Renuka Mishra and Aakash Batra[i]
Section 65 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) penalizes the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) with fraudulent or mala-fide intent. It provides for a penalty ranging from one lakh to one crore rupees on the initiation of CIRP fraudulently or with a mala-fide intent for purposes other than insolvency resolution or liquidation. Furthermore, it provides for a penalty ranging from one lakh to one crore rupees on voluntary initiation of liquidation proceedings with an intent to defraud anyone. The provision focuses on determining the intent of the applicants behind the initiation of proceedings and for ensuring that the IBC is not misused for mala-fide or fraudulent purposes.
Despite the aforementioned provision, there have been numerous instances by applicants aiming to initiate CIRP with mala-fide and fraudulent intention. Some of them include, inter alia: initiation of proceedings by the same persons in different capacities for fulfilling mischievous purposes - M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors.; filing of unquantified petitions with false information - TATA Chemicals Limited v/s. Raj Process Equipments and Systems Private Limited; filing of proceedings with an aim of diverting the attention of the tribunal from the main issue - Shobhnath v. Prism Industrial Complex Ltd.
Multiplicity of Proceedings
As discussed above, there can be numerous instances where proceedings are triggered with a fraudulent and mala-fide intent, which could defeat the purpose of IBC and result in its provisions being misused. The purpose is also defeated when multiple proceedings are initiated for the same cause of action and a floodgate of litigation is rendered open in appeals before the High Courts. Chapter VI of IBC talks about Adjudicating Authority for Corporate Persons and also about Appellate Authorities before which Appeals could be filed. The IBC Mechanism lays down that any person aggrieved with any order of the Adjudicating Authority or the National Company Law Appellate Tribunal (“NCLT”) may prefer an appeal to the National Company Law Appellate Tribunal (“NCLAT”) under section (u/s) 61 of the IBC. A final appeal regarding any order given by the NCLAT could be preferred before the Supreme Court u/s 62, and the jurisdiction of any other civil court since a matter pertaining to NCLT or NCLAT has been explicitly ousted by s. 63 as well as s. 231. However, the interference of various High Courts in IBC matters has increased in recent years and how this ultimately results in bypassing the hierarchy or mechanism of appeal provided by IBC and certain other problems that defeat the objective of IBC has to be carefully understood.
The intervention of High Courts
Initially in 2017, in the cases of Sree Metaliks Limited and Anr. v. Union of India and Anr. & Shivam Water Treaters v. Union of India the writ jurisdiction under Art. 226 of the Indian Constitution was first exercised in this area, for raising questions challenging the constitutionality of IBC, which were finally settled in by the Apex Court in the landmark judgment of Swiss Ribbons Private Ltd. and Anr. v. Union of India and Ors. The Hon’ble High Court of Bombay, while deciding the maintainability of a writ petition as an alternate remedy of appeal in the case of Anthony Raphael Kallarakkal v. National Company Law Tribunal, Mumbai Bench & Ors. for matters pertaining to IBC, gave an indication that “where exceptional facts and circumstances have been made out, the High Court can exercise writ jurisdiction under Article 226 even though alternate remedies u/s 61 & u/s 62 have been provided for”. This led to the Apex Court in the matter of M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. to settle, inter alia, whether High Courts have the power to interfere in IBC proceedings by the virtue of Art. 226/227 of the Indian Constitution. It was held in this particular case that NCLT does not have the power of judicial review over administrative actions and a decision that touches upon the realm of public law cannot be deemed to come under the purview of s. 60(5) of IBC
Subsequently in the case of Kamal K Singh v. Union of India and Ors. the writ of certiorari was issued by the Hon’ble High Court, for quashing the orders by NCLT which were against natural justice.
Although the High Courts are likely to intervene only when exceptional circumstances are made out and when procedural mistakes of NCLT result in failure of justice. However, it still requires contemplation that when an alternate mechanism is present which goes as high as to the Supreme Court of India, this intervention by the High Courts can be severely misused by the way of filing unnecessary petitions. The implications of such misuse could be detrimental and can sabotage the whole CIRP Process including the resolution plan. In the aforementioned case of Embassy Property Developments, it was pointed out that the NCLT and NCLAT are empowered to enquire into the allegations of fraud but the court also laid down that adjudicating upon a matter that falls in the realm of public law or revolve around the decisions passed by statutory or quasi-judicial authorities will be coram non judice. On a concurrent reading of Section 65, 66 and 69 of IBC, there is no question regarding the fact that NCLT is vested with the powers to inquire into fraudulent initiation of proceedings and fraudulent transactions. However, the scope of these sections is very narrow which gives an invitation to High Courts to intervene which many a time circumvents the IBC mechanism. The Supreme Court held in the landmark case of M/s Innoventive Industries Limited versus ICICI Bank that IBC is exhaustive for the matters relating to insolvency and is a single unified code encompassing the entire gamut of insolvency resolution law; intervention by the High Courts renders the mechanism of Appeal under IBC in front of NCLAT or the Supreme Court, redundant.
