CA Kamal Garg

Personal properties of promoters given as a “Security” to the Banks – whether subjected to moratorium under Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016 has giving the debtor an opportunity of admitting his guilt by accepting the fact that default has occurred and he is ready to pay off his dues through an interim resolution professional who will collect the claims within 30 days and perform such duties and functions as are mentioned in the Code for which the Corporate applicant shall make an application u/s. 10 of the Insolvency and Bankruptcy Code as is prescribed under Rule 7 and in Form 6 of the Insolvency and Bankruptcy (application to adjudicating authority) Rules, 2016. The corporate applicant shall provide such particulars and documents along with a fee of Rs. 25,000/- which has been prescribed by the Central government in the schedule of the adjudicating authority rules, 2016.

Section 10 of Part II of the Insolvency and Bankruptcy Code, 2016 provides that:

(1) Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.

(3) The corporate applicant shall, along with the application furnish the information relating to—

(a) its books of account and such other documents relating to such period as may be specified; and

(b) the resolution professional proposed to be appointed as an interim resolution professional.

The short-term objective of filing an application under section 10 is to seek protection against any legal proceeding which can be initiated or which is pending in the court/tribunal due to the default which has occurred on part of the corporate applicant. It is in a way an admission of guilt on part of the defaulter, i.e., the corporate applicant. If the application is complete the adjudicating authority shall admit the application and to ensure an uninterrupted resolution process, the Code provides immunity to debtors from resolution claims of creditors during this period. However, the long-term objective is to initiate the insolvency resolution proceedings and unlock wealth, if any, and prevent further losses to the business, company and the creditors which shall include financial as well as operational creditors.

Section 14 of Part II of the Insolvency and Bankruptcy Code, 2016 provides for Moratorium, as follows:

“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following namely :-

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority ;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein ;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) ;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

2. . . . . . . . . . .

3. . . . . . . . . . .

4. . . . . . . . . . .”

On a careful reading it should be noticed that the term “its” is significant. The plain language of the Section is that on the commencement of the Insolvency process the ‘Moratorium’ shall be declared for prohibiting any action to recover or enforce any security interest created by the Corporate Debtor in respect of “its” property. Relevant section which needs in-depth examination is section 14(1)(c) of The Code.

There are recognised canons of interpretation. Language of the Statute should be read as it existed. This is a trite law that no word can be added or substituted or deleted from the enacted Code duly legislated. Every word is to be read and interpreted as it exists in the statute with the natural meaning attached to the word. Rather in this Section the language is so simple that there is no scope even to supply ‘casus omissus’. Though the doctrine of ‘Noscitur a Sociis’ is somewhat applicable that the associated words take their meaning from one another so that common sense meaning coupled together in their cognate sense be interpreted. As a result, “its” denotes the property owned by the Corporate Debtor. The property not owned by the Corporate Debtor does not fall within the ambits of the Moratorium. Even Section 10 is confined to the Books of the Accounts of the Corporate Debtor, due to the reason that Section 10(3) has specified that the Corporate Applicant shall furnish “its” Books of Account.

The outcome of this discussion is that the Moratorium shall prohibit the action against the properties reflected in the Balance Sheet of the Corporate Debtor. The Moratorium has no application on the properties beyond the ownership of the Corporate Debtor. For the sake of completeness it is worth to refer that the provisions of The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (the SARFAESI Act) which may be having different criteria for enforcement of recovery of outstanding debt. Thus the NCLT in Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd. upheld the view that the SARFAESI Act may come within the ambits of Moratorium if an action is to foreclose or to recover or to create any interest in respect of the property belonged to or owned by a Corporate Debtor, otherwise not. Similar view was also taken in Schweitzer Systemtek India (P.) Ltd. v. Phoenix ARC (P.) Ltd. :

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April 2021