In recent times, several noteworthy judgments have been rendered by the Indian courts and tribunals in matters involving the insolvency law framework. Some of the decisions that discuss and set out the legal position concerning the interpretation and applicability of provisions of the Insolvency and Bankruptcy Code, 2016 in the second quarter of 2021 (April 2021 – June 2021) are summarised below:
1. Ghanashyam Mishra and Sons Pvt. Ltd. through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Ltd. through the Director & Ors.
Supreme Court of India
Citation: 2021 SCC OnLine SC 313
Decided on: 13 April 2021
The resolution plan approved by the adjudicating authority under the Insolvency and Bankruptcy Code, 2016 shall bind the corporate debtor, its employees, members, creditors, guarantors and other stakeholders including the Central Government, State Government or any local authority to whom a debt is owed.
Brief Facts: The Hon'ble Supreme Court in the instant matter clubbed multiple matters together to decide upon certain common questions stated as follows:
- Whether any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (IBC)?
- Whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or substantive in nature?
- Whether after approval of resolution plan by the Adjudicating Authority (AA) a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the Corporate Debtor, which are not a part of the Resolution Plan approved by the adjudicating authority?
Held: The findings of the Hon'ble Supreme Court of India are summarised in an issue-wise manner.
I. On the first issue
The Hon'ble Supreme Court held that a bare reading of Section 31 of the IBC made it abundantly clear that once a resolution plan meets requirements stated under Section 30(2) and is approved by the AA, it shall bind the corporate debtor, its employees, members, creditors, guarantors and other stakeholders. The rationale behind having a provision like Section 31 is to ensure that the corporate debtor is able to stand back up on its feet post revival. The resolution plan is made binding on all stakeholders to ensure that post approval, no surprise claims are flung on the successful resolution applicant. If the claims were allowed to be taken into consideration after the approval of the resolution plan, the very basis of the plan would go haywire and be rendered unworkable. Thus, once a resolution plan is approved, it would also bind the Central Government, any State Government or a local authority.
II. On the second issue
The Supreme Court referred to the Statement of Objects and Reasons of the Amendment Bill for the amendment of Section 31 of the IBC. It was held that the legislative intent was to clarify that the resolution plan approved by the AA shall bind the Central Government, State Government or any local authority to whom a debt is owed. The mischief that was sought to be remedied by the Amendment was to prevent the State or the Central Government from leveraging the ambiguity to continue the proceedings in respect of the debts owed to them. It was noted that certain tax authorities were not abiding by the IBC's mandate. Thus, the 2019 Amendment was declaratory and clarificatory in nature and therefore, retrospective in its operation. The Apex Court concluded that the 2019 Amendment is effective from the date on which the IBC was brought into effect.
III. On the third issue
The Supreme Court held that after the 2019 Amendment of Section 31(1) of the IBC (2019 Amendment), any debt in respect of dues arising under the law for the time being in force including the ones owed to the Central Government, any State Government or any local authority which is not a part of the resolution plan gets extinguished. Thus, no person would be entitled to initiate or continue any proceedings in respect to a claim which does not form a part of the resolution plan.
2. Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal
Supreme Court of India
Citation: 2021 SCC OnLine SC 321
Decided on: 15 April 2021
The balance sheet entries of the corporate debtor can be used as an acknowledgment of debt under Section 18 of the Limitation Act, 1963.
Brief Facts: A bench of three members of the National Company Law Appellate Tribunal (NCLAT) vide its order dated 25 September 2020 questioned the correctness of the position in another decision of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund & Anr.1 In V. Padmakumar, the NCLAT by way of a majority decision, held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act, 1963 (Limitation Act). Thus, the matter was referred to a larger bench for consideration. However, a bench of five members of the NCLAT abstained from deciding upon the merits of the matter while ruling that such a reference was incompetent. Accordingly, the appellant Asset Reconstruction Company (India) Ltd. (Appellant) filed an appeal against the NCLAT's refusal to adjudicate upon the matter. The appeal filed by the Appellant was heard with four other appeals that challenged the majority decision in V. Padmakumar.
