REHABILITATION
OR DISSOLUTION OF COMPANY- MAINTAINABILTY THRESHOLD OF Section 7 & 9 OF
PETITION UNDER Insolvency & Bankruptcy Code 2016 : ANIL K KHAWARE
Whether the consent of
the Central Government as provided under Section 16 G(1) (c) of the Tea
Act 1953 is mandatory?
Anil
K Khaware
Advocate
By
virtue of the present article, the landscape of section 7 & 9 of I & B
Code 2016 is sought to be analysed. Whether any fetter could be attached to the
power of National Company Law Tribunal (NCLT) under I & B Code 2016 as
regards the conflict with any other law, more particularly, as is the case,
here, the provisions of Tea Act 1953.The I & B Code 2016 was enacted with a
view to ensure efficacy and expediency of the issues relating to bankruptcy of
company and mode and manner of entertaining the petition of bankruptcy and for
taking steps of rehabilitation of company or for liquidation, if no
rehabilitation is probable.
Thus, the objective of the Insolvency and Bankruptcy Code, 2015 ( In short “code or “IBC””) is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons in a time bound manner with a view to maximize the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. Without any pale of doubt, a legal framework, to be effective, shall entail timely resolution of Insolvency and Bankruptcy issues and provide succor to the development of credit markets and encourage entrepreneurship. In essence, this will improve Ease of Doing Business, and facilitate more investments –a sine qua non of higher economic growth and development.
As always, even in National Company Law Tribunal (In short “NCLT”), the first barrier to a petition is to pass the threshold of maintainability. In IBC Code, after its codification and in view of its overriding effect, plethora of objection to maintainability of case for initiation of resolution process are routinely raised. In the present article, an interesting aspect is being deliberated and that relates to applicability of Tea Act 1953 relating to affairs of a tea company vis a vis applicability of IBC 2016. Whether Tea Act 1953 ( In short “Act”) shall have precedence over IBC 2016 and whether any process initiated under section 7 & 9 of IBC shall not be maintainable? The bar of maintainability has thus to cross the threshold in the discussion delineated below, in the light of the judgments rendered by the hon’ble Supreme Court.
The issue in hand is a proceeding challenging the Central Government Notification dated 28.01.2016, authorizing the Tea Board to take over the management and to take control of the Seven (7) “Tea Estates” of the corporate debtor. The hon’ble High Court of Calcutta had made an interim arrangement for the management of Seven (7) Tea Estates, while the High Court has directed/permitted the corporate debtor to run the gardens in a prudent businesslike manner and to pay both the current and arrear dues of the workers, with a view to ameliorate the conditions of the workers as also that of the Tea Estates.
The broad canvas of the matter can be appreciated in the light of the discerning analysis of hon’ble Supreme Court in a case captioned as Duncans Industries Ltd Vs A. J. Agrochem (CIVIL APPEAL NO. 5120 OF 2019) had dealt with Section 16G(1)(c) of the Tea Act 1953. The operational creditor had preferred insolvency proceedings before NCLT against the corporate debtor. It was contended then, that once the management of tea unit has been taken over by the Central Government, the proceedings for winding up or appointment of receiver cannot be initiated without the consent of the Central Government. The corporate debtor, thus, maintained that if the prior approval of the Central Government has not been taken, as mandated under Section 16G of the Tea Act, 1953 the insolvency proceeding under Section 9 of the IBC shall not be maintainable. Pertinently, the NCLT Kolkata had accepted the objection of corporate debtor and held that in view of the statutory provisions under Section 16G of the Tea Act 1953 and as the prior consent of the Central Government had not been obtained for initiating insolvency proceedings , thus, the proceedings under Section 9 of the IBC shall not be maintainable. The NCLAT (National Company Law Appellate Tribunal) , Calcutta, had reversed that in an appeal preferred by Operational Creditor and it was held by the NCLAT that the consent of the Central Government in terms of Section 16G of the Tea Act 1953 shall not be necessary and insolvency proceedings under the Code can proceed without demur. The corporate debtor had impugned the judgment of NCLAT in a statutory appeal, assailing the judgment of NCLAT before the hon’ble Supreme Court.
The Corporate debtor’s contentions before the hon’ble Supreme Court may be culled out as under:
(i) The Tea Act 1953, being is a “Special Act” for the purpose of providing
control by the Union of India of
the Tea Industry and Section 16 D (1) of the Tea Act, 1953 provides for
taking over the tea unit and the tea undertaking,
inter alia if the Central Government
is of the opinion that the tea
unit is being managed in a manner highly detrimental to the tea industry or to public interest and Section 16 D(4) provides that the Central
Government shall take such steps as may be necessary for the purpose of efficiently managing the business
of the undertaking.
