Asset held in trust not subject to the moratorium u/s.14 of the IBC

Asset held in trust not subject to the moratorium u/s.14 of the IBC.

Sun Pharmaceutical Industries Ltd. filed application before NCLT, Chandigarh bench seeking its direction to allow it to lift its stock of raw materials of approx. Rs.14 crore in possession of the Parabolic Drugs Ltd (Corporate Debtor). The Corporate Debtor was undergoing the corporate insolvency resolution process and the Resolution Professional appointed was managing the affairs. In terms of “Manufacturing & Supply Agreement” dated 11.02.2010 entered with the Corporate debtor. And as per the said agreement, Sun Pharma supplied the raw-material to the Corporate Debtor for the purpose of manufacturing of the agreed Drug. As per the agreement, the Corporate Debtor agreed to keep the raw materials supplied by the Sun Pharma in trust and to be used only for the purpose of manufacturing finished product and such finished product should be supplied to Sun Pharma only. Further, as per the said agreement, 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 remain and shall be deemed to be vested in RANBAXY (as acquired by Sun Pharma).

The grievance of the Sun Pharma was that neither the manufactured product was made available nor raw material was returned to the Sun Pharma. And after the

pronouncement of moratorium Sun Pharma had not been allowed to visit the manufacturing unit and even electricity connection at the factory of the Corporate Debtor was disconnected. The apprehension is that the raw material being a sensitive chemical might get perished by the passage of time.

Representatives appeared on behalf of the CoC and the Resolution Professional,  opposed the application. It is pleaded that once the Moratorium u/s 14 of IBC is in operation, then the recovery of any property by any owner which is in possession of the Corporate Debtor is prohibited, referred section 14(1)(d) of the Code.

It was also argued that the term “property” is defined u/s 3(27) of the insolvency code which includes money, goods, actionable claim, land, etc. The raw material which is supplied is the “Property” as mentioned in section 14(1)(d) which is under prohibition, therefore, cannot be recovered from the possession of the Corporate Debtor.

Held: The statute has mandated vide section 18(1)(f) that the Interim Resolution Professional shall perform several duties such as ‘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’. Tangible assets whether movable or immovable is within the category of “Assets” as defined in this section vide insertion of an Explanation. Through this explanation an exception is carved out that for the purpose of this section i.e. section 18(1)(f) the followings shall not constitute an Asset and therefore, an Asset owned by a third party, however, in possession of the Corporate Debtor, held under trust or under contractual arrangement.

In the light of this provision if we examine the facts of this case, it is not in dispute that the Operational Creditor M/s. Sun Pharmaceutical Ltd. has supplied the raw material which is in possession of the Corporate Debtor i.e. Parabolic Drugs Ltd. should be released without delay being perishable in nature, following section 18(1)(f) r/w Explanation.

The distinction between Sec.14 and Sec.18 was considered and held that the general rule of Sec.14 is that property in possession of the Corporate Debtor at the commencement of corporate insolvency resolution process cannot be recovered. However, an exception to the said general rule is carved out in the explanation to section 18. When Sec. 18 r/w explanation the term ”asset” shall not include an asset owned by third party in possession of Corporate Debtor, either (i) under trust, or under (ii) contractual arrangements including bailment.

[CA 206/2019, decided on 26/4/2019]