Section 14 of IBC does not bar classification of account of CD during pendency of CIRP: NCLT [Read Order]

The National Company Law Tribunal (NCLT) Mumbai bench held that section 14 of the Insolvency & Bankruptcy Code, 2016 does not bar such classification as such classification is neither in nature of the institution of suits or continuation of pending suits or proceedings against the corporate debtor or an action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property.

The present Interlocutory Application has been filed by the Rolta India Ltd, the Applicant/Resolution Professional of the Corporate Debtor seeking directions against the Respondent Bank, UBI to set aside the Letter dt. 25.03.2025, issued by the Respondent Bank in respect of classifying the Corporate Debtor’s account as Fraud in contravention of the Moratorium that is in operation as per Section 14 of the Insolvency and Bankruptcy Code, 2016.

It is submitted that the Respondent Bank is also a part of the Committee of Creditors and the Committee of Creditors has approved the Resolution Plan dt. 22.04.2024 with 100% of voting shares and the same is at the conclusionary stage and effect of the impugned Notice may cause unnecessary impediment in the smooth conclusion of the Process of the Corporate Insolvency Resolution Process of the Corporate Debtor.

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The bench of Sh. Prabhat Kumar (Technical Member) and Justice Virendrasingh Bisht (Retd.) (Judicial Member) has held that the Bank can classify a Corporate Debtor's account as fraud even while a Corporate Insolvency Resolution Process is ongoing and the Section 14 of the Insolvency & Bankruptcy Code, 2016 does not bar such classification as such classification is neither in nature of the institution of suits or continuation of pending suits or proceedings against the corporate debtor or an action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property.

The Corporate Insolvency Resolution Process and Fraud Identification are separate processes with different objectives. Moratorium under Sections 14 and 96 of the Insolvency and Bankruptcy Code protects the Corporate Debtor's assets during Corporate Insolvency Resolution Process; but does not prevent the Bank from identifying and Classifying a Fraudulent Account, which is purely an administrative decision of the Bank.

The Tribunal refused to interfere in bank's communication classifying a Corporate Debtor's account as fraud during the Corporate Insolvency Resolution Process. The bench dismissed the application.

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