If proceedings before DRT is going on against an entity ,then also CIRP Application under provisions of Sections 7, 9 & 10 will be maintainable.

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If proceedings before DRT is going on against an entity ,then also CIRP Application under provisions of Sections 7, 9 & 10 will be maintainable.

PREAMBLE: The Present Appeal arising out of order dated 21st March, 2022 passed by National Company Law Tribunal, Division Bench – I, Chennai Bench in CP/IB/75/2021 along with IA/839/CHE/2021 and IA/844/CHE/2021.

 

Mr. Amar Vora v City Union Bank Ltd.

National Company Law Appellate Tribunal, Chennai Bench

Company Appeal (AT) (CH) (Ins) No. 130 of 2022

 

BRIEF FACTS:

  1. It is submitted that the Appellant obtained three Credit facility from the financial Creditor/1st Respondent to develop the mall for a tune of Rs. 5,20,00,000/- on various dates by offering the property in town bearing survey nos. 80 to 85 of Managiri bit village, KK Nagar Madurai North Taluk as collateral. Though the financial Credits obtained from the 1st Respondent Bank on various occasions, they have also repaid the interest without any default so far.
  1. However, the first Respondent Bank initiated proceedings under Section 7 of I & B Code,2016 before the Adjudicating Authority (NCLT Chennai) alleging certain defaults.
  1. However, the 1st Respondent did not brought to the knowledge of the Hon’ble NCLT that it had earlier issued a demand notice to the Appellant under Section 13 (2) of SARFAESI ACT, 2002 on 30.08.2018 for a default of Rs. 14,14,61,066/- followed by paper publication dated 27.09.2018.
  1. The authorised officer took symbolic possession of the property mortgaged as per Section 13(4) of the SARFAESI ACT, 2002. Thereafter, the subject property was attached with DRT Madurai Bench.
  1. It is submitted that the Hon’ble NCLT did not consider the fact that OA No. 497 of 2019 on the file of DRT Madurai against the Appellant for recovery of debts and the parallel application in CP 75 of 2021 before the Adjudicating Authority under Section 7 is amount to forum shopping.
  2. It is submitted that there is a symbolicand physical possession of the Appellant Company in the PBPT Proceedings and SARFAESI Proceedings, hence the initiation proceedings under Section 7 of the I & B Code, 2016 should have been kept in abeyance until the orders in PBPT had attained finality.
  1. The Ld. Counsel for applicant further submitted that the Proceedings before the Adjudicating Authority is barred by limitation and therefore prayed this Bench to allow the Appeal by setting aside the impugned order passed by the Adjudicating Authority in admitting and initiating the CIRP against the Corporate Debtor.

ANALYSIS/APPRAISAL:

  1. This Tribunal intent to take up the Appeal and decide the same at the admission stage itself having gone through the Appeal and the order under challenge, hence, no notice was ordered to the Respondent. However, Counsel appearing for the Respondents present in person at the time of taking of the Appeal.
  1. After hearing the Ld. Counsel for the Appellant the four points emerge for consideration is:
  1. Whether the pendency of proceedings under SARFAESI ACT, DRT and before PBPT, prohibits the Respondent/financial Creditor for initiation of Proceedings under IBC, 2016?
  2. Whether the debt and default is proved in respect of Corporate Debtor?
  3. Whether the application is barred by limitation?
  4. Whether the order under challenge is reasoned order dealing with all issues as raised by the Appellant/Corporate Debtor?

THE NCLAT DECIDED THE ABOVE POINTS AS FOLLWOS-POINT NO. (i)

 It is the case of the Appellant that the financial Creditor issued notice under Section 13(2) of the SARFAESI ACT, 2002 for a default of Rs. 14,14,61,066/- for almost 12 accounts and the financial Creditor has also filed an application bearing OA No. 497 of 2019 before the DRT Madurai against the Appellant/Corporate Debtor for recovery of debts Rs. 19,73,47,599/- and filing the application before the Adjudicating Authority for default in loan amount to the tune of Rs. 8,04,86,434/- with interest for the very same loanfacility would amount to forum shopping and hence initiation of CIRP by the Adjudicating Authority cannot be maintained.

Further, the Ld. Counsel submitted that an application being IA 844 of 2021 filed before the Adjudicating Authority praying the Authority to keep abeyance till the matter in reference no. R-1929 of 2020 before the prohibition of Benami Property Transaction Act, 1988 is decided.

