The words ‘to secure the ends of justice’ in S.482 IBC, cannot mean to overlook the undermining of a statutory dictate: Supreme Court

SANDEEP KHAITAN RESOLUTION PROFESSIONAL FOR NATIONAL PLYWOOD INDUSTRIES LTD. … APPELLANT(S IN THE CRIMINAL APPELLATE JURISDICTION CRIMINAL APPEAL NO.447 OF 2021 Arising out of SLPNo. 15421) JSVM PLYWOOD INDUSTRIES LTD. & Anr. … RESPONDENT(S) VERSUS JUDGMENT K.M. JOSEPH J. Leave granted. 1. The appeal is directed against order dated 04.02.2021 passed by the Hon’ble High Court of Guwahati. In the impugned order the High Court has allowed an interlocutory application filed by the Respondent No. 1 to allow it to operate its bank account maintained with the ICICI Bank Bhubaneswar and to unfreeze the bank account of its creditors over which the lien has been created and the accounts frozen pursuant to the lodging of an FIR by the appellant before us. It was made subject to conditions. 2. An application under Section 7 of the Insolvency and Bankruptcy Code 2016 hereinafter referred to as the IBC was admitted on 26.08.2019 against one National Plywood Industries Limited of the IBC alleging non corporation by the previous management of the Corporate Debtor. On 27.04.2020 the Appellant got lodged an FIR. On 04.05.2020 the ICICI Bank created a lien upon the bank account of the Respondent No. 1 based on the development to be noticed is the order dated 20.05.2020 passed by the NCLT Guwahati. The order is passed in I.A. No. 320. The relief sought therein was for direction to the Directors of the Corporate Debtor to hand over the management of the company. The order reflects the controversy relating to the payment of Rs. 32.50 lakhs violating the moratorium. Tribunal finds that the directors of the Corporate Debtor were not giving maximum assistance. On the basis of its findings the tribunal issued directions to the suspended Board of the Corporate Debtor to cooperate with the Appellant. The Auditors were to complete the audit expeditiously interalia. More importantly the Directors were directed to refund the amount withdrawn less the amount if any paid to the alleged supplier as the cost of raw materials. The interlocutory application was posted before the regular bench for hearing after lifting the lockdown. 5. A perusal of the order reveals that the Directors of the company sought to defend the withdrawal of Rs.32.50 lakhs as one intended to pay for the raw materials. It is further noticed that the Tribunal noticed that there was no proof for the same. More importantly it was found that even if done to discharge debt due to supplies during the CIRP without permission and knowledge of the Resolution Professional it was in violation of Section 14 of the Code. 6. The Appellant moved an application for review of the order dated 20.05.2020. The Tribunal in its order dated 05.06.2020 noticed the limitations flowing from Rules 154 and 155 of the NCLT Rules 2016 in the matter of review. It is observed that for the reasons highlighted in the 20.05.2020 the former Directors of the Corporate Debtor are found prima facie liable to refund the amount unauthorisedly withdrawn from the account of the Corporate Debtor. It is also noticed that the Directors of the suspended board were not made respondents. The application for review came to be dismissed. 7. The genesis of the impugned order is the FIR lodged against the Appellant and arose from the payment effected into the account of Respondent No.1 in a sum of Rs. 32.50 lakhs. The said FIR came to be challenged in a petition under Section 482 of the Cr.P.C. by the Respondent No.1 by filing Criminal Petition No. 4520. In the same the Appellant also filed I.A. No. 4520. 8. On 19.01.2021 the NCLT Guwahati passed an order in I.A No. 37 of 2020. By the said order the Appellant was directed to discharge his duties as per the provisions of the IBC. Thereafter it also passed the following directions: i. “The Learned Counsel for the Respondents has confirmed that the Suspended Management has been co operating and providing assistance to RP to complete the CIRP in time. The Corporate Debtor is directed to submit its reply Affidavit to the allegations made relating to the transactions of Rs. 35.795 lakhs serving a copy upon the RP. ii. Any amount of the Corporate Debtor lying in any Bank is to be transferred to the account being operated by the RP. Banks having account of the Corporate Debtor are directed to lift the lien if any on any amount of the Corporate Debtor and allow the operation of the account by the RP only. iii. The RP is directed to utilize the funds of the Corporate Debtor under CIRP judiciously keeping the Unit in its full operation.” 