with the order dated 20.12.2022 amounted to contempt and the propriety of the adjudicating authority's directions on this aspect.

- The scope of the rights of the Indian Bank in realizing its security interest vis-`a-vis the obligations under the Insolvency and Bankruptcy Code, 2016 (IBC) and related regulations during CIRP and liquidation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature and Ownership of the Income Tax Refund Amount Received During CIRP

Relevant legal framework and precedents: The Insolvency and Bankruptcy Code, 2016 mandates a moratorium under Section 14 upon commencement of CIRP, prohibiting transfer or disposal of the corporate debtor's assets. Section 17 vests the Resolution Professional with the responsibility to manage the affairs and assets of the corporate debtor during CIRP. The moratorium and RP's control continue until either resolution plan approval or liquidation under Section 33. Indian Accounting Standard (Ind AS) 7 defines tax refunds as part of cash flow from operating activities, implying such receipts are assets of the entity.

Court's interpretation and reasoning: The Court observed that the Income Tax Refund amount was received in the corporate debtor's account maintained with the Indian Bank during the moratorium period. The moratorium prohibits alienation or disposal of assets by the corporate debtor, and the RP is entitled to take control of all assets. The refund amount, being received in the corporate debtor's account, indisputably belonged to the corporate debtor. The Court rejected the appellant's argument that the amount was not receivable or that it could withhold the amount due to its security interest.

Key evidence and findings: The RP's multiple requests via emails and letters to the Indian Bank to transfer the amount to the CIRP account, the filing of I.A. No. 2967/2021 seeking a direction for transfer, and the adjudicating authority's order directing such transfer were noted. The Indian Bank's refusal to transfer despite repeated requests and the moratorium's binding effect on all assets were emphasized.

Application of law to facts: The moratorium under Section 14 prohibits the corporate debtor from alienating assets; the RP manages these assets. The Income Tax Refund, received during CIRP, is an asset of the corporate debtor and must be transferred to the CIRP account. The Indian Bank's hypothecation rights do not empower it to withhold assets during CIRP contrary to the Code's provisions.

Treatment of competing arguments: The appellant contended that under the hypothecation deed, the refund was a receivable subject to its security and that it was not obliged to transfer the amount, especially since it had not relinquished its security interest. The Court rejected this, holding that the RP's right to control assets during CIRP supersedes such claims. The appellant's contention that the order was ex-parte and liable to be recalled was also dismissed as the bank had been served but failed to appear due to internal miscommunication.

Conclusions: The Income Tax Refund amount received during CIRP is an asset of the corporate debtor and must be transferred to the CIRP/liquidation account. The Indian Bank was obligated to transfer the amount upon RP's instruction and the adjudicating authority's order.

Issue 2: Validity and Effect of Order Directing Transfer of Income Tax Refund and Recall Application

Relevant legal framework and precedents: The adjudicating authority under the IBC has power to pass directions to ensure the CIRP's efficacy, including transfer of assets to the RP. The recall of orders is permissible only on valid grounds such as non-service or procedural irregularities.

Court's interpretation and reasoning: The Court found that the order dated 20.12.2022 directing transfer of the Income Tax Refund amount was not passed ex-parte as the bank was duly served but failed to appear due to internal miscommunication. The recall application (I.A. No. 2481/2023) filed by the bank to set aside the order was dismissed as there were no valid grounds for recall.

Key evidence and findings: The bank's own admission in the recall application that notices were served but went unnoticed due to miscommunication was highlighted. The adjudicating authority's factual findings and legal reasoning in the original order were upheld.

Application of law to facts: Proper service having been effected, and no procedural irregularity established, the order directing transfer was valid and binding. The bank's failure to appear did not invalidate the order.

Treatment of competing arguments: The appellant's plea of ex-parte order and miscommunication was rejected as insufficient to overturn the order. The Court emphasized the need for compliance with orders passed by the adjudicating authority under IBC.

Conclusions: The order directing transfer of the Income Tax Refund amount stands valid and binding. The recall application was rightly dismissed.

