NO SYMBOLIC POSSESSION IN CORPORATE INSOLVENCY RESOLUTION PROCESS

Symbolic possession

Symbolic possession is a legal concept where a lender (like a bank) acquires legal ownership rights to a defaulting borrower's property on paper, without taking physical control. Under Section 13 (4) (a) of the SARFAESI Act, in case the borrower fails to discharge (pay) his liability in full within 60 days of receipt of date of notice under section 13(2) of the SARFAESI Act, then the lender (Bank / financial institution) can take possession of the secured asset (movable or immovable property) in order to recover its secured debt. Under Rule 8 of the Security Interest (Enforcement) Rules, 2002, where the secured asset is an immovable property, the lender shall take or cause to be taken possession of the same by delivering a possession notice and by affixing it on the outer door or at such conspicuous place of the property. 

Transfer of assets by corporate debtor in CIRP

Corporate Insolvency Resolution Process (‘CIRP’ for short) may be initiated against the Corporate Debtor by financial creditors under Section 7 of the Insolvency and Bankruptcy of the Code, 2016 (‘Code’ for short) or under Section 9 of the Code by the Operational Creditors and under Section 10 of the Code by the Corporate debtor itself. If the application is correct in all aspect the Adjudicating Authority may admit the application. The CIRP starts from the date of admission.

The Adjudicating Authority, on admission of the application, shall declare a moratorium by an order; cause a public announcement calling the creditors of the corporate debtor to submit their claims in the prescribed form and also appoint an Interim Insolvency Professional (‘IRP’ for short). Section 18(f) of the code provides that the IRP shall 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-

• assets over which the corporate debtor has ownership rights which may be located in a foreign country;
• assets that may or may not be in possession of the corporate debtor;
• tangible assets, whether movable or immovable;
• intangible assets including intellectual property;
• securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
• assets subject to the determination of ownership by a court or authority.

Issue

The issue to be discussed in this article is as to whether the corporate debtor can be allowed to transfer the assets that are handed over to the IRP on symbolic possession without the physical possession with reference to decided case law.

Case law

In Mr. M. Bhaskaran and Mr. M. Radhakrishnan Versus Mr. Sandeep Kothari, Chennai - 2025 (9) TMI 1167 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL AT CHENNAI, the Orion Water Treatment Private Limited initiated Corporate Insolvency Resolution Process under section 10 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) by itself, as it has committed default in payment of debt to its creditors vide CP/IB/263/(CHE)/2022. The said application was admitted by the Adjudicating Authority on 18.10.2024. The Adjudicating Authority appointed Sandeep Kumar Kothari as IRP to conduct the CIRP smoothly. The Adjudicating Authority further directed the IRP to take over the management and affairs of the corporate debtor under Section 17(3) of the Code.

The IRP directed the corporate debtor to hand over all the assets of the corporate debtor and cash balance. The same has not been done by the corporate debtor. Therefore, the IRP filed an interim application before the Adjudicating Authority with the prayer that the Appellant may be directed to extend cooperation in managing the affairs of the Corporate Debtor and simultaneously, to vacate and hand over the control and custody of the premises of the Corporate Debtor to the Applicant or his authorised representative. Besides that, the IRP sought for possession of the inventories valuing about Rs.1,02,56,821/-, and the cash balance of Rs.1,56,382/- as per the financial statement pertaining to FY 2023-2024, and also prayed for handing over of all the assets and the records of the Corporate Debtor. The Adjudicating Authority allowed this application and directed the appellants to hand over all the assests including cash balance to the IRP.

Against the said order the appellants, in this case, filed the present appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short). In the appeal the appellants contended that they may be allowed to hand over the symbolic possession and not the actual possession of the corporate debtor.

The NCLAT called upon the appellants to elaborate upon as to where, in a proceeding which are being held under section 10 of the Code does this concept of 'symbolic possession', emerge or where it has been prescribed under law, particularly when the said section 10 proceedings is a CIRP Proceedings initiated by Orion Water Treatment Private Limited i.e., Corporate Debtor itself, where the Corporate Debtor has admittedly committed a default, in payment of debt due to the creditors. Though the appellants insisted on handing over the symbolic possession of the properties to IRP but unable to show as to from where the concept of symbolic possession has been derived by him, for the purpose of the proceedings of CIRP, commenced under section 10 of the Code.

The IRP, the respondent in this case, vehemently opposed the contentions of the appellants. He contended that there is no concept of the assets of the Corporate Debtor of symbolic possession available under the Code and that, particularly, when it happens to be a proceeding under section 10 of the Code, where the Corporate Debtor itself has initiated CIRP, if itself has got no right as such to retain the possession of the assets of the Corporate Debtor. there was no justification for permitting symbolic possession and that the relief granted by the NCLT directing actual handover was consistent with the Code.

The NCLAT analysed the provisions of the Code in regard to hand over the assets of the corporate debtor to the IRP after commencement of CIRP. The NCLAT observed that the Appellants had not identified any provision in the I&B Code that recognises or allows the practice of handing over merely a 'symbolic possession' in the CIRP context. The Court accepted the IRP's contention that the Code explicitly contemplates actual taking of control and custody by the IRP and that permitting symbolic possession would be inconsistent with that statutory mandate. Allowing symbolic possession where the CIRP has been duly ordered would 'deceive the very purpose' of initiating the CIRP under section 10, whose object is to enable an effective resolution process when a Corporate Debtor has committed default. The NCLAT found no legal or factual error in the NCLT’s reasoning that directed actual handover and cooperation; there was no dispute of fact requiring further factual interpretation. The NCLAT dismissed the appeal.