Held: The Hon'ble Supreme Court relied upon the recent judgments to observe that the reason for introducing Section 238A of the Insolvency and Bankruptcy Code, 2016 (IBC) was to ensure that the Limitation Act applied onto IBC proceedings to the extent provided. Therefore, it was held that there was no reason to exclude the applicability of Section 18 of the Limitation Act on IBC proceedings, provided that the acknowledgment of a debt was made prior to the expiry of the limitation.
Thereafter, the Hon'ble Apex Court ruled that the balance sheet entries would amount to acknowledgment of debt under Section 18 of the Limitation Act. Reliance was placed upon the decision in Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad2 to reiterate that there the intent of acknowledging a debt for the purposes of Section 18 of the Limitation Act in not required so long as the acknowledgement established a jural relation between debtor and creditor. The Hon'ble Apex Court further clarified that an admission of debt in balance sheets must be free from any caveats to establish liability. Further, a balance sheet must be appropriately approved by the shareholders and accompanied by a report of Directors to provide it legitimacy.3
Thus, the Hon'ble Supreme Court set aside the decision of the NCLAT in V. Padmakumar.
3. Sandeep Khaitan, Resolution Professional for National Plywood Industries Ltd. v. JSVM Plywood Industries Ltd. and Anr.
Supreme Court of India
Citation: 2021 SCC OnLine SC 338
Decided on: 22 April 2021
A moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a prohibition on transferring, encumbering, alienating or disposing of by the corporate debtor of any of its assets, which would also include all amounts lying to the credit in the bank accounts.
The words 'to secure the ends of justice' in Section 482 of the Code of Criminal Procedure, 1973 does not permit overlooking the statutory mandate under Section 14 and 17 of the Insolvency and Bankruptcy Code, 2016.
Brief Facts: The dispute before the Hon'ble Supreme Court traces its origins to proceedings under the IBC, before the National Company Law Tribunal, Guwahati (NCLT). The NCLT admitted an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against one National Plywood Industries Limited (Corporate Debtor) resulting in passing of a moratorium under Section 14 of the IBC. Subsequently, Sandeep Khaitan (Appellant) was appointed as the interim resolution professional.
During pendency of the proceedings, the Appellant found that the former managing director of the Corporate Debtor had diverted a sum of INR 32,50,000 (Rupees Thirty-Two Lakhs Fifty Thousand) from the accounts of the Corporate Debtor to JSVM Plywood Industries Ltd. (First Respondent) in violation of the moratorium. An FIR was lodged by the Appellant in this regard, pursuant to which the bank accounts of the First Respondent and its creditors were frozen along with a lien being created on one such frozen account. The FIR was challenged by the First Respondent in a petition under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) before the High Court of Guwahati (High Court). By way of its order passed in an interlocutory application filed by the First Respondent (Impugned Order), the High Court allowed the First Respondent to operate its bank account maintained with ICICI Bank and to unfreeze the bank accounts of its creditors which were frozen and over which a lien was created pursuant to the FIR. This Impugned Order was subsequently challenged by the Appellant before the Supreme Court.
Held: The Supreme Court noted that with the declaration of moratorium by the NCLT, all prohibitions within the meaning of Section 14 of the IBC would instantly come into force. It observed that there was no dispute between the parties that the aforementioned amounts were in fact remitted into the account of the First Respondent, subsequent to the date of passing of NCLT's order under Section 14.
The Supreme Court observed that the IBC has neatly carved out the role of the insolvency professional. The management of the corporate debtor vest in the interim resolution professional from the date of appointment of the interim resolution professional and the powers of the board of directors or the partners of the corporate debtor automatically stand suspended. Section 17 of the IBC clarifies that the powers of the board of directors or partners of a corporate debtor are to be exclusively exercised by the interim resolution professional. The Supreme Court held that a moratorium under Section 14 of the IBC, imposes a prohibition on transferring, encumbering, alienating or disposing of by the corporate debtor of any of its assets, which would also include all amounts lying to the credit in the bank accounts.
