- Bookmark
- Share
- CaseIQ
Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeep Desai And Others
Factual and Procedural Background
This appeal arises from an order dated 11th October 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, directing Dena Bank to hand over possession of certain mortgaged commercial properties to the Interim Resolution Professional (IRP) in the Corporate Insolvency Resolution Process (CIRP) against Calyx Chemicals & Pharmaceuticals Ltd.
Dena Bank had granted a loan to Calyx Chemicals in 2011 under the Dena Mortgage Loan Scheme, secured by exclusive mortgage of unencumbered commercial properties. The loan became a Non-Performing Asset in December 2013, prompting Dena Bank to initiate possession proceedings under the SARFAESI Act, 2002. Physical possession was taken by Dena Bank on 13th September 2017, prior to the commencement of the Moratorium under the Insolvency and Bankruptcy Code (I&B Code) on 6th February 2018.
Dena Bank filed an application seeking an interim order restraining the IRP from demanding possession of the mortgaged properties, contending that the bank had already lawfully taken possession before the Moratorium and that the Corporate Debtor no longer held ownership or possession. The IRP disputed this, asserting that the Corporate Debtor remained the owner under the I&B Code and that possession should be handed over to him.
During the pendency of the appeal, Encore Asset Reconstruction Company Pvt. Ltd. was substituted as the assignee of Dena Bank.
Legal Issues Presented
- Whether the possession of the mortgaged property taken by Dena Bank prior to the commencement of the Moratorium under the I&B Code can be retained by the bank against the claim of the Interim Resolution Professional.
- Whether Section 18 of the I&B Code, which empowers the IRP to take control and custody of assets over which the Corporate Debtor has ownership rights, prevails over Section 13(4) of the SARFAESI Act, 2002, which allows a secured creditor to take possession of secured assets.
Arguments of the Parties
Appellant's Arguments
- The Appellant (Dena Bank) contended that possession of the mortgaged properties was lawfully taken under the SARFAESI Act before the Moratorium commenced and therefore the IRP had no right to demand possession.
- Reliance was placed on the decision in M/s. Transcore v. Union of India & Anr (2008) 1 SCC 125, arguing that the secured assets’ title stood vested in the bank.
Respondent's Arguments (Interim Resolution Professional)
- The IRP maintained that the Corporate Debtor continued to be the owner of the property under Section 14 of the I&B Code despite the bank’s possession.
- The IRP argued that under Section 18 of the I&B Code, it was his duty to take control and custody of all assets over which the Corporate Debtor has ownership rights as recorded in its balance sheet, regardless of physical possession by third parties.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M/s. Transcore v. Union of India & Anr (2008) 1 SCC 125 | Title of secured assets stands vested in the secured creditor upon enforcement under SARFAESI Act | The Court noted this decision was rendered before the I&B Code came into force and therefore not applicable to override the Code’s provisions. |
Court's Reasoning and Analysis
The Court examined the interplay between the SARFAESI Act, 2002 and the Insolvency and Bankruptcy Code, 2016, focusing particularly on Sections 13(4) of the SARFAESI Act and Section 18 of the I&B Code. It was undisputed that Dena Bank took physical possession of the mortgaged property before the Moratorium commenced under the I&B Code.
However, the Court emphasized that the IRP’s duty under Section 18 of the I&B Code is to take control and custody of all assets over which the Corporate Debtor has ownership rights, as recorded in its balance sheet. The Court clarified that the term "assets" under Section 18 excludes assets owned by third parties in possession of the Corporate Debtor but does not exclude assets owned by the Corporate Debtor that are in possession of third parties such as the bank or its assignee.
The Court observed that the Appellant did not claim that the title to the assets had been transferred or sold under Section 13(4) of the SARFAESI Act. Therefore, the ownership of the property remained with the Corporate Debtor despite possession by the bank.
Further, the Court relied on Section 238 of the I&B Code, which states that the provisions of the Code override any inconsistent provisions of other laws, including the SARFAESI Act. Accordingly, Section 18 of the I&B Code prevails over Section 13(4) of the SARFAESI Act in this context.
Consequently, the Court held that the bank cannot retain possession of the property where the Corporate Debtor remains the owner under the I&B Code.
Holding and Implications
The appeal is dismissed with no costs.
The direct effect of this decision is that possession of the mortgaged property must be handed over to the Interim Resolution Professional, as the Corporate Debtor continues to own the asset despite the bank’s prior physical possession. The ruling clarifies the supremacy of the Insolvency and Bankruptcy Code over the SARFAESI Act in insolvency proceedings, particularly regarding asset possession and control during the Moratorium period. No new precedent beyond this specific application was established.
SUDHANSU JYOTI MUKHOPADHAYA, J. This appeal has been preferred by the Appellant against the order dated 11th October, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai, in the matter of State Bank of India Vs. Calyx Chemicals & Pharmaceuticals Ltd., whereby the Adjudicating Authority directed the Dena Bank to handover the possession of the mortgaged property in question. Company Appeal (AT) (Insolvency) No. 719 of 2018
2. In the Corporate Insolvency Resolution Process against Calyx Chemicals & Pharmaceuticals Ltd., Dena Bank filed an application for interim order to restrain the Interim Resolution Professional from demanding the custody of the property, as referred below: DESCRIPTION OF THE PROPERTIES MORTGAGED Address of the Property/ security
1. Gala No.2 on the Ground Flor of the Marwahs Complex, Marwah Industrial Estate, Sake Vihar Road, Andheri- East, Mumbai- 400072
2. Gala No 110 on the First Floor of the building known as Marwah Industrial Premises situated at 4, Marwah Industrial Estate, Saki Vihar Road, Andheri- East, Mumbai- 400072 Property in the name of Calyx Chemicals and Pharmaceuticals Limited Nature of the Property Commercial Premises
3. The case of the Dena Bank was that in the year 2011, the Corporate Debtor availed a loan against a property under the Scheme Dena Mortgage Loan Scheme. As per the Scheme, a borrower has to create a charge by way of exclusive mortgage of an unencumbered property held in the name of borrower to be treated as a Security against the loan.