(ii) Insolvency process is also meant to
culminate in liquidation, if there is no
revival. It is submitted that since Section 16G of Tea Act permits for the Central Government to take over the
management of a tea estate which
is not run properly, the prior permission under Section 16 G shall be applicable
to such an estate, the management of which has been taken over by the Government. Sectuion 16 E refers to the power of the Central
Government to restart the tea undertaking if it is found necessary in the interest of the
general public.
(iii) The “winding up” process under the Companies Act , 1956 includes the insolvency
proceedings under the IBC. It is submitted that, therefore, initiation of any proceedings for
winding up or liquidation, by way of insolvency
proceedings under the IBC shall be maintainable only after the consent of the Central Government
is obtained, as required under Section 16 G of the Tea Act 1953.
(iv) The Tea Act , 1953 apply to tea units, the management of which have been taken over for the purpose of
stimulating the production and manufacturing
of tea and the control by the Tea Board of the manufacturing
of tea from the tea units is in public interest as the latter was a welfare legislation. The Tea Act 1953 is a Central Act and applies only
to companies which are having tea gardens or tea units. If the provisions of the Tea Act are applicable, then on a conjoint reading of Section 16 G , Section 16 J and Section 16 M of the Tea Act, an application
under Section 7 or Section 9 of the IBC shall
not be maintainable without the
consent of the Central Government.
(v) The reliance by NCLAT on Section 238 of the
IBC 2016 to hold that the IBC will have an overriding effect over
the Tea Act 1953 is incorrect as Section 238 of the IBC 2016 may only
be applicable in the event of any conflict
between the two legislations. There is no such conflict between the Tea Act 1953 and the IBC 2016 and the provisions of the IBC and the Tea Act are not inconsistent with each other. It is contended by
the corporate debtor that whereas
the provisions of Section 7 or Section 9 of the code may not
require the consent of the Central Government to initiate such proceedings, but when the management of the
tea gardens have been taken over
by the Central Government under the Tea Act 1953, then the provisions
of the Tea Act 1953 shall have to apply and the consent of the Central Government shall
be necessary. In the face of above, the
process of insolvency resolution under the IBC cannot be permitted.
(vi) Both IBC 2016 and the Tea Act 1953 are welfare legislations. Whereas IBC is a general Act for corporate
resolution process for all corporates,but
the Tea Act protects corporates which have
tea gardens. The Tea Act 1953 being special legislation
enacted by the Parliament for protecting
the Tea Industries and Tea Gardens and thus provides for taking over the management by the Tea
Board or the Central Government
or any person authorized by the Central Government for running the tea gardens or protection of the workers. The
provisions, thus, should be
construed harmoniously.
(vii) The hon’ble Supreme Court in a matter
captioned as Macquarie Bank Ltd Vs Shilpi Cable Technologies Ltd (2018)
2 SCC 674 as well as in K. Kishan Vs M/s Vijay Nirman Company Pvt Ltd (2018) 17 SCC 662 had dealt with non applicability
of Section 238 of the IBC 2016 and since there
is no inconsistency between the Tea Act 1953 and the IBC 2016 , thus,
there can be no occasion to apply Section 238 of the IBC to give overriding effect.
Contentions
of Operational Creditor
(i) The IBC is a complete Code in itself and
it has consolidated and amended law
relating to re- organization and insolvency resolution and for matters connected therewith or incidental
thereto. The IBC 2016 has not prescribed
any pre requisite of obtaining consent from the Central Government for initiating corporate
insolvency resolution process like the Tea Act, 1953 which is an earlier Act enacted in 1953 and hence, such a prerequisite of obtaining
consent cannot be imported and/or read into
the Code when the Code does not specifically
provide for it.