The Supreme Court concluded that the High Court in passing the Impugned Order had overlooked the limits of its powers under Section 482 of the CrPC. It was held that the words, 'to secure the ends of justice' in Section 482, could not mean to overlook the statutory dictate under the provisions of Section 14 & 17 of the IBC. The Supreme Court therefore modified the Impugned Order, thus permitting the First Respondent to operate its bank account subject to it first remitting the sum of INR 32,50,000 (Rupees Thirty-Two Lakhs Fifty Thousand) into the bank account of the Corporate Debtor.
4. Basavaraj Koujalagi & Ors. v. Sumit Binani, Liquidator of Gujrat NRE Coke Ltd.
NCLT Kolkata Bench
Case Number: IA No.865/KB/2020 in CP (IB) No.182/KB/2017
Decided on: 3 May 2021
The liquidator is responsible for the affairs of the company in liquidation and if the decision is taken by him in the best interest of the company, then the matter should be left at that.
In absence of any allegation of fraud or bias in the decision of the liquidator, no order of a roving inquiry can be passed just on the basis of perceived loss of employment of workers.
Brief Facts: The applicants in the instant matter are the employees and workers of Gujrat NRE Coke Ltd. (Company) in employment for the last twelve years and working at the plant of the Company at Belur Industrial Area, Dharwad, Karnataka. The coal and coke industry suffered a major setback since 2012 due to various external factors, which impacted the performance of the Company. In spite of best efforts and due to continuous downturn in the industry, the Company could not manage to revive its operations. The Company filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) which was admitted. In due course, the Company was sent into liquidation. This case deals with the application filed by the workers of the Dharwad unit of the Company wherein inter alia the following reliefs were sought:
- An injunction order be passed against the respondent (Liquidator) restraining it from taking coercive steps for closing the operations of the Company's plant at Dharwad.
- An injunction order be passed against the Liquidator restraining it from terminating, or taking any decision to terminate, the agreement between the Company and one Jeju Metals Pvt. Ltd.
- A competent and independent agency be appointed to investigate the manner in which the Liquidator has been conducting the affairs of the Company and a report be called from such agency.
Held: The National Company Law Tribunal, Kolkata Bench (NCLT) rendered its findings on the aforementioned prayers as summarised below:
I. On the first prayer
The NCLT held that at some point, hard decisions are called for in the life of a company and such decisions must be taken. Unviable units could not be permitted to operate forever. The actions of the liquidator will have to measured up against the objectives of the IBC one of which is to free up resources of unviable units of a company. The NCLT ruled that unviable units cannot be kept afloat by some sleight of hand under the guise of keeping the company as a going concern, thereby defeating the objective of the IBC. Hence, the relief under the first prayer could not be granted.
II. On the second prayer
The NCLT held that it was not for the adjudicating authority to step into the shoes of the liquidator and examine the commercial viability of the contract. The liquidator is responsible for the affairs of the company in liquidation and if the decision is taken by him in the best interest of the company, then the matter should be left at that. The workers cannot be used as a thin edge of the wedge to revisit the termination of a contract. Thus, the relief under the second prayer could not be granted.
III. On the third prayer
The NCLT towards the end turned to the prayer of the applicants for an independent investigation to be conducted by an agency. In this regard, the NCLT held that in absence of any allegation of fraud or bias in the decision of the liquidator, no order of a roving inquiry could be passed just on the basis of perceived loss of employment of workers. To hold otherwise would have set a wrong precedent which would not let insolvency professionals take an independent decision leading to the failure of the entire system. The NCLT also observed that actions taken in good faith by a public servant enjoy protection under the law, and the IBC is no different, providing for the same under Section 233 of the IBC.
Based on the aforementioned findings, the NCLT dismissed the application.
