'Breaches Discipline Of Law Laid Down In IBC' : Supreme Court Disapproves Of HC Deferring CIRP Under Article 226
The Supreme Court recently took exception to the Telangana High Court ordering the deferring of the Corporate Insolvency Resolution Process in the exercise of powers under Article 226 of the Constitution.The Bench of Chief Justice of India DY Chandrachud , Justice J.B. Pardiwala and Justice Manoj Misra, held that the High Court was not justified in deferring the Corporate...
The Supreme Court recently took exception to the Telangana High Court ordering the deferring of the Corporate Insolvency Resolution Process in the exercise of powers under Article 226 of the Constitution.
The Bench of Chief Justice of India DY Chandrachud , Justice J.B. Pardiwala and Justice Manoj Misra, held that the High Court was not justified in deferring the Corporate Insolvency Resolution Process (CIRP) when the main relief sought in the writ petition uto consolidate the CIRP of two companies was refused.
Brief Facts
Committee of Creditors (CoC) of KSK Mahanadi Power Company Limited (appellant) has filed the present appeal. A petition under article 226 of the Indian Constitution was filed by the Uttar Pradesh Power Corporation Limited (UPPCL), the respondent. In the petition, the CIRP of two companies- KSK Water Infrastructure Private Limited and Raigarh Champa Rail Infrastructure Private Limited was sought to be consolidated before the NCLT.
Before this, the petition for consolidation was rejected by the NCLT in February, 2021 against an appeal was filed before the NCLAT. When the appeal was pending, further applications were filed before the NCLT which led to stay on the CIRP proceedings.
The High Court refused to consolidate the CIRP of both the companies. The court further directed the respondent to file a fresh application before the NCLT. However, the court further ordered the CIRP proceedings of the KSK Mahanadi to be deferred until new application is disposed of by the NCLT for which no notice was issued to the CoC.
Contentions
The appellant contended that the High Court was not justified to defer the CIRP under Article 226. It was further submitted that the court exceeded its power under Article 226. It was further argued that a deferment order was issued without giving notice of the same to the CoC which was unwarranted. It was further contended that the court had no power to defer the CIRP when the main relief sought had been refused. It was further submitted that this order contravened the provisions of the IBC which provides a full mechanism to resolve the insolvency of a distressed entity. This stand of the appellant was also supported by the RP who contended that deferment violated a well entrenched resolution process under the IBC.
Per contra, the respondent submitted that consolidation of the CIRP was indispensable due to the interconnected financial matters in which three companies were involved. It was further contended that the court's direction to defer the proceedings was fair and justified as parallel proceedings would have led to conflicting judgments. It was further argued that deferment did not affect the interest of the CoC adversely instead it would ensure a just and fair resolution process.
Supreme Court's Analysis
The Court observed that the High Court overstepped its jurisdiction while ordering the deferment of the CIRP when the main relief sought in the petition had already been refused. The Court further observed that the direction of the High Court breached the legal principles entrenched in the IBC which provides a robust mechanism to resolve the insolvency of a corporate entity in a timely manner. This order of the high court potentially affected the interest all stakeholders involved in the insolvency process as it would have obstructed the timely resolution of the distressed assets.
The Court further observed that the High Court passed an order deferring the process without providing an opportunity of being heard to the CoC. Therefore, it infracted the principle of natural justice. The Court further noted that the CoC deserved a notice that such an order is being passed. It was held that significantly, the High Court declined to grant the main relief which was sought in the petition for the consolidation of the CIRP of three corporate entities. After coming to that conclusion, there was absolutely no reason for the High Court to exercise its jurisdiction under Article 226 by directing the deferment of the CIRP. Such a direction under Article 226 breaches the discipline of the law which has been laid down in the provisions of the Insolvency and Bankruptcy Code 2016.
Conclusion
The Supreme Court concluded that the high court exceeded its jurisdiction under Article 226 of the Constitution when it ordered to defer the CIRP of the corporate debtor. Accordingly, the appeal was allowed and impugned order of the High Court was set aside to the extent that it directs the deferment of the CIRP of the Corporate Debtor.
Case Title: CoC of KSK Mahanadi Power Company Ltd. v. Uttar Pradesh Power Corporation Ltd. and Ors.
Case Reference: Civil Appeal No. 11086 of 2024 (Arising out of SLP (C) No. 23339 of 2024)
Citation : 2024 LiveLaw (SC) 815