NCLT: RP can take possession of a corporate debtor’s assets which are subject matter of litigation to facilitate the corporate insolvency resolution process January 27, 2020
Published in: Between The Lines
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The National Company Law Tribunal, Mumbai Bench (“NCLT”) in the case of Pravin Blaggan, in the matter of Goa Auto Accessories v. Suresh Saluja (decided on December 12, 2019) held that a resolution professional (“RP”) could take possession of a corporate debtor’s assets which were subject matter of litigation, to facilitate the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
The case relates to the possession of a property at the Honda Industrial Estate (“Property”) by one Mr. Pravin Blaggan (“Applicant”), which was in actuality, under the ownership of Goa Auto Accessories (“Goa Auto”). The NCLT had, pursuant to an application filed by Goa Auto in the capacity of a corporate applicant under section 10 of the IBC, passed an order dated December 11, 2018 (“Order 1”). Order 1 commenced the CIRP for Goa Auto. Consequently, the NCLT appointed Mr. Suresh Saluja as the IRP for the same.
Thereafter, a miscellaneous application was filed by the Applicant before the NCLT, challenging the direction of the Interim Resolution Professional (“IRP”) by letter dated December 21, 2018 (“Letter”), wherein the IRP had called upon the Applicant to hand over the possession of the property owned by Goa Auto in view of the commencement of CIRP. The Applicant was called upon to comply with the aforesaid direction with twenty-four hours of the receipt of the said Letter. By way of the Letter, the IRP had also alleged that the Applicant was in illegal occupation of the property. The division bench of the NCLT heard the miscellaneous application and passed an order directing the RP to take possession of the property from the Applicant. However, a dissenting order dismissing the miscellaneous application was passed on August 20, 2019. The matter was then referred to Honourable Suchitra Kanuparthi as the third member to resolve the difference of opinion due to the previous two orders.
Whether the NCLT could order possession of the property of Goa Auto to facilitate the CIRP and allow the RP to take possession of the same, pending adjudication of suits filed by the Goa Auto and the Applicant.
Contentions of the Applicant:
The Applicant submitted that he had not been occupying the Property illegally, and in fact had been occupying the same as per an agreement dated January 28, 1997, which was entered into between Goa Auto and the Applicant (“Agreement”). Further, the Applicant submitted that he was an erstwhile employee of Goa Auto and had worked from 1982 to January 1983. Following this period, the Corporate Applicant started his own proprietary entity and carried on business from the shed, of the job work assigned by Goa Auto in respect of components of spare parts of automobiles. It was also submitted by the Applicant that he had filed a special suit for the recovery of monies from Goa Auto. It was further contended that in view of section 18(1)(f)(vi) (assets subject to the determination of ownership by a court or authority) of the IBC the assets which were subject to determination of court/authority, possession of the same could not be sought for by a resolution professional pending adjudication of a suit. Resultantly, in the instant case, pending finalization of the suit in respect of the Property, the RP could not seek possession of the same. Further, the RP only had to fulfill an administrative function as he did not possess any adjudicatory powers to claim possession of the Property.
Contentions of Goa Auto:
It was argued by Goa Auto that while a resolution professional was duty bound to take control and custody of an asset of a corporate applicant, the same was subject to determination of ownership by a court/authority.Given the fact that suits were pending for finalization before the courts in Goa, the possession of the Property could not be sought for by the RP. Goa Auto also relied upon the judgment of the Bombay High Court in Tata Steel BSL Limited v. Varsha [2019 3 AIRBOMR 351], wherein it was held that merely because a CIRP had been undertaken, a dispute which was recognized as sub judice for which accommodation was made in the resolution plan could not be extinguished.
Contentions by the Resolution Professional:
The RP submitted that he had filed a reply to the miscellaneous application, wherein he had submitted that by way of the Agreement, Goa Auto had conferred upon the Applicant the right to use the Property for the purpose of setting up a welding, fabrication, milling, drilling and deburring unit in order to carry out the job work for Goa Auto. It was also submitted that certain disputes had arisen between Goa Auto and the Applicant, as the latter had breached certain conditions of the Agreement. In view of the breach, Goa Auto had called upon the Applicant to vacate the Property by notice dated August 22, 2008. In any case, as per clause 7 of the said Agreement, Goa Auto was entitled to ask the Applicant to vacate the Property within one month of such notice. Notably, Goa Auto had also filed a special suit before the Honourble Civil Court at Bicholim, Goa, seeking possession of the Property from the Applicant.
