The National Company Law Tribunal, Delhi (“NCLAT“) vide its judgment dated 14th May, 2019 in the matter of Encore Asset Reconstruction Company Pvt. Ltd vs. Ms. Charu Sandeep Desai & Ors. bearing Company Appeal (AT) (Insolvency) No. 719 of 2018 held that a secured lender which has taken physical possession of mortgaged property prior to admission of insolvency proceedings must hand over custody of the same to the Interim Resolution Professional (“IRP“) as section 18 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) will prevail over Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act“).
- Sometime in 2011, Calyx Chemicals and Pharmaceuticals Limited (“Corporate Debtor“) had availed a loan against property from Dena Bank pursuant to which a charge by way of exclusive mortgage was created in favour of Dena Bank against certain property held by the corporate debtor (“Property“).
- The Corporate Debtor defaulted on repayment of such loan and as a consequence thereof, Dena Bank initiated proceedings under the SARFAESI Act and physical possession of the Property was duly taken over by Dena Bank on 13th September, 2017.
- Thereafter in October 2017, an application was filed under Section 7 of the IBC against the Corporate Debtor by State Bank of India before the NCLT. This application was admitted on 6th February, 2018 and an IRP was appointed. Moratorium under section 14 of the IBC also commenced therefrom.
- Dena Bank then filed an application before the NCLT seeking an interim order to restrain the IRP from demanding custody of the Property which was in its physical possession pursuant to its SARFAESI action.
Judgment of the NCLT
Relying on the Supreme Court’s decision in Transcore vs Union of India (2008 (1) SCC 125), Dena Bank pleaded that once it had taken possession of the secured asset, then all rights, title etc. in the Property stood vested in the Bank.
The NCLT however observed that the Supreme Court had held in the Transcore judgment that the rights in the asset can be dealt with by a Financial Institution as if it is the owner of the asset and the words “as if” denote deemed ownership and not actual ownership. Further since the Property continued to reflect as an asset in the balance sheet of the Corporate Debtor, the IRP was bound under Section 18 of the IBC to take control and custody of such Property. It was also held that any further action by Dena Bank to enforce its security interest would be covered under the moratorium.
As a consequence, all the properties of the Corporate Debtor (including the Property and other assets given as security) should come within one basket for further consideration, either by a resolution applicant or for liquidation.
Appeal to the NCLAT
Dena Bank (since then substituted by its assignee Encore Asset Reconstruction Company Pvt. Ltd (“Encore“)) filed an appeal against the NCLT order.
Section 18 of the IBC Code states that it is the duty of the Resolution Professional to control and take custody of the assets over which the corporate debtor has “ownership rights” as stated in the balance sheet of the corporate debtor including the assets that may or may not be in possession of the ‘corporate debtor’. Thus, the NCLAT dismissed the appeal, holding that although the asset of the Corporate Debtor was not in the Corporate Debtor’s possession, Encore was bound to hand over the same to the IRP because the title remained with the Corporate Debtor.
The NCLAT distinguished the Transcore judgment stating it was rendered prior to the existence of the IBC. Further in terms of Section 238 of the IBC, it was clear that the IBC prevails over any inconsistent provision of the SARFAESI Act.
It is thus clear that on commencement of a CIRP, all assets of the Corporate Debtor, including assets given as security to creditors and those in possession of creditors, come under the custody and control of the resolution professional appointed under the IBC Code.
These assets form part of a pool of assets which can be dealt with in any manner as set out in a resolution plan and which has the approval of the requisite majority of the Committee of Creditors (which includes both secured and unsecured financial creditors).
It is only on the failure of the resolution process and on initiation of liquidation that a secured creditor regains the right to enforce its secured asset independently in terms of Section 52 of the IBC.
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