Can an Unregistered Partnership file for CIRP against a Corporate Debtor? NCLT Answers – By Aridaman Raghav and Apoorva Soni

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Can an Unregistered Partnership file for CIRP against a Corporate Debtor? NCLT Answers

(Aridaman Raghav and Apoorva Soni, 3rd Year Law students at National University of Study and Research in Law, Ranchi)

Introduction

The National Company Law Tribunal (“NCLT”), Mumbai, by its order dated 16th July 2020 in the case of M/s Shree Dev Chemicals Corporation v. Gammon India Limited [2020] ibclaw.in 60 NCLT reiterated its stance while dealing with an unregistered partnership’s right to file for insolvency proceedings as an Operational Creditor overriding the exception created under Section 69(2) of the Indian Partnership Act, 1932 (“IPA, 1932”).

Section 69(2) of the IPA, 1932 bars a party to institute any ‘suit’ enforcing rights arising out of a contractual relationship unless the firm is registered and the persons suing are or have been displayed in the Register of Firms as partners in the firm.

The facts briefly stated are that an application was filed under Section 9 of The Insolvency and Bankruptcy Code, 2016 (“IBC”) by M/s Shree Dev Chemicals Corporation, the Operational Creditor seeking to initiate Corporate Insolvency Resolution Process (“CIRP”) against Gammon India Limited, the Corporate Debtor upon failure of repayment of the principal amount and the interest so accumulated. Gammon India Limited contended that the applicant is barred by Section 69(2) of the IPA, 1932 to proceed with the same.

Interplay of Section 69(2) of The IPA, 1932 and Section 9 of IBC

The adjudicating authority lucidly emphasized that the defense under Section 69(2) would not pass muster as the present provision is only applicable to ‘suits’ and not ‘proceedings’ and an application under Section 9 of the IBC are to be identified as the latter.

Earlier this year, the Mumbai bench of NCLT, in a similarly situated case of M/s NN Enterprises v. Relcon Infra Projects Limited [2020] ibclaw.in 42 NCLT elucidated the position of law on the present matter. Herein, the Counsel for Relcon Infra Projects Limited, the Corporate Debtor contended that the term “partnership firm” referred to under Section 3(23) of the IBC essentially means a registered partnership firm and not an unregistered one, therefore, Section 69(2) of the IPA, 1932 is a bar to an application under Section 9 of the IBC. However, the Counsel on behalf of the Operational Creditor, M/s NN Enterprises relied on the judgment delivered by the Hon’ble Calcutta High Court in Shree Balaji Steels v. Gontermann-Peipers (India) Limited in the context of winding-up under the Companies Act, 1956 which promulgated that, in order to include the winding-up petition within the bar as contemplated under Section 69(2) of the IPA, 1932, two things are to be considered. One, whether the winding-up petition can be construed as a ‘suit’ and two, whether a winding-up petition has been filed on a cause of action to enforce a right arising out of a contract or conferred by the Partnership Act. The High Court observed that as far as the first condition is concerned, it is an admitted position that the petition for winding up filed by an unregistered firm cannot be construed as a ‘suit’ within the meaning of Section 69(2) of the Partnership Act which expressly uses the term ‘suit’ and not ‘proceedings’.

The legal significance of the word ‘suit’ is very broad, and it also has a much narrower meaning when it is examined in the procedural sense. A ‘suit’ as defined in the case of Prem Nath L. Ganesh Dass v. Prem Nath L. Ram Nath and Ors. is a proceeding in a Court of justice for the enforcement of a right denoting a legal proceeding of a civil kind. The absence of the inclusion of the term ‘proceedings’ under Section 69(2) of the IPA, 1932 coherently indicates the legislature’s intention to not include the same under the said provision. The rule of construction, as observed by Lord Brougham sitting in the Judicial Committee of the Privy Council in Crawford v. Spooner is that the construction of the Act must be taken from the bare terms of the Act. We cannot fish out what possibly may have been the intention of the Legislature; we cannot aid the Legislature’s defective phrasing of an Act, we cannot add or mend or by construction make up deficiencies which are lacking. It is a safe guide to adhere to the litera legis than to try and discover the sententia legis.

It is pertinent to note that even Section 26 of the IBC implicitly identifies CIRP as a proceeding and debunks the apprehension of it being discerned as a ‘suit’. Further, the Supreme Court in the case of B.K. Educational Services Private Limited v. Parag Gupta and Associates [2018] ibclaw.in 32 SC held that an application for CIRP would not constitute a ‘suit’. This view was later endorsed by the Hon’ble Supreme Court in Sagar Sharma v. Phoenix ARC Private Limited [2019] ibclaw.in 17 SC, wherein the Court noted that applications under the IBC are petitions. The Hon’ble Supreme Court while addressing the applicability of the provisions of the Limitation Act, 1963 in the case of Gaurav Hargovindbhai Davev. Asset Reconstruction Company [2019] ibclaw.in 16 SC, also held that Article 62 (of the Limitation Act, 1963) is not applicable on the ground that it would only apply to ‘suits’. Thus, the NCLT concluded that the provisions of Section 69(2) of the IPA, 1932 apply to ‘suits’ and therefore, cannot apply to ‘proceedings’ under the IBC including the present application.

Conclusion

The present petition, although dismissed on grounds of limitation, laid down a ratio precedent for a long-standing legal conundrum. The decision by NCLT in the present matter has provided clarity with regards to the right of an unregistered partnership to file for insolvency proceeding as an Operational Creditor under the Insolvency and Bankruptcy Code, 2016 by laying down a demarcation between a ‘suit’ and a ‘proceeding’, thereby upholding the true spirit of the legislation.

 

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