Supreme Court allows insolvency proceedings under IBC without Tea Act consent: Duncans Industries Ltd. vs. A.J. Agrochem (2019)

Date of the Judgment: 04 October 2019

Citation: 2019 INSC 938

Judges: Arun Mishra, J., M. R. Shah, J., B. R. Gavai, J.

Can a company facing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) be exempt from those proceedings if the management of its tea estates has been taken over by the Central Government under the Tea Act, 1953? The Supreme Court of India recently addressed this question in a dispute between Duncans Industries Ltd., a company managing tea gardens, and A.J. Agrochem, an operational creditor. The court had to determine whether the provisions of the Tea Act, which require prior consent from the Central Government for winding up proceedings, would override the IBC, which aims for a time-bound resolution of insolvency. The judgment was delivered by a three-judge bench comprising Justices Arun Mishra, M.R. Shah, and B.R. Gavai, with the majority opinion authored by Justice M.R. Shah.

Case Background

Duncans Industries Ltd., the appellant, owns and manages 14 tea gardens. The Central Government, through a notification dated 28 January 2016, took control of 7 of these tea gardens under Section 16E of the Tea Act, 1953. A.J. Agrochem, the respondent, is an operational creditor who supplied pesticides, insecticides, and herbicides to Duncans Industries. According to A.J. Agrochem, Duncans Industries owed them ₹41,55,500. A.J. Agrochem initiated proceedings against Duncans Industries before the National Company Law Tribunal (NCLT) under Section 9 of the IBC.

Duncans Industries opposed the insolvency proceedings, arguing that Section 16G(1)(c) of the Tea Act requires the Central Government’s consent before any winding-up or receivership proceedings can be initiated when the management of a tea unit has been taken over by the government. Duncans Industries contended that because they did not obtain prior approval from the Central Government, the insolvency proceedings under Section 9 of the IBC were not maintainable.

Timeline:

Legal Framework

The core legal issue revolves around the interplay between the Tea Act, 1953, and the Insolvency and Bankruptcy Code, 2016. The appellant, Duncans Industries, relied heavily on Section 16G of the Tea Act, which states:

“16G. Application of Act 1 of 1956.—(1) Where the management of a tea undertaking or tea unit owned by a company has been taken over by any person or body of persons authorised by the Central Government under this Act, then, notwithstanding anything contained in the said Act or in the memorandum or articles of association of such company,—
(a) it shall not be lawful for the shareholders of such company or any other person to nominate or appoint any person to be a director of the company;
(b) no resolution passed in a meeting of the shareholders of such company shall be given effect to unless approved by the Central Government;
(c) no proceeding for the winding up of such company or for the appointment of receiver in respect thereof shall lie in any court except with the consent of the Central Government.”

Specifically, the appellant argued that Section 16G(1)(c) of the Tea Act requires that no winding-up proceedings can be initiated without the consent of the Central Government when the management of a tea unit has been taken over by the government. They contended that insolvency proceedings under the IBC should be considered a form of winding-up and therefore require prior consent.

The respondent, A.J. Agrochem, invoked the provisions of the IBC, particularly Section 238, which provides that the IBC shall have an overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The respondent argued that the IBC is a complete code in itself, designed for the time-bound resolution of insolvency, and that importing the requirement of consent from the Tea Act would frustrate the purpose of the IBC.

Arguments

Arguments by the Appellant (Duncans Industries Ltd.):

• The Tea Act is a special law enacted to control the tea industry, and it includes provisions for the Central Government to take over the management of tea units that are not being run properly.
• Section 16G of the Tea Act specifically deals with situations where the management of a tea unit has been taken over by the Central Government.
• The term “winding up” under the Companies Act includes insolvency proceedings under the IBC. Therefore, initiating insolvency proceedings under the IBC requires the Central Government’s consent as per Section 16G of the Tea Act.
• The provisions of the Tea Act apply to tea units whose management has been taken over to stimulate production and manufacturing of tea in public interest.
• The Tea Act is a special legislation that protects companies with tea gardens and should be harmoniously construed with the IBC.
• Section 238 of the IBC should not be applied because there is no conflict between the Tea Act and the IBC. The IBC process can be started if permission is obtained from the Central Government.
• The interim order of the High Court of Calcutta was passed to improve the conditions of the workers and the tea estates, and the provisions of the Tea Act should apply.

