NCLT Kolkata: IBC Prevails Over State Financial Corporation Act, 1951

Background Facts:

On 21.08.2009, Basukinath Food Processors Limited (Corporate Debtor) entered into a Loan Agreement ('Agreement') with West Bengal Industrial Development Corporation Ltd. (Respondent) for an amount of Rs. 20 Crore. Following Clause 4 of the Agreement, a Charge was created on the first equitable mortgage on all immovable properties both present and future. To secure borrowings by the Corporate Debtor, another first charge on movable properties was also created.

Default was made by the Corporate Debtor which led to the Respondent taking possession of the factory situated at Kharagpur, West Bengal. Mr. Rajesh Lahila was appointed as the Resolution Professional ('RP') on 17.02.2022 to manage the CIRP of the Corporate Debtor and to take custody of all the assets of the Corporate Debtor.

RP met the Respondent officials several times and also sent various emails and a formal letter dated 24.01.2022 for handing over the possession of the property. However, the property was not handed over.

Aggrieved by the same, the Applicant has filed an application against the Respondent to hand over the possession of the assets of the Corporate Debtor.

NCLT Verdict:

The NCLT Kolkata allowed the application and held that the IBC prevails over the SFC Act.

The Tribunal placed reliance on Section 18(f) of IBC which is read below:

Section 18. Duties of Interim Resolution Professional

The interim resolution professional shall perform the following duties, namely:—

(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;

(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;

It observed that the above section casts a duty on the RP to take control and custody of any assets 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 the assets of the Corporate Debtor including assets that may not be in possession of the Corporate Debtor at the date of commencement of CIRP. It also noted that no dispute on the said property as is in the possession of Respondent has been recorded in the Corporate Debtor's balance sheet though it has been pledged with the Respondent for the purpose of securing the borrowings made by the Corporate Debtor.

Placing reference to Section 238 of IBC and Section 29(5) of the SFC Act which is read as follows:

Section 238. Provisions of this Code to override other laws.

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

29. Rights of Financial Corporation in case of default.

(5). Where the Financial Corporation has taken any action against an industrial concern under the provisions of sub-section (1), the Financial Corporation shall be deemed to be the owner of such concern, for the purposes of suits by or against the concern, and shall sue and be sued in the name of the concern.

It observed that IBC takes precedence over the provisions of the SFC Act. It noted that Section 29(5) of the SFC Act designates the Financial Corporation as a deemed owner for legal proceedings, but not the actual owner of the assets. It observed that the Respondent had filed its claim relating to the financial debt with RP and is also claiming the ownership of the assets and refusing to hand over the property to the RP. Such a conflict stance does not serve the purpose of the Respondent.

Presently, the Respondent cannot be treated as the owner of the said properties as post invocation of Section 29 of the SFC Act, no transfer of assets has been made by executing appropriate documents of conveyance. Moreover, as per Section 54 of the Transfer of Property Act of 1882, any transfer of immovable property with a value of more than than hundred rupees can only be made by a registered instrument. Thus, the Respondent is holding the properties merely as a mortgage with a security interest.

The Tribunal noted the inconsistency between Section 18(f) of IBC and Section 29 of the SFC Act and observed that while Section 18(f) of IBC casts duty on the RP to take custody of Corporate Debtor's assets as recorded in the balance sheets, the explanation of the said provision also provides that Corporate Debtor's assets not in possession shall also be taken into custody. On the other hand, Section 29 of the SFC Act provides that on a failure to the payment as per the terms and conditions of the borrowings, the Corporation can take first charge over the Corporate Debtor's immovable properties to be retained and dispose of the said properties pledged. Presently, NCLT resolved the said inconsistency through the application of Section 238 of IBC providing that IBC shall prevail over any other statute in the case of such inconsistency.

In conclusion, NCLT allowed the application and directed the Respondent to hand over the possession of the property to the Applicant within 15 days from the date of pronouncement of the said order.

Case Title: Mr. Rajesh Lahila vs. West Bengal Industrial Development Corporation Ltd.

Case No.: I.A. (IB) No. 204/KB/2022 and I.A. (IB) No. 1144/KB/2022 in C.P. (IB) No. 1674/KB/2019

Counsel for Resolution Professional: Mr. Shaunak Mitra, Advocate, Mr. Subodh Kr. Agrawal, PCA, Mr. Rahul Auddy, Adv., Mr. Aditya Gooptu, Adv., Ms. Puja Agarwal, PCA

Counsel for Applicant in IA/1144/2022: Mr. Reetobroto Mitra, Adv.

Counsel for Respondent in IA/204/2022: Ms. Meenakshi Manot, Adv.

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