NCLAT (08.04.2021) in Regional Provident Fund Commissioner EPFO Vs. T.V. Balasubramanian [Company Appeal (AT) (Insolvency) No. 1521 of 2019] AA, on the application of RP cancelled the encumbrance on the property of CD created through attachment order, under the provisions of EPF & MP Act, Appellate Authority held that;
In this case, the alleged encumbrance certificate which was issued during Moratorium is only the incorporation of earlier Order in the record. But in fact attachment of the property was made much before the initiation of Corporate Insolvency Resolution Process.
Excerpts of the Order;
# 3. The Financial Creditor, Edelweiss Asset Reconstruction Company Ltd had filed a company petition under Section 7 of the IBC. The Adjudicating Authority admitted the petition and appointed the Resolution Professional, who has filed M.A No.830/2019 to cancel the encumbrance, which was created by the impugned Order of attachment, registered by the EPFO Vellore.
# 4. The Corporate Debtor filed MA No. 830 of 2019 through Resolution Professional of the Corporate Debtor to cancel the encumbrance which had been created by way of attachment
application even without considering the Reply of the Recovery Officer of EPFO, the Appellant.
# 6. The Resolution Professional has filed its counter-affidavit on behalf of the Corporate Debtor, wherein it is stated that creation of the charge of the security interest effected by the Appellant by registering the deed is in contravention of the Moratorium as contemplated under Section 74(2) read with Section 14(1) of the Code. Further, the same would result in defeating the interest of the creditors, if the Appellant herein crystallises security interest to his advantage and take the benefit of Section 52 of the Code and thus, violate the distribution under Section 53 in the event of the liquidation of the Corporate Debtor. The aforesaid deed registered on dated 28th March 2019 was made during the CIRP is contrary to the Moratorium declared by the Adjudicating Authority, is in gross violation of Section 14(1) of the Code.
# 7. It is stated by the Respondent that the Learned Adjudicating Authority while passing the impugned Order duly considered the immovable properties belonging to the Corporate Debtor, which were attached and under the legal custody of Recovery Officer, EPFO and only upon such information proceeded and passed the impugned Order.
# 8. We have heard the arguments of the learned counsel for the parties and perused the records.
# 9. The Adjudicating Authority has stated in its order that “during course of hearing a representation on behalf the Respondent that Reply has been filed today in the registry. Counsel for the Applicant brings it to the notice of the Tribunal that a delay of more than three weeks in filing the Reply hampers the CIRP of the Corporate Debtor prejudicially as the CIRP is to expire on 02nd November, 2019 and the CIRP is a time bound process. Pursuant to this, the Tribunal is constrain to take the application today itself for disposal but without consideration of the submissions made and contentions raised in the Reply as filed by the Respondent being not available”.
# 10. It is thus, clear that the Adjudicating Authority has decided the application without considering the submissions made by the Respondent, even though objections were filed by the Respondent but that was not considered and Order was passed in haste, which is against the Principles of Natural Justice.
# 11. The Learned Adjudicating Authority has allowed the application of the Resolution Professional on the pretext that during Moratorium, no encumbrance or charge can be created over the property, by any authority including the Respondent, except in accordance with the provision of IBC 2016 even for the dues which are payable by the Corporate Debtor.
# 12. The Adjudicating Authority has further observed that the provision of Section 238 of the IBC shall have effect not withstanding anything in consistent therewith contained in any other law for the time being in force. In the circumstances, the Adjudicating Authority allowed the M.A. and passed the impugned Order that encumbrance, which had been created by way of attachment, registered by the Respondent stands cancelled.
# 13. It is pertinent to mention that the Adjudicating Authority has passed the impugned Order without considering the attachment order dated 04th August, 2017. It is on record that the Recovery Officer in order to realise outstanding dues, attached the immovable properties belonging to the Corporate Debtor, in the exercise of powers vested in him under Section 8(B) of the EPF and M.A. Act, 1952, vide order of attachment EPFCP–16 bearing reference No. T.N./VL/6294/Recovery/2017 dated 04th August, 2017. On perusal of this letter (Annexure A-4), it is clear that Authorised officer, Regional officer, Vellore, issued a Recovery Certificate to the Recovery Officer, Regional Office, Vellore in exercise of powers conferred under Section 8(B) to 8(G) of the Employees Provident Fund and Miscellaneous Act, 1952. Copy of Order of attachment EPFCP-16 is also enclosed with the attachment order passed by the Recovery Officer, Employees Provident Fund Organization. Thus, it is undisputed that the attachment of immovable property of the Corporate Debtor was made by the Recovery Officer EPFO Organization on 04th August 2017 much before the petition under Section 7 of the Code.
