India: Moratorium Applicable Only To Properties Owned By The Corporate Debtor And Not Of A Personal Guarantor

Before we dwell further on the topic of this article, it is imperative to take note of the relevant provisions of the Insolvency and Bankruptcy Code, 2016 (the"Code") that remain bone of contention. Also, the recent Order dated 09.08.17 by the Hon'ble National Company Law Appellate Tribunal (NCLAT) in Company Appeal (AT) (Insolvency) No. 129 of 2017 titled"Schweitzer Systemtek India Pvt. Ltd. Vs. Phoenix ARC Pvt. Ltd. & Ors."(the"Case") has been analyzed herein under to throw some more light on the article-topic vis-à-vis relevant provisions of the Code.

  • Section 10(3) of the Code reads as under:

"(1) ...

(2) ...

/div>
  1. The corporate applicant shall, along with the application furnish the information relating to--
    1. its books of account and such other documents relating to such period as may be specified; and
    2. ....

(4) ...

(5)..."

Section 14 (Moratorium) of the Code provides as under:

  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) ...;

(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) ...

(2) ...

(3) ...

(4) ..."

  • Section 60 of the Code is reproduced herein below:

"60. Adjudicating Authority for corporate persons(1) ...

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or bankruptcy of a personal guarantor of such corporate debtor shall be filed before such National Company Law Tribunal.

(3) ...

(4) ...

(5) ... –

(6) ...".

In the Case, the Appellant-Corporate Applicant challenged the order passed by Ld. Adjudicating Authority (National Company Law Tribunal or NCLT) Mumbai Bench, whereby and where-under the application preferred by appellant under section 10 of the Code was admitted, an order of Moratorium passed and Insolvency Resolution Professional (IRP) was ordered to beappointed. The grievance of the appellant before NCLAT was that the movable and immovable property of the guarantor (promoter) got attached pursuant to Corporate Insolvency Resolution Process (CIRP) initiated under section 10 against the AppellantCorporate Applicant. However, such statement was disputed by the Financial Creditor (being the first respondent in the Case).

The NCLAT took note of the observations of the Adjudicating Authority in the order under challenge wherein the provision relating to moratorium under section 14 was discussed and clarified as to which property is to be attached while passing order for initiation of moratorium. The relevant portion of the Order of the Adjudicating Authority is reproduced hereunder:

"8.1. On careful reading I have 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 recognized 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 I hasten to addthatthedoctrineof Noscitura 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 do not fall within the ambits of the Moratorium. Even Section 10 is confined to the Book 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 Accounts. This Bench has no legislative authority to expand the meaning of the term "its" even under the umbrella of 'ejusdem generis'.

8.2 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. As a result, the Order of the Hon'ble Court directing the Court Commissioner to take over the possession shall not fall within the clutches of Moratorium. Even otherwise, the provisions of The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (the SARFAESI Act) may be having different criteria for enforcement of recovery of outstanding debt, which is not the subject matter of this Bench. Before I part with it is necessary to clarify my humble 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.

9. To conclude the Application under Section 10 of The Code is hereby "Admitted" subject to the exception as carved out supra. The consequential directions shall be that the provisions of Section 14 of The Code i.e. "Moratorium" shall come into operation. Next, the proposed name of Interim Resolution Professional i.e. (Page 4 name) is hereby approved. The IRP shall take appropriate action such as Public Announcement etc. so that the Insolvency Resolution Process shall be initiated expeditiously. He is directed to submit a Progress Report within one month's time from the commencement of Insolvency Resolution Process."

Hon'ble NCLAT observed earlier order in matter titled "Alpha & Omega Diagnostics (India) Ltd. V. Asset Reconstruction Company of India Ltd. & Ors." being Company Appeal (AT) (Insol.) No. 116 of 2017. The NCLAT vide its judgment dated 31st July, 2017, made following observations: -

"4. Ld. Counsel appearing on behalf of the Appellant submitted that the appellant has grievance only relating to qualifying part of the impugned order as quoted above. According to the appellant, the Moratorium should take into its recourse on the subject matters and assets relating to its matters pending before the Debt Recovery Tribunal (DRT) and under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).

5.However, we are not inclined to accept such submissions as Appellant-Corporate Applicant has sought for "its" own insolvency resolution process that will include only the assets of the Corporate Debtor and not any assets, movable or immovable of a third party, like any director or other. In so far as 'guarantor' is concerned, we are not expressing any opinion, as they come within the meaning of 'Corporate Debtor individually', as distinct from principal debtor who has taken a loan.

6.In the aforesaid background, if Ld. Adjudicating Authority, on careful reading of the provisions has come to the definite conclusion that on 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, no ground is made out to interfere with the said order."

Hon'ble NCLAT, while dismissing the appeal of the corporate debtor in the Case, clarified that section 60(2) of the Code, if CIRP or liquidation proceeding of a corporate debtor is pending before the Adjudicating Authority, an application relating to the insolvency resolution or bankruptcy of a personal guarantor required to be filed before the same Bench of Adjudicating Authority. In other words, separate application for initiation of resolution process require to be filed against the guarantor before the same very Bench of the Adjudicating Authority who is hearing the corporate resolution process or liquidation proceeding against principal corporate debtor.

The point-wise outcome of the above analysis of the Case and provisions of the Code is:

  1. The term "its" (mentioned in section 10(3) and section 14) denotes the property owned by the Corporate Debtor alone;
  2. The property not owned by the Corporate Debtor do not fall within the ambits of the Moratorium;
  3. NCLAT has no legislative authority to expand the meaning of the term "its" even under the umbrella of 'ejusdem generis';
  4. Moratorium shall prohibit the action against the properties reflected in the Balance Sheet of the Corporate Debtor alone;
  5. The Moratorium has no application on the properties beyond the ownership of the Corporate Debtor;
  6. 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;
  7. Separate application for initiation of resolution process required to be filed against the guarantor before the same very Bench of the Adjudicating Authority who is hearing the CIRP or liquidation proceeding against principal corporate debtor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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