Moreover, there are precedents where the NCLAT has also set aside the orders of NCLTs because they were against the principles of natural justice, such as in the case of Mr. Dingo Ku v. M/s. Suntech Infra Solutions Pvt. Ltd. and Ors. Now, when the NCLAT is empowered to do so, why the interference of High Courts is imperative cannot be fully justified. Even the Companies Act 2013 obliges NCLT & NCLAT to uphold the principles of natural justice by the way of Sec. 424.
Section 231 was duly observed in the case of Aryan Mining and Trading Corporation Private Limited v. Ganesh Sponge Private Limited, where NCLT Kolkata held that any injunction granted by any court, shall be a nullity in law and cannot be given effect to. A similar judicial interpretation was provided by the Delhi High Court in the case of Liberty House Group Pte Ltd v. State Bank of India and Others refrained from exercising jurisdiction with respect to the action taken by the NCLT due to the same powers conferred upon NCLT itself or any other appellate authority under IBC. As the scenario now is not the same after the Embassy Property Developments case, cautionary principles should be developed so as to limit the area and draw a distinction where the High Court can entertain the case in pursuance of saving public interest as well as conserving the purpose of time-bound resolution behind IBC. While exercising jurisdiction under art. 226, the High Courts should very carefully distinguish between the lack of jurisdiction and the wrongful exercise of the available jurisdiction in case bypassing a statutory alternative remedy in imperative to safeguard the public interest.
Parallel proceedings under different enactments
To ensure the benefit of all stakeholders, IBC consolidated the historical insolvency laws in India when it came into existence. The centuries-old laws of Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 were repealed by IBC and many other insolvency & reorganization laws such as Sick Industrial Companies Act, 1985, Recovery of Debts and Bankruptcy Act, 1993, and Securitization and Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002 (‘SARFAESI Act’), etc. were consolidated by this code to achieve the objectives as given in its preamble.
However, there has been a tendency for applicants to involve in parallel proceedings under different enactments. The NCLAT in the case of Punjab National Bank v. Vindhya Cereals , held to reverse the NCLT judgement and stipulated that applicants are allowed to file multiple proceedings under different enactments and the same shall not be covered under the ambit of fraudulent and mala-fide proceedings under the Sec. 65 of IBC. The authors humbly disagree with this proposition as the non-obstante clause provided under Sec. 238 of IBC provides for the supremacy of IBC over any other Law. On the contrary, this case provides for simultaneous proceedings. The conjoint reading of this case with the non-obstante clause leads to an ambiguous position as the remedy provided under any other Law will be rendered ineffective owing to the non-obstante clause under IBC.
Furthermore, the practise of forum shopping could lead to various anomalies in the legal regime. Forum shopping is a phenomenon wherein any person willing to file an application or petition has multiple forums (courts or tribunals) to choose from in order to file his case. It can lead to unfairness and can become an impediment to the efficiency of the justice system due to the addition of an unnecessary burden on Courts and extraneous expenses. Moreover, it will lead to a lack of uniformity in the pronouncements; some pronouncements being rendered by authorities which might not be specifically trained in this arena of law. Additionally, the objective behind the enactment of IBC to ensure speedier and timely resolution of disputes is also rendered futile.
Changes required in Sec. 65
Due to the multiplicity of proceedings through petitions in High Courts and parallel proceedings under different enactments, the purpose of providing an efficacious and timely remedy under the IBC gets defeated. Many times, such multiple proceedings are triggered with a malicious intention to put the burden upon the other party for making them succumb to unjustified seemingly coerced settlements. Although Sec. 65 provides for the prevention of fraudulent acts by the way of penalization, a change is needed in its definition to make it more inclusive and give it a wider ambit to cover such instances when the petitioners use the garb of alternative remedies for some malicious ulterior motive. A strict penalty should be provided for dishonestly using the adjudicatory and judicial framework with an intention of pressurizing the other party and delaying the resolution process for personal benefits. Furthermore, it needs to be understood why the jurisdiction of civil courts has been ousted as per Sec. 231 because if such interventions are allowed through circumstantial perusal of the cases, the jurisprudential framework of IBC will get distorted and will invite a plethora of ambiguities in the existing adjudicatory mechanism.
[i] Renuka Mishra and Aakash Batra are third-year students at Symbiosis Law School, Pune. Any query on the article can be directed to renukasymbiosis@gmail.com. Preferred Citation: Renuka Mishra and Aakash Batra, Multiplicity of Proceedings and Scope of Sec. 65 Under Insolvency and Bankruptcy Code, 2016, Arbitration & Corporate Law Review, Published on 26th July, 2020.
This article was reviewed by Arnav Maru and Shruti Dhonde.