Sangeetha Prathap

The National Company Law Tribunal (NCLT) Ahmedabad Bench has held that Mehsana Urban Co-operative Bank was not legally entitled to make deductions from the share and dividend accounts of Swastik Ceracon Limited during the Corporate Insolvency Resolution Process (CIRP), and that such deductions amounted to an unlawful recovery during a period when any recovery action is prohibited under the Insolvency and Bankruptcy Code. A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma ruled that these deductions were void and directed the bank to return ₹56 lakh with 10% interest per annum from the respective adjustment dates.

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The CIRP of Swastik Ceracon commenced on 15 January 2019, and Mehsana Urban Co-operative Bank participated in the Committee of Creditors as a financial creditor. Although the Resolution Plan was approved on 20 June 2022, the bank went on to transfer money from the corporate debtor’s accounts on five occasions between July 2019 and August 2021, totalling ₹56 lakh from dividend and share accounts. These deductions were challenged by the Successful Resolution Applicant, which pointed out that the bank had never disclosed any right of set-off in Form C or in the Information Memorandum during CIRP and that shares of the corporate debtor were shown as free assets without encumbrance. The applicant further pointed out that the bank also retained ₹20.37 lakh from fixed deposits kept as security for guarantees.

The bank resisted the application by arguing that once the Resolution Plan was approved, the Tribunal lost jurisdiction and that cooperative banking legislation permitted the bank to recover dues from shares and dividends. Swastik Ceracon maintained that the deductions constituted a clear breach of the moratorium under Section 14 and continued even beyond the approval of the Resolution Plan, thereby obstructing the implementation of a plan that had already been sanctioned. The applicant stressed that the deductions were never disclosed during CIRP, which deprived the Resolution Professional and the Committee of Creditors of information necessary to preserve asset value.

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The Tribunal rejected the bank’s argument on lack of jurisdiction and held that Section 60(5)(c) of the Code entitled the NCLT to adjudicate disputes arising out of the implementation of an approved Resolution Plan. It further held that insolvency set-off can operate only if it is disclosed expressly and recognised during CIRP, and not if asserted unilaterally at a later stage. The Bench noted that adjustments carried out by the bank during and after CIRP directly conflicted with the moratorium, depleted the value of the corporate debtor, and undermined the distribution framework under the Code. It emphasised that dividend and share amounts could not be appropriated because shares were protected assets during resolution and the bank had made no disclosure of its alleged right.

On the issue of the retained fixed deposit amount, however, the Tribunal differentiated margin money kept against pre-CIRP invoked bank guarantees from share and dividend balances. It held that such margin money is not a protected asset and therefore does not transfer to the Successful Resolution Applicant under the insolvency framework. Accordingly, the bank could retain the margin money amount, but could not justify the deductions made from the share and dividend accounts.

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In conclusion, the Tribunal partly allowed the application. Mehsana Urban Co-operative Bank was ordered to refund ₹56,00,000 together with 10% interest per annum from the respective dates of adjustment, whereas the request for refund of ₹20,37,767.85 retained as margin money was rejected. The ruling ultimately affirms that dividend and share adjustments during CIRP are void and must be reversed, while the bank remains entitled to retain the fixed deposits kept as margin for pre-CIRP bank guarantees.

Appearance

For Appellants: Advocates Tirth Nayak, Yashraj Champawat

For Respondent: Advocate Kamlesh Patel

Cause Title: Swastik Ceracon Ltd. v. Mehsana Urban Co-Operative Bank Ltd.

Case No: IA/370(AHM)2025 In CP(IB) 175 of 2018

Coram: Judicial Member Shammi Khan, Technical Member Sanjeev Sharma