The IBC, 2016 is a special enactment and is an act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individual in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship. As held by the Hon’ble Supreme Court the aim and object of the Code is not for recovery of debts but for Resolution of Corporate Persons.

In this regard Section 238 of I & B Code, 2016 deal with provisions of the Code to override other laws and the said provision reads as under:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

In view of the above provision of law the financial Creditor/ Operational Creditor/Corporate Persons can file an application under Section 7 ,9 & 10 of the I & B Code, 2016 before the respective Adjudicating Authorities even though in respect of same any proceeding pending before other forums on the ground that the provisions of I & B Code, 2016 is overriding effect of other laws.

In view of the aforesaid reasons the Appellant cannot take a stand that the proceedings are pending before DRT and PBPT and the application under Section 7 of the I & B Code, 2016 cannot be maintained does not merit. The application under Section 7 filed by the financial Creditor before the Adjudicating Authority is very well maintained. Accordingly, the point is answered against the Appellant.

THE NCLAT DECIDED THE ABOVE POINTS AS FOLLWOS-POINT NO. (ii)

Form-1 dated 09.03.2021 filed by the Respondents/financial Creditor at part -IV regarding particulars of financial debt shown as Rs. 5,20,00,000/- and the Appellant has in para 6 of the counter filed before the Adjudicating Authority admitted that the Appellant obtained three credit facility from the financial Creditor to a tune ofRs. 5,20,00,000/- on various dates by producing the subject property as collateral.

In view of the reason the Appellant had admitted the debt and default. The Adjudicating Authority also took the stand that the existence of debt and default had been proved beyond reasonable doubt. Accordingly, the point is answered against the Appellant.

THE NCLAT DECIDED THE ABOVE POINTS AS FOLLWOS-POINT NO. (iii)

The Respondent/financial Creditor in the application form-1 dated 09.03.2021 in part – IV column -2 with regard to date of default it is mentioned that the date of default is 31.05.2018, however the fact remains that the application filed by the Respondent/financial Creditor before the Adjudicating Authority is on 18.03.2021 which is within the period of limitation i.e. 3 years from the date of default as per Section 137 of the limitation Act since the limitation act applicable to the proceedings under IBC. Therefore, the application filed before the Adjudicating Authority is within the period of limitation and accordingly the point is answered against the Appellant.

THE NCLAT DECIDED THE ABOVE POINTS AS FOLLWOS-POINT NO. (iv)

The order passed by the Adjudicating Authority in admitting the application filed by the 1st Respondent against the Corporate Debtor is a well reasoned order and we do not find any legal or factual infirmity in the order and no interference is called for. The Appeal of the Corporate Debtor has been dismissed on the basis of above discussions.

CONCLUSION:  The Hon’ble NCLAT held that in view of the provisions of Section 238 of the I&BC 2016 the financial Creditor/ Operational Creditor/Corporate Persons can file an application under Section 7 ,9 & 10 of the I & B Code, 2016 before the respective Adjudicating Authorities even though in respect of same any proceeding pending before other forums on the ground that the provisions of I & B Code, 2016 is overriding effect of other laws. It means that if proceedings before DRT is going on against an entity ,then also CIRP Application under provisions of Sections 7, 9 & 10 will be maintainable.

 

DISCLAIMER: the case law presented here is only for sharing information with readers. The views expressed here are personal views of the author. In case of necessity do consult with professionals for more clarification and understanding of subject matter.

 

REFERENCES:

  1. https://ibbi.gov.in//uploads/order/7d069091ededcf5cf6cf8777412f3342.pdf

Section 238 : IBC provisions that overrides other lawsThe provisions of this Code apply, notwithstanding anything in any other law, now in force or any document having effect under any such law that is inconsistent with them. Section 238 is a non-obstante provision. It signifies that a clause or provision in the Act has the authority to override any other provision or clause in the Act that conflicts with this or another legislation.

 

THE IMPACT OF SECTION 238 AS INTERPRETED BY THE COURTS

1. The problem of overriding impact was first brought up in the case of Innoventive Industries Limited v. ICICI Bank Limited, which was also the IBC’s inaugural case. It was contended that corporate debtors are fetching advantage of the gain/immunity from quittance given by the government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 for a set period.

 

i) ICICI filed a claim against Innovative Industries Ltd. as a financial creditor due to a default in payments on financing extended to Innoventive Industries.

ii) They contended that they are not obliged to pay any monies to ICICI due to a relief order granted by the Maharashtra Government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 (MRUA).

iii) The NCLT issued a moratorium and appointed an Insolvency Resolution Professional based on the overriding implications of the IBC over the MRUA (IRP).

iv) The NCLAT held in the appeal that there is no conflict between MRUA and IBC because they are enactments in two different domains.

v) The provisions of the IBC take precedence over those of the MRUA.

