National Company Law Tribunal's Ruling on Insolvency & Bankruptcy Code

The National Company Law Tribunal (NCLT) has made a significant ruling regarding the scope of the moratorium under the Insolvency & Bankruptcy Code (IBC). The tribunal clarified that the moratorium does not prevent banks from identifying and classifying accounts as fraudulent, labeling this act as an administrative decision of the bank.

Implications of the Ruling

• This decision may impact numerous cases where lenders are attempting to declare a corporate debtor's account as 'fraudulent' during the Corporate Insolvency Resolution Process (CIRP).
• The tribunal emphasized that CIRP and fraud identification serve different purposes and are distinct processes.
• The role of the tribunal is to ensure CIRP integrity and address fraudulent activities within it, not to contest a bank's classification decisions.

Legal Perspectives

• IBC aims to obstruct actions affecting the insolvency resolution, and that fraud classification does not impede CIRP. 
• Additionally, Section 66(2) supports resolution professionals in addressing fraudulent trading during CIRP.

Strategic Implications

• This ruling necessitates a change in litigation strategies for stakeholders, as tribunals will refrain from interfering in banks' administrative decisions. 
• This exposes corporate debtors and promoters to potential criminal investigations during CIRP, raising risks for resolution applicants who may inherit such legal challenges and costs.