(ii) Alleged requirement of obtaining consent of
the Central Government prior to
initiating the corporate insolvency resolution process would be completely contrary to the overriding
nature of the Code, and of the clear legislative
intent of keeping the arms of the Government away from the resolution process and of not delaying the
process of resolution. Moreover,
bare perusal of Chapter IIIA of the Tea Act 1953 reveals that the object of restarting/revival of the tea
company writ large in the scheme
of the Tea Act . The said object of restarting/revival
is borne out from Section 16 B (2) Section 16 E (1) (b) , Section 16 I(1) and Section 16 K of the Tea Act. It is submitted that restarting/revival of the
company is also the object of the IBC,
as is clear from the Preamble of the IBC and also as observed by the hon’ble Supreme Court in the case of Swiss Ribbons Pvt Ltd Vs Union of India [AIR 2019 SC 739 : (2019) 4 SCC 17]. Hence, in
the event of any conflict between the
two legislations, the provisions of the IBC
would prevail by virtue of Section 238 of the IBC.
(iii) In the present case Section 16 G of the Tea Act does not have any applicability, as the management has not been “taken over”
by the Central Government or the
Tea Board. The notification dated 28.01.2016 was
issued under Section 16 E (1) of the Tea Act. It is
submitted that, according to the sub section
(2) thereof, the provisions of Section 16 G shall
apply to a notified order made under Section 16 E (1). Section 16 G (1) shall be applicable when the
management of a tea undertaking or tea
unit owned by a company has been taken over by the Tea Board. Thus, Section 16 G (1) of the Tea Act does not automatically get triggered with the issuance of a notification
under Section 16 E (1) of the Tea Act,but becomes applicable once the management
of a tea undertaking or tea unit
owned by a company has been taken over by the Tea Board.
(iv) In the case in hand, pursuant to the interim
order passed by the Division Bench
of the High Court of Calcutta in which the notification dated 28.01.2016 is challenged by the
corporate debtor, the corporate debtor continues
to be in management and control of the tea units/gardens and therefore, application of Section 16 E(1) is no longer prevalent and consequently Section 16 G of the Tea Act shall not be
applicable at all.
(v) Section 16G(1)(c) of the Tea Act is applicable to a proceeding for
“winding up” and not to proceeding
for initiation of “corporate insolvency resolution
process”, as the both are not one and the same proceedings. The winding up of a company is provided
for, and governed by The Companies Act, 1956 whereas, on the other hand, initiation of corporate insolvency resolution process is
provided for, and governed by, the
Insolvency and Bankruptcy Code, 2016 and both these processes are distinct from one another and not
synonymous with one another. The power of
the Parliament to make any law relating to winding up may be traced to Entry nos. 33 and 34 of the
Union List of the Seventh Schedule of
the Constitution, on the other hand, the power of the Parliament to make any law relating to insolvency can be
traced to Entry no. 9 of the Concurrent
List of the Seventh Schedule of the Constitution and therefore, winding up and insolvency proceedings are not one and the
same as they have been mentioned
under two separate entries in two separate
lists in the Seventh Schedule.
(vi) Section 16 G (1) (c) of the Tea Act 1953, which mandates that no winding up proceeding shall lie in any court
against a company which has been taken
over by the Tea Board without the consent of the Central Government, does not and cannot be
interpreted to mean that the said section
applies to any proceeding for initiation of corporate insolvency resolution process against a company
which has been taken over by the Tea
Board.
(vii) The NCLAT has rightly held that Section 16 G (1) (c) relates to winding up and, on the other hand, Section 9 of the IBC is not a
proceeding for winding up, but
for initiation of “corporate insolvency resolution process” to ensure revival and continuation of the
corporate debtor by protecting the
corporate debtor from its own management and from corporate debt by liquidation and reference was made to Innovative Industries Ltd Vs ICICI Bank [AIR 2017 SC 4084 at paras 16,
51 and 56 : (2018) 1 SCC 407],
Swiss Ribbons Pvt. Ltd. [AIR 2019 SC 739 at paras 10 to 12 : (2019) 4 SCC 17] and a decision in PCIT v.
Monnet Ispat and Energy Ltd. (2018) 18
SCC 786.
The hon’ble Supreme Court has noted that
the IBC is a complete Code in itself. In the case of Swiss Ribbons Pvt. Ltd. (supra) and in Innoventive Industries Ltd.
(supra), in paragraphs 25 and 26, it is held as under:
‘Statement of
Objects and Reasons— There is no single law in India that deals with insolvency and bankruptcy. Provisions
relating to Insolvency and Bankruptcy for companies can be found in the Sick Industrial Companies ( Spewcial Provisions) Act 1985, the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Ac , 2002 and the Companies Act , 2013. These statutes
provide for creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR),
Debts Recovery Tribunal (DRT) and National
Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is
handled by the High Courts. Individual
bankruptcy and insolvency is dealt with under the Presidency Town Insolvency act , 1909, and the Provincial Insolvency Act , 1920 and is
dealt with by the courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective
and results in undue delays in resolution,
therefore, the proposed legislation.