5. Lalit Kumar Jain v. Union of India
Supreme Court of India
Case Numer: Transfer Case (Civil) No. 245/2020
Decided on: 21 May 2021
Personal guarantors to the corporate debtors are liable under the Insolvency and the Bankruptcy Code, 2016.
Brief Facts: On 15 November 2019, the Ministry of Corporate Affairs issued the Notification (Notification) vide which the personal guarantors were brought within the scope of the insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). The instant judgment pertains to the common question of law that arises in multiple legal proceedings preferred under Article 32 and the cases transferred from several High Courts filed under Article 139A of the Constitution of India. The common question in the instant matter relates to the vires and validity of the Notification.
The petitioners, in the capacity of directors, or promoters, or in some instances as chairman or managing directors, had furnished personal guarantees to the banks and financial institutions, which led to the release of advances to various companies. Presently, the petitioners are facing insolvency proceedings which are at different stages. The principal ground of attack of the petitioners is that the executive could not have selectively brought into force the IBC and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors. Hence, the present case.
Held: The Hon'ble Supreme Court took note of all the provisions introduced in the IBC at various stages. The Apex Court observed that it was pretty evident that the method adopted by the Central Government to bring into force different provisions of the Act had a specific design: to fulfil the objectives of the IBC having regarding to the priorities. Thus, the initial notifications were issued to introduce the necessary mechanism through which the insolvency processes were to be carried out and regulated. Thereafter, gradually the Central Governments kept issuing notifications on other subjects for which the insolvency framework was ready.
The Hon'ble Supreme Court then observed that the amendment of 2018 brought in the IBC was in furtherance of the object of extending the provisions of the IBC to personal guarantors of the corporate debtors to strengthen the insolvency resolution mechanism further. According to the Apex Court, it was interesting to note that even in the unamended IBC, the adjudicating authority for insolvency and liquidation for corporate persons, including corporate debtors and personal guarantors, was NCLT.
After extensive analysis of the judicial pronouncements relied upon by the parties and the legal provisions in question, the Hon'ble Supreme Court held that there was sufficient legislative guidance for the Central Government before the amendment of 2018 was made effective to distinguish and classify personal guarantors separately from other individuals. This was evident from a reading of Sections 5(22), 60, 234, 245 and unamended Section 60 of the IBC.
The Hon'ble Supreme Court opined that there appeared to be sound reasons why the forum for adjudicating insolvency processes must be common, i.e., through the NCLT. It was observed that the NCLT would then be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor's insolvency process or even later. According to the Apex Court, a complete picture would facilitate the committee of creditors in framing realistic resolution plans, keeping in mind the prospect of realising some part of the creditor's dues from personal guarantors. Based on this discussion, the Apex Court held that the impugned notification was not an instance of the legislative exercise or amounting to impermissible and selective application of the provisions of the IBC.
The Hon'ble Supreme Court then referred to the petitioners' argument that the Notification took away the protection afforded by law to personal guarantors and looked over the co-extensive nature of the liability of a guarantor and principal borrower. The Hon'ble Supreme Court held that the sanction of a resolution plan and the finality imparted to it by Section 31 of the IBC did not per se operate as a discharge of the guarantor's liability. The Apex Court relied upon multiple decisions4 to hold that the release or discharge of the corporate debtor from the debt owed by it to its creditor, by an involuntary process, i.e., by the operation of law or due to liquidation or insolvency does not absolve the surety/ guarantor of his or her liability which arises out of an independent contract. As to the nature and extent of the liability of the personal guarantor, it was held that much would depend on the terms of the guarantee itself.
Therefore, the Notification was held legal and valid, and the writ petitions, transferred cases and transfer petitions in the instant matter were dismissed accordingly.
6. India Resurgence v. Amit Metaliks
Supreme Court of India
Case Numer: Civil Appeal No. 1700 of 2021
Decided on: 13 May 2021
A security interest available to a dissenting financial creditor over the assets of the corporate debtor does not give it a right over and above other financial creditors.
