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TMI Blog2024 (5) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the creditor of the Corporate Debtor cannot avail of the benefit of set-off during this interregnum by claiming that moratorium had ceased to exist. Whether the Respondent in the given factual matrix is liable to refund the amount which has been set off against income tax dues? - HELD THAT:- In this case, the set-off exercise undertaken by the Respondent preceded the liquidation orders, hence could not have been allowed by the Adjudicating Authority. It is also strenuously contended that the Income Tax Department cannot claim the status of a secured creditor - reference made to the judgement of the Hon ble Apex Court in Bharti Airtel Ltd vs Vijaykumar V. Iyer [ 2024 (1) TMI 187 - SUPREME COURT ] wherein after explaining the contours and different meanings that can be ascribed to the term set-off , it was held that set-off done at the behest of any entity against a company while undergoing CIRP is violative of the basic principles and provisions of IBC. When it is settled law that Regulation 29 of the Liquidation Regulations does not apply to Part II of the IBC, there are no hesitation in holding that Regulation 29 comes into play only after the liquidation order is passed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application filed by the Liquidator seeking direction to the present Respondents for refund of an amount of Rs. 90,42,174/- which had been adjusted by them against outstanding tax liability of the Corporate Debtor while moratorium under Section 14 of the IBC was in effect. Aggrieved by this order, the present appeal has been preferred by the Liquidator Appellant. 2. The chronological sequence of events of the present case which are necessary to be noticed for consideration of the matter by us is as hereunder: M/s Kotak Urja Pvt Ltd was admitted into Corporate Insolvency Resolution Process ( CIRP in short) on 18.11.2019. The present Appellant was appointed as the Resolution Professional ( RP in short). The RP had informed Respondent about the admission of the Corporate Debtor into CIRP following which the Respondent filed a claim with the RP for an amount of Rs.11.59 cr on 20.01.2020. The said claim was admitted by the RP. While moratorium was in force, on 10.02.2021, an amount of Rs.90.42 lakhs received towards tax refund was adjusted by the Respondent against outstanding tax demands. The Committee of Creditors ( CoC in short) passed a resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering away of the liquidation estate. 5. It was also asserted that the Adjudicating Authority had misinterpreted the statutory provisions of IBC in holding that the adjustment of tax refund against tax dues was an exercise of the right to realize security interests by a secured creditor. It was pointed out that in terms of Section 52 of the IBC, the option to realize security interest becomes available to a secured creditor only after liquidation proceedings have commenced. In the present case while the liquidation order was passed on 03.10.2022, the purported realization of security interest by way of adjustment of tax refund took place on 10.02.2021 which clearly preceded the commencement of liquidation and hence impermissible. 6. Contention was raised that the procedure prescribed in Section 52 of the IBC was also not followed by the Respondent while adjusting tax refund against tax dues in that they had not filed Form D of Schedule II under Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016. It was submitted that any secured creditor intending to realise security interests is first required to inform the Liquidator after identifying the assets subjected to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation order was passed, amounted to violation of the provisions of moratorium contained under Section 14 of the IBC and, if so, whether the Respondent is liable to refund the amount which had been set off. 12. For a proper appreciation of the issue at hand, we may begin by first perusing the provisions contained in Section 14 of IBC which is as extracted hereunder: 14. Moratorium - (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:- (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or liquidation order, as the case may be. 13. From a bare reading of Section 14(1)(a), (b) and (c) of the IBC, the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be a stay on the commencement and continuation of all legal proceedings against the Corporate Debtor and prohibition of action whatsoever of foreclosure, recovery or enforcement of any 'security interest' which has been created by the corporate debtor vis-a-vis its property. Further, there shall be no transfer, encumbrance, alienation or disposal of the assets or any legal right or beneficial interests by the corporate debtor during the moratorium. The logical corollary that follows is that any adjustment of any tax refund amount during moratorium period is not permitted in terms of the above provisions. 14. The fundamental principle underlying insolvency law as codified in IBC is that insolvency proceedings are collective proceedings addressing the interests of all the stakeholders including the creditors, which seeks to protect, preserve and maximise the value of the assets of the distressed Corporate Debtor while simultaneously providing brea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of moratorium shall take effect from the date of order of the commencement of CIRP and continue till the completion of the CIRP. The proviso to the said clause further amplifies that moratorium shall cease to have effect 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. 18. Applying the provisions contained in Section 14 of IBC to the factual matrix of the present case, we have no reasons to disagree with the Respondent that at the time when the tax set-off was carried out, the maximum time period for CIRP stood already crossed. Be that as it may, we also notice that at that point of time when the set-off exercise was carried out, neither was the resolution plan approved nor the liquidation order passed. Thus at the best, we may agree that in the present matter, CIRP period had come to an end on 21.12.2020, however, the CIRP process kept continuing until the liquidation order was passed on 03.10.2022. To say that merely on completion of permissible CIRP time-period, the CIRP process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , namely, (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off. It is observed that the streams of common law and equity on the right of set-off have flown together and have so combined as to be in the modern era indistinguishable from one another. It is necessary to briefly explain the contours of contractual set-off, statutory/legal setoff, equitable set-off and insolvency set-off. 12. At the outset we should record, that there is a difference between the Corporate Insolvency Resolution Process and the liquidation process of the IBC. The Corporate Insolvency Resolution Process focuses on and fosters rehabilitation, revival and resolution of the corporate debtor, whereas the liquidation process focuses on the constellation of assets of the company in liquidation, and distribution and payment to the creditors from the liquidation estate in terms of the order of preference set out in the insolvency statute. 13. Unlike the provisions of the Companies Act, 1956 or the Companies Act, 2013, IBC in the case of Corporate Insolvency Resolution Process does not give the indebted creditors the right to set-off agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BBI (Liquidation Process) Regulations, 2016 ( Liquidation Regulations in short) be applied to CIRP. 21. When it is settled law that Regulation 29 of the Liquidation Regulations does not apply to Part II of the IBC, we have no hesitation in holding that Regulation 29 comes into play only after the liquidation order is passed by the Adjudicating Authority and not at any moment earlier than that. Given this position, we hold that the Adjudicating Authority committed grave error to hold that moratorium had come to a halt during the period of vacuum from the expiry of the permitted CIRP period till passing of the liquidation order and that the Respondent was entitled to conduct the set-off exercise to realise security interest in terms of Section 52 of the IBC. Furthermore, the option to realise security interests becomes available to a secured creditor only after liquidation proceedings commences in terms of Section 33 of IBC with the passing of liquidation order. It is interesting to note that the definition clause under Section 3(31) the IBC provides that a security interest shall include an interest that has been created for a secured creditor by way of a transaction that secured pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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