Supreme Court Halts High Court Auction Amidst Insolvency Proceedings: Anand Rao Korada vs. M/s. Varsha Fabrics (P) Ltd. (2019)

Date of the Judgment: November 18, 2019

Citation: 2019 INSC 1165

Judges: Indu Malhotra, J., R. Subhash Reddy, J.

When a company faces financial difficulties, can a High Court continue with auctioning its assets if insolvency proceedings have already begun before the National Company Law Tribunal (NCLT)? The Supreme Court of India recently addressed this critical question in a case involving M/s Hirakud Industrial Works Ltd. The court clarified the supremacy of the insolvency process under the Insolvency and Bankruptcy Code, 2016 (IBC), over other legal proceedings.

The Supreme Court bench, comprising Justices Indu Malhotra and R. Subhash Reddy, delivered the judgment. Justice Indu Malhotra authored the opinion for the bench.

Case Background

The case revolves around M/s Hirakud Industrial Works Ltd. (Respondent No. 4), which faced financial distress. Here’s a breakdown of the key events:

On 10.07.2006, M/s Varsha Fabrics Pvt. Ltd. (Respondent No. 1), India Finance Ltd. (Respondent No. 2), Mudrika Commercial Pvt. Ltd. (Respondent No. 3), Hirakud Industrial Works Ltd. (Respondent No. 4), and Industrial Development Corporation of Orissa Ltd. (Respondent No. 5) entered into a Share Purchase Agreement (SPA). As per the SPA, Respondent No. 5 divested its 100% shareholding in Respondent No. 4 in favour of Respondent Nos. 1 to 3.

Respondent No. 4 shut down its factory on 08.05.2007.

Subsequently, Respondent Nos. 1 to 3 sold their stake in Respondent No. 4 to Indo Wagon Engineering Ltd.

The Hirakud Workers’ Union (Respondent No. 13) filed a writ petition (W.P. (Civil) No. 12479/2009) before the Odisha High Court, seeking cancellation of the SPA dated 10.07.2006 and payment of arrears and current salaries of the workmen.

On 28.03.2011, Respondent No. 13 filed another writ petition (W.P. (Civil) No. 7939/2011) before the Odisha High Court for payment of their dues.

The Odisha High Court, on 14.03.2012, directed the Deputy Labour Commissioner, Sambalpur Division (Respondent No. 10) to recover the workmen’s dues by selling the assets of Respondent No. 4 through a public auction.

The Supreme Court, on 03.08.2015, directed the Labour Court to determine the compensation payable to the workmen. It also directed that if Respondent Nos. 1 to 3 fail to pay the compensation, the assets of Respondent No. 4 would be sold through public auction to disburse the arrears of the workmen.

The Labour Court, Sambalpur, on 11.11.2016, quantified the amount payable to the workmen as Rs. 45,66,67,133/-.

On 12.01.2017, the High Court directed the Deputy Labour Commissioner to sell a parcel of Respondent No. 4’s land admeasuring 157.27 acres to the Hirakud Dam Project. The sale proceeds of Rs. 10,04,12,105/- were disbursed towards the arrears of the workmen’s dues.

During the pendency of proceedings before the High Court, M/s Nandakini Contractors Pvt. Ltd., a Financial Creditor, filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the NCLT, Cuttack Bench, for initiating the Corporate Insolvency Resolution Process (CIRP) against Respondent No. 4 for defaulting on a financial debt of Rs. 24,11,975/-.

The NCLT, on 04.06.2019, admitted the insolvency petition and declared a moratorium under Sections 13 and 15 of the IBC. The Appellant was appointed as the Insolvency Resolution Professional.

Despite the moratorium, the High Court continued with the auction proceedings, leading to the present appeals before the Supreme Court.

Timeline:

Course of Proceedings

The Odisha High Court, in W.P. (Civil) No. 7939/2011, had been overseeing the recovery of dues owed to the workmen of Hirakud Industrial Works Ltd. The High Court directed the Deputy Labour Commissioner to auction the company’s assets to pay these dues. Despite the Supreme Court’s order to determine the compensation payable to the workmen by the Labour Court, the High Court continued with the auction process. Subsequently, when the NCLT admitted the insolvency petition and declared a moratorium, the High Court still proceeded with the auction, which led to the present appeal before the Supreme Court.

Legal Framework

The Supreme Court examined the following key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC):

• Section 14 of the IBC: This section mandates a moratorium upon the commencement of the insolvency process. It prohibits the institution or continuation of suits or proceedings against the corporate debtor, including the execution of any judgment, decree, or order. The section states:

  “14. Moratorium. – (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: – (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;…”

• Section 238 of the IBC: This section gives the IBC an overriding effect over all other laws. It states:

  “238. Provisions of this Code to override other laws. – 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.”

