2019 (6) TMI 1331 - AT - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process - Corporate Debtor - Section 7 of the Insolvency and Bankruptcy Code, 2016 - HELD THAT - Section 20 of the I B Code deals with Management of operations of corporate debtor as going concern . As per sub-section (2) therein, the Interim Resolution Professional has the authority to raise interim finance provided that no security interest shall be created over any encumbered property of the Corporate Debtor without the prior consent of the creditors whose debt is secured over such encumbered property. However, no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt. During the Moratorium period, the assignee also cannot deduct any amount from the assets of the Corporate Debtor . The Explanation below Section 18 does not include the assets generated from the rent paid by the lessee (tenants) . As the premises belongs to the Corporate Debtor , the lessee pays rent in favour of the Corporate Debtor , though as per the agreement, the right of LICHFL is only that of an assignee which cannot recover or deduct any amount during the period of Moratorium . Application dismissed.

Summary

Issues:
1. Appeal against order admitting application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Modification of the order dated 29th October, 2018 regarding the operation of the Corporate Debtor's bank accounts.
3. Interpretation of provisions related to moratorium under the Insolvency and Bankruptcy Code.
4. Application of the Explanation below Section 18 regarding assets of the Corporate Debtor held under trust or contractual arrangements.

Analysis:
1. The appeal was filed against the order admitting the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, appointing an Interim Resolution Professional and imposing a moratorium. The Appellant, a Director and Shareholder of the Corporate Debtor, challenged this order.

2. An Interlocutory Application was filed seeking modification of the order dated 29th October, 2018, to allow the Corporate Debtor to operate its bank accounts for day-to-day expenses, particularly related to loan repayments and operational costs. The Appellant argued that certain transactions crucial for the Corporate Debtor's functioning were not covered in the original order.

3. The Counsel for the Committee of Creditors cited Section 14(1)(b) & (d) of the Insolvency and Bankruptcy Code, emphasizing the restrictions imposed during the moratorium period. However, the Appellant relied on the Explanation below Section 18, asserting that assets held under trust or contractual arrangements were not part of the Corporate Debtor's assets, and therefore, not subject to the moratorium.

4. The Agreement for Assignment of Rent highlighted the arrangement between the Corporate Debtor, LICHFL, and tenants, specifying the assignment of rental income to LICHFL. The Tribunal analyzed Section 20 of the Insolvency and Bankruptcy Code, which allows the Interim Resolution Professional to raise interim finance but restricts creating security interests without creditor consent.

5. Ultimately, the Tribunal rejected the Interlocutory Application, maintaining the original order. It suggested the Resolution Professional inform the Committee of Creditors about the situation for independent consideration. The decision was based on the understanding that assets generated from rent payments were not subject to deduction during the moratorium, as per the Assignment Agreement and relevant provisions of the Code.