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Banks (Finance)

NCLT Ruling Allows Banks to Classify Accounts as Fraud Despite Moratorium

Strategic Insights

— 1 min read

The National Company Law Tribunal has made a significant observation that a moratorium under the Insolvency & Bankruptcy Code (IBC) does not prevent a bank from identifying and classifying a fraudulent account. This distinction is crucial as it highlights the bank's administrative discretion in classifying accounts, separate from the Corporate Insolvency Resolution Process (CIRP). The ruling came in a case where Bank of India classified Rolta India's account as a non-performing asset (NPA) related to fraud, amounting to ₹616 crore. Rolta India, a defense-focused software company, has admitted liabilities of over ₹14,074 crore.

Key Takeaways:

  • The NCLT's observation distinguishes CIRP and fraud identification as separate processes with different objectives.
  • Banks have the discretion to classify accounts as fraud based on their internal policies and regulatory guidelines.
  • The moratorium under IBC does not prohibit all actions that would affect the insolvency resolution of the company, including classification of a corporate debtor as a fraud account.
  • The tribunal's order has implications for many similar cases where lenders are seeking to declare a corporate debtor's account as 'fraudulent' while the company is still undergoing the CIRP.
  • Jyoti A Singh, founder of AJA Legal, pointed out that the purpose of the moratorium under IBC is to prohibit actions that would affect insolvency resolution.
  • Section 66(2) of the IBC mandates the RP to make an application during CIRP for instances of fraudulent trading or wrongful trading, supporting the tribunal's view.
  • Himanshu Vidhani, partner at Chandhiok and Mahajan, said the order distinguishes administrative decisions of banking institutions from measures that would affect the assets of the corporate debtor.
  • The tribunal has also acknowledged the dual regulatory space of corporate insolvency and fraud classification under the RBI's Master Directions on Frauds.
  • Experts warn that the order may expose corporate debtors and promoters to the risk of criminal investigation during CIRP and create a higher risk for resolution applicants.

Statistics:

  • ₹616 crore: the amount of non-performing asset (NPA) related to Rolta India classified as fraud by Bank of India.
  • ₹14,074 crore: the liabilities admitted by Rolta India.
  • July 8: the date of the NCLT's order.
  • January 2023: the month when Rolta India was admitted to the bankruptcy process.

Sources:

  • The National Company Law Tribunal's order of July 8.
  • The Times of India news article.
  • IBC (Insolvency and Bankruptcy Code) 2016.
  • RBI (Reserve Bank of India) Master Directions on Frauds, 2016.
  • AJA Legal news article.

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