[Rohit Sharma is a Partner at Mamta Binani & Associates]
The promulgation of the Insolvency and Bankruptcy Code, 2016 (‘Code’) has led to an enormous number of applications being filed before the adjudicating authority for initiation of the corporate insolvency resolution process (‘CIRP’) against a company. The purpose of the Code, according to the Report of the Insolvency Law Committee, was for the resolution/ liquidation of sick companies. That the Code is not a debt recovery tool is by now loud and clear. However, the assets of a corporate debtor are relevant for the corporate resolution or even during the liquidation of a corporate debtor. The Code allows immunity to the assets of the corporate debtor both during resolution and liquidation. During resolution, section 14 of the Code allows a calm period to the corporate debtor and, during such period, no assets of the corporate debtor can be encroached upon or attached by any authority.
At the outset, it is important to understand the reason for the attachment of assets by the Enforcement Directorate (“ED”). The attachment of assets of a company generally takes place when the statutory authority is of the understanding that the company has acquired the assets by availing loans from the banks or financial institutions and thereafter defrauded the banks by diverting the funds fraudulently for a purpose other than that for which the same was sanctioned. The moot issue in such a situation is whether the ED can attach the assets of the corporate debtor which is under moratorium and/or where the company is under liquidation. This post focuses on the repercussions these attachment orders has on the whole process of the CIRP and liquidation of a corporate debtor.
Insolvency and Bankruptcy Code, 2016
Section 14 of the Code, states as follows:
(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) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
Also, during liquidation, according to section 33(5) of the Code, no legal proceeding can be initiated against the corporate debtor. Accordingly, there is no question of alienating or attaching any of the assets of the corporate debtor. In fact, during liquidation, according to section 35(1)(b) of the Code, the liquidator is expected to take into custody or control all the assets, property, effects and actionable claims of the corporate debtor.
Despite clear provisions of law safeguarding the assets of an insolvent entity, it is seen in several cases that the assets are being attached by different government authorities and/or quasi government authorities. This disrupts both the resolution as well as the liquidation process of the corporate debtor.
Effect on CIRP and liquidation of the corporate debtor
In a circumstance where the insolvency professional (“IP”) is required to understand the business of the corporate debtor in a very short span of time, pending litigation leads to more complexities for the IP. There can be substantial litigation pending against or by the corporate debtor in various jurisdictions, which may also include arbitration. Although section 14 of the Code restricts the institution of suits or continuation of pending suits, there may be certain litigation with respect to money suits, resolving which may lead to the introduction of much-needed finance for the company. For example, if litigation is pending against the creditors of the company and resolving such litigation becomes the duty of the resolution professional as the insolvent company is in dire need of finance.
The period of completion of the CIRP is restricted to 180 days or 270 days from the date of admission of the application. The Code in itself is a time-constrained process; hence, the attachment of assets during such process drastically affects the stakeholders of the corporate debtor. It is pertinent obtaining a release of the assets from such statutory authorities is a task in itself and requires a substantial number of days or months for the final judgment to be pronounced. Hence, the precious time of a resolution professional is spent in obtaining judgments in such matters. Directly or indirectly, such litigation hampers the whole process of CIRP. Accordingly, such litigation affects the stakeholders of the corporate debtor.
Further, the pain of the insolvency professional swells further when the assets of the corporate debtor are attached more than once. In such a situation, the insolvency professional may have to file an application each time before the adjudicating authority to get the assets released from the ED. Also, there can be a situation where when an insolvency professional files an application before the adjudicating authority for detachment of assets and obtains an unfavorable order; left with no other option, he will have to proceed to file an appeal before the National Company Law Appellate Tribunal (“NCLAT”). In the meantime, there could be a subsequent order of the ED for attachment of a few or all of the remaining assets of the company. The insolvency professional will be engaged with filing an application before the adjudicating authority for subsequent attachment of assets and also an appeal before the NCLAT against the unfavorable order of the same adjudicating authority.
In a situation like this, even if the corporate debtor is a going concern, is making profit in its business and performing well under the supervision of the resolution professional, the resolution applicant would not be in a position to bid higher, as the assets of the corporate debtor are attached by the ED. So, an insolvent company which could eventually turn out to be a healthy company will have to move towards liquidation.