9. Thereafter in the petition filed by the Respondent No.1 under Section 482 the High Court admitted the petition. The case was directed to be listed for regular hearing in usual course. According to the Appellant the High Court had directed investigation to be continued. This is not seen reflected in the order which is produced). In the I.A No. 453 of 2020 filed in the Section 482 resulting in the impugned order the prayers sought has already been noted. It is to allow the Respondent No.1 and its creditors to operate their bank account over which lien has been created and those accounts which have been frozen based on the FIR dated 27.04.2020. THE IMPUGNED ORDER After noticing the contentions of the parties the Learned Single Judge in the impugned order proceeds to hold as follows: i. “From the material on record it is apparent that there was business relation between the petitioner company and the NPIL which is evident from the various documents annexed to the petition. Only question raised in this FIR is that the money was transferred by the suspended CMD without any authority inasmuch as the entire state of affairs of NPIL was vested with the Respondent No. 2 who has been appointed as resolution professional. Only petitioner is that the suspended CMD has personal interest in the petitioner company being an associate company which is however a disputed fact required to be investigated by police. ii. Be that as it may having considered the entire gamut of the matter and the nature of accusation brought against the present petitioner I am of the view that freezing of all the bank account as indicated above would certainly cause unnecessary hardship which may not be necessary for the investigation of the present FIR in view of the nature of the accusation made therein as well as in view of the offer made by the petitioner to furnish a bond. Therefore in my consider view the petitioner is entitled to the interim relief as sought for. Accordingly it is provided that the lien created upon the bank account iii. It is however made clear that the interim no. 149905001306 maintained with the ICICI Limited Branch Bhubaneswar be lifted the petitioner and its creditors shall be allowed to operate the bank account over which lien has been created and the accounts have been frozen pursuant to the instruction of the Respondent No. 2 in connection with Margherita P.S. Case No. 0112 2020 until further order of the Court. relief granted to the petitioner as above with regard to unfreezing the bank account and lifting of lien shall be subject to the condition that the petitioner shall withdraw the WP No. 118 2020 filed before the Itanagar Permanent Bench of this Court and furnishing an indemnity bond undertaking to refund the amount of Rs. 32.50 Lakhs if required subject to final outcome of the criminal case.” 13 We heard the Learned Counsel for the Appellant Shri Anand Varma and the Learned Counsel for the Respondent No. 1 Shri Harish Pandey. The State is represented by Shri Shuvodeep Roy. The Learned Counsel for the Appellant contended that the impugned order proceeds on an erroneous basis namely that the allegations about the co accused having an interest in the Respondent No.1 Company was a disputed fact which had to be investigated. It is the case of the Appellant that there is a report of the auditing firm. Also the said finding of the High Court is contrary to the documents of the Respondent No. 1 itself. It is also urged that the High Court itself has permitted the investigation to go on in the petition under section 482. Secondly he pointed out that the impugned order was contrary to Section 14 of the IBC. He drew support from the judgment of this Court in P Mohanraj vs. M S. Shah Brothers Ispat Pvt. Ltd. in Civil Appeal No. 103518. According to him the whole purpose of the moratorium would be defeated if members of the previous management of the Corporate Debtor are left free to transfer the funds of the Corporate Debtor. The Respondent No. 1 was a related party of the Corporate Debtor. He reiterates that with the appointment of Appellant as the Resolution Professional under Section 25 has not been stricken by the remand by this Court of the appeal against the order admitting the application. Per contra Shri Harish Pandey Learned Counsel contended that the order may not be interfered by this Court. The Respondent No.1 was a related party and it was always known to be such related party. He referred to the fact that the Respondent No.1 was supplier of raw material to the Corporate Debtor. He pointed out goods worth more than Rs.2 crores have been supplied by it to the Corporate Debtor. Payments were being made. In fact a sum of more than Rs.39 lakhs is further due from the Corporate Debtor to the Respondent No. 1. It is emphasized as a MSME it would cause grave prejudice to it if the impugned order is set aside. It is the case of the Respondent No. 1 further that the business relationship between the Respondent No. 1 and Corporate Debtor has existed for more than 15 years. The Corporate Debtor has been declared a sick industry on 18.04.2006. It was nursed back by the Respondent No. 1. Our attention is drawn to the minutes of the first meeting of the Committee