Brief Facts: The appellant, in the instant matter, challenged the order of the National Company Law Appellate Tribunal (NCLAT) whereby the NCLAT refused to interfere with the order (Impugned Order) of the National Company Law Tribunal, Kochi Bench (NCLT). The NCLAT had vide the Impugned Order approved the resolution plan submitted by Amit Metalinks Ltd. in the Corporate Insolvency Resolution Process (CIRP), which concerned VSP Udyog Pvt. Ltd., i.e., corporate debtor.
The appellant had assigned to it the rights, title and interest carried by Religare Finvest Ltd. as secured financial creditor of the corporate debtor, having 3.94% of voting share in the Committee of Creditors (CoC). During the CIRP, the appellant expressed its reservations on the share being proposed, particularly with reference to the value of the security interest held by it, and chose to remain a dissentient financial creditor. Eventually, the resolution plan received the approval of 95.35% of the voting share of the financial creditors. The resolution plan approved by the CoC was also approved by the NCLT, which found the same to be "feasible and viable". Thereafter, the appellant preferred an appeal against the order of the NCLT under Section 61(1) read with Section 61(3) of the Insolvency Bankruptcy Code, 2016 (IBC).
Held: The appellant before the Hon'ble Apex Court once again reiterated its case that the CoC could not have failed to consider the provision contained in Section 30(4) of the IBC, the priority and value of security interest of the creditors while deciding upon the manner of distribution. The appellant also added that the principal reason for its dissent was that against a total admitted claim of over INR 13.38 crores, the resolution applicant had offered the appellant a meagre amount of about INR 2.026 crores. Moreover, such an offer was made in ignorance of the fact that the value of the security held by the appellant was to the tune of more than INR 12 crores.
The Hon'ble Supreme Court at the outset held that the appeal remained totally bereft of substance and did not merit admission. The Hon'ble Supreme Court observed that it was beyond a shadow of a doubt that the approval of resolution plan fell within the domain of the commercial wisdom of the CoC, and the scope of judicial review was limited to the four corners of Section 30(2), read with Section 61(3) of the IBC. The Hon'ble Apex Court relied on the decision in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors.5 and other previous decisions6 to reiterate that the powers of the adjudicating authority dealing with the resolution plan did not extend to examine the correctness of commercial wisdom exercised of the CoC. Thus, once it was found that all mandatory requirements were duly complied with, the process of judicial review could not be stretched to carry out quantitative analysis qua a particular creditor or any stakeholder, who may carry his own dissatisfaction. In other words, the Hon'ble Supreme Court held that every dissatisfaction might not partake the character of a legal grievance meriting an appeal.
Inasmuch as the provisions of Section 30(4) of the IBC were concerned, the Hon'ble Supreme Court held that the NCLAT was correct in holding that the same only amplified the considerations for the CoC while exercising its commercial wisdom to take an informed decision on the feasibility of a resolution plan. The Hon'ble Apex Court, considering the facts, held that the proposal for the payment to all secured financial creditors was equitable, and no case of disregard of priority was made out. If the proposition suggested by the appellant was to be accepted, the Hon'ble Apex Court opined that it would lead to more liquidations than insolvency resolution and maximisation of value of the assets of the corporate debtor. Hence, the appeal stood dismissed.
7. Sirpur Paper Mills v. I.K. Merchants
High Court of Calcutta
Citation: 2021 SCC OnLine Cal 1601
Decided on: 7 May 2021
An award holder cannot seek the enforcement of an arbitral award post the announcement of a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016.
Brief Facts: The present case deals with an application for setting aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) passed in proceedings held between I.K. Merchants Pvt. Ltd. (Respondent) and Sirpur Paper Mills Limited (Petitioner). During the pendency of the proceedings, Corporate Insolvency Resolution Proceeding (CIRP) was initiated against the Petitioner and subsequently, a moratorium was also brought into effect under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Petitioner being the award debtor, contended that the proceedings under Section 34 of the Arbitration Act had become infructuous. The rationale given by the Petitioner was that a resolution plan was approved for the insolvency resolution of the Petitioner under the IBC. Thus, the award holder's claim was frustrated by the approval of the resolution plan under Section 31 of the IBC.