The RP also argued that since the time he was appointed as an IRP, it was his duty to take control and custody of any asset over which Goa Auto had an ownership right, including those which may or may not be in its possession. It was contended that merely because the Applicant was claiming a lien on the Property under the guise of a pending suit before a civil court, the same could not prejudice the right of the RP under the provisions of IBC. Further, no interim order had been passed in respect of such suit.
The RP further submitted that he had a right to claim possession of the Property under section 18(1)(f)(ii) (assets that may or may not be in possession of the corporate debtor) of the IBC and that his right to claim possession was not affected under section 18(1)(f)(vi) of IBC. Pertinently, it was pointed out that there was no dispute of ownership in respect of the Property. The bone of contention was with regard to the possession of the Property and right to use the same.
OBSERVATIONS OF THE NCLT
It was held that the NCLT alone had jurisdiction when it came to applications and proceedings by or against a corporate applicant covered by the IBC. Thus, no other forum has jurisdiction to entertain or dispose of any such applications or proceedings. If it were to be held that a civil court also had jurisdiction, the same would introduce manipulations to frustrate the resolution process.
Through a plain reading of section 60(5)(b) (NCLT shall have jurisdiction to entertain/ dispose of any claim made by or against the corporate debtor) of the IBC and section 60(5)(c) (NCLT shall have jurisdiction to entertain or dispose of any question of priorities, law or facts, arising out of the insolvency resolution or liquidation proceedings) of the IBC, it was concluded that the IBC empowered the NCLT to entertain the dispute raised in the suit. Further, section 63 (civil court not to have jurisdiction) of the IBC, barred the jurisdiction of the civil court in matters pertaining to the National Company Law Appellate Tribunal (“NCLAT”). Section 231 (bar of jurisdiction) of the IBC also barred the civil court from granting any injunction in respect of any action taken or in pursuance of any order passed by the adjudicating authority under the IBC. Therefore, upon a conjoint reading of the above mentioned provisions of IBC, the jurisdiction of the civil court was excluded when matters fell under the purview of the IBC. It was also noted that the IBC was a self-contained code that conferred supervisory powers on the NCLT with respect to the entire CIRP. The principles of comity would be affected if conflicting orders were passed by a civil court and the NCLT. Ultimately, such a course of action would be detrimental to the conduction of the CIRP.
It was stated that the office of the RP had become functus officio upon completion of his tenure, and thereafter, the RP had been appointed as a liquidator. Subsequent to the same, the RP had not taken any steps to amend his status. Subject to the directions of the adjudicating authority under section 35(1)(b)of the IBC a liquidator had the power to take into custody or control all the assets, property effects, and actionable claims of Goa Auto. The NCLT observed that similar provisions also existed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. Importantly, the non-obstante clause under section 238 of the IBC, enabled the IBC to have an overriding effect over anything inconsistent in any other law or instrument.
It was observed that there were two pending suits in question: (i) one filed by Goa Auto seeking, inter alia, the possession of the Property and, (ii) the other, filed by the Applicant, claiming for the recovery of monies from Goa Auto. In respect of both aforesaid suits, it was observed that no restraint orders had been passed. Hence, it was held that the RP’s claim for possession of the Property before the adjudicating authority in view of CIRP order could be entertained under the provisions of IBC.
In view of the moratorium, even though the suit filed by the Applicant though temporarily stayed, the suit filed for recovery of possession filed by Goa Auto was deemed to continue. Further, the NCLT noted that the RP had filed an application to liquidate Goa Auto under section 31 of the IBC as no resolution plan had been received by him.
DECISION OF THE NCLT
Thus, in view of the overriding power under section 238 of the IBC, the NCLT directed that the RP/ liquidator be allowed to take possession of the Property from the Applicant.
Vaish Associates Advocates View:
The NCLT concluded by reiterating that no civil court would have the jurisdiction to entertain any suit or proceeding in a matter over which the NCLT has jurisdiction in accordance with the IBC. Further, the civil suit filed by the Applicant was only for the recovery of monies and would therefore, have a limited bearing on the suit for possession by the RP. Hence, the pendency of civil proceedings did not bar the RP from exercising his duty of taking control and custody of the assets of Goa Auto.
This judgment will go a long way in establishing the rights of an insolvency professional under the IBC, and in clarifying that possession of property that is not under the possession of a corporate debtor but which is owned by the corporate debtor could be taken back by the insolvency professional on behalf of the corporate debtor.
For more information please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER