Possession of Machinery Hypothecated Remains to Corporate Debtor in absence of Lease Deed By Third Party: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) New Delhi has held that if no lease deed is presented that would allow a third party to claim ownership of the machinery, the corporate debtor will continue to be the owner of the machinery in its possession. As a result, the Resolution Professional is permitted to include such machinery in the information memorandum.

In order to resolve its debt, which was admitted on December 24, 2021, Bank of India Limited (Financial Creditor) filed an application against the Corporate Debtor (CD) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the "Code"). The corporate debtor's Resolution Professional (RP) submitted an Interlocutory Application (IA) to get Agrasen Engineering Industries Pvt.'s resolution plan approved. SRA, Ltd. In this case, RP filed an intervention application against the suspended directors of the corporate debtor, requesting that certain of their business dealings be declared fraudulent and that they be ordered to contribute appropriately from the corporate debtor's assets.

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The appellant simultaneously filed an Intervention Application against the RP, requesting that the Wagner 630 line (the "machinery"), which is purportedly its property, be excluded from the corporate debtor's Information Memorandum (IM) since it is ineligible to be included in the SRA's resolution plan. In the same ruling, the Tribunal dismissed the appellant's IA while allowing the RP's IA.

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The appellant argued that while the machinery was leased to the corporate debtor, it did not constitute a transfer of ownership because it was merely a transfer of interest. According to the Code's interpretation of Section 18, the assets do not include third-party assets held in trust or under contractual agreements, such as bailment. In contrast, the respondent argued that the corporate debtor had hypothecated the machinery in a hypothecation/loan agreement that was signed on June 6, 2014.

The tribunal observed that the appellant's main contention is that the machinery was provided on lease, which must be proven by a lease deed since it involves a business-to-business transaction and the lease amount must be specified. According to the bench consisting of Mr. Naresh Salecha, a technical member, and Justice Rakesh Kumar Jain, a judicial member, the corporate debtor has created charge over the machinery and declared that it has already been purchased and will be included in the promoter's contribution to the loan approved by the financial creditor.

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Additionally, it noted that the corporate debtor had acknowledged that it had claimed depreciation on the machinery as an owner because, according to the Supreme Court's ruling in the Mother Hospital Pvt. Ltd. vs. Commissioner of Income Tax, Trichur (2018) case, a lessee is not permitted to claim depreciation.

To Read the full text of the Order CLICK HERE

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