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RELEASE OF THIRD-PARTY ASSETS PERMITTED DURING MORATORIUM UNDER THE BANKRUPTCY CODE

Can you rescue your raw materials or unfinished products from a company after it goes under insolvency?

The answer is yes, as held by the National Company Law Tribunal (“NCLT”), Chandigarh Bench.   

Many entities who supplied raw materials or unfinished products to companies for contract manufacturing/processing complained of their raw materials being stuck whenever any of such manufacturing companies fell under the purview of the (Indian) Insolvency and Bankruptcy Code, 2016 (“Code”).  In terms of the Code, the moment an insolvency petition is admitted with respect to a company (called “corporate debtor”), a Resolution Professional is appointed suspending the board of directors of the corporate debtor and a moratorium is declared on inter alia all claims and demands against the corporate debtor. Before the judgment being reported herein, a parallel view prevailed that during moratorium period, even the raw materials or unfinished products supplied by third parties cannot be returned by the corporate debtor or Resolution Professional to such third parties.

The NCLT has recently resolved this crucial and practical problem, and has clarified that the materials owned by a third party, kept in possession of a corporate debtor under trust or under well-structured contractual arrangement including bailment, do not form part of the assets of the corporate debtor. Resultantly, such assets can be released by the Resolution Professional.

In this case, the NCLT accordingly directed for release of the raw materials of Sun Pharmaceutical Industries Limited kept at the premises of Parabolic Drugs Limited (corporate debtor).

Case Details: CA 206/2019 filed by Sun Pharmaceutical Industries Ltd. in C.P.(IB)-102/CHD/2018 [Weather Makers Pvt. Ltd vs. Parabolic Drugs Limited]