2020 (8) TMI 641 - AT - Insolvency and Bankruptcy

Appeal Tribunal overturns Adjudicating Authority's Order due to failure to consider pre-existing objections

The Appeal Tribunal set aside the Adjudicating Authority's Order in a case involving encumbrance during Corporate Insolvency Resolution Process (CIRP). ... CIRP process - Principles of natural justice - Adjudicating Authority has decided the application without considering the submissions made by the Respondent - Cancellation of encumbrance which had been created by way of attachment - attachment prior to the initiation of CIRP process - HELD THAT:- The Adjudicating Authority has passed the impugned Order without considering the attachment order dated 04th August, 2017. It is on record that the Recovery Officer in order to realise outstanding dues, attached the immovable properties belonging to the Corporate Debtor, in the exercise of powers vested in him under Section 8(B) of the EPF and M.A. Act, 1952 - On perusal of the letter produced, it is clear that Authorised officer, Regional officer, Vellore, issued a Recovery Certificate to the Recovery Officer, Regional Office, Vellore in exercise of powers conferred under Section 8(B) to 8(G) of the Employees Provident Fund and Miscellaneous Act, 1952. Copy of Order of attachment EPFCP-16 is also enclosed with the attachment order passed by the Recovery Officer, Employees Provident Fund Organization. Thus, it is undisputed that the attachment of immovable property of the Corporate Debtor was made by the Recovery Officer EPFO Organization on 04th August 2017 much before the petition under Section 7 of the Code. The Recovery Officer had issued a reminder to Sub Registrar for issuance of encumbrance certificate about the property attached by EPFO Vellore, to put a restriction on the Corporate Debtor from alienating the property, already attached by the Recovery Officer for the dues of Employees Provident Fund, by Order dated 04th August, 2017. The Recovery Officer has also demanded the encumbrance certificate duly incorporating the attachment of EPFO - It is also apparent that the Sub Registrar failed to incorporate the attachment in the register. Therefore, the Recovery Officer of EPFO issued a reminder on 10th May 2018 and 29th November 2019 for incorporating attachment of the immovable property in the record. The Respondent has filed the attachment order dated 04th August 2017, which shows that the attachment order of immovable property of the Corporate Debtor was made by the Recovery Officer Employees Provident Organization on 04th August 2017. The petition under Section 7 was admitted by the Adjudicating Authority by Order dated 04th February 2019. Thus it is apparent that the attachment of the immovable property in question had already existed prior to the initiation of CIRP of the Corporate Debtor. The alleged encumbrance certificate which was issued during Moratorium is only the incorporation of earlier Order in the record. But in fact attachment of the property was made much before the initiation of Corporate Insolvency Resolution Process. It is also clear that the Adjudicating Authority has passed the Order even without considering the submission and objections of the Appellant. Adjudicating Authority failed to consider the fact that attachment of the property was made much before the issuance of the CIRP - thus, the Adjudicating Authority failed to take notice that attachment of the property of the corporate debtor was made much before the initiation of CIRP, but it was only recorded in the register during CIRP. It is on record that the impugned order is passed without considering the objections of the Recovery Officer, EPFO, though the objection by EPFO was already filed in the Registry of NCLT. Appeal allowed. Issues: Appeal against Order dated 11th October 2019 passed by Adjudicating Authority in Company Petition No. CP/1037/(I.B.)/2018Issue 1: Consideration of encumbrance during Corporate Insolvency Resolution Process (CIRP)The Financial Creditor filed a company petition under Section 7 of the IBC, leading to the appointment of a Resolution Professional who sought to cancel the encumbrance created by an attachment order registered by EPFO Vellore. The Resolution Professional argued that the encumbrance violated the Moratorium under Section 14(1) of the Code, potentially impacting creditor interests during liquidation. The Adjudicating Authority allowed the Resolution Professional's application, emphasizing the prohibition on creating encumbrances during the Moratorium period.Issue 2: Failure to consider objections and attachments made before CIRP initiationThe Adjudicating Authority passed the impugned Order without considering objections filed by the Recovery Officer of EPFO, despite objections being on record. The Recovery Officer had attached the Corporate Debtor's immovable properties before the initiation of CIRP, but the attachment was only recorded during CIRP. The Authority neglected to acknowledge that the attachment predated the CIRP initiation, leading to the Appeal Tribunal setting aside the impugned Order due to the Authority's failure to consider the pre-existing attachment and objections raised.ConclusionThe Appeal Tribunal allowed the appeal, setting aside the impugned Order without imposing costs. The detailed analysis highlighted the importance of considering pre-existing attachments and objections during CIRP proceedings, emphasizing the need for procedural fairness and adherence to the principles of natural justice in insolvency cases.