of Creditors dated 23.09.2019. The minutes reveal that committee of creditors observes that a substantial part of the raw materials is purchased from Respondent No.1 and that the relatives of the Corporate Debtor directors or shareholders hold more than 51 percent shareholding of the first respondent. It is further noted that the processes to assess the veracity and reasonableness of the transaction in such situation were let known and the purchases sales must be benchmarked against arm’s length transactions and open market transactions.It is the case of the Respondent No. 1 that right from the beginning it was known that the Respondent No. 1 was a related party. It is the further case of the Respondent No. 1 that its claim for over 6 crores of rupees was vetted verified and admitted by the Appellant. After the commencement of CIRP Respondent No. 1 had made regular substantial supplies to the Corporate Debtor for which the payment were being madeand has been defined by Regulations. Regulation 32 of the INSOLVENCY AND BANKRUPTCY BOARD OF INDIAREGULATIONS 2016 reads as The essential goods and services referred to in follows: Essential Supplies. section 14(2) shall mean i. Electricity ii. water iii. telecommunication services and iv. information technology services to the extent these are not a direct input to the output produced or supplied by the corporate Illustration Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes and not for generation of hydro electricity.” Also undoubtedly Section of Section 14 of the THE INSOLVENCY AND BANKRUPTCY CODE 2016 provides as follows: “Where the interim resolution professional or resolution professional as the case may be considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern then the supply of such goods or services shall not be terminated suspended or interrupted during the period of moratorium except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.” This provision was inserted with effect from 28.12.2019. No doubt under this provision goods or services not covered by Section 14(2) are also covered. The call however is to be taken by the IRP RP. Raw material supply could fall within the provision. The IRP RP must take a decision guided purely by the object of the IBC and the provisions and the factual matrix. With the appointment of Committee of Creditors a Resolution Professional is to be thereafter to conduct the resolution process and manage the operations. Section 23 makes it clear that his power is the same as the powers of the Interim Resolution Professional. Undoubtedly the Resolution Professional is bound to seek prior approval of the Committee of Creditors in maters covered by Section 28. We have to also in this context bear in mind that the High Court appears to have in passing the impugned order which is an interim order for that matter overlooked the salutary limits on its power under Section 482. The power under Section 482 may not be available to the Court to countenance the breach of a statuary provision. The words ‘to secure the ends of justice’ in Section 482 cannot mean to overlook the undermining of a statutory dictate which in this case is the provisions of Section 14 and Section 17 of the It would appear to us that having regard to the orders passed by the NCLT admitting the application under Section 7 and also the ordering of moratorium under Section 14 of the IBC and the orders which have been passed by the tribunal otherwise the impugned order of the High Court resulting in the Respondent No. 1 being allowed to operate the account without making good the amount of Rs 32.50 lakhs to be placed in the account of the Corporate Debtor cannot be sustained. The Learned Counsel for the Appellant has also no objection in the Respondent No. 1 being allowed to operate its account subject to it remitting an amount of Rs. 32.50 lakhs into the account of the Corporate Debtor. In such circumstances Appeal is allowed. The Impugned order is modified as follows: i. The Respondent No.1 is allowed to operate its account subject to it to first remitting into the account of the Corporate Debtor the amount of Rs 32.50 lakhs which stood paid to it by the management of the Corporate Debtor. The assets of the Corporate Debtor shall be managed strictly in terms of the provisions of the IBC. The Appellant as RP will bear in mind the provision of Section 14and the object of IBC. We however make it clear that our order shall not be taken as our pronouncement on the 28 issues arising from the FIR including the petition pending under Section 482 of the Cr.P.C. ii. We also make it clear that the judgment will not stand in the way of the Respondent No.1 pursuing its claim with regard to its entitlement to a sum of Rs.32.50 lakhs and any other sum from the Corporate Debtor or any other person in the appropriate forum and in accordance with law. There will be no order as to costs. ......................J. J. New Delhi April 22 2021. 

