2024 (7) TMI 624 - AT - Insolvency and Bankruptcy

NCLAT revives Section 7 insolvency petition wrongly rejected due to pending DRT proceedings under Section 19

NCLAT Principal Bench allowed appeal against Adjudicating Authority's rejection of Section 7 application under IBC. The Authority had incorrectly relied ... Rejection of section 7 application - initiation of CIRP - Principles of estoppel. Whether reliance by the Adjudicating Authority to Section 10 of CPC for taking the view that Section 7 Application, which is subsequent proceeding need to be stayed is correct view in law? - HELD THAT:- Section 238 of the IBC as extracted above, gives overriding effect to the proceedings under Section 7. Thus, despite the provision of Section 10 of CPC, the proceedings under Section 7 has to be proceeded with. The clear intendment of the statute is that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith in any other law for the time being in force. Even if for argument sake, it is accepted the provisions of Section 10 CPC will be attracted, the clear intendment of the statute is that proceedings under the IBC shall have effect. Insolvency resolution of the Corporate Debtor has to be detected at the earliest and remedial measures are to be taken to bring back the Corporate Debtor on its feet - in view of the overriding provision of Section 238, the proceedings under Section 7 shall not be barred by any proceeding initiated under Section 19. As noted above, Section 19 proceedings are for the purpose of recovery of dues by the Bank and Section 7 proceedings are for insolvency resolution of the Corporate Debtor. Both proceedings covers entirely different field and rejection of proceedings under Section 19 by DRT on 17.06.2022 cannot operate as any bar for Application under Section 7. The determination of default in DRT proceedings, which is pending in Calcutta High Court can have relevance for the purposes of Section 19 Application, but cannot be said to be a reason to hold the proceedings under Section 7 barred, as has been held by the Adjudicating Authority. The Hon’ble Supreme Court in Employees Organisation vs. Jaipur Metals & Electricals Ltd. [2018 (12) TMI 674 - SUPREME COURT] clearly held in the above case that petition under Section 7 is an independent proceeding, which is unaffected by pendency of proceedings in other Court, which may be filed by the same Company. The order of DRT dated 17.06.2022 and the proceedings under Section 19, which are still inconclusive, cannot be a ground to hold Section 7 Application as barred. The Adjudicating Authority committed error in holding Section 7 Application as barred in view of the order dated 17.06.2022 passed by DRT - order of Adjudicating Authority dated 21.03.2023 is unsustainable. Appeal allowed. The Company Petition is revived before the Adjudicating Authority, to be considered afresh in accordance with law. Issues Involved:1. Whether the proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) are barred in view of the order passed by DRT-II, Kolkata in T.A. No.179 of 2020 dated 17.06.2022.2. Whether the Adjudicating Authority erred in applying Section 10 of the Code of Civil Procedure (CPC) to stay the Section 7 application.3. Whether the findings of the Debt Recovery Tribunal (DRT) on default can preclude the Section 7 proceedings under the IBC.4. Whether the One Time Settlement (OTS) proposal by the Corporate Debtor affects the Section 7 application.5. The applicability of the principle of res judicata and issue estoppel in the context of Section 7 proceedings under the IBC.Detailed Analysis:1. Whether the proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) are barred in view of the order passed by DRT-II, Kolkata in T.A. No.179 of 2020 dated 17.06.2022:The National Company Law Appellate Tribunal (NCLAT) held that the proceedings under Section 7 of the IBC are not barred by the order passed by DRT-II, Kolkata. The IBC is a subsequent legislation with an overriding effect as per Section 238 of the IBC. The proceedings under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (1993 Act) are for the recovery of dues, whereas Section 7 of the IBC is for insolvency resolution of the Corporate Debtor. Both proceedings cover entirely different fields, and the rejection of proceedings under Section 19 by DRT cannot operate as a bar for an application under Section 7.2. Whether the Adjudicating Authority erred in applying Section 10 of the Code of Civil Procedure (CPC) to stay the Section 7 application:The NCLAT found that the Adjudicating Authority erred in applying Section 10 of the CPC to stay the Section 7 application. Section 238 of the IBC gives overriding effect to the proceedings under the IBC, notwithstanding anything inconsistent in any other law. The statute under the IBC never contemplated that proceedings under the IBC should await the outcome of any previously instituted proceeding under any other statute. Thus, the Section 7 application should proceed despite the pendency of proceedings under Section 19 of the 1993 Act.3. Whether the findings of the Debt Recovery Tribunal (DRT) on default can preclude the Section 7 proceedings under the IBC:The NCLAT held that the findings of the DRT on default cannot preclude the Section 7 proceedings under the IBC. The determination of default in DRT proceedings can have relevance for the purposes of Section 19 application but cannot be a reason to hold the proceedings under Section 7 barred. The Section 7 application is an independent proceeding, and the findings of the DRT do not operate as issue estoppel in the context of Section 7 proceedings.4. Whether the One Time Settlement (OTS) proposal by the Corporate Debtor affects the Section 7 application:The NCLAT noted that the Corporate Debtor had submitted an OTS proposal acknowledging the outstanding amount and proposing to make the payment. This acknowledgment of debt and default by the Corporate Debtor in the OTS proposal was not considered by the Adjudicating Authority. The OTS proposal clearly acknowledged the debt and default, and the Section 7 application was filed within the limitation period.5. The applicability of the principle of res judicata and issue estoppel in the context of Section 7 proceedings under the IBC:The NCLAT held that the principle of res judicata and issue estoppel do not apply to Section 7 proceedings under the IBC. The proceedings under the 1993 Act and the IBC are entirely different with different purposes and objects. The judgment of the Hon'ble Supreme Court in Hope Plantations Ltd. does not render any assistance to the Respondent in this context. The Section 7 application is an independent proceeding and is not barred by any findings or orders in the DRT proceedings.Conclusion:The NCLAT concluded that the order of the Adjudicating Authority dated 21.03.2023 is unsustainable. The appeal was allowed, and the order dated 21.03.2023 was set aside. The Company Petition - TP (IBC) No.02/CB/2022 is revived before the Adjudicating Authority to be considered afresh in accordance with the law.