The recent decision of the Hon'ble National Company Law Tribunal, Mumbai Bench, in the case concerning Rolta India Limited (Corporate Debtor herein), wherein it upheld the right of the Bank of India (Financial Creditor) to classify the Corporate Debtor's account as "fraud" during the pendency of the Corporate Insolvency Resolution Process (CIRP), has given rise to significant issue regarding its wider implications on the insolvency framework under the Insolvency and Bankruptcy Code, 2016 ("IBC").
This decision arose from an application filed by the Resolution Professional (RP) of Rolta India seeking a restraint against the Bank of India, which had classified Rolta India's account as fraudulent on account of default of Rs. 616 crore and declared as NPA. The RP argued that such a classification would negatively impact the ongoing CIRP against the Corporate Debtor and jeopardize the interest of stakeholders. The Hon'ble Tribunal, however, dismissed the application filed by RP and held that the moratorium under Section 14 of IBC, which prohibits the institution or continuation of suits or proceedings against the Corporate Debtor, does not extend to internal and regulatory actions undertaken by banks in furtherance of their obligations under the Reserve Bank of India's Master Directions. Further, held that the classification of an account as "fraud" by the Bank of India to be an administrative decision based on risk assessment and regulatory compliance, distinct and independent from the insolvency process.
From a regulatory perspective, the present decision of the Hon'ble Tribunal affirms the prerogative of financial institutions to undertake administrative actions, including fraud classification, in discharge of their obligations under the RBI's guidelines. It serves as a deterrent against the strategic misuse of the CIRP framework by defaulting promoters who may seek to avoid scrutiny under the guise of moratorium. This ruling, while legally sound in its reasoning, raises several concerns in terms of practical impact on the CIRP and the objective of IBC.
One of the foremost concerns arising from such classification during CIRP is the serious prejudice it may cause to the resolution process itself. A declaration of fraud, inevitably carries reputational stigma and regulatory consequences and likely to deter potential resolution applicants from submitting resolution plans due to fears of being associated with a "fraudulent entity," thus, in turn, is likely to reduce competitive participation and may result in suppression of the overall asset value of the corporate debtor, thereby defeating the objective of value maximization enshrined under the IBC. In addition, it may lead to increased scrutiny, criminal investigations, and possible disqualification under Section 29A of the IBC, thereby narrowing the pool of eligible resolution applicants and frustrating the objective of IBC i.e. timely resolution of the Corporate Debtor. Additionally, the said classification may have a direct and adverse impact on the day-to-day operations of the corporate debtor, potentially resulting in the freezing of bank accounts, withdrawal of critical vendor and contractual support, and termination of essential supply arrangements. Collectively, these consequences would severely impair the ability of the Resolution Professional to preserve the corporate debtor as a going concern.
Another critical issue is the potential for such classification to pre-empt findings that are otherwise required to be made by the RP or the Adjudicating Authority under Sections 43, 45, and 66 of the IBC. Allowing a bank to unilaterally declare a debtor as fraudulent in parallel may be viewed as a premature adjudication, especially when the promoters or management have not yet been found guilty through the CIRP mechanism. While it is true that banks have a statutory obligation to act under the RBI's directions, such action when taken during CIRP may lead to multiple litigations and jurisdictional inconsistencies, thereby impeding the efficient conduct of the resolution process and frustrating the time-bound framework contemplated under the IBC.
In light of the foregoing, it is evident that the present ruling makes it clear that the moratorium under Section 14 of IBC is not intended to curtail regulatory oversight or bank-led internal processes, but merely to pause coercive recovery and legal proceedings during CIRP. However, this judgment also highlights a pressing gap in the regulatory framework especially, the absence of a harmonized mechanism to reconcile the objectives of IBC with the RBI's regulatory classifications. In the absence of such coordination, actions taken under the RBI's framework may prejudice the resolution process by discouraging investor interest, impacting business continuity, and eroding confidence among stakeholders. To prevent such outcomes, there is a need for inter-regulatory alignment that ensures fraud classification, where warranted, is exercised with procedural safeguards and does not derail the resolution mechanism envisaged under the Code. Accordingly, a calibrated and harmonized approach between insolvency law and banking regulation is necessary to prevent parallel proceedings from frustrating the core purpose of the IBC i.e. maximization of the assets as well as the revival of the corporate debtor in a time-bound manner.
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