Held: The High Court noted that the moot question was whether the claim of an award-holder can be frustrated upon the approval of a resolution plan under Section 31 of the IBC. The High Court referred to two relevant decisions7 of the Hon'ble Supreme Court wherein it was held that once a resolution plan is approved, a creditor could not initiate proceedings for recovery of claims which were not a part of such resolution plan. The High Court observed that a successful resolution applicant who takes over the business of the corporate debtor starts the business on a 'fresh slate'. It was then reiterated the law laid in Edelweiss, where it was held that an approved resolution plan would be binding on the corporate debtor, its employees and other stakeholders by virtue of Section 31 of the IBC.
Keeping the various stages of IBC in mind, the High Court noted that the Respondent had sufficient opportunities to approach the National Company Law Tribunal (NCLT) for appropriate relief. Hence, the Respondent was under an obligation to take active steps under the IBC, instead of waiting for the adjudication of the application under Section 34 of the Arbitration Act. The High Court found that firstly, the Respondent was free to enforce the award against the Petitioner, especially in the absence of an application for stay under the amended provision of Section 36 of the Arbitration Act. Secondly, the Respondent could have pursued its claim before a forum contemplated under the IBC. The High Court thus concluded that the claim of the award holder had extinguished upon approval of the resolution plan under Section 31 of the IBC.
8. Lakshmi Narayan Sharma v. Punjab National Bank
National Company Law Appellate Tribunal
Citation: 2021 SCC OnLine NCLAT 155
Decided on: 12 May 2021
A 'Balance and Security Confirmation Letter' is sufficient acknowledgement of debt so as to extend limitation period for initiating insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016.
Brief Facts: M/s Saptarishi Hotels Pvt. Ltd. (Corporate Debtor) along with Maha Hotels Projects Pvt. Ltd. was awarded a public private partnership project to develop and operate a four-star hotel on build operate transfer basis with the National Institute of Tourism and Hospitality Management. To facilitate the project, the Corporate Debtor was sanctioned a 'consortium loan' by Punjab National Bank (First Respondent) along with Punjab & Sindh Bank as per a 'consortium loan agreement' and 'sanction letters'.
Due to several delays and complications in the completion of the project, the Corporate Debtor defaulted in its interest payments. Against such default, the First Respondent preferred an application under Section 7 (Section 7 Application) of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal, Hyderabad Bench (NCLT). The NCLT vide its order 18 January 2021 (Impugned Order) admitted the Section 7 Application filed by the First Respondent, holding ruling that the financial creditor had established the 'debt and default' through various documents filed, and thus declared the moratorium under Section 14 of the IBC. The Impugned Order came to be challenged before the National Company Law Appellate Tribunal (NCLAT) by a Promoter/Suspended Director of the Corporate Debtor (Appellant) as an aggrieved person.
Held: The NCLAT observed that the default in repayment of loan by the Corporate Debtor was an admitted fact. In fact, the First Respondent had even issued a notice to the Corporate Debtor under Section 13 (2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Corporate Debtor had failed to pay the debt despite lapse of the 60 (sixty) day time period given to it.
The NCLAT then relied on the decision of the Supreme Court in Asset Reconstruction Company India Ltd. v Bishal Jaiswal and Anr.8 that settled a live issue on the interplay between the IBC and the Limitation Act. The Supreme Court in Asset Reconstruction held in definite terms that the entries in the balance sheets of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act, thereby extending the period of limitation. In doing so, the Supreme Court expressly set aside the judgement of the NCLAT in V. Padmakumar v. Stressed Assets Stabilization Fund9.