Arguments by the Respondent (A.J. Agrochem):

• The IBC is a complete code for insolvency resolution, and it does not require prior consent from the Central Government for initiating corporate insolvency resolution process.
• Importing the requirement of obtaining consent of the Central Government would be contrary to the overriding nature of the IBC and the legislative intent of keeping the government away from the resolution process.
• The object of both the Tea Act and the IBC is the revival of the company. In case of conflict, the IBC shall prevail by virtue of Section 238 of the IBC.
• Section 16G of the Tea Act applies only when the management has actually been taken over by the Central Government or the Tea Board, which is not the case here due to the interim order of the High Court of Calcutta.
• Section 16G(1)(c) of the Tea Act applies to “winding up” proceedings, not to the initiation of “corporate insolvency resolution process.” The two are distinct processes.
• Winding up is governed by the Companies Act and falls under Entries 33 and 34 of the Union List, while insolvency falls under Entry 9 of the Concurrent List, making them separate legal concepts.
• The corporate insolvency resolution process is to ensure revival and continuation of the corporate debtor, not its liquidation.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether, before initiating proceedings under Section 9 of the IBC, consent of the Central Government is required under Section 16G(1)(c) of the Tea Act, 1953, and whether, in the absence of such consent, the proceedings initiated under Section 9 of the IBC would be maintainable.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 – Supreme Court of India
• K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662 – Supreme Court of India
• Swiss Ribbons Pvt. Ltd. v. Union of India [AIR 2019 SC 739 : (2019) 4 SCC 17] – Supreme Court of India
• Innoventive Industries Ltd. v. ICICI Bank [AIR 2017 SC 4084 : (2018) 1 SCC 407] – Supreme Court of India
• PCIT v. Monnet Ispat and Energy Ltd. (2018) 18 SCC 786 – Supreme Court of India
• ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta (2019) 2 SCC 1 – Supreme Court of India

Statutes:

• Section 16E of the Tea Act, 1953 – Regarding the power of the Central Government to take over tea undertakings.
• Section 16G of the Tea Act, 1953 – Regarding the application of the Companies Act, 1956 when management of a tea undertaking is taken over.
• Section 9 of the Insolvency and Bankruptcy Code, 2016 – Regarding the initiation of corporate insolvency resolution process by an operational creditor.
• Section 238 of the Insolvency and Bankruptcy Code, 2016 – Regarding the overriding effect of the IBC.

[TABLE] of Authorities Considered:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ The court distinguished the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 and K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662* stating that Section 238 of the IBC would be applicable in the present case.

✓ The court relied on Swiss Ribbons Pvt. Ltd. v. Union of India [AIR 2019 SC 739 : (2019) 4 SCC 17]* to highlight the objectives of the IBC, particularly the focus on revival and time-bound resolution.

✓ The court also relied on Innoventive Industries Ltd. v. ICICI Bank [AIR 2017 SC 4084 : (2018) 1 SCC 407]* and PCIT v. Monnet Ispat and Energy Ltd. (2018) 18 SCC 786* to reiterate the IBC’s purpose and its overriding effect.

✓ The court referred to ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta (2019) 2 SCC 1* to emphasize that liquidation is a last resort under the IBC.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the objectives of the Insolvency and Bankruptcy Code (IBC), which prioritizes the revival and continuation of corporate debtors through a time-bound resolution process. The court emphasized that the IBC is a complete code designed to ensure that companies facing financial distress are given an opportunity to reorganize and avoid liquidation. The court was also keen to ensure that the process of corporate insolvency resolution is not delayed by the requirement of obtaining consent from the Central Government under the Tea Act, which would frustrate the purpose of the IBC. The court also noted that the management of the tea gardens were still being run by the appellant, and not the Central Government, despite the notification.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

The Supreme Court’s decision was influenced by both factual and legal considerations. The factual aspects included the interim order of the High Court of Calcutta which allowed the appellant to continue running the tea gardens, and the fact that the management of the tea gardens were not actually taken over by the Central Government. The legal considerations included the interpretation of Section 16G of the Tea Act and the overriding effect of Section 238 of the IBC.

Logical Reasoning:

The court considered the argument that the Tea Act is a special law but concluded that the IBC, being a later enactment with an overriding clause, should prevail. The court also rejected the argument that insolvency proceedings under the IBC are equivalent to winding-up proceedings under the Companies Act, emphasizing that the primary goal of the IBC is to revive companies, not liquidate them.

The Supreme Court’s decision was based on a harmonious interpretation of both statutes, giving primacy to the IBC’s objectives and the need for a time-bound resolution process. The court also emphasized that the IBC is a beneficial legislation for corporate debtors, aiming to protect them from mismanagement and corporate death.

The court quoted from the judgment:

“The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.”

“The primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.”

“The sum and substance of the above discussion would be that the provisions of the IBC would have an over-riding effect over the Tea Act, 1953 and that no prior consent of the Central Government before initiation of the proceedings under Section 7 or Section 9 of the IBC would be required.”

There were no dissenting opinions in this case. The three-judge bench unanimously agreed on the decision.

Key Takeaways

• The Insolvency and Bankruptcy Code (IBC) has an overriding effect over other laws, including the Tea Act, 1953, when it comes to insolvency proceedings.
• Prior consent from the Central Government is not required under Section 16G(1)(c) of the Tea Act before initiating proceedings under Section 9 of the IBC.
• The term “winding up” in the Tea Act does not include the corporate insolvency resolution process under the IBC.
• The primary objective of the IBC is the revival and continuation of corporate debtors, not liquidation.
• The actual taking over of management of a tea unit by the Central Government is a prerequisite for the application of Section 16G of the Tea Act.