In Rei Agro Ltd. (2018), the National Company Law Tribunal (“NCLT”), Kolkata Bench held that the assets attached by the ED be handed over to the liquidator. The liquidator of the corporate debtor, Rei Agro Limited, filed the said application before the NCLT under section 35(1)(n) of the Code seeking orders against the ED to get the assets of the corporate debtor detached by the ED. He stated that there were two occasions when the assets were attached by the ED, one being during the moratorium of the corporate debtor and the second being during the liquidation. The allegation made by the liquidator against the ED related to a breach of the provisions of section 14 of the Code.
The NCLT relied on the provisions of section 238 of the Code, which states that the provisions of the Code shall override the provisions of any other Act or Rules. It also relied on the Supreme Court’s judgment in Soldier India Private Ltd. vs. Fair Growth Financial Services Private Ltd. & Ors. (2001) 3 SCC 71 wherein the assets were attached under the Maharashtra Protection of Interest of Depositors Act (‘MPID Act’). The Supreme Court held that if the assets are allowed to be sold under the MPID Act and through the competent authority to the depositors, the stakeholders of the company would be deprived of their rights to receive the liquidation value of the assets. Hence, taking the same observation of the Supreme Court, the NCLT admitted the said application and directed the ED to hand over the possession of the assets to the liquidator.
It is to be noted that in the said matter there were two attachment orders by the ED, i.e., one during the CIRP and the second one during the liquidation of the corporate debtor. Both of such attachments were made in the gap of around 5-6 months. The adjudicating authority has passed an order in favor of the resolution professional in the application against the attachment order of the ED during the liquidation stage while the application against the attachment order during the period of the CIRP still remains pending before the NCLT.
In Varrsana Ispat Limited (2018), the committee of creditors (“CoC”) did not freeze the resolution plan, despite which the NCLT did not pass an order of liquidation in the matter. The reason for not passing the liquidation order, even when 5 months have elapsed since the conclusion of the CIRP, is that the matters for detachment of assets are pending before the NCLAT and the Appellate Tribunal under the Prevention of Money Laundering Act (“PMLA”).
The resolution professional went on to state that there are a series of litigation in the matter due to the attachment of a substantial asset of the company by the ED, which has led to very low bids in the resolution plan. The matter is listed for hearing before the Appellate Tribunal under the PMLA, wherein the application is being filed by the resolution professional against the attachment order of the ED.
The matter was initially bought before the NCLT, Kolkata Bench wherein the resolution professional filed the application seeking direction against the ED for getting the assets released. However, the said matter was disposed of vide by way of an order dated 12 July 2018, wherein the Bench stated that since the provisional attachment was carried out prior to the initiation of the CIRP, and hence an adverse order was passed.
Currently, in the present matter, an appeal is pending against the order of the NCLT, Kolkata Bench for direction to the ED for detachment of the assets. Also, an application before the Appellate Tribunal, PMLA is pending for direction to the ED for releasing the assets of the corporate debtor. Subsequently, an appeal has been preferred by the resolution professional against the said order of the NCLT, Kolkata Bench which is pending before the NCLAT.
In another matter, Abhishek Stock Broking Services (P) Ltd. vs. Shree Ganesh Jewellery House (I) Ltd. (C.A No. 839/KB/2018), the assets of the corporate debtor were under the possession of the enforcement agencies leading to undetermined valuation of the assets of the corporate debtor. The resolution professional was also unable to take over the management of the corporate debtor due to the arrest of one of the promoters of the corporate debtor by the Directorate of Revenue Intelligence (‘DRI’) during the period of CIRP. Hence, the resolution professional was unable to prepare an information memorandum, being one of the important documents for the purpose of the receipt of resolution plans and the NCLT ordered for liquidation of the corporate debtor by way of its order dated 14 September 2018.
Further, in Winsome Diamonds & Jewellery Ltd., the Appellate Tribunal under the PMLA directed the ED to release the assets citing reason that the general public cannot suffer for the wrong deeds of the directors or promoters of the companies they invested in. The Appellate Tribunal observed and expressed that the non-performing assets have been choking the banking system of the country and the banking conditions are deteriorating day by day.
It is pertinent to mention here that the resolution plans being received while the assets are attached by the ED propose a very low bid despite the fact that the company is in a position to be resolved. The question that needs to be answered is that what recourse is available to the ED in a situation where the assets are acquired by the proceeds of crime or through money-laundering activity.
– Rohit Sharma