The Insolvency and Bankruptcy code , 2016 (IBC) provides for a time bound resolution process of the corporate debtor. All the types of creditors i.e. Financial or Operational Creditors or the corporate debtor itself can file an application to initiate Corporate Insolvency Resolution Process under section 7, 9 or 10 respectively.
Upon the application being admitted under IBC, the moratorium is issued according to which:-
“Section 14- Moratorium
- The adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely-
- The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
- transferring , encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
- Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under securitisation and reconstruction of financial assets and enforcement of security interest Act, 2002;
- The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”
According to the above provision the moratorium is issued only against the properties of the corporate debtor and not against the properties of the promoters of the corporate debtor. As per section 14 the corporate debtor cannot dispose of or alienate or transfer any of its properties and no one can enforce the security interest created in favour of the property of the corporate debtor.
Overall, once an application under IBC is admitted, the properties in the name of the corporate debtor has to remain intact till the cessation of moratorium or approval of the resolution plan or passing of liquidation orders.
Personal liability of the promoter when moratorium has been issued
The provisions of IBC ascertains that the moratorium is effective against the properties of the corporate debtor but does not clarify about the personal properties of the promoter.
Whether the personal properties of the promoter would come under the purview of the moratorium under section 14 of IBC?
If a security interest is created against the personal properties of the promoter it implies that the ownership of the property exists with the promoter and not the corporate debtor, therefore the personal properties of the promoter remains out of the purview of the effect of moratorium issued.
The same law has been laid down by the NCLT, Mumbai bench in Schweitzer Systemtek (Corporate Debtor) vs. Phoenix ARC Limited (Creditor) wherein the lender dhanlaxmi bank lended some amount to the corporate debtor and the promoter pledged its personal properties against the said loan. The bank later on transferred the loan to the assets reconstruction company i.e. Phoenix ARC Limited. Afterwards the corporate debtor filed an insolvency application under section 10 of IBC but the creditor contested the same on the apprehension that it might lose the control over the assets of the promoter as the moratorium will become effective upon the properties of the promoter.
The creditor had already initiated action against the personal properties of the promoter and were about to reach at an advanced stage. But NCLT clarified that the moratorium will not be effective upon the personal properties of the promoter.
In the light of above it is clear that only those properties in the name of the corporate debtor shall come under the purview of the moratorium and not the personal properties in the name of the corporate debtor. As the corporate debtor loses the ownership rights over the properties which are pledged to the banks or security interest is created against such properties in the favour of any other party.
Disclaimer – Please note that the above view is based on personal interpretation and for general awareness. The readers are required to take opinion from the IBC professionals or Insolvency Professionals before relying on the article. For any clarifications, please write to us at email@example.com