NCLAT Delhi: Set-Off With Refund Of Claim Between Expiry Of CIRP And Before Passing Liquidation Order Amounts To Violation Of Moratorium Under IBC

Background Facts:

The Resolution Professional ('RP') of Kotak Urja Pvt. Ltd. (Corporate Debtor) informed the Income Tax Department (Respondent) that the Corporate Debtor was admitted into the CIRP on 18.11.2019. On 20.01.2020, following the said notice, the Income Tax Department filed its claim of Rs. 11.59 crores which has been admitted by the RP.

On 10.02.2021, the Income Tax Department adjusted an amount of Rs. 90.42 lakhs received as a tax refund against outstanding tax demands. However, the said adjustment was done after the CIRP ended on 21.12.2020. Subsequently, the RP filed an application for the liquidation of the Corporate Debtor on 18.05.2021, as decided by the Committee of Creditors (“CoC”).

During the pendency of the liquidation, the RP sent letters to the Income Tax Department on requesting a refund of the adjusted amount. At the time of the set-off, no resolution plan had been approved, nor had any liquidation order been issued.

The RP then filed an Interim Application before NCLT Mumbai seeking directions for the Income Tax Department to refund the Rs. 90.42 lakhs adjusted against the Corporate Debtor's alleged tax liability. On 03.08.2022, the liquidation order was passed and on 01.02.2023, the Income Tax Department submitted a claim of Rs. 10.69 crore to the Liquidator, which was admitted.

The RP has filed the appeal against NCLT Mumbai's Order dated 16.06.2023 whereby it dismissed the RP's application for directions to the Income Tax Department for the refund.

NCLAT Verdict:

The NCLAT Delhi allowed the appeal and held that the set-off/adjustment of demand with refund by the Income Tax Department during the intervening period when the CIRP timeline period has expired but before passing of Liquidation Order under Section 33 of IBC amounts to a violation of moratorium under Section 14 of the IBC.

The Appellate Tribunal noted that the moratorium under the IBC functions to safeguard and protect the Corporate Debtor's assets from being diminished or dissipated, ensuring that no individual creditor can initiate actions to enforce their claims to the detriment of others. Further on a bare reading of Section 14(1)(a), (b), and (c) of the IBC, NCLAT highlighted that any adjustment of any tax refund amounts during the moratorium period is not allowed as per the provisions of IBC.

Regarding the duration of the moratorium under the IBC, it was noted that Section 14(4) of the IBC explicitly states that the moratorium order takes effect from the date the CIRP commences and continues until the CIRP is completed. Moreover, the proviso to this section clarifies that the moratorium ends once the Adjudicating Authority confirms the resolution plan as approved by the CoC or until the Adjudicating Authority passes a liquidation order requiring the assets of the Corporate Debtor to be gathered and distributed among its creditors.

NCLAT observed that the CIRP period had concluded on 21.12.2020. However, the CIRP process continued until the liquidation order was issued on 03.10.2022. At the time when the set-off was conducted, neither a resolution plan had been approved nor had a liquidation order been passed.

Further, the Supreme Court in its decision in Bharti Airtel Ltd vs. Vijaykumar V. Iyer and Ors. ruled that set-offs initiated by any entity against a company undergoing CIRP violate the fundamental principles and provisions of IBC. It referenced Section 238 of the IBC, emphasizing that the provisions relating to CIRP in Chapter II, Part II of the IBC do not recognize the principle of insolvency set-off. Additionally, the insolvency set-off described in Regulation 29 of the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) does not apply to CIRP.

NCLAT noted that it is well-established that Regulation 29 of the Liquidation Regulations is applicable only after a liquidation order is passed by the Adjudicating Authority, not before. Further, even if the CIRP period had ended without an approved resolution plan and the liquidation order had not yet been passed, creditors of the Corporate Debtor could not claim the benefit of set-off during this interim period by arguing that the moratorium had ceased.

Thus, NCLAT highlighted that NCLT Mumbai made a significant error in determining that the moratorium had ended during the gap between the expiration of the CIRP period and the issuance of the liquidation order. Consequently, the Income Tax Department was incorrectly deemed entitled to perform the set-off to realize security interest under Section 52 of the IBC.

NCLAT also ruled that secured creditors can only exercise the option to realize security interests after liquidation proceedings have commenced, as specified in Section 33 of the IBC, which requires the issuance of a liquidation order.

Regarding the issue of whether the Income Tax Department, as a government authority, qualifies as a secured creditor and is entitled to realize security interest, Section 3(31) of the IBC defines a security interest as an interest created for a secured creditor through a transaction that secures the performance of an obligation.

The Appellate Tribunal noted that Supreme Court in its judgment in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. & Ors. clarified that the precedent set in Rainbow Papers should be limited to the specific facts of that case. In Rainbow Papers, the Operational Creditor was deemed a secured creditor based on the relevant statutory provisions of the Gujarat Value Added Tax, 2003. However, the Income Tax Department in the current case does not have a similar statutory basis to claim secured Operational Creditor status.

NCLAT also pointed out that the refund from the Income Tax Department was considered an asset of the Corporate Debtor and should be included in the liquidation assets. Therefore, adjusting the amount of Rs 90 lakhs towards tax demands before liquidation constituted a recovery by the Income Tax Department, violating the moratorium.

In conclusion, NCLAT Delhi directed the Income Tax Department to refund the sum of Rs. 90 Lakhs which was set off against the Corporate Debtor's outstanding tax dues, to the Liquidator within two weeks from the date of the order. It has also permitted them to file their claim with the Liquidator for the recovery of their dues following the Liquidation Regulations.

Case Title: Mr. Devarajan Raman Liquidator of Kotak Urja Pvt. Ltd. vs. Principal Commissioner Income Tax and Ors.

Case No.: Company Appeal (AT) (Insolvency) No. 977 of 2023

Counsel for Appellant: Ms. Anjali Sharma, Mr. Deepak Bashta and Ms. Shila Taware, Advocates.

Counsel for Respondent: Mr. Sanjay Kumar, Ms Easha and Ms. Hemlata Rawat, Advocates.

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