 

vi) FINALLY, THE SUPREME COURT UPHELD the interpretation by ruling that the non-obstante provision of the IBC would prevail over the non-obstante clause of the MRUA in an appeal against the NCLAT judgment.

vii) On the subject of debt suspension due to the MRUA relief order, it was held that due to the non-obstante provision in the IBC, any right of the corporate debtor under any other law could not come between the IBC and the relief order.

2. The overriding impact of the IBC was again questioned in the instance of Sterling SEZ Infrastructure Ltd, which was governed by the Prevention of Money Laundering Act, 2002 (PMLA).

i) In this instance, SREI Infrastructure Financial Limited filed a CIRP against Sterling SEZ and its controlling company, Sterling Biotech Limited (SBL).

ii) The SBL group’s credit facilities of Rs.8100 crores from various banks and financial institutions were also declared as fraud accounts by the involved banks.

iii) Fearing arrest, the SBL Group’s promoters fled the country under dubious circumstances.

iv) As a result, the Enforcement Directorate began proceedings against the Corporate Debtor, and assets pertaining to the corporate debtor were attached by order dated 29.05.2018 under Section 2(1) (u) of the PMLA Act.

v) In July 2018, the tribunal granted a creditors’ petition to commence CIRP, a moratorium was established and an IRP was appointed as a result.

vi) In the course of his work, the Resolution Professional informed the Directorate of Enforcement about CIRP and requested that the order of attachment of assets be lifted for him to continue to be in charge of, and take custody of it.

vii) The topic was considered during the beginning of CIRP, and it was decided that the temporary attachment of assets order under PMLA 2002 would take precedence over the CIRP u/s 7 of the IBC.

viii) The establishment of actions or processes against the Corporate Debtor, including the execution of any judgment, decision, or order of any court of law, tribunal, or other authority, is said to be banned during the moratorium period.

ix) As a result, the Enforcement Directorate’s order could not be carried out. The defence claimed that the IBC is civil legislation and cannot take precedence over the PMLA Act.

x) As a result, the NCLT was said to lack jurisdiction in the case.

xi) The NCLT’s declaration of a moratorium, thus, did not apply to the Enforcement Directorate’s attachment order or the criminal proceedings brought against the Corporate Debtor.

xii) With the assistance of amicus curiae, the honourable tribunal concluded that the IBC has a greater impact than PMLA based on the objectives of IBC: maximizing asset value, faster settlement, faster recovery, and economic interest of beneficiaries.

3. In the matter of Leo Edibles & Fats Ltd v. the Income-tax Department, the court addressed the question of the IBC’s overriding impact over the Income Tax Act in determining the dues of the Income Tax Authority during liquidation.

i) The Income Tax Authority could no longer claim a priority in respect of clearing of tax dues under the Income Tax Act if the assessee company is undergoing liquidation under IBC.

ii) The High Court further stated that assets under attachment (even if encumbered) will not generate a secured creditor interest in favor of the Income Tax Authority under the IBC.

iii) The High Court further stated that the moratorium in terms of processes established under the IBC guarantees that any outstanding lawsuit begins before the bankruptcy proceeding is stopped.

iv) As a result, assets subject to an order of attachment issued before the liquidation, commencement shall be auctioned along with the assessee company’s other unencumbered assets.

4. In another instancePr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd, the Supreme Court confirmed that anything incongruous in any other statute, including the Income Tax Act, shall be overridden by Section 238 of the Insolvency and Bankruptcy Code, 2016.

5. In one of the cases, Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Others, the NCLAT found that the IBC is a unique law that has precedence over other laws. The corporate insolvency resolution process start date could not be postponed due to an ongoing internal disagreement between Corporate Debtor’s directors over charges of oppression and mismanagement. Financial creditors’ statutory rights could not be curtailed due to pending Oppression and Mismanagement lawsuits under Sections 241 and 242 of the Companies Act, 2013.

Article 137of Limitation Act, 963 – is a residual provision, and provides for a limitation period for any application for which no period of limitation is provided in any of the Articles in the Schedule to the Limitation Act. It provides for a period of limitation of 3 years from the date when the right to apply accrues[ The Supreme Court in Bharat Sanchar Nigam Ltd. & another vs. M/s Nortel Networks Pvt. Ltd].

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