NCLAT Says Dispute Over Title To Cotton Bales In Galaxy Cotton Liquidation Lies Before DRAT

The National Company Law Appellate Tribunal (NCLAT) has dismissed appeals filed by two cotton traders seeking exclusion of cotton bales claimed by them from the liquidation estate of Galaxy Cotton & Textiles Pvt. Ltd., after noting that the liquidator had already excluded the disputed stock from the liquidation process and that disputes over title and security interest in the goods were pending before the Debt Recovery Appellate Tribunal (DRAT).

The bench of Judicial Member Justice N Seshasayee and Technical Members Arun Baroka and Indevar Pandey observed:

“In fitness of things, we consider, that the appellants should have approached the DRAT concerned where the issue regarding title to cotton etc., is pending, but appeared to have believed that NCLAT as a one-stopsolution centre for all its challenges. We need to inform the appellants that our interferences with an issue is limited by the extent of our jurisdiction, and we are least inclined to walk into a territory where even angels fear to tread.”

The appeals arose from an order passed by the Ahmedabad bench of the National Company Law Tribunal (NCLT) on August 23, 2024.

Galaxy Cotton & Textiles Pvt. Ltd. had mortgaged its warehouse to State Bank of India (SBI) in 2008. In 2013, Giriraj Enterprise and Nilesh Enterprise, both traders in cotton, deposited 4,100 cotton bales weighing 6,68,300 kg in the warehouse under lease arrangements with Galaxy Cotton.

The cotton bales were separately hypothecated to Bank of Baroda (BoB) against cash credit facilities of Rs 4.90 crore each.

In 2016, SBI took possession of the warehouse under the SARFAESI Act while the cotton bales remained stored there. Bank of Baroda subsequently initiated proceedings before the Debt Recovery Tribunal (DRT), Ahmedabad, challenging SBI's claim over the cotton stock.

The DRT later held that SBI had no “right, title or interest” over the cotton bales hypothecated to BoB. SBI challenged the order before the DRAT, which subsequently permitted sale of the cotton bales.

SBI later initiated insolvency proceedings against Galaxy Cotton in 2018. After the corporate insolvency resolution process failed, the company was ordered to be liquidated in 2022.

The appellants thereafter approached the NCLT seeking declarations that the cotton bales did not form part of the liquidation estate of Galaxy Cotton.

On August 23, 2024, the NCLT disposed of the applications after recording that the goods had already been shifted out of the corporate debtor's premises and that the matter involved third-party goods for which the liquidator was not accountable.

Before the NCLAT, the appellants argued that the cotton bales were their exclusive property and never formed part of the assets of Galaxy Cotton. They also alleged depletion and deterioration of the stock while it remained in SBI's custody.

SBI argued that the dispute essentially concerned competing security interests between SBI and BoB and that the issue was already pending before the DRAT. It also contended that tribunals under the Insolvency and Bankruptcy Code lacked jurisdiction to adjudicate disputes relating to title and rights over the cotton bales.

The liquidator submitted that the disputed cotton bales had already been excluded from the liquidation estate and were never included in the liquidation process or e-auction conducted in relation to the corporate debtor's assets.

The NCLAT observed that the appellants' original prayer already stood satisfied because the liquidator had excluded the cotton bales from the liquidation estate and SBI did not object to it.

The tribunal questioned SBI for approaching the NCLAT seeking permission to allow the auction purchaser to lift the cotton bales even while contending that disputes relating to the stock were outside the tribunal's jurisdiction and pending before the DRAT.

The tribunal observed,

“We are conscious of the extent of our statutory authority to decide the title to the cotton and the right of SBI to sell it, since there is an ongoing dispute over the same between SBI and Bank of Baroda now pending in Appeal No.101 of 2017 before the DRAT....what then prompted SBI to file its two applications (I.A. 7879 of 2025 and I.A. 7880 of 2025), seeking leave of this tribunal to let the auction purchaser of the cotton bales to lift it. After all, going by SBI's logic, neither the liquidation issue concerning the warehouse of U.V. cotton, nor the title to and security interest over the cotton bales seeks a solution from us."

The NCLAT dismissed both appeals and left it open to the appellants to pursue remedies before appropriate fora.