Ashutosh Gupta and Gaurav Rana

MOOT QUESTION VI, CAN A LIQUIDATOR AND RP INITIATE CIRP AGAINST OTHER CORPORATE DEBTOR.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (“Ordinance”) promulgated on 28th December, 2020, has not only brought, changes in respect to home buyers but also clarity in respect to powers and rights as entrusted upon the Liquidator and the Resolution Professional (“RP”) under Insolvency and Bankruptcy Code, 2016 India (“Code” or “IBC”) and regulations made thereunder with respect to initiating insolvency proceedings against other corporate debtor(s). In certain words, said Ordinance was also notified so as to reverse the effect of the Hon’ble National Company Law Appellant Tribunal’s (“NCLAT”) judgment in Abhay N. Manudhane Vs. Gupta Coal India Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 786 of 2019 dated 01.10.2019. Wherein NCLAT held that as per Section 11 of the Code, Liquidator on behalf of Corporate Debtor can not initiate Insolvency proceedings under the Code against other Corporate Debtor, but he can initiate other proceedings against such Corporate Debtor like recovery proceedings etc.

In this Article we will be discussing the factual matrix, the rationale of NCLAT while giving aforesaid judgment and implication of Ordinance on the same.

FACTS OF THE CASE:

Mr. Abhay N. Manudhane, Liquidator of Gupta Coal India Pvt Ltd. (“Corporate Debtor”) approached Adjudicating Authority, Mumbai Bench for initiating Section 9 of the Code against different companies/corporate debtors, as there was debt payable to the Corporate Debtor by the said companies. After hearing the Liquidator, Adjudicating Authority dismissed application of the Liquidator on the ground that, though Section 33(5) of the Code allow Liquidator to file cases by or against the Corporate Debtor so as to protect its right(s) and interest but Section 11 of the Code place embargo on it and thus Liquidator has no authority to proceed with Insolvency proceedings against other corporate debtors.

Being aggrieved an appeal was preferred by Mr. Abhay N. Manudhane, against the order dated 30.5.2019 passed by the Adjudicating Authority (“Impugned Order”).

SUBMISSIONS OF THE PARTIES :

Learned Counsel appearing on behalf of the Appellant referred to Section 33(5) of the I&B Code to suggest that ‘no suit or other legal proceeding shall be instituted by or against the corporate debtor’, provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority’. Section 33 (5) of the Code is reproduced herein below:

33. Initiation of liquidation. –

***

(5) Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority,

***”

It is submitted that in this background, the Appellant intends to file application under Section 9 against different companies, there being a debt payable to the present ‘Corporate Debtor’ against other companies or against other ‘Corporate Debtors

FINDING

NCLAT relied on Section 11 of the Code, which states that :

“11. Persons not entitled to make application.—

The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely:–

(a) a corporate debtor undergoing a corporate insolvency resolution process; or

(b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or

(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or

(d) a corporate debtor in respect of whom a liquidation order has been made.

Explanation.—For the purpose of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.”

NCLAT noted that clause (d) of the Section 11 of the Code, specifically states that Corporate Debtor in respect of whom a liquidation order has been made is not entitled to make application to initiate Insolvency proceedings under Chapter II.

Further NCLAT noted that, Section 33(5) of the Code is subject to Section 52 of the Code. Section 52 relates to right of secured creditor in liquidation proceedings.

ORDER

NCLAT after analyzing Section 11 read with 33 of the Code, held that though Liquidator is allowed to initiate any suit or legal proceedings against other corporate debtors for recovery of any money of the Corporate Debtor, but Application under Chapter II of the Code is not maintainable.

ANALYSIS OF ORDER AND IMPACT OF ORDINANCE

That the NCLAT judgment stroked down the right of the Liquidator to enforce the debt of the Corporate Debtor by invoking relevant provisions of the Code, in terms of Section 11(d) of the Code. By the same coin, one can easily interpret that even RP is also not allowed to initiate Insolvency Proceedings against any other corporate debtor(s) during the period it is going under Corporate Insolvency Resolution Process (CIRP) in terms of clause (a) of the Section 11 (a) of the Code. Interestingly, said question came before Adjudicating Authority, New Delhi in Mandhana Industries Limited v. Instyle Exports Private Limited and vide order dated 7.12.2018 Adjudicating Authority, New Delhi answer it in negative and dismissed the application of RP on the premises that said application are barred by Section 11 (a) of the Code.

That the said judgments could have scuttled the right of the Corporate Debtor to enforce its debt under the Code, just because either CIRP is going against it or liquidation order has been passed. However, legislature had not anticipated that, while framing Section 11 of the Code, which was enacted so as to ousted certain companies who have either gone through the CIRP process or were under liquidation.

To do away with the effect of Abhay N Manudhana (Supra), the Central Government came up with Section 4 of the Ordinance, which added explanation II with Section 11 of the Code. Same is reproduced herein :

“Explanation II.– For the purposes of this section, it is hereby clarified that nothing in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another corporate debtor.”

That the inclusion of the Explanation II, clarifies that Section 11 of the Code, do not create any embargo on corporate debtor (acting through IRP, RP or Liquidator) from initiating insolvency proceedings against other corporate debtor(s). Further, insertion of the Explanation II under Section 11 of Code also confirms that, said intention of the Legislature was from inception of the Code.

Having said that, a pertinent question which may arise that, whether insertion of explanation, would be read retrospectively or prospectively. Same was answered by the Hon’ble Supreme Court speaking through Hon’ble Mr. Justice Rohinton Nariman in the matter of Pioneer Urban Land and Infrastructure Limited vs. Union of India Judgment dated August 09, 2019 in Writ Petition(s)(Civil) No. 43/2019 held that ordinarily insertion of an explanation cannot in any way interfere or change the enactment or part thereof or enlarge its scope  or it cannot be treated or read as addition or abrogation of any existing right or liability, as it is just a clarification for clarity of doubts, and hence it should be given effect retrospectively.

In essence, a liquidator and RP, as the case may be, can initiate Corporate Insolvency Resolution Process against other corporate debtor (s) who owes to concerned corporate debtor and had defaulted in terms of the IBC.

Authors are advocate at New Delhi and Managing Partner and Partner respectively at Indo Legal Services a boutique law firm in New Delhi.

Disclaimer: This article is for information purposes only. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Although we have endeavoured to accurately reflect the subject matter of this article, we make no representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this article. No recipient or reader of this article should construe it as an attempt to solicit business in any manner whatsoever.

Author Bio

Qualification: LL.B / Advocate
Company: Indo Legal Services LLP
Location: New Delhi, New Delhi, IN
Member Since: 18 Feb 2020 | Total Posts: 8
MR. GAURAV RANA(Advocate, CS) Mr. Rana, Advocate is a member of Bar Council Association of Delhi High Court, India and an Associate member of Institute of Company Secretaries of India. He has extensive experience in commercial litigation, arbitration and regularly argues at various fora. He advises View Full Profile

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