2025 (5) TMI 1029 - AT - IBC

Financial Corporation's Pre-CIRP Asset Possession Ruled Custodial, Not Absolute Ownership Under Insolvency Code Provisions

Financial Corporation's pre-CIRP asset possession under State Financial Corporation Act does not confer absolute ownership. SC upheld IBC's primacy, ... Direction to the Respondent (Appellant) to handover the possession of the movable and immovable properties/assets of the CD to him - HELD THAT:- Since, the property has not been transferred further by the Appellant by way of sale, therefore, it was only a custodian. After perusal of the record are of the considered opinion that there is no error in the impugned order passed by the Tribunal as the controversy in the present case is fully covered by the decision of the High Court of Patna in the case of Bihar State Financial Corporation [2008 (1) TMI 1015 - PATNA HIGH COURT]. Appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals are:Whether the possession of the Corporate Debtor's assets taken by the Financial Corporation under Section 29 of the State Financial Corporation Act, 1951, prior to the commencement of the Corporate Insolvency Resolution Process (CIRP), confers ownership upon the Financial Corporation such that the Resolution Professional (RP) cannot claim possession of those assets during CIRP.Whether the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) override the provisions of the State Financial Corporation Act, 1951, particularly regarding possession and ownership of assets during CIRP.The legal effect and interpretation of Section 29(5) of the State Financial Corporation Act, 1951, in relation to possession and ownership of assets taken by the Financial Corporation.The applicability of the precedent set by the Hon'ble High Court of Patna in Bihar State Financial Corporation & Ors. vs. Parmanand Kumar (2008) regarding possession, ownership, and transfer of assets under the State Financial Corporation Act vis-`a-vis insolvency proceedings.Whether the decision of the Hon'ble Supreme Court in Aruna Oswal v. Pankaj Oswal & Ors. (2020) is applicable to the present controversy.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether possession taken under Section 29 of the State Financial Corporation Act confers ownership on the Financial Corporation, barring the RP from possession during CIRPRelevant legal framework and precedents: Section 29 of the State Financial Corporation Act, 1951 empowers the Financial Corporation to take possession of the assets of a defaulting borrower to recover dues. Sub-section (5) of Section 29 states that upon taking possession, the Corporation shall be deemed to be the owner of the concern, undertaking, or property.The Tribunal referred extensively to the judgment of the Patna High Court in Bihar State Financial Corporation & Ors. vs. Parmanand Kumar (2008), which interpreted Section 29(5) and related provisions. The Court held that the Corporation acts as a statutory authority empowered to deal with the assets of the debtor but continues to hold such assets in a custodial capacity until they are transferred by sale or other means. Ownership in the strict sense vests only upon transfer to a third party, not merely by taking possession.Court's interpretation and reasoning: The Tribunal concurred with the Patna High Court's interpretation that the Financial Corporation, although deemed owner under Section 29(5), acts only as a custodian or statutory agent for realization of dues until the assets are actually transferred. The statutory scheme envisages that the Corporation's possession is for the purpose of recovery and does not extinguish the debtor's ownership rights unless and until the assets are sold or otherwise transferred.Key evidence and findings: The Appellant Financial Corporation had taken possession of the Corporate Debtor's assets in 2016, prior to the initiation of CIRP in 2022. However, no sale or transfer of the assets had been effected by the Corporation. The RP's application sought possession of the assets to enable the CIRP to proceed effectively.Application of law to facts: Since the assets were only in the possession of the Financial Corporation without any transfer of ownership, and the CIRP had commenced subsequently, the provisions of the IBC, which govern insolvency resolution, would prevail. The RP's claim to possession to conduct CIRP was thus justified.Treatment of competing arguments: The Appellant argued that possession under Section 29(5) confers ownership, barring the RP's claim. The Tribunal rejected this, relying on the Patna High Court's ruling that possession alone does not extinguish debtor's ownership rights until transfer. The Respondent's contention that the Financial Corporation acts only as a custodian until sale was accepted.Conclusions: Possession under Section 29(5) does not amount to absolute ownership preventing the RP from taking possession during CIRP. The RP is entitled to possession for the purpose of insolvency resolution.Issue 2: Whether the provisions of the Insolvency and Bankruptcy Code, 2016 override the State Financial Corporation Act, 1951 in matters of possession and asset control during CIRPRelevant legal framework and precedents: The IBC is a special legislation aimed at time-bound resolution of insolvency and has overriding effect over other laws in case of conflict, as per Section 238 of the IBC. Section 19(2) read with Section 60(5) of the IBC empowers the RP to take custody and control of the assets of the Corporate Debtor during CIRP.Court's interpretation and reasoning: The Tribunal held that the IBC provisions prevail over the State Financial Corporation Act in the context of insolvency proceedings. The RP's right to possession under IBC cannot be denied by the Financial Corporation's possession taken under a prior statute.Key evidence and findings: The application under Section 19(2) and Section 60(5) of the IBC by the RP was allowed by the Tribunal, recognizing the primacy of the IBC in insolvency matters.Application of law to facts: Since the CIRP commenced after the Financial Corporation's possession, and the IBC mandates the RP to take control of assets, the RP's application for possession was rightly allowed.Treatment of competing arguments: The Appellant contended that its possession and ownership rights under the State Financial Corporation Act should prevail. The Tribunal rejected this, emphasizing the overriding effect of the IBC.Conclusions: The IBC provisions override the State Financial Corporation Act in insolvency resolution, entitling the RP to possession and control of the Corporate Debtor's assets.Issue 3: Applicability of the Supreme Court decision in Aruna Oswal v. Pankaj Oswal & Ors. (2020)Relevant legal framework and precedents: The Appellant relied on the Supreme Court decision in Aruna Oswal, which dealt with issues of ownership and possession under different facts.Court's interpretation and reasoning: The Tribunal found that the facts and issues in Aruna Oswal were not analogous to the present case. The Supreme Court's decision did not address the specific interplay between possession under the State Financial Corporation Act and possession/control under the IBC during CIRP.Key evidence and findings: The Tribunal observed that the Patna High Court's decision was directly on point and more relevant to the present controversy.Application of law to facts: The Aruna Oswal decision was held inapplicable to the present facts and issues.Treatment of competing arguments: The Appellant's reliance on Aruna Oswal was rejected as misplaced.Conclusions: The Supreme Court decision in Aruna Oswal does not apply to the present controversy and does not affect the Tribunal's decision.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Under the statutory scheme the Corporation while transferring the assets of debtor acts only as a person authorized by law to deal with assets of debtor and acts only as such in applying the proceeds of transfer for discharging the liabilities of owner of assets so transferred. This provision conclusively establishes the statutory scheme of continued ownership of debtor promoters until assets vest in transferee as transferees from the owners.'This core principle establishes that possession by the Financial Corporation under Section 29(5) does not equate to absolute ownership barring the debtor or the RP from claiming possession or ownership rights until transfer is effected.The Tribunal further held that the provisions of the Insolvency and Bankruptcy Code, 2016 override the State Financial Corporation Act, 1951 in matters concerning possession and control of assets during CIRP.Accordingly, the Tribunal concluded that the Resolution Professional is entitled to possession of the Corporate Debtor's movable and immovable properties for the purpose of conducting the CIRP, notwithstanding the prior possession by the Financial Corporation.The appeals were dismissed for lack of merit, affirming the Tribunal's order allowing the RP's application for possession.