Promoters Cannot Escape Liquidation Of Personal Assets Given As Security By Filing For Bankruptcy under Code: NCLT

The National Company Law Tribunal recently held that the personal properties of the Promoters given as security to the Banks can be proceeded against, in spite of initiation of insolvency proceedings against the Company. Judicial Member M.K. Shrawat ruled that personal properties of the Promoters would not be saved by the Moratorium prescribed by Section 14 of the Insolvency and Bankruptcy Code, 2016. During the moratorium, all pending actions against the Debtor are stayed, and no new actions can be initiated.

The Tribunal was hearing a Petition filed by M/s Schweitzer Systemtek India, invoking Section 10 of the Code, which pertains to initiation of insolvency proceedings by the Corporate Debtor. The Debtor had been lent Rs. 4.5 crore by Dhanlaxmi Bank, and the Promoter had pledged personal properties. The Bank had then assigned the loan and the security to Phoenix ARC, which was now opposing the Petition as the Creditor. The Creditor had submitted that the Petition was an attempt to thwart the actions taken so far for recovery of the outstanding debt. It submitted that the Creditor had approached the NCLT with malafide intention, even though the default of non-payment has already been established. The Tribunal opined that the Petition  deserved to be appointed, so that an Insolvency Professional could streamline the position of the debt, determine the measures taken to safeguard the interests of the sundry creditors, and examine the correctness of the loss claimed.

“This Code of 2016 has prescribed certain limitations which are inbuilt and must not be overlooked. The ‘Moratorium’ indeed is an effective tool, sometimes being used by the Corporate Debtor to thwart or frustrate the Recovery Proceedings, as happened in this Case,” the Tribunal pointed out.

July 20th, 2017