Issue 3: Non-Compliance with Adjudicating Authority's Order and Contempt Proceedings

Relevant legal framework and precedents: Under the IBC and the Contempt of Courts Act, non-compliance with orders of the adjudicating authority can attract contempt proceedings. The adjudicating authority may direct transfer of funds and initiate action for non-compliance.

Court's interpretation and reasoning: The Indian Bank failed to comply with the order dated 20.12.2022 directing transfer of the Income Tax Refund to the liquidation account. The liquidator filed I.A. No. 2074/2023 seeking contempt proceedings. The adjudicating authority allowed the application and directed the bank to remit the amount failing which contempt proceedings could be initiated. The Court found no error in this approach.

Key evidence and findings: The bank's continued refusal to transfer the amount despite the order, and the liquidator's application for contempt were noted. The adjudicating authority's measured approach in directing transfer and granting liberty to initiate contempt was upheld.

Application of law to facts: The bank's non-compliance with a valid order justifies directions for transfer and potential contempt action. The Court emphasized the primacy of compliance with adjudicating authority's orders in insolvency proceedings.

Treatment of competing arguments: The appellant's argument that it was ready to pay costs and had not refused transfer was rejected as inconsistent with the facts. The Court noted the bank's refusal to transfer and its conditional approach as untenable.

Conclusions: The Indian Bank's non-compliance warranted the adjudicating authority's directions. The liquidator's application was rightly allowed, and the bank was directed to comply forthwith.

Issue 4: Rights of the Indian Bank to Realise Security Interest and Treatment of Claims

Relevant legal framework and precedents: The hypothecation deed grants security interest over receivables to the bank. However, under IBC, during CIRP and liquidation, realization of security and distribution of assets are governed by the Code and the Liquidation Regulations, 2016.

Court's interpretation and reasoning: The Court clarified that the issue of realization of security interest and entitlement to claims filed by the bank before the liquidator are separate matters to be decided in accordance with law by the liquidator. The bank's refusal to transfer the amount based on security interest was not justified during CIRP/liquidation.

Key evidence and findings: The bank's claim before the liquidator and its communication to not relinquish security interest were noted. The Court emphasized that the manner of realization and distribution is to be examined by the liquidator and not in interlocutory applications for transfer of funds.

Application of law to facts: The bank's security interest does not override the RP's or liquidator's control over assets during insolvency proceedings. The bank must comply with orders for transfer, and its claim is to be adjudicated separately.

Treatment of competing arguments: The bank's plea of security interest was not accepted as a ground to withhold transfer. The Court distinguished between possession/control of assets and realization of security interest.

Conclusions: The bank's rights to realize security interest and claim adjudication are to be determined by the liquidator in accordance with the law. The bank must comply with transfer orders in the meantime.

3. SIGNIFICANT HOLDINGS

"Amount having been received in the CIRP process amount was to taken control by the RP and Indian Bank could not have denied transfer of the said amount in the corporate debtor's account as was requested by the RP by several emails."

"The Indian Bank could not have refused to transfer the amount in the corporate debtor account and it was not open for the appellant to put condition for transfer into any account of its choice when the CIRP account was maintained in the Yes Bank and all amounts belonging to the corporate debtor were parked in the said account."

"The question of realisation of its security and claim which the appellant is entitled to receive are the question which need to be considered and examined by the liquidator in accordance with the law."

"There was no ground in I.A. No. 2481/2023 to recall the order dated 20.12.2021, hence the adjudicating authority did not commit any error in rejecting I.A. No. 2481/2023 filed by the appellant."

"The CIRP commenced against the corporate debtor vide order dated 19.02.2021. Adjudicating authority while admitting Section 7 application directed to impose the moratorium... The moratorium prohibits transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein."

Final determinations:

- The Income Tax Refund amount received during CIRP belongs to the corporate debtor and must be transferred to the CIRP/liquidation account.

- The Indian Bank was obliged to comply with the adjudicating authority's order directing transfer and cannot withhold the amount on account of its security interest.

- The order dated 20.12.2022 directing transfer was validly passed and was not ex-parte; the recall application was rightly dismissed.

- The Indian Bank's failure to comply with the order justified directions for transfer and potential contempt proceedings.

- The bank's rights to realize security interest and claim adjudication are to be determined separately by the liquidator under applicable law.