NCLT Chandigarh Allows RP Access To Sealed SRS Entertainment Premises Despite Municipal Recovery Proceedings

The Chandigarh bench of the National Company Law Tribunal (NCLT) has held that recovery proceedings initiated by the Municipal Corporation of Faridabad could not impede the corporate insolvency resolution process of SRS Entertainment India Ltd. The tribunal directed the civic body to provide the company's resolution professional access to its sealed registered office and records.

The bench of Judicial Member Khetrabasi Biswal and Technical Member Kaushalendra Kumar Singh allowed an application filed by Resolution Professional Anil Arora seeking access to the premises and records required for conducting the insolvency resolution process.

“This Tribunal is of the considered view that statutory dues and recovery proceedings cannot override the objective of resolution under the IBC. The IRP cannot effectively carry out his duties, including collation of claims, verification of records, and conduct of ongoing proceedings (including arbitration), without access to the books of account and documents.", the tribunal noted.

The corporate insolvency resolution process against SRS Entertainment India Ltd. commenced on December 21, 2021, when the tribunal admitted an insolvency petition filed by Raj Pal Theatre and appointed Arora as Interim Resolution Professional.

According to the application, when Arora visited the company's registered office at SRS Multiplex in Faridabad on December 24, 2021, he found the premises under the lock and key of the Municipal Corporation of Faridabad. Public notices pasted at the site stated that the premises had been sealed on October 12, 2021, on account of arrears of property tax and again on October 28, 2021, on account of arrears of advertisement fee.

Arora submitted that the books of account, ledgers, and other records of the corporate debtor were lying inside the sealed premises. He argued that the seal prevented him from discharging his statutory duties under the Insolvency and Bankruptcy Code.

The resolution professional submitted that he repeatedly requested the municipal corporation to hand over possession of the registered office and permit access to the records. He also sent emails and personally met officials of the corporation. However, the premises remained sealed.

Arora further submitted that arbitration proceedings between the corporate debtor and Omaxe Ltd. were continuing before a sole arbitrator pursuant to orders of the Delhi High Court. He said the corporate debtor had claims of Rs 21 crore against Omaxe Ltd. and that the proceedings could not be effectively pursued without access to the books of account, vouchers and supporting documents.

The municipal corporation opposed the plea. It contended that advertisement fee dues of Rs 52.8 lakh plus GST remained unpaid in respect of certain properties and that notices had been issued seeking recovery of the amount.

The corporation submitted that the premises had been sealed on October 28, 2021, for recovery of advertisement fee dues. It argued that the resolution professional had an alternative statutory remedy against the sealing order and therefore the application before the NCLT was not maintainable.

The corporation also contended that the multiplex housing the registered office belonged to SRS Ltd., the holding company of the corporate debtor. It argued that both companies had been formed in a manner that enabled avoidance of advertisement fee dues and urged the tribunal to lift the corporate veil.

Rejecting the maintainability objection, the tribunal held that the application was not a challenge to the legality of the sealing order. Instead, it was filed to enable the Interim Resolution Professional to take control and custody of the assets and records of the corporate debtor during the insolvency process.

The tribunal observed that the relief sought was intrinsically connected with the conduct of the corporate insolvency resolution process. It held that the existence of an alternative remedy under another statute did not oust its jurisdiction in the matter.

"Further, once CIRP has commenced, the IRP is under a statutory obligation to take control and custody of all assets, records, and operations of the Corporate Debtor under Section 18 of the Code. Any impediment in discharge of such duties falls squarely within the jurisdiction of this Tribunal. In view of the above, the objection regarding maintainability is rejected.”, the tribunal observed.

On the merits, the tribunal noted that the insolvency resolution process had commenced on December 21, 2021. It observed that the Interim Resolution Professional was required to take control and custody of the assets, records and documents of the corporate debtor.

The tribunal observed that the premises had been sealed before commencement of the insolvency process. However, it held that continued denial of access to the Interim Resolution Professional had the effect of frustrating the resolution process.

The tribunal clarified that its order did not extinguish or adjudicate upon the dues claimed by the municipal corporation.

“At the same time, it is clarified that this order does not extinguish or adjudicate upon the dues claimed by the Respondent. The Respondent is at liberty to lodge its claim in accordance with law before the IRP, if admissible.”, the tribunal observed.

The tribunal further observed that the Insolvency and Bankruptcy Code contemplates a framework in which government dues are subordinated under the distribution waterfall. It held that retention of possession over assets of the corporate debtor while asserting priority over other creditors was contrary to the provisions and scheme of the Code.

Accordingly, the tribunal directed the Municipal Corporation of Faridabad to allow the resolution professional to enter the premises and obtain physical access to the registered office of the corporate debtor.

It also directed the corporation to hand over or permit retrieval of books of account, records, documents, electronic data and other assets belonging to the corporate debtor and to extend necessary cooperation in the discharge of the resolution professional's functions.