The National Company Law Appellate Tribunal ("NCLAT") in its recent judgement of Axis Bank Limited v. Asset Reconstruction Company (India) Limited, [Company Appeal (AT) (Insolvency) No. 1975 of 2024] has held that when a stay order is issued against an admission order passed under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), the moratorium under Section 14 of the IBC continues to remain in force. Resultantly, creditors cannot withdraw funds from the Corporate Debtor's accounts during the stay period.
Brief Facts
On February 22, 2023, the National Company Law Tribunal ("NCLT") admitted a Section 7 application filed by IndusInd Bank Limited against Siti Networks Limited ("Corporate Debtor") and appointed an Interim Resolution Professional ("IRP").
Thereafter, on March 7, 2023, the NCLAT stayed the operation of the admission order in response to an appeal filed by Shilpi Asthana, a suspended director (Company Appeal (AT) (Insolvency) No. 274 of 2023) ("Company Appeal"). Following this interim order, the IRP handed back the management of the Corporate Debtor to the promoters between March 10-15, 2023.
On March 31, 2023, Axis Bank Limited ("Axis Bank"), which maintained an escrow account for the Corporate Debtor, withdrew Rs. 20 Crores (Rupees twenty crore) from the Corporate Debtor's account.
Subsequently, on May 18, 2023, Shilpi Asthana filed an IA No. 2340 of 2023 in the Company Appeal seeking to implead Axis Bank and Aditya Birla Finance Limited ("ABFL") as parties to the Appeal, alleging they were acting contrary to the orders dated February 22, 2023, and March 7, 2023. A Contempt Application No. 16 of 2023 was also filed by Shilpi Asthana for initiating contempt proceedings, mentioning the appropriation of amounts from the account of the Corporate Debtor. Another IA No. 2558 of 2023 was filed seeking direction to the lenders to reverse the transactions.
Asset Reconstruction Company (India) Limited ("ARCIL/ Respondent") also filed a reply in IA No. 2558 of 2023 praying for direction to prevent Axis Bank from unilateral appropriation of funds from the current account of the Corporate Debtor and for direction to refund the entire amount.
On June 12, 2023, the NCLAT directed Axis Bank and ABFL not to withdraw any amount from the account of the Corporate Debtor till the next date. Thereafter, on August 10, 2023, the NCLAT heard and dismissed Company Appeal, upholding the admission order. With the dismissal of the appeal, all pending applications were also closed.
Subsequent to the order dated August 10, 2023, the Committee of Creditors ("CoC") was constituted, and the first meeting was held on September 1, 2023.
Thereafter, on December 16, 2023, ARCIL filed an IA No. 126 of 2024 ("IA 126") seeking direction against Axis Bank and other financial creditors to remit the amount back to the account of the Corporate Debtor which was withdrawn during the period March 7, 2023, till June 12, 2023.
On October 1, 2024, the NCLT allowed IA No. 126, ordering Axis Bank and other lenders to refund the amounts withdrawn from the Corporate Debtor's account during the stay period. Aggrieved by this order, Axis Bank and other lenders filed the appeals before the NCLAT.
Submissions by the Parties
Appellants (Axis Bank and Other Lenders) made the following submissions:
The NCLT committed an error in directing the reversal of the amount which was withdrawn from the account of the Corporate Debtor during the period when the interim order dated March 7, 2023 was in operation. They contended that after the stay order on March 7, 2023, the order of appointment of IRP as well as the order directing for Moratorium was stayed, and there was no moratorium in operation after March 7, 2023, to prohibit Axis Bank from withdrawing the amount from the account of the Corporate Debtor.
NCLT misinterpreted the interim order dated March 7, 2023. They argued that once a judicial order admitting a Section 7 application is stayed, all consequences arising out of such order are suspended.
ARCIL's application was barred by the principle of res judicata since an application seeking reversal of the amount withdrawn after March 7, 2023, till June 12, 2023 had been dismissed by the NCLAT. They also argued that before the Supreme Court, an IA seeking reversal of withdrawal from Axis Bank and other Banks was also dismissed.
ARCIL was estopped from raising any objection with regard to withdrawal of the amount. They argued that ARCIL's objection was only that if any amount is withdrawn by Axis Bank, it should be distributed to all lenders including ARCIL.
The Appellants also invoked the principle of merger, arguing that the NCLAT's order dated August 10, 2023 had merged with the Supreme Court's order dismissing the Company Appeal filed by the suspended director, which also dismissed the IA No. 2558 of 2023 seeking reversal of the disbursal.
ARCIL/ Respondent made the following submissions:
The judgment of the NCLAT in Ashok Kumar Tyagi v. Uco Bank, CA(AT)(Ins) No. 1323 of 2022, held that stay of the admission order under Section 7 cannot lead to installation of the management. Reliance was placed on the Supreme Court's judgment in Shree Chamundi Mopeds Limited v. Church of South India Trust Association, CSI Cinod Secretariat, Madras [1992 3 SCC 1] which held that the stay of an order and quashing of an order do not have the same effect. By staying an order, it becomes inoperative but is not quashed.
