India: Insolvency & Bankruptcy Code, 2016 - Moratorium Inapplicable To Third Party Assets

Last Updated: 10 May 2019
Article by AMLEGALS  

IN THE NATIONAL COMPANY LAW TRIBUNAL – CHANDIGARH BENCH
M/s. Sun pharmaceutical industries limited
in the matter of weather makers private limited v. parabolic drugs limited
CA NO.206 of 2019 IN C.P (IB) – 102/CHD/2018

FACTS

The present application was moved by M/s. Sun Pharmaceutical Industries Limited (hereinafter referred to as the "Applicant"), formerly known as Ranbaxy Laboratories,before the National Company Law Tribunal Chandigarh Bench (hereinafter referred to as the "NCLT") in the case of Parabolic Drugs (hereinafter referred to as the "Corporate Debtor"), which was undergoing Corporate Insolvency Resolution Process (hereinafter referred to as the "CIRP"), seeking to lift the raw material belonging to the Applicant.

Since the Corporate Debtor was undergoing CIRP, moratorium was declared in the light of Section 14 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code").

The Applicant had entered into a Manufacturing & Supply Agreement (hereinafter referred to as the "Contract") wherein the Corporate Debtor had agreed to manufacture a drug for the Applicant, the raw material for which was to be given by the Applicant.

While the Applicant relied on a number of clauses of the Contract, the NCLT put emphasis on clause 3.18 of the Contract, reproduced hereinunder:

"3.18 The property and ownership in the raw materials, packaging or other materials and the finished Products or stock in-process of manufacture shall at all times remains and shall be deemed to be vested in RANBAXY"

The Applicant was aggrieved by the fact that after the CIRP process was started for the Corporate Debtor, neither the drug to be manufactured was made available to them nor the raw material was returned by the RP.

To add to this, there was an apprehension that the raw material (a sensitive chemical) stored with the Corporate Debtor would perish since the electricity connection of the premises was also disconnected.

ISSUE BEFORE THE NCLT

The issue before the NCLT was:

Whether third party goods in the possession of the Corporate Debtor should be returned to the owner upon the commencement of the Moratorium or not?

OBSERVATION

The observation of the NCLT was rather very straightforward having direct reference to the Code and following a very strict interpretation of the provisions therein.

The NCLT noted that while the Learned Resolution Professional on behalf of the Corporate Debtor relied upon Clause (d) of Sub-Section (1) of Section 14, the facts and circumstances of the case held provisions of Section 18 to be more appropriate while dealing with the question of law before it.

While examining the provisions of Section 14 (1) (d) of the Code the NCLT pointed out that the recovery of any "property", as opposed to the term "asset" used under Section 18 of the Code, was prohibited after moratorium was declared by the virtue of the commencement of the CIRP, by an owner or a lessor given that such a property was in the possession of a Corporate Debtor.

The definition of the term "property" is found under Sub-Section (27) of Section 3 of the Code which included money, goods, land and actionable claims amongst other elements within its scope.

The NCLT noted that the Committee of Creditors of the Corporate Debtor had resolved unanimously by way of a vote to not release the goods to the Applicant which gave rise to the reasoning that such a resolution was to bar the Applicant from the "recovery" of its goods while in a strict sense, the claim of the Applicant was not for recovery of money or goods at the first place. 

"From the side of the Applicant, a legal argument was raised that the admitted position of supply of goods was not denied by the Resolution Professional. Further, it is pleaded that provisions of Section 14 do not apply in this situation because the material supplied do not fall under the category of essential goods or services. The Ld. Counsel has informed that "Essential Supplies" are defined under Regulation 32 of IBBI (Insolvency Resolution Process and Corporate Persons) Regulation 2016 which includes and shall mean electricity, water, telecommunication services and information technology services.

CONCLUDING VIEW

The primary reasoning of the NCLT for relying upon the provisions of Section 18 of the Code and the explanation provided therein was answered by way of a fine distinction between the areas of operation of Section 14 Code vis-à-vis Section 18 of the Code.

The NCLT noted that Section 14 is with regards to the property which is occupied or in possession of the Corporate Debtor and when read with Section 3(27) of the Code, it did include money, goods, land etc. Thus, if the property as defined under Section 3 is with the Corporate debtor then the same cannot be recovered from the Corporate Debtor.

This was taken to be the general rule of operation.

The distinction was thus brought out by the Explanation as provided for under Section 18 wherein "asset" as provided for therein did not include the assets owned by a third party in possession of Corporate Debtor, either

  1. Under trust or;
  2. Under a contractual arrangement including bailment.

Thus, the exception to the general rule is only when the "asset" is either a trust asset or an asset in possession owing to contractual arrangement.

Hence it was concluded that an exception could easily be drawn to the general rule under Section 14 by the Explanation under Section 18 but it was limited in its operation.

The factual matrix had already established, and nor it was ever disputed, that the raw materials were provided to the Corporate Debtor under a contractual arrangement.

AMLEGALS REMARKS

In the present case, the NCLT points out that while Section 14 in the general rule, the Explanation to Section 18 is the exception to this rule.

While making this conclusion, it is important to note that the scope of operation of this exception is limited by the Code itself as provided for under the Explanation to Section 18.

An asset owned by a third party but in possession of the Corporate Debtor shall not stand to be included under Clause (f) of Sub-Section (1) of Section 18 of the Code.

What is important to note further which the NCLT could have emphasized on is that in order to seek relief in the light of the Explanation for Section 18, the party seeking such relief should prima facie be a third party in addition to the other conditions stated therein.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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