• Section 231 of the IBC: This section bars the jurisdiction of civil courts in matters where the NCLT or NCLAT is empowered to pass an order under the IBC. It states:

  “231. Bar of jurisdiction. – No civil court shall have jurisdiction in respect of any matter in which the Adjudicating Authority or the Board is empowered by, or under, this Code to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority or the Board under this Code.”

These provisions establish that once the insolvency process is initiated and a moratorium is declared by the NCLT, all other proceedings against the corporate debtor, including auction proceedings by the High Court, must be stayed. The IBC aims to consolidate and streamline the insolvency resolution process, ensuring that the assets of the corporate debtor are managed under the framework of the IBC.

Arguments

Appellant (Resolution Professional):

• The Appellant argued that the High Court’s orders dated 14.08.2019 and 05.09.2019, which directed the auction of the Corporate Debtor’s assets, were illegal.
• The Appellant contended that the Corporate Insolvency Resolution Process (CIRP) had commenced against the Corporate Debtor, and a moratorium had been declared by the NCLT on 04.06.2019, as per Section 14 of the IBC.
• The Appellant submitted that Section 14 of the IBC prohibits the continuation of any proceedings against the Corporate Debtor once a moratorium is in place.
• The Appellant relied on Section 238 of the IBC, which gives overriding effect to the IBC over any other law, including the High Court’s orders.
• The Appellant argued that the High Court should have stayed the auction proceedings once the CIRP was initiated by the NCLT.

Respondent No. 8 (HINDALCO):

• Respondent No. 8, who had participated in the High Court’s auction, raised serious objections to the stay of the auction proceedings.
• Respondent No. 8 sought permission to file an application before the appropriate authority to decide on the objections raised by it.

Respondent No. 1 to 3:

• The Counsel for Respondent Nos. 1 to 3 supported the submissions made by the Appellant.

Respondent No. 13 (Hirakud Workers’ Union):

• Respondent No. 13 was not represented by Counsel during the hearing before the Supreme Court.

Innovativeness of the argument: The Appellant’s argument was based on the clear provisions of the IBC, highlighting the legislative intent to prioritize the insolvency resolution process under the IBC over other proceedings, including those before the High Court. The argument was innovative in the sense that it sought to enforce the moratorium declared by the NCLT, thereby preventing any parallel proceedings that could jeopardize the insolvency process.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the High Court could proceed with the auction of the Corporate Debtor’s assets after the commencement of the Corporate Insolvency Resolution Process (CIRP) and the declaration of a moratorium by the NCLT under the Insolvency and Bankruptcy Code, 2016 (IBC).

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC): The court relied on this section to emphasize the imposition of a moratorium upon the commencement of the insolvency process, which prohibits the continuation of proceedings against the corporate debtor.
• Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section was cited to highlight the overriding effect of the IBC over other laws, reinforcing the supremacy of the insolvency process.
• Section 231 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section was cited to emphasize the bar on the jurisdiction of the civil court to interfere with the matters where the NCLT or NCLAT is empowered under the code.

Authorities Considered by the Court

Judgment

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

How each authority was viewed by the Court?

• Section 14 of the IBC*: The Court held that the moratorium under Section 14 of the IBC prohibits the continuation of any proceedings against the corporate debtor, including the auction proceedings before the High Court.
• Section 238 of the IBC*: The Court emphasized that Section 238 of the IBC gives the IBC an overriding effect over all other laws, including the orders of the High Court, thereby reinforcing the supremacy of the insolvency process.
• Section 231 of the IBC*: The Court held that Section 231 bars the jurisdiction of the civil court to interfere with the matters where the NCLT or NCLAT is empowered under the code.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the Insolvency and Bankruptcy Code, 2016 (IBC). The Court emphasized the need to ensure that the insolvency resolution process is not hampered by parallel proceedings in other forums. The Court’s reasoning was driven by the following points:

• Supremacy of the IBC: The Court reiterated that the IBC is a complete code designed to consolidate and amend laws relating to insolvency resolution. It highlighted that Section 238 of the IBC gives it an overriding effect over all other laws.
• Moratorium under Section 14: The Court emphasized that the moratorium declared under Section 14 of the IBC prohibits the continuation of any proceedings against the corporate debtor, including auction proceedings initiated by the High Court.
• Exclusive Jurisdiction of NCLT: The Court noted that the IBC vests exclusive jurisdiction on the NCLT and the NCLAT to deal with all issues pertaining to the insolvency process of a corporate debtor. Section 231 of the IBC bars the jurisdiction of the civil court to interfere with the matters where the NCLT or NCLAT is empowered under the code.
• Protection of Stakeholders: The Court was concerned that if the assets of the corporate debtor were alienated during the pendency of the IBC proceedings, it would seriously jeopardize the interests of all stakeholders.
• Streamlined Insolvency Process: The Court underscored the need for a streamlined insolvency process to maximize the value of the assets of the corporate debtor.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s decision was primarily driven by legal considerations (80%), with a lesser emphasis on the factual aspects of the case (20%).

