Pledged assets can be auctioned by insolvency professionals: NCLT

A recent National Company Law Tribunal (NCLT) order has sent corporate lawyers and promoters into a tizzy. The NCLT’s Mumbai Bench has asked for the personal properties of promoters to be auctioned off even when the process of insolvency is pending before the insolvency professional.

The petition was filed by Schweitzer Systemtek India, invoking the Insolvency and Bankruptcy Code (IBC) with the NCLT, after it defaulted on a loan of ~4.5 crore given by Dhanlaxmi Bank. The suit was initiated by the promoter himself against the asset reconstruction company (ARC) after Dhanlaxmi Bank sold the loan to Phoenix ARC. The NCLT Mumbai Bench said the promoters cannot be granted any relaxation under the IBC and appointed an insolvency professional to go ahead with the auction of the property.

“This Code of 2016 has prescribed certain limitations, which are in-built 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 is the case here,” said the order of July 3.

“Going by the strict interpretation of the relevant provisions, no fault can be found with the order of the NCLT, but the material question that remains lingering is whether the prayer could have been granted in the interest of justice and equity,” said R S Loona, managing partner, Dhaval Vussonji Alliance.

If any viable restructuring is worked out, the creditor will recover his dues without enforcement of any security. Else, the creditor will be entitled to stand outside liquidation proceedings and realise his dues by enforcement of all security, including collateral ones.

Another lawyer said the onus is now on the company to approach the NCLT tribunal and get a stay against this order. “This case will have farreaching impact on other similar cases being taken up by the NCLT Bench, which is set to hear 500 non-performing asset cases in the years to come,” said a lawyer.

According to the IBC, a company gets 270 days to resolve the debt in which an insolvency professional is appointed by the NCLT and the present board of directors is suspended. After 270 days, if the debt is not resolved, the professional can sell the company’s assets to recover the loan. But according to the NCLT’s order in Schweitzer Systemtek India suit, instead of waiting for the six-month waiting period, the insolvency professional can now go ahead and sell the promoter’s personal property, which was pledged with the banks.

The NCLT Bench, in its examination of the balance sheet of the company, found its assets were significantly insufficient even as the liability was approximately ~5.3 crore. “The possibility of recovery from a sundry debtor are substantial in nature, which requires due consideration,” the court observed.

Going by this definition, many promoters, who are facing proceedings in the NCLT Bench, are staring at property losses even before the stipulated period.