Survival of Proceedings through the Prism of Section -14 of the Code – By Senguttuvan.K & Veeraraghavan.V

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Survival of Proceedings through the Prism of Section -14 of the Code

“This preservation of favourable variations and the rejection of injurious variations, I call Natural Selection or Survival of the fittest”

quipped Charles Darwin expounding his famous evolution theory

Cut across to 2016, the enactment of IBC has led to a similar situation in respect of the “survival” of pending proceedings under different statutes while the Corporate Debtor continues to face music after initiation of proceedings under the Code. This Article seeks to analyse the proceedings that would survive the embargo imposed u/s-14 of the IBC, 2016.

The Article summarizes the legal position from three different aspects for a company, when such company faces IRP

  • Statutory Proceedings before different statutory authorities constituted under different statutes like GST, Income Tax Act and other similar dues
  • Proceedings under the Negotiable Instruments Act in respect of Cheque Bouncing Cases
  • Proceedings initiated by Vendors and Banks under other Statutes also included Arbitration Proceedings

In order to effectively implement the provisions of the code and to meet its end objective, Section- 14 of the IBC was ingrained to afford immunity to the corporate debtor from facing any legal proceedings like institution of a suit or continuation of any pending proceedings with respect to the same cause of action. However, the immunity given Section- 14 is not a blanket immunity and there are exception to this general norm.

PMLA Proceedings

The Criminal Proceedings initiated under the Prevention of Money Laundering Act, 2018 will not be barred by virtue of Section -14(1)(a) of the IBC. This view has reached finality in view of the decision of the Hon’ble Apex Court hearing an Appeal against the judgement of the Hon’ble NCLAT of Calcutta in the Judgement of Varssana Ispat Limited vs Deputy Director of Enforcement Company Appeal (AT) (Insolvency) No 493 of 2018. The Hon’ble NCLAT has held that, the PMLA deals with “Proceeds of Crime”, whereas the IBC is not applicable to such proceeding. Further, under the PMLA, the proceedings are initiated against Ex-Directors and Shareholders who cannot be given protection by virtue of a statutory protection.

It is submitted that, one of the main purposes of enacting the code is to ensure there is insolvency resolution of corporate persons, but, at the same time ensure that, there is promotion of Entrepreneurship. However, once an insolvency process has already been initiated, by virtue of Section-14 of the Code, a major portion of proceedings before other authorities comes to a standstill. In short any proceedings resulting into debt recovery and any penal proceedings attached to that, but not the criminal prosecution, cease to exist. A detailed discussion on such proceedings in view of the law enunciated u/s-14 of the IBC is discussed here:

The National Company Law Tribunal of the Ahmedabad in the case of Reliance Commercial Finance Ltd v VS Texmills Pvt Ltd approved a resolution plan by the Committee of Creditors, by taking an objection to the clause that did not permit renewal of these cancelled licenses at the cost of the resolution applicant or the corporate debtor. They observed that, proceedings of such nature will not be hit by the limitation under Section-14 of the IBC, 2016. It was held that, there was not automatic abatement of legal proceedings before any such authority, as such authority had exclusive jurisdiction to pass appropriate orders

Writ Proceedings

In Canara Bank vs. Deccan Chronicle Holdings Limited – [2017] ibclaw.in 25 NCLAT, the Hon’ble NCLAT has held that, the Wide powers of the High Courts under Article 226 of the Constitution of India and Power of the Supreme Court under Article 32 of the Constitution of India will remain unbridled by the provisions of Section -14 of the IBC. The Hon’ble Tribunal held that, the language ingrained in the said provision only affects the suit or any other pending proceeding initiated against the corporate debtor. Whereas, no original suit for recovery of money or debt can be filed against the Corporate Debtor in the Supreme Court, the suit invoking original jurisdiction of the High Court will still be affected by the prohibition ingrained u/s-14 of the code.

Arbitration Proceedings

However, the Landmark Judgement on the said issue was given by the Hon’ble Delhi Court in the case of Power Grid Corporation of India vs Jyoti Structures Limited [2017] ibclaw.in 12 HC. The Hon’ble High Court evolved an important proposition on the said issue by holding that, Section- 14 of the Code would not apply to the proceedings which are in benefit of the corporate debtor. The Crux of the issue is the maintainability of the application filed under Section -34 of the Arbitration and Conciliation Act that deals with the staying a money decree passed in favour of a Corporate Debtor against whom insolvency proceedings were initiated under the IBC by a Financial Creditor. In the said case, a money decree was awarded in favour of the CD, which is Jyoti Structures Limited. Simultaneously, insolvency proceeding were initiated against the Corporate Debtor under IBC by a Financial Debtor. However, an application under Section-34 was filed to stay the execution of the money decree citing the provisions of Section-14 of the IBC, 2016 saying that, all proceedings would be protected by the embargo under Section-14 of the IBC, 2016.  

The Hon’ble High Court invoked the object and purpose of the IBC by referring to the Bankruptcy Law Reforms Committee that was relied upon by the Hon’ble Apex Court in the case of M/s Innoventive Industries Limited vs. ICICI Bank & another [2017] ibclaw.in 02 SC. The Hon’ble High Court held that the purpose of the code is to protect the assets from dissipation or diminishment and further maximize the value of the assets. Therefore, unexecutability of the Arbitral Award would prevent the Corporate Debtor from recovering money due. The Hon’ble High Court further held that, as much as the execution of the arbitral award is not a ‘debt recovery action’ that will not endanger the value of the assets being in sync with the moratorium process keeping the Corporate Debtor’s Assets together, Section-14 would not be a bar.