The Code seeks to provide for designating
NCLT and DRT as the adjudicating
authorities for corporate persons and firms and individuals, respectively, for resolution of
insolvency, liquidation and bankruptcy. The
Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The
Code also seeks to provide for establishment
of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency
professional agencies and
information utilities. Till the Board is established, the Central Government shall exercise all powers
of the Board or designate any
financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist
in completion of insolvency resolution,
liquidation and bankruptcy proceedings envisaged in the Code. Information Utilities would collect, collate, authenticate
and disseminate financial
information to facilitate such proceedings. The Code also proposes to establish a fund to be called the Insolvency
and Bankruptcy Fund of India for
the purposes specified in the Code.
The Code seeks to provide for
amendments in the Indian Partenrship Act 1932, the Central Excise Act , 1944, Customs Act, 1962, the Income Tax Act 1961, the Recovery of Debts Due to Banks
and Financial Institutions Act,
1993, the Finance Act, 1994, the Securitization and
Reconstructionof Financial Assets
and Enforcement of Security Interest Act , 2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Payment and Settlement Systems Act, 2007, the Limited Liability Partenership Act , 2008, and the Companies Act 2013.
As is discernible,
the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency
resolution of corporate debtors. Unless, such
reorganization is effected in a time bound manner, the value of the assets of such persons will deplete.
Therefore, maximization of value of the
assets of such persons so that they are efficiently run as going concerns is another very important
objective of the Code. This, in turn, will
promote entrepreneurship as the persons in management of the corporate debtor are removed and
replaced by entrepreneurs. When, therefore,
a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is
able to repay its debts, which, in
turn, enhances the viability of credit in the hands of banks and financial institutions. Above all,
ultimately, the interests of all stakeholders
are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme
—workers are paid, the creditors in the
long run will be repaid in full, and shareholders/investors are able to \maximize their investment. Timely
resolution of a corporate debtor who is
in the red, by an effective legal framework, would go a long way to support the development of credit
markets. Since, more investment can be
made with funds that have come back into the economy, business then eases up, which leads, overall, to
higher economic growth and development
of the Indian economy. What is interesting to note is that the Preamble does not, in any manner,
refer to liquidation, which is only availed
of as a last resort, if there is either no resolution plan or the resolution plans submitted are not up to the
mark. Even in liquidation, the
liquidator can sell the business of the corporate debtor as a going concern (Ref: S Arcelor Mittal (India) P Ltd Vs Satish Kumar Gupta (2019) 2 SCC 1].
It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby, preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends. The Section 16 G (1) (c) refers to the proceeding for winding up of such company or for the appointment of receiver in respect thereof. Therefore, as such, the proceedings under Section 9 of the IBC shall not be limited and/or restricted to winding up and/or appointment of receiver only. The winding up/liquidation of the company shall be the last resort and only on an eventuality, when the corporate insolvency resolution process fails. As observed by this Court in Swiss Ribbons Pvt. Ltd. (supra), referred to hereinabove, the primary focus of the legislation, while enacting the IBC is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate debt by liquidation and such corporate insolvency resolution process is to be completed in a time bound manner. Therefore, the entire “corporate insolvency resolutionprocess” as such cannot be equated with “winding up proceedings”. Therefore, considering Section 238 of the IBC, which is a subsequent Act to the Tea Act 1953, shall be applicable and the provisions of the IBC shall have an overriding effect over the Tea Act , 1953. Any other view would frustrate the object and purpose of the IBC. If the submission on behalf of the appellant that before initiation of proceedings under Section 9 of the IBC, the consent of the Central Government as provided under Section 16 G (1) (c) of the Tea Act is to be obtained, in that case, the main object and purpose of the IBC, namely, to complete the “corporate insolvency resolution process” in a time bound manner, shall be frustrated.
The hon’ble Supreme Court has held
thus that the provisions of the IBC would
have an overriding effect over the Tea Act 1953 and that no prior consent
of the Central Government before initiation of the proceedings under Section 7 or Section 9 of the IBC would be required and even without such consent of the
Central Government, the insolvency proceedings
under Section 7 or Section 9 of the IBC
initiated by the operational
creditor shall be maintainable.
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Nice article Khaware ji . Related to banking field , useful to all
ReplyDeleteVery useful for me personally ☺️
ReplyDelete