Logical Reasoning

Judgment

The Supreme Court held that the High Court could not proceed with the auction of the Corporate Debtor’s assets after the commencement of the Corporate Insolvency Resolution Process (CIRP) and the declaration of a moratorium by the NCLT. The Court emphasized that the IBC is a complete code and has an overriding effect over other laws. The following points were emphasized by the court:

• The Court observed that the High Court’s orders dated 14.08.2019 and 05.09.2019 were passed after the CIRP had commenced and the moratorium had been declared by the NCLT on 04.06.2019.
• The Court stated that the moratorium declared under Section 14 of the IBC prohibits the continuation of any proceedings against the corporate debtor, including the auction of its assets.
• The Court relied on Section 238 of the IBC, which gives the IBC an overriding effect over all other laws, including the orders of the High Court.
• The Court noted that Section 231 of the IBC bars the jurisdiction of the civil court to interfere with the matters where the NCLT or NCLAT is empowered under the code.
• The Court highlighted that the subject matter of the auction proceedings before the High Court was a vast chunk of land admeasuring about 330 acres, including Railway lines and buildings.
• The Court was concerned that if the assets of the Corporate Debtor were alienated during the pendency of the proceedings under the IBC, it would seriously jeopardize the interest of all the stakeholders.

The Court set aside the impugned interim orders passed by the Odisha High Court, stating that parallel proceedings with respect to the main issue cannot take place in the High Court. The Court clarified that the sale or liquidation of the assets of the Corporate Debtor would now be governed by the provisions of the IBC.

The Court also noted that it was open for Respondent No. 13 (Hirakud Workers’ Union) to file an application under Regulation 9 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, for payment of arrears, salaries and other dues before the competent authority.

The Court granted liberty to the parties to pursue whatever remedies are available in accordance with law.

“In view of the provisions of the IBC, the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor – Respondent No. 4 herein, once the proceedings under the IBC had commenced, and an Order declaring moratorium was passed by the NCLT.”

“As a consequence, we set aside the impugned Interim Orders dated 14.08.2019 and 05.09.2019 passed by the Odisha High Court, as parallel proceedings with respect to the main issue cannot take place in the High Court. The sale or liquidation of the assets of Respondent No. 4 will now be governed by the provisions of the IBC.”

“It is open for Respondent No. 13 – Hirakud Workers’ Union to file an application under Regulation 9 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 for payment of arrears, salaries and other dues before the competent authority.”

There were no dissenting opinions in this case.

Key Takeaways

• The judgment reinforces the supremacy of the Insolvency and Bankruptcy Code, 2016 (IBC) over other laws, including orders of the High Court.
• Once a moratorium is declared by the NCLT under the IBC, all other proceedings against the corporate debtor, including auction proceedings, must be stayed.
• The judgment clarifies that the NCLT and NCLAT have exclusive jurisdiction over matters related to the insolvency process of a corporate debtor.
• The judgment protects the interests of all stakeholders by ensuring that the assets of the corporate debtor are managed under the framework of the IBC.
• The judgment provides a clear direction for creditors and other stakeholders to pursue their claims through the IBC process.

Directions

The Supreme Court directed that:

• The impugned Interim Orders dated 14.08.2019 and 05.09.2019 passed by the Odisha High Court were set aside.
• The sale or liquidation of the assets of Respondent No. 4 (Hirakud Industrial Works Ltd.) would now be governed by the provisions of the IBC.
• Respondent No. 13 (Hirakud Workers’ Union) was permitted to file an application under Regulation 9 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, for payment of arrears, salaries, and other dues before the competent authority.
• The parties were granted liberty to pursue whatever remedies are available in accordance with the law.

Development of Law

The ratio decidendi of this case is that once the Corporate Insolvency Resolution Process (CIRP) commences and a moratorium is declared by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 (IBC), any parallel proceedings, including auction proceedings in the High Court, must be stayed. This ruling reinforces the supremacy of the IBC and ensures that the insolvency process is not hampered by conflicting legal proceedings. The judgment clarifies that the NCLT and NCLAT have exclusive jurisdiction over matters related to the insolvency process of a corporate debtor. This is a reaffirmation of the existing position of law.

Conclusion

In conclusion, the Supreme Court’s judgment in Anand Rao Korada vs. M/s. Varsha Fabrics (P) Ltd. & Ors. clarifies the interplay between High Court proceedings and insolvency proceedings under the IBC. The Court firmly established that once the CIRP is initiated and a moratorium is declared by the NCLT, all other proceedings, including auction proceedings in the High Court, must be stayed. This decision upholds the legislative intent of the IBC to provide a streamlined and efficient process for the resolution of corporate insolvencies, ensuring that the assets of the corporate debtor are managed under the framework of the IBC to protect the interests of all stakeholders.

Category

Parent category:Insolvency Law

Sub-category: IBC