Suspended Directors Liable for Clearing Cheques During Moratorium, Rules NCLAT

Suspended Directors Liable for Clearing Cheques During Moratorium, Rules NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT), New Delhi, upheld an order of the NCLT directing the suspended directors of Satra Properties (India) Ltd. to refund ₹91 lakh with interest for permitting cheque encashment after the commencement of moratorium. The tribunal held that the payments were made in violation of Section 14 of the Insolvency and Bankruptcy Code (IBC) and amounted to transactions intended to defraud creditors under Section 66(2).

Factual background

Satra Properties was undergoing insolvency proceedings initiated under Section 7 of the IBC in 2019. The petition was reserved for orders on February 19, 2020. Despite near certainty of admission, the suspended directors issued two cheques dated July 31, 2020 to Darshan Developers, even though the company’s bank accounts held negligible balances.

On August 3, 2020, CIRP was admitted, and the moratorium commenced. The following day, fresh credits of ₹50 lakh and ₹41 lakh were received into the corporate debtor’s accounts. These credits were used to clear the cheques on August 6, 2020. The NCLT held that the payment was irregular and directed the suspended directors to refund the amount with interest.

Procedural Background

The Interim Resolution Professional (IRP) moved an application under Section 66(2) before the NCLT, Mumbai, alleging fraudulent and wrongful transactions. The NCLT allowed the application and ordered the directors to jointly and severally refund the amount. The suspended directors challenged this order before the NCLAT.

Issues

1. Whether the clearance of cheques after commencement of moratorium violated Section 14 of the IBC.

2. Whether such encashment constituted a fraudulent transaction attracting Section 66(2).

3. Whether the suspended directors could escape liability by relying on a personal insolvency moratorium under Section 96.

4. Whether the transaction could be justified as part of a bona fide MoU for project development.

Contentions of the Parties

Appellants (suspended directors): The cheques were issued pursuant to a December 2019 MoU with Shreeniwas Developers for a slum rehabilitation project. No personal benefit accrued to the directors; the transaction was bona fide. The IRP initially treated the payment as legitimate. Section 66(2) requires specific intent to defraud, which was absent. Proceedings were barred due to an interim moratorium under Section 96 arising from a personal insolvency case against one director.

Respondent (resolution professional): The cheques were issued when insolvency admission was imminent, showing mala fide intent. The corporate debtor’s accounts had negligible balance on the cheque date; payment was made solely from post-moratorium credits. The MoU did not justify payment to Darshan Developers, whose partner was related to one director. Section 96 moratorium is irrelevant to Section 66 proceedings. The transaction violated Section 14 and caused wrongful loss to creditors.

Reasoning and Analysis

The Bench of Judicial Member Justice N Seshasayee and Technical Member Arun Baroka held that the cheque encashment on August 6, 2020 occurred after the moratorium commenced on August 3, 2020 and was therefore in clear violation of Section 14. It noted that the issuance of cheques during a period when insolvency admission was reserved invited suspicion, particularly as the payments were made using fresh credits received after commencement of CIRP. The tribunal found no credible link between the MoU and the payment to Darshan Developers and held that the directors failed to exercise due diligence to minimise creditor losses, satisfying the ingredients of Section 66(2). On the Section 96 objection, the tribunal clarified that the personal insolvency moratorium does not restrict NCLT from proceeding against directors for fraudulent or wrongful trading. Upholding the NCLT’s order, it ruled that interest at 12% was justified as Section 66 empowers the adjudicating authority to order suitable contribution to the corporate debtor’s estate.

Implications

The ruling reinforces that directors cannot authorise or facilitate payments once the moratorium begins, even if cheques were issued earlier. It establishes that any post-moratorium transactions that diminish the corporate debtor’s estate may amount to fraudulent or wrongful trading. The judgment also clarifies that Section 96 moratorium for personal guarantor proceedings cannot shield directors from liability under Section 66. This decision strengthens creditor protection and underscores strict adherence to moratorium prohibitions.

In this case the appellant was represented by Mr. Malak Bhatt, Ms. Neeha Nagpal and Ms. Somya Saxena, Advocates. Meanwhile the respondent was represented by Mr. Divyanshu Rai, Ms. Taruna, Mr. Shubh Gautam, Mr. Vishal Sharma, A. Gulati and Ms. Vaishali Patrikar for R-1.