Promoters Cannot Escape Liquidation Of Personal Assets Given As Security By Filing For Bankruptcy under Code: NCLT [Read Order]

The National Company Law Tribunal recently held that the personal properties of the Promoters given as security to the Banks can be proceeded against, in spite of initiation of insolvency proceedings against the Company.

Judicial Member M.K. Shrawat ruled that personal properties of the Promoters would not saved by the Moratorium prescribed by Section 14 of the Insolvency and Bankruptcy Code, 2016. During the moratorium, all pending actions against the Debtor are stayed, and no new actions can be initiated.

Mr. Shrawat undertook an interpretation of Section 14 of the Code to rule, "On careful reading I have noticed that the term "its" is significant… 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.(sic)"

The Tribunal was hearing a Petition filed by M/s Schweitzer Systemtek India, invoking Section 10 of the Code, which pertains to initiation of insolvency proceedings by the Corporate Debtor. The Debtor had been lent Rs. 4.5 crore by Dhanlaxmi Bank, and the Promoter had pledged personal properties. The Bank had then assigned the loan and the security to Phoenix ARC, which was now opposing the Petition as the Creditor.

The Creditor had submitted that the Petition was an attempt to thwart the actions taken so far for recovery of the outstanding debt. It submitted that the Creditor had approached the NCLT with malafide intention, even though the default of non-payment has already been established.

The Tribunal opined that the Petition deserved to be appointed, so that an Insolvency Professional could streamline the position of the debt, determine the measures taken to safeguard the interests of the sundry creditors, and examine the correctness of the loss claimed.

"On examination of the Balance Sheet a huge contract is apparent. On left hand side of the Balance Sheet the liability is stated to be approximately Rs. 5,30,00,000/-, but on the right hand side the Fixed Assets, FDRs, Bank Guarantee are significantly insufficient. The Insolvency Professional thus can iron out all these creases. The details of reserves and Surplus need due examination. The possibility of recovery from Sundry Debtor, are substantial in nature which require due consideration," the Tribunal further noted.

It, however, refused to come to the rescue of the Promoters, ruling that their properties could be proceeded against, even during the Moratorium.

"This Code of 2016 has prescribed certain limitations which are inbuilt and must not be overlooked. The 'Moratorium' indeed is an effective tool, sometimes being used by the Corporate Debtor to thwart or frustrate the Recovery Proceedings, as happened in this Case," the Tribunal pointed out.

Read the Order Here