When an application is filed against directors of a company under section 241 of the Companies Act, 2013(CA, 2013), the rights of the investors cannot be suppressed by barring the initiation of the Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code, 2016 (IBC, 2016). Even in cases of multiple proceedings, if requirements mentioned under section 7 or 9 of IBC, 2016 are fulfilled, CIRP can be initiated. Although, IBC is supreme law but, can a blanket moratorium as under IBC, 2016 be granted under CA, 2013? In this article, we have initiated an attempt to substantiate such statements by the reasoning of adjudicating and appellate authorities.
In IL & FS Securities Services Ltd. v. Securities & Exchange Board of India, a petition was filed under section 241 of CA, 2013, stating that the Company’s activities were being conducted in a way that was detrimental to the public interest. The NCLT issued an order suspending the board of directors and appointed a newly constituted board.
An application was filed before NCLT for a stay on the institution or continuation of suits or proceedings against IL & FS Securities Ltd. before any court of law/tribunal. Subsequently, raising a pertinent question- Whether a blanket moratorium can be granted under the Companies Act?
NCLT clarified that CA, 2013 contains no such clause through which moratorium can be granted as mentioned under IBC, 2016. However, through a separate application under IBC, 2016 parties may avail blanket moratorium for initiation of CIRP for the Company as well as for its 348 associate companies, thereby holding that a blanket moratorium cannot be passed under CA, 2013.
Hence, such application stands on no valid grounds. Moreover, a moratorium order as provided under IBC, 2016 cannot be extended to an application under section 241 and 242 of CA, 2013 which can only be invoked when the Court is satisfied that the affairs of the Company have been mismanaged and where relief has already been granted by the Tribunal.
In VIL Ltd. v. IL&FS Transportation Networks Ltd., an interim order was passed by NCLAT under section 241 and 242 of CA, 2013 prohibiting recovery proceedings against IL&FS Transportation Networks Ltd. and its 348 Group companies. Based on the aforesaid order, an application was filed by VIL Ltd., seeking sine die adjournment of instant arbitral proceedings filed under section 9 of Arbitration and Conciliation Act, 1996 to restraint the IL&FS Transportation Networks Ltd. from invoking the bank guarantee furnished by the VIL Ltd. The Court held that since the stay was ordered by NCLAT against proceedings having an adverse effect on financial resources of the VIL Ltd. and not on proceedings beneficial to VIL Ltd., same would not be applicable in instant proceedings, as sine die adjournment of instant proceedings will amount to a continuation of restraint order against them for an indefinite period, which will definitely have an adverse effect on the financial claim of VIL Ltd. It was implicit from the interim order passed by NCLAT, in concurrence with Deewan Housing Finance Corporation Ltd. v. SEBI, that though moratorium was not declared with respect to Deewan Housing Finance Corporation Ltd., but interim directions were identical to provisions of section 14 and, therefore, principle, that declaration of the moratorium will not cause any stay on the proceedings beneficial to corporate debtor, were also applicable in the instant case which further led to the dismissal of the present application. Henceforth, powers exercised by NCLAT under section 241 and 242 of CA, 2013, 2013 are not akin to as provided under section 14 of IBC, 2016.
Can ongoing proceeding under section 241 of Companies Act, 2013 act as a bar to initiation of CIRP under IBC, 2016?
In Jagmohan Bajaj v. Shivam Fragrances (P.) Ltd., an application was filed before the Tribunal opposing the onset of CIRP due to the pending internal dispute between directors of the corporate debtor on allegations under section 241 of CA, 2013. The Tribunal was of the view that it may not be legitimate to jeopardise the legitimate interest of investors. There is no controversy that the Corporate Debtor raised a loan in the nature of a financial debt that was overdue, and that the financial creditor was well within its rights to initiate CIRP because the corporate debtor failed to transfer the immovable asset in accordance with the arbitral award to discharge the obligation arising out of financial debt. Henceforth, there remains no reason to suppress the rights of investors.
Similarly, the Tribunal in Prayag Polytech P. Ltd. v. Great Aid Technical Services P. Ltd., decided that once an application is complete and a default petition under Sec 241 of CA, 2013 is filed, it cannot be an impediment to filing a CIRP against a corporate debtor. Because the IBC, 2016, is a complete code and Union law, it will take precedence over prior legislations such as CA, 2013. Section 238 of the code states that the provisions of the code must be followed notwithstanding any other legislation to the contrary.
In cases of pre-existence of dispute, prior to the issue of demand notice under section 8(1) of IBC, 2016, any application filed under section 9 of IBC, 2016 is not maintainable. The Appellate Tribunal in Vivek Pasricha v. Amit Sachdeva, where on account of failure to pay arrears of salary an application was filed by Amit Sachdeva. The Tribunal after discovering the fact that a petition is already filed under section 241 and 242 of CA, 2013, held that any further petition filed by Vivek Pasricha on the same issue is not maintainable.
However, the Tribunal in the case of Sagaya Annal Associates v. Store N Move P. Ltd., held that a petition filed by operation creditor under section 9 of IBC, 2016 against the corporate debtor, was not maintainable if there is a prior disagreement between the parties. In the present case, the Managing Partner of Operational Creditor holding 36.84 per cent stake in Corporate Debtor had filed a petition against Corporate Debtor under section 241 of CA, 2013 even before the issuance of demand notice.
In multiple judgments the Tribunal has held that the Directors cannot act on behalf of the Company in matters related to Section 241 of CA, 2013, which further raises the apposite question- Is there any need to pass any specific resolution for a director to initiate CIRP under section 9 of IBC, 2016? The Tribunal in Shah Brothers Ispat (P.) Ltd. v. Diamond Engineering (Chennai) (P.) Ltd. held that there is no need to pass any specific resolution to empower a director to initiate a CIRP against a corporate debtor in case a corporate debtor fails to discharge any liability.
Can a claim under IBC, 2016 resort to oppression and mismanagement?
In Ms Ratna Singh v. Theme Export (P.) Ltd., the Tribunal clarified that the IBC, 2016 is not designed to be used as a preventive measure against oppression and mismanagement, although it does include provisions in Part II of Chapter III which enables for the outset of actions involving wrongdoers/illegal transactions, etc.
In comparison to CA, 2013, IBC, 2016 is far more encompassing and wide. When the IBC was enacted, it appears that the overlap of some of the preceding clauses was not readily apparent. The CIRP cannot be avoided by relying on the pending internal dispute amongst Corporate Debtor’s Directors over charges of oppression and mismanagement. The statutory right of a financial creditor who meets the section 7 conditions to trigger CIRP cannot be made subordinate to the determination of an application under sections 241 and 242 of CA, 2013. When it comes to triggering the CIRP, bankruptcy reigns supreme, and it cannot be surpassed by using remedies provided under regular law. When there are disagreements, the IBC’s superiority over other laws is made clear via section 238 of IBC, 2016.
Written By: Aayush Akar, Student, National Law University Odisha, Cuttack & Riya Jain, Student, Damodaram Sanjivayya National Law University, Visakhapatnam