2019 (4) TMI 1886 - Tri - Insolvency and Bankruptcy

Tribunal rules raw materials not assets under Insolvency Code, orders return to applicant.

The Tribunal held that the raw materials supplied by the applicant, held under a contractual arrangement and trust, are not considered 'assets' under ... Lifting of raw materials allegedly belonging to the Applicant, which is in the possession of the Corporate Debtor - section 60(5) of the Insolvency Code - the argument is that an asset owned by a third party but in possession of the Corporate Debtor which is held under a trust or under a contractual arrangement shall be out of the clutches of the provisions of 18(1)(f) as well as section 14 of IBC - HELD THAT:- One of the facts is not in dispute that the Applicant had supplied raw material which is in possession of the Corporate Debtor, now under insolvency, hence controlled by the appointed Ld. Resolution Professional. The Applicant has expressed an apprehension that the raw material being a chemical, is perishable in nature, hence requires to be protected before it expires or gets destroyed by any chemical reaction. A legal question has been raised that whether the raw material in possession of the Corporate Debtor, should not be allowed to be returned on commencement of “Moratorium”? On one hand the Ld. RP has taken the shelter of the provisions of section 14(1)(d) of the IBC, but on the other hand the Applicant has placed reliance on the Explanation under section 18(1)(f) of IBC. At the outset, at this juncture, in our opinion the facts and circumstances of the case lead us to hold that the provisions of section 18 are more appropriate to address the legal issue in hand. 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 short, an Asset belonging to an Operational Creditor, however, in possession of a Corporate Debtor shall not be treated as an Asset, therefore, the RP shall not be allowed to take control and custody over the said Asset. What are the areas of operation of Sec. 14 vis-a-vis Sec. 18 of IBC? - HELD THAT:- The property as defined U/s 3(27) of the Code includes money, goods, land, actionable claims etc. If the property as defined in Sec. 3 is in possession of the Corporate Debtor, then such property cannot be recovered from the Corporate Debtor by the owner of the property on commencement of Moratorium. This is the general rule through which the Corporate Insolvency Resolution Process proceedings are being triggered on admission of an insolvency petition. Under the insolvency Code, later on an exception is provided U/s 18 (Explanation) against this general rule. However, the area of operation of Sec. 18 is distinct from Sec. 14. There is a fine distinction as appearing in Sec. 18 r/w explanation that for the purpose of this section 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. Therefore, it is clear that the ambit of application of this explanation is confined to these two types of assets, i.e. either a trust asset or an asset in possession owing to contractual arrangement. Hence, a conclusion can be drawn that the exception as carved out through this explanation against the general rule of S. 14, which is limited in its operation in respect of these two types of assets only, although as per the main provision, an asset owned by a third party but in possession of the Corporate Debtor shall not be included U/s 18(1)(f) which prescribes taking control over the properties as described therein. Whether the raw material which is supplied by the applicant for manufacturing of a drug in possession of the Corporate Debtor can be an asset to be held as a trust property or under contractual arrangement? - HELD THAT:- Our concern is limited to an arrangement which is undisputedly a contractual arrangement, which in general prescribes the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed off according to the directions of the person delivering them - Since, the raw material was supplied under a contractual arrangement, terms already reproduced above therefore, the provisions of Explanation to Sec. 18 are squarely applicable. The applicant is entitled to take back the property from the possession of the RP. Application allowed. Issues Involved:1. Applicability of Section 14 of the Insolvency and Bankruptcy Code (IBC) regarding the moratorium on recovery of property.2. Applicability of Section 18(1)(f) of the IBC concerning the control and custody of assets held under trust or contractual arrangements.3. Determination of whether raw materials supplied by the applicant qualify as assets under trust or contractual arrangements.Issue-wise Detailed Analysis:1. Applicability of Section 14 of the IBC regarding the moratorium on recovery of property:The Tribunal examined the provisions of Section 14(1)(d) of the IBC, which prohibits the recovery of any property by an owner or lessor if such property is occupied by or in possession of the Corporate Debtor during the moratorium period. The Tribunal noted that the term 'property' is defined under Section 3(27) of the IBC to include money, goods, actionable claims, land, etc. The raw material supplied by the applicant falls under the definition of 'property,' and therefore, its recovery would generally be prohibited under Section 14(1)(d) during the moratorium.2. Applicability of Section 18(1)(f) of the IBC concerning the control and custody of assets held under trust or contractual arrangements:The Tribunal considered the provisions of Section 18(1)(f) of the IBC, which mandates the Interim Resolution Professional (IRP) to take control and custody of any asset over which the Corporate Debtor has ownership rights. However, the explanation annexed to Section 18(1)(f) carves out an exception for assets owned by a third party but in possession of the Corporate Debtor, held under trust or contractual arrangements, including bailment. The Tribunal emphasized that such assets are excluded from the definition of 'assets' for the purpose of Section 18(1)(f), and hence, the IRP cannot take control and custody of these assets.3. Determination of whether raw materials supplied by the applicant qualify as assets under trust or contractual arrangements:The Tribunal analyzed the 'Manufacturing & Supply Agreement' dated 11.02.2010 between the applicant (Sun Pharmaceutical Industries Ltd.) and the Corporate Debtor (Parabolic Drugs Ltd.). The agreement contained specific clauses (3.11, 3.12, 3.14, 3.16, and 3.18) that explicitly stated the raw materials supplied by the applicant were to be used exclusively for manufacturing the product for the applicant and were to be held in trust by the Corporate Debtor. The Tribunal concluded that the raw materials supplied by the applicant were indeed held under a contractual arrangement and trust, as per the terms of the agreement.Conclusion:The Tribunal held that the raw materials supplied by the applicant, being held under a contractual arrangement and trust, fall within the exception provided under the explanation to Section 18(1)(f) of the IBC. Therefore, these raw materials do not constitute 'assets' for the purpose of Section 18(1)(f), and the IRP cannot take control and custody of them. Consequently, the Tribunal directed the return of the raw materials to the applicant, allowing the application (CA 206/2019 in CP 102/2018).Order:The application (CA 206/2019 in CP 102/2018) is hereby allowed, and the raw materials supplied by the applicant are to be returned from the possession of the Resolution Professional.