Potential Future Impact:

• This judgment clarifies the relationship between the IBC and other sector-specific laws, ensuring that the IBC’s objectives are not frustrated by conflicting provisions in other statutes.
• It provides clarity to operational creditors and financial institutions regarding the initiation of insolvency proceedings against companies whose management may be under government control.
• It reinforces the importance of a time-bound resolution process under the IBC, which is essential for the revival of distressed companies.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

No specific amendments were discussed in this judgment.

Development of Law

The ratio decidendi of this case is that the provisions of the Insolvency and Bankruptcy Code (IBC) would have an overriding effect over the Tea Act, 1953, and that no prior consent of the Central Government is required before initiating proceedings under Section 7 or Section 9 of the IBC. This clarifies that the IBC’s objective of a time-bound resolution process is paramount and should not be hindered by conflicting provisions in other sector-specific laws. This also clarifies that the term “winding up” does not include the corporate insolvency resolution process under the IBC. This ruling reinforces the primacy of the IBC in matters of insolvency and provides clarity on the interplay between different statutes.

Conclusion

The Supreme Court dismissed the appeal filed by Duncans Industries Ltd., affirming that insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code (IBC) can be initiated without prior consent from the Central Government, even when the management of a tea unit is under the purview of the Tea Act, 1953. The court held that the IBC has an overriding effect and that the corporate insolvency resolution process is distinct from winding-up proceedings. This decision reinforces the IBC’s objective of time-bound resolution and revival of corporate debtors, ensuring that the insolvency process is not unduly delayed by conflicting provisions in other laws.

Category

Parent Category: Insolvency and Bankruptcy Code, 2016

Child Categories:

• Section 9, Insolvency and Bankruptcy Code, 2016
• Section 238, Insolvency and Bankruptcy Code, 2016
• Corporate Insolvency Resolution Process
• Operational Creditor

Parent Category: Tea Act, 1953

Child Categories:

• Section 16E, Tea Act, 1953
• Section 16G, Tea Act, 1953
• Tea Industry

Frequently Asked Questions (FAQ)

Q1: What was the main issue in the Duncans Industries Ltd. vs. A.J. Agrochem case?

A: The main issue was whether prior consent of the Central Government is required under Section 16G(1)(c) of the Tea Act, 1953, before initiating proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016.

Q2: What did the Supreme Court decide in this case?

A: The Supreme Court held that prior consent from the Central Government is not required under Section 16G(1)(c) of the Tea Act before initiating proceedings under Section 9 of the IBC.

Q3: What is the significance of Section 238 of the IBC?

A: Section 238 of the IBC gives the IBC an overriding effect over other laws, meaning that in case of conflict, the provisions of the IBC will prevail.

Q4: What is the difference between “winding up” and “corporate insolvency resolution process” under the IBC?

A: “Winding up” refers to the liquidation of a company, while “corporate insolvency resolution process” under the IBC aims at the revival and continuation of the company. The IBC process is primarily focused on resolution, while winding up is a last resort.

Q5: What was the argument of Duncans Industries in this case?

A: Duncans Industries argued that Section 16G(1)(c) of the Tea Act requires the Central Government’s consent before any winding-up or receivership proceedings can be initiated when the management of a tea unit has been taken over by the government. They contended that insolvency proceedings under the IBC should be considered a form of winding-up and therefore require prior consent.

Q6: What was the argument of A.J. Agrochem in this case?

A: A.J. Agrochem argued that the IBC is a complete code for insolvency resolution and does not require prior consent from the Central Government for initiating corporate insolvency resolution process. They also argued that the IBC has an overriding effect under Section 238 and that the IBC process is for revival and not liquidation.

Q7: What does the term ‘ratio decidendi’ mean?

A: ‘Ratio decidendi’ refers to the legal principle or rule of law on which a court’s decision is based. It is the binding part of a judgment that sets a precedent for future cases.

Q8: What were the key takeaways from the judgment?

A: Key takeaways include the overriding effect of the IBC, the non-requirement of prior consent from the Central Government under the Tea Act for IBC proceedings, the distinction between winding up and insolvency resolution, and the primary objective of the IBC being the revival of corporate debtors.

Q9: Did the Supreme Court give any specific directions in this case?

A: No, the Supreme Court did not give any specific directions in this judgment.

Q10: How does this judgment impact the interplay between the IBC and other sector-specific laws?

A: This judgment clarifies that the IBC’s objectives are paramount, and its provisions will override other sector-specific laws when it comes to insolvency proceedings. This ensures that the IBC’s time-bound resolution process is not hindered by conflicting provisions in other statutes.