2022 (1) TMI 263 - AT - Insolvency and Bankruptcy

Right of bank to claim priority on redemption of FD - Seeking transfer of amount payable (including interest accrued thereon) on closure of Fixed Deposits to the account held by the Corporate Debtor with IDBI Bank - CIRP proceedings under process - HELD THAT - From the perusal of Clause 10(c) of the Facility Agreements (at page 86 of the Appeal Paper Book), the Appellant Bank is required to first ask from the Corporate Debtor to furnish additional security - It is an admitted fact that the Appellant has failed to place on record any document to establish that a request was ever made for creating additional security in terms of Clause 10(c). From the perusal of the Clause 14 of the Facility Agreements which states that in the event of default in repayment of the financial facilities, the Appellant has the right to take possession of Charged Assets - Fixed Deposits were never charged to the Appellant neither originally as Charged Assets nor subsequently as Additional Security , hence the Bank has no right over these Fixed Deposits even when loan is recalled by the Bank. No such charge was registered by the Corporate Debtor or even by the Appellant in terms of Section 77 of the Companies Act, 2013. Appeal dismissed.

Issues Involved:
1. Whether the Fixed Deposits were charged assets or additional security under the Facility Agreements.
2. Whether the Appellant Bank has the right of set-off or lien over the Fixed Deposits.
3. Whether the moratorium under Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016, bars the enforcement of security interests.
4. Whether the Resolution Professional had the authority to request the closure of Fixed Deposits and transfer of funds.

Issue-wise Detailed Analysis:

1. Whether the Fixed Deposits were charged assets or additional security under the Facility Agreements:

The Appellant Bank argued that the Fixed Deposits were part of the security for the loans provided to the Corporate Debtor and were covered under the "Additional Security" clause of the Facility Agreements. However, the Respondent No. 1 contended that the Fixed Deposits were never offered as additional security and that the Appellant Bank failed to provide any document proving a request for additional security as required by Clause 10(c) of the Facility Agreements. The Tribunal found that the Fixed Deposits were neither originally charged assets nor subsequently additional security, and no charge was registered under Section 77 of the Companies Act, 2013.

2. Whether the Appellant Bank has the right of set-off or lien over the Fixed Deposits:

The Appellant Bank claimed a right of set-off under Clause 18 of the Facility Agreements, which allows the bank to set off any indebtedness or liability of the borrower. However, the Respondent No. 1 argued that the right of set-off was not invoked at the time of the loan recall notice and was only exercised after the initiation of the Corporate Insolvency Resolution Process (CIRP). The Tribunal observed that the right of set-off was not exercised timely and that the Fixed Deposits were not subject to any lien, as evidenced by the balance certificates issued by the bank.

3. Whether the moratorium under Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016, bars the enforcement of security interests:

The Respondent No. 1 argued that the moratorium under Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016, prevents the enforcement of any security interest in respect of the Corporate Debtor. The Tribunal agreed, citing precedents that no recovery action in the form of lien or set-off can be exercised by banks to settle pre-CIRP dues once a moratorium is in place.

4. Whether the Resolution Professional had the authority to request the closure of Fixed Deposits and transfer of funds:

The Respondent No. 1, acting as the Resolution Professional, requested the closure of the Fixed Deposits and the transfer of funds to meet the expenses of the Corporate Debtor as a going concern. The Tribunal found that the Resolution Professional was within their rights to make such a request, especially since the Fixed Deposits were not subject to any valid lien or charge by the Appellant Bank.

Conclusion:

The Tribunal concluded that the Fixed Deposits were not charged assets or additional security under the Facility Agreements, and the Appellant Bank did not have a valid right of set-off or lien over them. The moratorium under Section 14(1)(c) barred any enforcement of security interests, and the Resolution Professional was authorized to request the closure and transfer of the Fixed Deposits. Consequently, the Tribunal affirmed the order of the Adjudicating Authority and dismissed the appeal with no order as to costs.

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