India: Liability Of The Promoter With Regards To The Personal Property Given As Security When The Moratorium Has Been Issued


The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code") provides for a time-bound resolution process for insolvency and bankruptcy. Part II of the Code, provides for the procedure for the insolvency resolution wherein financial creditors, operational creditors or corporate debtors themselves can approach the Adjudicating Authority for initiation of corporate insolvency resolution process under the provisions of Sections 7, 8, and 10 respectively. Section 10 of the Code deals with the application for the initiation of the corporate insolvency resolution process by the Corporate Debtor itself, where subsection (1) provides that when a corporate debtor has committed a default1, the corporate applicant2 can file an application for initiating the corporate insolvency resolution process with the Adjudicating Authority. Once the application under sub section 4 is admitted, the Corporate Insolvency Resolution Process (hereinafter referred to as CIRP) commences. In this situation, Section 14 of the Code comes into the picture because it states that a moratorium shall be issued from the insolvency commencement date. A moratorium under the Code, prohibits the institution of suits or continuation of pending suits against the corporate debtor, the transferring encumbering alienating or disposing of the corporate debtor any of its assets or legal rights therein, further it also prohibits 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 SARFAESI Act, 2002. It is this limb of the moratorium that this article will be focusing on.

Moratorium is a very effective tool, however, sometimes it has been used to thwart or frustrate the Recovery Proceedings by the Corporate Debtor. Due to this reason, the question that whether the personal properties of the promoters which have been given as security can escape liability during the moratorium period comes to the fore.

Personal Liability of the promoter when the Moratorium has been issued

Recently in the case of Schweitzer Systemtek vs. Phoenix ARC Limited3, the Mumbai bench of the NCLT was asked to adjudicate on the issue that whether the personal properties of the promoters which have been given as security to the bank/creditor come under the purview of the moratorium as envisaged under Section 14 of the Code or not. In this case, Dhanlaxmi Bank had lent Rs 4.5 crore to the company wherein the promoter had pledged personal properties. The bank sold the loan along with security to Phoenix ARC. M/s Schweitzer Systemtek had filed for the initiation of CIRP under Section 10 (3) which was opposed by Phoenix ARC fearing that if the case is admitted, a moratorium under Section 14 of the Code will be issued, which could thwart the action taken so far for recovery of the outstanding loans which included selling personal properties of the promoters which were in an advanced stage.

The Tribunal perused the facts and came to the conclusion that the admitted position of the debtor is that the personal properties have been given as a "Security" to the banks which clearly implies that the properties are currently not under the ownership of the Corporate Debtor. In that regard, to ascertain that whether the properties which are not owned by a Corporate Debtor will come within the ambits of the Moratorium or not, the Tribunal examined Section 14 (c) of the Code and observed that the canon of interpretation is a very important tool for gauging the intention of the legislature and language of the Statute is such that no word can be added, or substituted or deleted from the enacted Code, thereby the term "its" in the aforementioned section becomes very important because on a plain reading of the section it is understood 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, the usage of the word "its" clearly makes a distinction between the property owned by the Corporate Debtor and other properties, which means that the Moratorium will have no application on the properties beyond the ownership of the Corporate Debtor. In this case, since the property in question was given as security to the bank, the moratorium would not apply on the personal properties.

This issue was also discussed in the case of "Alpha & Omega Diagnostics (India) Ltd v/s Asset Reconstruction of India & Ors4" before the Mumbai bench of the NCLT, where the tribunal took a similar stand and held that the personal properties of the promoters which have been given as security will not be affected by the Moratorium issued under Section 14 since the wordings of the section are very clear in their meaning that that the Moratorium applies only to the properties of the corporate debtor and therefore the personal properties of the promoters which have already been given as a security to the lending bank will remain unaffected by the Moratorium in effect, this reasoning was then challenged before the NCLAT5, wherein it dismissed the appeal by affirming the order of the NCLT Mumbai bench.


1 Section 2 (12) 2 Section 5 (5)

2 Section 5 (5)

3 T.C.P No. 1059

4 T.C.P. No. 1117,/I&BP/NCLT/MB/MAH/2017, Order dated 10.07.2017

5 Company Appeal(AT) (Insol) No. 116 of 2017, Order dated 31.07.2017

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