CASE BRIEF: Sandeep Khaitan vs Jsvm Plywood Industries Ltd.

CASE NAME	Sandeep Khaitan vs Jsvm Plywood Industries Ltd.
CITATION	CRIMINAL APPEAL NO.447 OF 2021
COURT	In the Supreme Court of India.
Bench	Uday Umesh Lalit, Indira Banerjee, K.M. Joseph
Date of Decision	22 April, 2021

Introduction

The case of Sandeep Khaitan vs. Jsvm Plywood Industries Ltd. marks a critical development in India’s evolving insolvency landscape. This Supreme Court ruling delves into the interplay between the Insolvency and Bankruptcy Code (IBC), 2016, and the obligations of corporate debtors during the Corporate Insolvency Resolution Process (CIRP).

The dispute arose when Sandeep Khaitan, acting as the Resolution Professional for National Plywood Industries Ltd. (NPIL), challenged financial transactions conducted by the suspended management of NPIL in violation of the moratorium under Section 14 of the IBC. Specifically, Khaitan alleged that a sum of ₹32.50 lakhs was unlawfully transferred to Jsvm Plywood Industries Ltd., an operational creditor, without authorization from the Resolution Professional. The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) examined the matter before it was escalated to the Supreme Court.

By adjudicating key principles of financial accountability, creditor rights, and procedural compliance under the IBC, the Supreme Court reinforced the sanctity of the insolvency framework. This decision underscores the judiciary’s role in ensuring transparency and discipline in corporate insolvency proceedings, thereby strengthening the regulatory fabric of India’s insolvency regime.

FACTS

The appellant, Sandeep Khaitan, was appointed as the Resolution Professional (RP) for National Plywood Industries Ltd. (NPIL) after the National Company Law Tribunal (NCLT), Guwahati, admitted an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, on August 26, 2019. The admission of the application triggered a moratorium under Section 14 of the IBC, imposing restrictions on financial transactions involving NPIL.

Jsvm Plywood Industries Ltd. (the respondent) claimed to be an operational creditor of NPIL, asserting dues from past business transactions. On April 18, 2020, despite the ongoing moratorium, NPIL’s suspended management transferred ₹32.50 lakhs to Jsvm Plywood through multiple online transactions. These payments were made without the authorization of the RP in alleged violation of Section 14 of the IBC. Upon discovering the transactions, the RP raised objections and filed a cyber complaint on April 23, 2020. Subsequently, on April 27, 2020, he lodged a First Information Report (FIR), leading to the freezing of Jsvm Plywood’s bank account by ICICI Bank.

Jsvm Plywood challenged the freezing of its account, filing an interlocutory application before the High Court under Section 482 of the Criminal Procedure Code (CrPC). The company contended that it had a long-standing business relationship with NPIL and that the payment represented dues for raw materials supplied during the Corporate Insolvency Resolution Process (CIRP). The respondent further argued that it had provided goods worth over ₹2.7 crore to NPIL during the CIRP, with outstanding payments exceeding ₹39 lakhs. Additionally, Jsvm Plywood claimed that its classification as a related party had previously been acknowledged in the Committee of Creditors (CoC) minutes.

The High Court ruled in favor of Jsvm Plywood, allowing it to operate its bank account and lifting the lien, subject to the condition that the company furnish an indemnity bond to refund ₹32.50 lakhs if required. The RP, dissatisfied with this order, appealed to the Supreme Court, asserting that the High Court’s ruling undermined the statutory framework of the IBC and permitted a transaction in violation of the moratorium.

The Supreme Court was called upon to address crucial questions regarding the enforcement of the moratorium, the role of the Resolution Professional in overseeing financial transactions, and the broader implications of unauthorized payments during the CIRP. The case underscored the judiciary’s role in upholding procedural discipline and financial integrity within India’s insolvency resolution framework.

ISSUES

Whether the transfer of ₹32.50 lakhs by the suspended management of National Plywood Industries Ltd. (NPIL) to Jsvm Plywood Industries Ltd. during the moratorium period violated Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.
Whether the High Court’s order allowing Jsvm Plywood Industries Ltd. to operate its bank account, despite the pending investigation and the Resolution Professional’s objections, was legally justified under the IBC framework.
Whether the Resolution Professional’s authority under Sections 17 and 25 of the IBC was undermined by permitting a transaction that bypassed the Corporate Insolvency Resolution Process (CIRP) and disregarded procedural compliance.

