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

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

The National Company Law Appellate Tribunal ('NCLAT') Delhi, comprising Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member), and Mr. Arun Baroka (Technical Member), ruled that the offsetting or adjustment of demands with refunds by the Income Tax Department during the period between the expiration of the Corporate Insolvency Resolution Process (CIRP) timeline and the issuance of the Liquidation Order under Section 33 of the Insolvency and Bankruptcy Code, 2016 ('IBC'), constitutes a breach of the moratorium stipulated in Section 14 of the IBC.

The Resolution Professional (RP) of Kotak Urja Pvt. Ltd. (Corporate Debtor) notified the Income Tax Department (Respondent) that the Corporate Debtor had been admitted into the CIRP on 18.11.2019. Following this notice, on 20.01.2020, the Income Tax Department filed a claim of Rs. 11.59 crores, which was admitted by the RP.

On 10.02.2021, the Income Tax Department offset an amount of Rs. 90.42 lakhs, received as a tax refund, against outstanding tax demands. However, this offsetting occurred after the conclusion of the CIRP on 21.12.2020. Subsequently, the RP filed an application for the liquidation of the Corporate Debtor on 18.05.2021, as resolved by the CoC.

During the liquidation proceedings, the Resolution Professional (RP) corresponded with the Income Tax Department requesting a refund of the adjusted amount. At the time of the offset, no resolution plan had been approved, and no liquidation order had been issued.

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

In its appeal against the Order dated 16.06.2023 by NCLT Mumbai, where the RP's application for directions to the Income Tax Department for the refund was dismissed, the RP approached NCLAT Delhi.

The NCLAT Delhi ruled in favor of the appeal, stating that the set-off/adjustment of demand with refund by the Income Tax Department during the period after the expiration of the CIRP timeline but before the issuance of the Liquidation Order under Section 33 of the IBC constitutes a violation of the moratorium under Section 14 of the IBC.

The Appellate Tribunal underscored the significance of the moratorium under the IBC, emphasizing its role in safeguarding the assets of the Corporate Debtor from depletion or misuse. It ensures that individual creditors cannot take actions to enforce their claims to the detriment of others. NCLAT further highlighted that Section 14(1)(a), (b), and (c) of the IBC clearly prohibits any adjustment of tax refund amounts during the moratorium period.

Regarding the duration of the moratorium, the Tribunal noted that Section 14(4) of the IBC explicitly states that the moratorium order becomes effective from the commencement of the CIRP and remains in force until the completion of the CIRP. Additionally, the proviso to this section specifies that the moratorium ceases either upon the confirmation of the resolution plan approved by the CoC by the Adjudicating Authority or upon the Adjudicating Authority issuing a liquidation order for the gathering and distribution of the Corporate Debtor's assets among its creditors.

Thus, the NCLAT emphasized that the NCLT Mumbai had made a significant error in concluding that the moratorium had ceased during the interim period between the conclusion of the CIRP period and the issuance of the liquidation order. As a result, the Income Tax Department was incorrectly deemed entitled to carry out the set-off to realize security interest under Section 52 of the IBC.

Furthermore, the NCLAT ruled that secured creditors can only exercise the option to realize security interests after the initiation of liquidation proceedings, as stipulated in Section 33 of the IBC, which mandates 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.

Thus, the NCLAT emphasized that the NCLT Mumbai had made a significant error in concluding that the moratorium had ceased during the interim period between the conclusion of the CIRP period and the issuance of the liquidation order. As a result, the Income Tax Department was incorrectly deemed entitled to carry out the set-off to realize security interest under Section 52 of the IBC.

Furthermore, the NCLAT ruled that secured creditors can only exercise the option to realize security interests after the initiation of liquidation proceedings, as stipulated in Section 33 of the IBC, which mandates 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 NCLAT noted that the 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 confined to the specific circumstances of that case. In Rainbow Papers, the Operational Creditor was recognized as a secured creditor based on the pertinent statutory provisions of the Gujarat Value Added Tax, 2003. However, the Income Tax Department in the present case lacks a similar statutory basis to assert secured Operational Creditor status.

Additionally, the NCLAT highlighted that the refund from the Income Tax Department was considered an asset of the Corporate Debtor and should be treated as part of the liquidation assets. Therefore, adjusting the amount of Rs. 90 lakhs towards tax demands before liquidation constituted a recovery by the Income Tax Department, thus violating the moratorium.

In conclusion, the 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. Furthermore, it permitted the Income Tax Department to file their claim with the Liquidator for the recovery of their dues following the Liquidation Regulations.