The NCLAT noted that in the instant case, the guarantors of the Corporate Debtor had executed 'balance and security confirmation letters' (Confirmation Letters) acknowledging the debt in unequivocal terms. The NCLAT was of the view that the Confirmation Letters constituted an acknowledgment of debt as understood under Section 18 of the Limitation Act. The period of limitation thus stood extended by virtue of the acknowledgement. Thus, the NCLAT concluded that the Section 7 Application preferred by the First Respondent was maintainable in law and well within the period of limitation. The appeal was accordingly dismissed.
9. Dreamz Infra India Limited v. Competent Authority (Karnataka High Court)
High Court of Karnataka
Case Number: Writ Petition No. 13477 of 2020 (GM-RES)
Decided on: 24 May 2021
The Insolvency and Bankruptcy Code, 2016 by virtue of the non-obstante clause contained under Section 238 has an overriding effect on proceedings initiated under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 against the corporate debtor.
Brief Facts: Dreamz Infra India Limited (Corporate Debtor), a real estate company engaged in the development of housing projects. The Corporate Debtor required its homebuyers to deposit some amount as earnest money against their bookings for apartments. However, regardless of having taken an advance in form of earnest money, the Corporate Debtor failed to deliver the possession of these apartment. Resultantly, the homebuyers filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal, Bengaluru Bench (NCLT). The NCLT admitted the petition of the homebuyers and initiated the Corporate Insolvency Resolution Process (CIRP).
Post the initiation of the CIRP, the respondent being the competent authority (Competent Authority) initiated proceedings under Section 7(1) of the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (Act). The Competent Authority acting under the powers vested under Section 3 and 7(1) of the Act attached the properties of the Company.
Consequently, the Company filed a writ petition before the High Court of Karnataka (High Court) to decide upon the legality of the parallel proceedings initiated under the Act by the Competent Authority.
Held: The High Court took note of the fact that the CIRP had been initiated under the IBC. Thus, no parallel proceedings could be initiated to determine the liabilities of the Companies which were purely in the purview of the adjudicating authority. The NCLT placed reliance upon multiple decisions10 to hold that there was no scope for any civil proceedings in cases where the homebuyers preferred a petition under the IBC.
Moreover, the High Court observed that it was a settled proposition that the IBC would have an overriding effect and shall prevail over any other enactment given the non-obstante clause under Section 238 of the IBC. Thus, the High Court quashed the proceedings initiated by the Competent Authority under the Act.
* The authors would like to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of the Amity Law School, Delhi.
1. V. Padmakumar v. Stressed Assets Stabilisation Fund & Anr., 2020 SCC OnLine NCLAT 417.
2. Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad, 1962 1 SCR 140.
3. Pandam Tea Co. Ltd, In re, 1973 SCC OnLine Cal 93.
4. Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. & Wvg. Mills Ltd., 2002 5 SCC 54; Punjab National Bank v. State of U.P., 2002 5 SCC 80.
5. Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors., 2021 SCC OnLine SC 253.
6. Essar Steel India Ltd. v. Satish Kumar Gupta and Ors., 2020 8 SCC 531; K. Sashidhar v. Indian Overseas Bank and Ors., 2019 12 SCC 150; Maharashtra Seamless Limited v. Padmanabhan Venkatesh and Ors., 2020 11 SCC 467.
7. Essar Steel India Limited v. Satish Kumar Gupta, 2020 8 SCC 531; Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Ltd., 2021 SCC OnLine SC 313.
8. Asset Reconstruction Company India Ltd. v. Bishal Jaiswal and Anr., 2021 SCC OnLine SC 321.
9. V. Padmakumar v. Stressed Assets Stabilisation Fund & Anr., 2020 SCC OnLine NCLAT 417.
10. Innoventive Industries Ltd. v. ICICI Bank and Ors., 2018 1 WBLR SC 446; Anand Rao Korada, Resolution Professional v. Varsha Fabrics (P) Ltd, Civil Appeal No. 88008801 OF 2019; Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited and Others, (2018) 16 SCC 94.
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