# 14. Appellant has also filed the letter (Annexure A-5) issued to the Sub Registrar for issuing attachment certificated dated 10th May, 2018. It is stated that the:
“Recovery Officer has attached the immovable properties belonging to the said establishment and had requested to encumber the scheduled properties in your records as per the provisions. Whereas it is ascertained through your official website (www.tnreginet.com) the above-said property has not been encumbered in the name of EPFO, Vellore till date. Copy of the acknowledgement along with EPFCP-16 are enclosed for ready reference. Hence, you are once again requested to encumber the property in the name of Employees Provident Fund Organization, Vellore and not to allow the owner of the property to enter into any transaction for sale of the attached properties without the prior written approval of the undersigned. You are also requested to issue Encumbrance certificate duly incorporating the attachment of EPFO. This office has to recover the statutory dues by selling the encumbered property through e-auction. Your cooperation is very much solicited.”
# 15. On perusal of the above-mentioned letter, it is clear that the Recovery Officer had issued a reminder to Sub Registrar for issuance of encumbrance certificate about the property attached by EPFO Vellore, to put a restriction on the Corporate Debtor from alienating the property, already attached by the Recovery Officer for the dues of Employees Provident Fund, by Order dated 04th August, 2017. The Recovery Officer has also demanded the encumbrance certificate duly incorporating the attachment of EPFO.
# 16. It is also apparent that the Sub Registrar failed to incorporate the attachment in the register. Therefore, the Recovery Officer of EPFO issued a reminder on 10th May 2018 and 29th November 2019 for incorporating attachment of the immovable property in the record. The Respondent has filed the attachment order dated 04th August 2017, which shows that the attachment order of immovable property of the Corporate Debtor was made by the Recovery Officer Employees Provident Organization on 04th August 2017. The petition under Section 7 was admitted by the Adjudicating Authority by Order dated 04th February 2019. Thus it is apparent that the attachment of the immovable property in question had already existed prior to the initiation of CIRP of the Corporate Debtor. The Sub Registrar indeed failed in his duty to incorporate the attachment in the register, despite receiving the attachment order on 16th August 2017 and after that reminder letter DT 14th May 2018 and 29th November 2018. The Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein by the Corporate Debtor. In this case, the alleged encumbrance certificate which was issued during Moratorium is only the incorporation of earlier Order in the record. But in fact attachment of the property was made much before the initiation of Corporate Insolvency Resolution Process. It is also clear that the Adjudicating Authority has passed the Order even without considering the submission and objections of the Appellant. Adjudicating Authority failed to consider the fact that attachment of the property was made much before the issuance of the CIRP.
# 17. It is thus clear that the Adjudicating Authority failed to take notice that attachment of the property of the corporate debtor was made much before the initiation of CIRP, but it was only recorded in the register during CIRP. It is on record that the impugned order is passed without considering the objections of the Recovery Officer, EPFO, though the objection by EPFO was already filed in the Registry of NCLT. In the circumstances, we are of the considered opinion that Appeal deserves to be allowed.
18. The Appeal is allowed. The impugned Order is set aside. No order as to Costs.
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Blogger’s Comments; As per the provisions of SARFAESI Act, the priority of enforcement of attachment orders vis-à-vis other secured creditors will be according to the date of registration with CERSAI,(Chapter-IVA of SARFAESI Act was notified by MOF on 26.12.2019 & concerned rules notified on 24.01.2020).
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (SARFAESI)
CHAPTER IV A *
# Section 26B. Registration by secured creditors and other creditors.-
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(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.
(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed.
# Section 26C. Effect of the registration of transactions, etc.-
(1) Without prejudice to the provisions contained in any other law, for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or other creditor or filing of attachment orders under this Chapter shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be.
(2) Where security interest or attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under the provisions of Chapter IV and this Chapter, the claim of such secured creditor or other creditor holding attachment order shall have priority over any subsequent security interest created upon such property and any transfer by way of sale, lease or assignment or licence of such property or attachment order subsequent to such registration, shall be subject to such claim:
Provided that nothing contained in this sub-section shall apply to transactions carried on by the borrower in the ordinary course of business.
* Notified vide MOF notification dated 26.12.2019. Concerned rules (amendment) notified on 24.01.2020.
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