The Hon’ble High Court further held that the term “proceedings” ingrained in Section-14 of the Code will not permeate every proceeding and is restricted to only such proceedings that threatens the ‘debt recovery action’ against the Corporate Debtor.

This Judgement of the Hon’ble Delhi High Court has pretty much exhaustively laid down the law pertaining to the scope and applicability of Section-14 of the IBC, with respect to proceedings pending under different statutory enactments whilst the proceedings under IBC is initiated against a Corporate Debtor.

Tax Proceedings

The Continuation of the Government proceedings more specifically with respect to taxation matters, wherein the recovery proceedings have been initiated under different taxing statutes remains to be answered by the courts in India. The Hon’ble High Court of Guwahathi in in National Plywood Industries Ltd. vs UoI – [LSI-116-HC-2020(GAU)], in a challenge (Writ Petition) against the adjudication order, remanded the matter with a direction to examine whether institution or continuation of proceedings under the Central Goods and Services Tax Act, 2017 would be barred by Section 14(1) during the Moratorium period.

However, in view of the recent judgement in the case of Ultra Tech Nathdwara Cement Ltd vs Union Of India [2020] ibclaw.in 21 HC, the Rajasthan High Court had quashed notices of the CGST Department for recovery of tax dues that was issued after the Committee of Creditors had finalized the resolution plan that was placed for approval before the Hon’ble Tribunal. The High Court emphatically held that, the decision taken by the Committee of Creditors can only be minimally interfered with, even through the mechanism of judicial review, as the courts can do very little to interfere through the process of judicial review. The Hon’ble High Court of Rajasthan had invoked Section-31 of IBC, 2016 that binds the Central Government, State Government or any local authority after the passing of a resolution plan. The Hon’ble High Court placed reliance on the speech of the Hon’ble Finance Minister in the Parliament, wherein a word was given by the FM that the Central Government wouldn’t interfere with the resolution process once it is approved by a Committee of Creditors. The Hon’ble High Court had also laid emphasis on the object of the code to revive a dying entity by paying off the loans and starting with a clean state. The High Court had held that, this arduous task has been given to an expert in an Insolvency Resolution Professional and the Government ought not to interfere.

The above judgement throws light with respect to the issue of recovery proceedings initiated by the Government when a resolution plan formulated by the Committee of Creditors approved by the Adjudicating Authority. However, the Judgement does not deal with a situation wherein, the recovery proceedings initiated by the Government against the Corporate Debtor or other statutory dues is already pending payment by the Corporate Debtor, when the Insolvency proceedings are initiated against the same Corporate Debtor. Whereas, the order of priority is specified for a Corporate Debtor in a liquidation process under Section -53 of the IBC, 2016 and for insolvency of an individual under Section -178 of the IBC, 2016, it is not specified for a Corporate Debtor during the process of insolvency.

Now, an important question arises as to, the status of a Statutory due (money due to income tax, GST, PF, ESI, Electricity Bills etc) pending during the course of the insolvency proceedings prior to approval of the resolution plan. Applying the decision of the Delhi High Court stated supra, proceedings which are likely to add to the liability of the CD or the one that is likely to affect the Debt Recovery Action of the Corporate Debtor will not stand the rigor of Section -14 of the IBC and is likely to be superseded by the said provision.

Therefore, in cases where tax refund (TDS or any other refund under income tax, GST Refund for Exports or inverted duty structure or any such refund) being due from the Government to the CD is likely to add to the Financial Corpus of the CD and will in turn enable him to pay off the Financial or Operational Debt.

It is imperative add another dimension to the current situation, as to the status of proceedings or prosecution launched against the directors or individual persons in proceedings under the Income Tax Act, 1961 and the CGST Act,2017 or the respective State GST Act.

Cheque Bouncing Cases

It is contended that, the Bombay High Court in the case of Indorama Synthetics (I) Ltd. Nagpur Vs. State of Maharashtra and others reported in 2016 (4) Mh.L.J.249 and the subsequently the Madras High Court in the case of Mr. Ajay Kumar Bishnoi Former Managing Director M/s.Tecpro Systems Ltd. Vs. M/s.Tap Engineering (2020) ibclaw.in 14 HC had categorically held that, the proceedings under Section- 138 of the NI Act will not be stayed by virtue of Section-14 of IBC, 2016. It was held that, the term proceedings in Section-14 of IBC has to be interpreted ejusdem generis in light of the term suit or other proceedings in the said section. Therefore, proceedings of criminal nature will be exempted from the purview of the Section-14 of IBC,2016.

However, the Central Government introduced the Insolvency and Bankruptcy Code (Amendment) Act, 2020 with effect from 28th December 2019 to absolve the Corporate Debtor of the Liability   with respect to an offence committed prior to initiation of Corporate Insolvency Resolution process. The Act also states that, the Prosecution in respect of such offences will not be carried forward, once a resolution plan has been approved by the NCLT provided, such resolution plan proposes change in control of the corporate debtor to a person who was already not a promoter or a director or a person against whom a investigation report has already been filed1.

Therefore, in respect of tax proceedings under the Income Tax Act, 1961 and CGST Act, 2017 under which prosecution is launched against the person in charge or directors of any company, they will stand abated or rescinded in view of the amendment carried out by the Government. However, prosecution will not be furthered only from the date of approval of the resolution plan by the NCLT.

In view of the above precedents and legal discussions, it is safe to conclude that, the embargo imposed vide Section-14 of the IBC is not unlimited and unfettered and is subject to certain exceptions as discussed.

 

 

 

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References   [ + ]

1. Section 32A (1) of the IBC