Moratorium inapplicable to third party goods with corporate debtor: NCLT

The applicability of moratorium over third party assets in possession of the corporate debtor was disputed before the Chandigarh Bench of NCLT. The Bench ruled, in certain types of cases, when such assets are owned by third parties, they will not be struck by the moratorium..The application was filed by Sun Pharmaceutical Industries in the case of Parabolic Drugs (erstwhile Ranbaxy) which has been under insolvency since August 30, 2018. The insolvency was triggered by an operational creditor, Weather Makers. As part of the arrangement between Sun Pharma and Parabolic, Parabolic would use the raw materials supplied by Sun Pharma only for the purpose of production of a particular product. The raw material in question was a chemical..The said product was not delivered to Sun Pharma and upon initiation of insolvency, Sun Pharma was not allowed access to the raw materials either. During CIRP, the electricity was also cut off for Parabolic. In this backdrop, Sun Pharma argued that the raw materials being chemicals, would get perished and should, therefore, be returned. The creditors’ committee of Parabolic, however, voted against this decision in view of the moratorium applicable during the period of insolvency..While Section 14(1)(d) of the IBC prohibits recovery of any property by the owner, in possession of the corporate debtor, it does not state what such property comprises of. Section 3(27) mentions that property will include – money, goods, land, actionable claim, etc..On the other hand, Section 18 of the IBC requires the resolution professional to take control and custody over the assets of the corporate debtor. For the purposes of Section 18 only, however, assets owned by third parties in possession of the corporate debtor are not included. This implies that the resolution professional is not required to take ‘control and custody’ over assets in possession of the corporate debtor, which belong to third parties..The question before the NCLT was whether the raw materials in question supplied by Sun Pharma to Parabolic would be covered by the moratorium under Section 14 or the assets covered under Section 18. To settle this apparent conflict between the two provisions, the Bench held that Section 18 acts as an exception to the rule laid down in Section 14..The Bench found that while Section 14 imposes a moratorium on property belonging to third parties in possession of the corporate debtor, which includes ‘goods’, Section 18 carves out a particular exception for two kinds of assets, (i) a trust asset or (ii) an asset in possession owing to a contractual arrangement. It further concluded that the arrangement in question was a contractual one and therefore, the raw material was to be returned to Sun Pharma..Sun Pharma was represented by Senior Advocate Anand Chhibar, assisted by Advocates Gaurav Mankotia and J.S. Bhatia..(Read the order).Bar & Bench is available on WhatsApp. For real-time updates on stories, click here to subscribe to our WhatsApp.