Summary: While addressing a dispute regarding the order of the High Court under IBC and the order of NCLAT, NCLT the Supreme Court held that as per section 482 of the IBC, the High Courts cannot support the breach of a statutory provision and undermine the dictate of a provision. This judgment was in the case of Sandeep Khaitan, Resolution Professional For National Plywood Industries Ltd. vs. JSVM Plywood Industries Ltd. &amp; Anr. [Cr.A.No.447/2021] by a Double Bench consisting of Hon’ble Justice Uday Umesh Lalit and Hon’ble Justice K.M. Joseph. The present appeal was against an order of the Guwhati High Court which allowed an interlocutory application filed by respondent no.1. the application allowed it to operate its bank account maintained with ICICI Bank, unfreeze the bank account of its creditor over which the lien was created, and the accounts which were frozen pursuant to the FIR. The facts of the case were that an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was admitted against the National Plywood Industries Ltd. (NPIL).  The appellant was the Interim Resolution Professional (IRP) and a moratorium was passed under section 14 of IBC. While the appellant was appointed as Resolution Professional (RP), Respondent no.1 claimed to be an operational creditor and claimed for amounts due to them from the Corporate Debtor before the appellant. The application filed by the former Managing director (MD) of the Corporate Debtor under section 7 IBC seeking an injunction on the activities of the respondent was disposed of. The appellant alleges that the former MD of the corporate debtor and Respondent no.1 engaged in an illegal transaction of RS. 32.50 Lakhs w/o the authority of appellant, thus violating section 14 IBC. The appellant alleged that the MD made a transaction of rs. 500 initially to Respondent no. 1 and then made a payment of the said amount from 4 transactions. Out of them, one was for Rs.3.29 lakhs from another account. Based on this the appellant filed a cyber complaint, an FIR, and an application under section 19 r/w section 23(2) of IBC alleging noncorporation. Later the ICICI bank also created a lien on the account of Respondent no.1. The NCLT order asked for the suspension of the board of the Corporate Debtor and the board was asked to return the amount withdrawn less the amount paid to the supplier. The learned Judge in the Impugned order reversed the above decisions on the condition that the respondent would refund the Rs.32.50 if required. After hearing the parties in the present appeal the Supreme Court observed that, apart from Rs. 32.50 lakhs which the respondent contend was the price of raw materials there was more than Rs.39 Lakhs still due. Further setting aside of the appellate order of NCLAT did not mean setting aside the order admitting the application. thus the essential grievance of the appellant is regarding the Rs.32.50 lakhs transaction which took place after the appellant was order to act according to the law. The Supreme on an analysis of the IBC observed, IBC had provisions that contemplated the resolution of insolvency and if impossible to wind up the corporate debtor. When an IRP has appointed the roles of the Board of Directors or partners stands suspended and as per section 17, their powers are also exercised by the professional. Further, the impact of the moratorium includes the prohibition of transferring, encumbering, alienation or disposing of by the corporate debtor of any of its assets. As per section 14(2) IBC and the IBC regulations, the goods and services are those which are essential for the functioning and are not a direct input to the output. It is on the IRP/RP to decide if the same is crucial for the functioning of the Corporate Debtor and therefore Raw Materials also could fall within the provision. The role of RP is however restricted to the extent of taking permission from the committee of creditors for matters under section  28.