7 June 2021
Since the introduction of the Insolvency and Bankruptcy Code, 2016 (“Code/IBC”), the courts and tribunals in India have had to constantly assess the application of the Code vis-à-vis other central and state legislations in light of the non-obstante clause under Section 238 of the Code. The courts have time and again reiterated that the Code would have an overriding effect over other legislations to the extent of being repugnant to the matters exhaustively dealt with under the Code. The courts have re-affirmed the primacy of the Code based on the premise that the IBC is a ‘complete and consolidated code in itself.’ For example, in Innoventive Industries Ltd. vs. ICICI Bank and Ors. (“Innoventive”), the Hon’ble Supreme Court upheld the primacy of the Code over the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 and in Directorate of Enforcement vs. Manoj Kumar Agarwal & Ors (“Manoj Kumar Agarwal case”), the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) noted that the provisions of the Code shall override the attachment of the properties of the Corporate Debtor under Sections 5 and 8 of the Prevention of Money Laundering Act, 2002.[1]
Recently, the Hon’ble High Court of Karnataka (“Hon’ble High Court”) in its judgment dated May 24, 2021 in the matter of Dreamz Infra India Limited v. Competent Authority (which shall be analysed in this post) also held that the provisions of the Code shall override the provisions of the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (“Act”) and the Hon’ble High Court accordingly quashed the parallel proceedings initiated by the state government under the Act.[2]
Factual Scenario
Dreamz Infra India Limited (“Petitioner Company / Corporate Debtor”), a real estate company engaged in the development of various housing projects had asked the homebuyers to deposit a certain amount as earnest money in lieu of booking their apartments. However, despite taking the advance deposit, the Corporate Debtor failed to honour its commitment to deliver the possession of these apartment. Accordingly, the homebuyers, being aggrieved by the actions of the Corporate Debtor, had filed a petition under Section 7 of the Code before the Ld. National Company Law Tribunal, Bengaluru Bench (“NCLT”). The NCLT admitted the said petition and appointed an Interim Resolution Professional, thus, initiating the Corporate Insolvency Resolution Process (“CIR Process”) of the Corporate Debtor vide order dated August 20, 2019.
Subsequently, after initiation of the CIR Process, the Respondent being Competent Authority under the Act had initiated proceedings under Section 7(1) of the Act before the Principal City Civil and Sessions Judge (Special Judge), Metropolitan Areas and the same was admitted on January 9, 2020. The Competent Authority is entitled, under Section 7(1) of the Act, to assess the deposit liabilities and the assets of the financial establishments and submit a report to the Special Court. Further, Section 3 of the Act empowers the Competent Authority to attach the properties of the defaulter. Therefore, in the instant case, certain properties of the Petitioner Company were attached by the Competent Authority.
Writ Petition before the Hon’ble High Court of Karnataka
In light of the parallel proceedings, the Hon’ble Karnataka High Court was called upon to decide the legality of parallel proceedings under the Code and the Act by way of the writ petition filed under Articles 226 and 227 of the Constitution of India, read with Section 482 of the Code of Criminal Procedure, 1973. The Petitioner Company while praying for quashing of the proceedings initiated against the Company by the competent authority, made the following submissions:
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The competent authority was not empowered to initiate the proceedings under the Act in lieu of the ‘moratorium’ under Section 14 of the Code;
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There cannot be any parallel proceedings once the CIR Process of the Corporate Debtor has commenced under the provisions of the Code;
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The instant proceedings would hamper the interest of the creditors including the homebuyers who wish to recover their money from the Corporate Debtor;
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The instant proceedings are illegal in view of non-obstante clause under Section 238 of the Code, by way of which it is evident that the provisions of the Code shall override any other laws;
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That the attachment of properties of the Corporate Debtor and subsequent sale of a few properties by the Respondent has led to a deterioration of the value of assets of the Corporate Debtor;
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The Petitioner Company engaged in real estate sector is not a ‘financial institution’ under the provisions of the Act, therefore, the proceedings could not have been initiated by the Competent Authority under the Act.
The Respondent Competent Authority made the following submissions:
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The Competent Authority has the power to attach the properties under the Act as the Petitioner Company has failed to allocate any flats even after taking advance deposit;
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The Act is an alternative remedy available to the homebuyers who have suffered because of the actions of the Petitioner Company.
After hearing the aforesaid submissions, the Hon’ble High Court quashed the proceedings initiated by the Competent Authority under the Act, and made the following observations:
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The Hon’ble High Court carefully examined the NCLT’s order and thereafter, it concluded that when the CIRP Process has been initiated by the NCLT and the Resolution Professional has been appointed under the Code, the liabilities and assets ought to be considered by the NCLT;
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The Hon’ble High Court placed reliance on the Hon’ble Supreme Court’s judgments in Innoventive, Anand Rao Korada, Resolution Professional v. Varsha Fabrics (P) Ltd, and Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited and Others to state that there cannot be any other civil proceedings when homebuyers have preferred a petition under the IBC wherein the NCLT is seized of the matter and has initiated the CIR Process of the Corporate Debtor[3];
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The Code shall have an overriding effect and shall prevail over the Act in view of non-obstante clause under Section 238 of the Code;
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However, the Hon’ble High Court did not accept the submissions made by the Company that it is not a ‘financial institution’ under the Act as the Petitioner Company had failed to either refund the earnest money or allot apartments to the homebuyers.
Thus, the Hon’ble High Court re-affirmed the primacy of the Code as it directed the Competent Authority to quash the proceedings and release the properties attached under the Act as the same would be covered under the aegis of the Code.
Conclusion
Although the Code contains a non-obstante clause as a manifestation of the intent of the law makers, there has been considerable litigation around inconsistency between the Code and other legislations. As a result, the courts have been called upon to decide the contours of Section 238 on multiple occasions. The instant case is a welcome reiteration by the Hon’ble High Court to manifest the intent of the Code in so far as it seeks to make any laws inconsistent with its scheme inapplicable to the extent of such inconsistency.
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
bishwajit.dubey@cyrilshroff.com
[1] See: Innoventive Industries Ltd. vs. ICICI Bank and Ors, Directorate of Enforcement vs. Manoj Kumar Agarwal & Ors.Company Appeal (AT)(Ins) No. 575 of 2019.
[2] See: Dreamz Infra India Limited v. Competent Authority, Writ Petition No. 13477/2020(GM-RES)
[3] See: Anand Rao Korada, Resolution Professional v. Varsha Fabrics (P) Ltd, Civil Appeal No. 88008801 OF 2019; Alchemist Asset Reconstruction Company Limited v.Hotel Gaudavan Private Limited and Others, (2018) 16 SCC 94