4. The loan had become Bad hence declared as Non-Performing Asset on 1st December, 2013. As a consequence, Dena Bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002 for short) to take physical possession under Section 13(4) of the SARFAESI Act, 2002. It is informed that the procedure for obtaining physical possession was duly completed by issuing a Notice under Section 13(2) of SARFAESI Act, 2002 and on lapse of 60 days, a notice Company Appeal (AT) (Insolvency) No. 719 of 2018 under Section 13(4) of the said Act for taking over the possession. Physical possession was taken over on 13th September, 2017, is an undisputed fact.
5. It was pleaded that the Resolution Professional was putting pressure to hand over the physical possession back to him, although the Corporate Debtor on whose behalf the Resolution Professional is commencing Insolvency Proceedings had already ceased to be the owner of the said property having no physical control on the said property.
6. The Moratorium had commenced on admission of the case w.e.f. 6th February, 2018 pursuant to an application moved by the State Bank of India under Section 7 of the I&B Code. It was in this background, it was pleaded by Dena Bank that physical possession was taken over before the date of commencement of Moratorium. Therefore, the Resolution Professional should not have demanded for taking over the possession of the said property.
7. Encore Asset Reconstruction Company Pvt. Ltd. is an assignee of the Dena Bank which has been substituted during the pendency of the appeal.
8. Learned counsel for the Appellant submitted that in the light of the decision of the Honble Supreme Court in M/s. Transcore v. Union of India & Anr. (2008) 1 SCC 125, the Appellant has taken decision of the said secured assets title etc. which stood vested in the Bank. Company Appeal (AT) (Insolvency) No. 719 of 2018
9. The stand of the Resolution Professional is that the Bank cannot be an owner and the Corporate Debtor continued to be the owner of the property. Reliance has been placed on Section 14 of the I&B Code.
10. We have heard learned counsel for the parties and perused the record.
11. Section 18 of the I&B Code deals with Duties of Interim Resolution Professional. As per which, it is the duty of the Interim Resolution Professional to take over the control and custody of any assets over which the Corporate Debtor has ownership rights as recorded in the balance sheet of the Corporate Debtor which includes the assets that may or may not be in possession of the Corporate Debtor as apparent from clause (f)
(ii) of Section 18, relevant portion of which reads as follows:
18. Duties of interim resolution professional. The interim resolution professional shall perform the following duties, namely: (a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to
(i) business operations for the previous two years; Company Appeal (AT) (Insolvency) No. 719 of 2018
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified; (b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15; (c) constitute a committee of creditors; (d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors; (e) file information collected with the information utility, if necessary; and (f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including
(i) assets over which the corporate debtor has ownership rights which may be located in a foreign country; Company Appeal (AT) (Insolvency) No. 719 of 2018
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or authority; (g) to perform such other duties as may be specified by the Board. Explanation.For the purposes of this sub-section, the term assets shall not include the following, namely: (a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment; (b) assets of any Indian or foreign subsidiary of the corporate debtor; and (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator. Company Appeal (AT) (Insolvency) No. 719 of 2018
12. From the explanation below Section 18, it is clear that the term assets do not include the assets owned by a third party in possession of the Corporate Debtor.
13. It is not the case of the Appellant that the title of the assets has already been transferred or they have sold the assets in terms of Section 13(4) of the SARFAESI Act, 2002. It is also not the case of the Appellant that the assets owned by a third party is in possession of the Corporate Debtor in terms of Section 18, as it is the duty of the Interim Resolution Professional to take control and custody of any asset over which the Corporate Debtor has ownership rights as recorded in the balance sheet of the Corporate Debtor. Even if it is not in possession of the Corporate Debtor, a person who is in possession of the same, including the Dena Bank or Encore Asset Reconstruction Company Pvt. Ltd. is bound to hand over the same to the Resolution Professional, when title still vests with Corporate Debtor.
14. Decision in M/s. Transcore v. Union of India & Anr. was rendered in the year 2008 when the I&B Code was not in existence. The I&B Code came into force w.e.f. 1st December, 2016 and Section 238 reads as follows:
238. Provisions of this Code to override other laws.The provisions of this Code shall have effect, notwithstanding anything inconsistent Company Appeal (AT) (Insolvency) No. 719 of 2018 therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
15. SARFAESI Act, 2002 being an existing law, Section 238 of the I&B Code will prevail over any of the provisions of the SARFAESI Act, 2002 if it is inconsistent with any of the provisions of the I&B Code.
16. In the aforesaid background, we hold that Section 18 of the I&B Code will prevail over Section 13(4) of the SARFAESI Act, 2002 and the Dena Bank cannot retain the possession of the property in question of which the Corporate Debtor is the owner.
17. We find no merit in this appeal. It is accordingly dismissed. No costs. (Justice S.J. Mukhopadhaya) Chairperson (Justice A.I.S. Cheema) Member(Judicial) NEW DELHI 14th May, 2019
Alert