Interpreting the stay of admission order as suggested by the Appellants would lead to absurdity and would not serve the purpose behind Section 14 of IBC.
The principle of res judicata is applicable only when an issue is directly and substantially decided by a Court. The issue of appropriation was never decided by the NCLAT or the Supreme Court.
Doctrine of estoppel is not applicable to the present case. No representation was made by ARCIL or anyone to the lenders that they could withdraw the amount from the account of the Corporate Debtor. On the contrary, ARCIL raised objections in the Joint Lenders' Meeting held on April 26, 2023.
Doctrine of merger had no application in this case as it does not apply to issues which were not adjudicated.
Issues framed by the NCLAT
The NCLAT framed the following issues for determination:
1. What is the effect and consequences of the interim order dated March 7, 2023, staying the operation of the admission order dated February 22, 2023?
2. Whether status quo prevailing prior to passing of the order dated February 22, 2023, shall be restored in view of the interim order dated March 7, 2023?
3. What is the effect on the moratorium which commenced on February 22, 2023, by admitting Section 7 application, on passing of an interim order dated March 7, 2023?
4. Whether application IA No. 126 filed by ARCIL praying for reversal of the amount withdrawn by Axis Bank and other lenders during the stay period was barred by principle of res judicata, issue estoppel and merger?
5. Whether on principle of restitution, the lenders who have withdrawn the money from the account of the Corporate Debtor during period of interim stay which came to end on August 10, 2023, when Appeal was dismissed, were obliged to reverse the amount in the account of Corporate Debtor?
6. Whether Axis Bank and other lenders who have withdrawn the amount from the account of the Corporate Debtor were liable to refund the amount with interest?
Analysis and findings of the NCLAT
The NCLAT observed that under the IBC, the admission of an application is a significant event that alters the nature of proceedings. Once the petition is admitted and CIRP is initiated, the proceedings become in rem.
The NCLAT analyzed the effect of the stay order dated March 7, 2023, on the moratorium imposed by the admission order dated February 22, 2023 and held that the stay order does not have the effect of quashing the admission order; it only makes it inoperative temporarily. It was held that by passing the interim order on March 7, 2023, the NCLAT only suspended the admission order and did not quash it. Consequently, the moratorium under Section 14 continued during the stay period.
The NCLAT also referred to the Report of the Bankruptcy Law Reforms Committee and Notes on Clauses of IBC, which emphasized that moratorium is meant to keep the corporate debtor's assets together during the insolvency resolution process and prevent a race to recovery by creditors.
The NCLAT rejected the Appellants' argument that ARCIL's application was barred by res judicata. It found that the previous applications seeking reversal of withdrawn amounts were merely closed when the appeal was dismissed, without any adjudication on merits.
Further the NCLAT analyzed the judgment dated August 10, 2023 in Company Appeal, and found that it only dealt with the challenge to the admission order and did not decide any issue related to the withdrawal of amounts by Axis Bank and other lenders. The closing of all applications was a consequence of the dismissal of the appeal, not an adjudication on the merits of those applications. NCLAT referred to the Supreme Court's judgment in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, Civil Appeal No. 3224 of 2020 which held that for applying the plea of res judicata, there has to be a conscious adjudication and the matter directly and substantially in issue must be heard and finally decided. Consequently, the doctrine of merger argument raised by the Appellants was also rejected on account of the facts that Supreme Court's order dismissing the appeal did not extend to issues that were not adjudicated.
It was held that once the appeal was dismissed on August 10, 2023, the interim order dated March 7, 2023, stood merged with the final order of dismissal. As a result, any benefit taken by parties under the interim order had to be returned under the doctrine of restitution. It was observed that since Axis Bank and other lenders had taken advantage of the interim order to withdraw amounts from the Corporate Debtor's account. When the Company Appeal was dismissed on August 10, 2023, Axis Bank and other lenders were obliged to restore the Corporate Debtor to its original position by reversing the withdrawals.
Conclusion
The NCLAT dismissed the appeals filed by Axis Bank and other lenders, upholding the NCLT's order directing them to refund the amounts withdrawn during the stay period. It held that:
1. The moratorium under Section 14 of the IBC continued during the stay period.
2. Axis Bank and other lenders were not entitled to withdraw funds from the Corporate Debtor's accounts during this period.
3. ARCIL's application was not barred by res judicata, issue estoppel, or merger.
4. Under the doctrine of restitution, lenders were obliged to reverse the withdrawals once the appeal was dismissed. However, the lenders were not liable to pay interest on the withdrawn amounts.
Please find attached a copy of the Judgement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