ARGUMENTS FROM BOTH SIDES

Arguments by the petitioners

The petitioner argued that the transfer of ₹32.50 lakhs by the suspended management of National Plywood Industries Ltd. (NPIL) to Jsvm Plywood Industries Ltd. was a clear violation of the moratorium imposed under Section 14 of the IBC. Once the CIRP began, all financial transactions required approval from the Resolution Professional, which was not obtained in this case.
The petitioner contended that under Sections 17 and 25 of the IBC, the Resolution Professional had exclusive authority to manage NPIL’s assets and financial transactions. Allowing unauthorized transfers during CIRP not only undermined his statutory powers but also set a dangerous precedent for similar violations.
It was argued that the High Court exceeded its jurisdiction under Section 482 of the CrPC by interfering with the CIRP process. The IBC provides a self-contained mechanism for resolving such disputes through NCLT and NCLAT, and any deviation from this framework disrupts the insolvency resolution mechanism.

Arguments by the Respondents

The respondent contended that the ₹32.50 lakh payment was made against raw materials supplied to NPIL during the CIRP and was a legitimate business transaction. It argued that the moratorium should not prevent the payment of dues for essential supplies required to keep NPIL operational.
Jsvm Plywood emphasized that it had been a supplier to NPIL for over 15 years and had outstanding claims exceeding ₹39 lakhs. The payment in question was merely a part of its total dues, and withholding the amount would cause financial distress to a Micro, Small, and Medium Enterprise (MSME).
The respondent supported the High Court’s ruling, arguing that the court had imposed reasonable safeguards by requiring an indemnity bond. It maintained that freezing its account indefinitely was unjustified when no conclusive finding of wrongdoing had been made.
Jsvm Plywood denied any collusion with NPIL’s suspended management and argued that there was no intent to circumvent the CIRP process. It maintained that payments were made in the ordinary course of business and did not amount to fraudulent or preferential transactions under the IBC.

DECISION

In Sandeep Khaitan vs. Jsvm Plywood Industries Ltd., the Supreme Court examined key issues concerning the enforcement of the moratorium, the authority of the Resolution Professional, and the integrity of the insolvency resolution process under the Insolvency and Bankruptcy Code (IBC), 2016.

The Court ruled that the transfer of ₹32.50 lakhs by the suspended management of National Plywood Industries Ltd. (NPIL) to Jsvm Plywood Industries Ltd. during the moratorium period was in violation of Section 14 of the IBC. It reaffirmed that once CIRP is initiated, financial transactions must be conducted strictly under the supervision of the Resolution Professional. Unauthorized payments made in disregard of this requirement undermine the resolution process and disrupt equitable treatment among creditors.

Furthermore, the Court held that the High Court erred in lifting the lien on Jsvm Plywood’s bank account, as it allowed the company to retain funds that were subject to dispute and a pending investigation. The ruling emphasized that judicial intervention under Section 482 of the CrPC should not override the specialized mechanisms of the IBC.

Accordingly, the Supreme Court modified the High Court’s order, directing Jsvm Plywood to first return the ₹32.50 lakhs to NPIL’s account before being allowed to operate its bank account. The decision reinforced the primacy of the IBC framework, ensuring that CIRP remains fair, transparent, and compliant with statutory mandates, thereby upholding the integrity of India’s insolvency regime.

CONCLUSION

The Supreme Court’s decision in Sandeep Khaitan vs. Jsvm Plywood Industries Ltd. underscores the importance of procedural discipline, statutory compliance, and the role of the Resolution Professional (RP) in safeguarding the integrity of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016.

A key aspect of the ruling was the Court’s firm stance on enforcing the moratorium under Section 14 of the IBC. By declaring the ₹32.50 lakh transfer unauthorized, the Court reinforced the principle that financial transactions during CIRP must adhere strictly to the regulatory framework. This decision serves as a reminder that any deviation from the RP’s oversight can undermine creditor rights and disrupt the insolvency resolution process.

Additionally, the Court’s intervention highlights the judiciary’s role in preventing undue interference in CIRP matters. By modifying the High Court’s order and directing the return of the disputed amount, the Supreme Court reinforced the principle that judicial intervention under Section 482 of the CrPC must align with the IBC’s specialized framework. This ruling ensures that insolvency proceedings remain within the jurisdiction of NCLT and NCLAT, preserving the efficiency and purpose of the IBC.

This case sets a crucial precedent in Indian insolvency law, emphasizing that compliance with the IBC is not merely procedural but fundamental to maintaining fairness and transparency in corporate resolution processes. It reinforces the RP’s authority and protects the IBC’s objectives from being diluted by unauthorized financial dealings.