2019 (7) TMI 1251 - Tri - Insolvency and Bankruptcy

Termination of agreement - Directions to the Resolution Professional of the Corporate Debtor to handover to the Applicant certain Plant Machinery owned by it which are lying at the Premises of the Corporate Debtor - Whether the termination of the agreement on 28.11.2017 by the Applicant under Clause 15.3(b) of the agreement dated 12.05.2011 during the moratorium declared under Section 14 of the IBC, 2016 on 13.09.2017 is legally tenable? HELD THAT - The intention of the legislature in relation to Section 14 is to ensure that after the declaration of moratorium, there is a standstill period during which there is a bar on creating any encumbrance, sale or alienation of the assets of the Corporate Debtor, so that the financial position of the Corporate Debtor must remain preserved and transparent as a going concern. The suspension of all proceedings against the Corporate Debtor is essential, as it stabilizes the assets of the Corporate Debtor thereby giving the creditors clarity regarding the financial health of the Corporate Debtor and providing them a drawing board to formulate a Resolution Plan, which could effectively restructure the outstanding debts. The action of the Applicant terminating the agreement during the moratorium declared vide order dated 13.09.2017 by this Authority is in violation of Clause (d) of Sub-Section (1) of Section 14 of the IBC, as the interest created in favour of Corporate Debtor by virtue of the agreement has been taken away, on which the whole of the business of the Corporate Debtor was dependent. Thus, the termination of the agreement vide letter dated 28.11.2017 by the Applicant is declared as null and void and stands set aside. Both the Applicant and the Corporate Debtor are directed to perform their respective obligations as per the terms and conditions of the Agreement dated May 12, 2011 r/w Addendum Agreement dated April 27, 2016, as if the agreement(s) was never terminated - this Tribunal is not inclined to grant any relief to the Applicant as prayed for.

Issues Involved:
1. Legality of the termination of the agreement during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016.
2. Entitlement of the Applicant to recover its plant and machinery from the Corporate Debtor.
3. Disputes regarding the outstanding dues between the Applicant and the Corporate Debtor.

Issue-wise Detailed Analysis:

1. Legality of the Termination of the Agreement:
The primary issue under consideration was whether the termination of the agreement on November 28, 2017, by the Applicant under Clause 15.3(b) of the agreement dated May 12, 2011, during the moratorium declared under Section 14 of the IBC, 2016 on September 13, 2017, is legally tenable.

Clause 15.3(b) of the agreement allowed either party to terminate the agreement if the other party entered into bankruptcy, liquidation, or a winding-up petition was admitted. However, Section 14 of the IBC, 2016, imposes a moratorium prohibiting actions such as the recovery of property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.

The Tribunal observed that the provisions of Clause 15.3(b) were inconsistent with Section 14 of the IBC, which aims to ensure a standstill period to preserve the financial position of the Corporate Debtor as a going concern. The Tribunal emphasized that the moratorium is intended to stabilize the assets of the Corporate Debtor, providing creditors with clarity to formulate a Resolution Plan. The termination of the agreement by the Applicant during the moratorium was found to have taken away the interest created in favor of the Corporate Debtor, frustrating the object of the CIR Process. Consequently, the termination was declared null and void, and the agreement dated May 12, 2011, along with the Addendum dated April 27, 2016, was revived.

2. Entitlement to Recover Plant and Machinery:
The Applicant sought directions for the Resolution Professional (RP) to hand over certain plant and machinery owned by it, which were lying at the premises of the Corporate Debtor. The Tribunal noted that Section 14(1)(d) of the IBC prohibits the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.

Given the moratorium's purpose to maintain the Corporate Debtor as a going concern, the Tribunal concluded that the Applicant's action to recover its assets during the moratorium was not permissible. The Tribunal directed both the Applicant and the Corporate Debtor to perform their respective obligations under the terms and conditions of the Agreement dated May 12, 2011, read with the Addendum Agreement dated April 27, 2016, as if the agreement was never terminated.

3. Disputes Regarding Outstanding Dues:
The Applicant and the Corporate Debtor had conflicting claims regarding outstanding dues. The Applicant contended that it was only liable to pay INR 24,34,314/- to the Corporate Debtor, while the Corporate Debtor claimed that the Applicant owed INR 3,98,91,388/-.

The Tribunal directed both parties to appoint an independent Chartered Accountant to reconcile their accounts, with the remuneration for the Chartered Accountant to be shared equally by both parties. This step was aimed at resolving the disputes regarding outstanding dues in an impartial manner.

Conclusion:
The Tribunal declared the termination of the agreement by the Applicant during the moratorium as null and void, thereby reviving the agreement. The Applicant's request to recover its plant and machinery was denied, and both parties were directed to perform their obligations under the revived agreement. Additionally, an independent Chartered Accountant was to be appointed to reconcile the outstanding dues between the parties. The Tribunal did not grant any relief to the Applicant as prayed for and made no order as to costs.

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