NCLT says pledged assets can be auctioned by insolvency professionals

"Code of 2016 has prescribed certain limitations which are inbuilt and must not be overlooked: NCLT

A recent  National Company Law Tribunal (NCLT) order has sent corporate lawyers and promoters to seek guidance from the higher courts as the NCLT said the personal properties of promoters can be auctioned even when the process of insolvency is pending before it.

The petition was filed by Schweitzer Systemtek India, invoking Section 10 of the Insolvency and Bankruptcy Code for a default of Rs 4.5 crore. The suit was initiated by the promoter himself to protect the firm's interests after Dhanlaxmi Bank sold the loan to Phoenix ARC (asset reconstruction company).  The NCLT Mumbai bench said the promoters cannot be granted any relaxation under the IBC and appointed the insolvency professional who can go ahead with the auction of the property.

“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 here,” said the order dated July 3.

“The onus is now on the company to go to the NCLT tribunal and get a stay against this order,” said a lawyer in Mumbai. It will have far reaching impact on other similar cases which are now being taken up by the other NCLT bench, he added.

As per the IBC, a company will get 270 days to resolve the issue in which an insolvency professional would be appointed and the present board of directors would be suspended. After 270 days, the professional can sell the company’s assets for recovery of the loan. But as per the NCLT order, instead of waiting for the 6-month’s standstill period, the insolvency professional can go ahead and sell promoters personal property which is pledged with the banks.

On examination of the Balance Sheet, a huge contract is apparent. On left hand side of the Balance Sheet, the liability is stated to be approximately Rs 5,30,00,000/-, but on the right hand side; the fixed assets, fixed deposits, Bank Guarantee are significantly insufficient. The Insolvency Professional thus can iron out all these creases. The details of reserves and Surplus need due examination. The possibility of recovery from Sundry Debtor, are substantial in nature which requires due consideration,” the court said.

Going by this definition, many companies, which are facing proceedings in the NCLT bench, are staring at the loss of their properties even before the stipulated period.