Resolution Professional At S.94/95 Stage Cannot Decide On Maintainability Of Petition By Entering Into Merits: Karnataka High Court

Brief Facts

A petition under section 95 of the IBC was filed by Boyount Technology Constellation Pvt. Ltd. (appellant) against M/s Manyata Reallty (respondent), a registered partnership firm. The petition was filed to initiate the insolvency proceedings against the respondent for the debt amount of Rs. 8,11,49,54,687.

This petition was challenged by the respondent on the ground that a petition under section 95 could not be maintained against a partnership firm. Parties had entered into an agreement on December 23, 2009 and an addendum on July 20,2012 for real estate development for 103 acres land. Separate Joint Development Agreement (JDAs) were signed between 2010 and 2015. The respondent claimed that the appellant failed to complete the work on time due to which losses were incurred by the respondent.

Due to failure to complete the work, 6 six JDAs were terminated by the respondent on December 7, 2019 and three others were terminated partially. When further dispute arose between them, another notice of termination was issued on July 16, 2022. Thereafter, an arbitration clause in the agreement was invoked leading the constitution of the arbitral tribunal. Arbitration proceedings had started and reached at an advanced stage. The appellant tried to obstruct the arbitration proceedings by filing multiple legal proceedings.

A demand notice under section 95 of the IBC was issued against the respondent by the appellant claiming the amount of Rs. 8.11 crores. The respondent claimed that this amount had already been claimed in the form of a counter claim in the ongoing arbitral proceedings.

The Single Judge observed that since the respondent was a partnership firm against which no petition under section 95 could be maintained in light of MCA notification issued on November 25, 2019. The court further held that registrar could decide the jurisdictional aspect at the filing stage itself so that frivolous petitions could be dismissed at that stage itself. This decision of the Single Judge was challenged before the division bench.

Contentions

The appellant argued that registrar was not empowered to adjudicate on the maintainability of the petition under section 95 of the IBC. It was further contended that adjudication begins by the NCLT only when a report under section 100 of the IBC is submitted by the registrar. It was further argued that interim moratorium under section 96 of the IBC is a statutory fallout and the petition under section 95 cannot be rejected on this ground.

Per Contra, the respondent submitted that insolvency proceedings under section 95 could not be initiated against a partnership firm as it was applicable only to personal corporate guarantors. It was further contended that the partnership firm could neither be considered a corporate person nor a corporate debtor under the IBC. It was further argued that insolvency proceeding were initiated just to stall the ongoing arbitral proceedings. Once a petition under section 95 is filed, interim moratorium under section 96 of the IBC will come into operation that is why it had been filed. It was further contended that since the petition under section 95 of the IBC could not be filed against the partnership firm, no subsequent actions could have been taken by the NCLT like registration and scrutiny of the petition.

Court's Analysis

The court referred to the Supreme Court judgment in Jamal Uddin Ahmad vs. Abu Saleh Najmuddin (2003) wherein a distinction between ministerial and judicial functions were discussed. A judicial function involves interpretation of a law and applying the same on the facts presented before the court by both parties. This application of law affects the right and liabilities of the parties. On the other hand, ministerial function involves performance of a duty in accordance with a framework already laid down without any discretionary power. The ministerial acts like receiving insolvency petitions are administrative in nature which are performed to ensure procedural compliance. The court observed that in the present case also, when registrar was receiving the petition under section 95 of the IBC, the ministerial act was being performed to ensure procedural compliance. Therefore, the registrar was not entitled to assess the merits or maintainability of the petition at that stage which should be left to be decided by the NCLT.

The Supreme Court judgment in Dilip B Jiwrajka v. Union of India (2024) was referred in which the court held that the role under Section 99 which is ascribed to the resolution professional is that of a facilitator and is to gather relevant information on the basis of the application which has been submitted under Section 94 or Section 95 and after carrying out the process which is referred to in sub-section (2), sub- section (4) and sub-section (6) of Section 99, to submit a report recommending the acceptance or rejection of the application. The resolution professional is not intended to perform an adjudicatory function or to arrive at binding conclusions on facts. The role of the resolution professional is purely recommendatory in nature and cannot bind the creditor, the debtor or, the adjudicating authority.

The court further observed that moratorium under section 96 of the IBC is a statutory effect which comes into operation after filing a petition under section 95 of the IBC. The RP is not entitled to assess the merits or validity of the petition just because a statutory effect will follow. The Role of the RP is merely administrative in nature in which it will be seen whether the procedure compliance has been ensured or not. Petition on merits will be adjudicated by the NCLT. The court further observed that a legal right to file a petition cannot be defeated merely on the ground that statutory effects will follow. The court held that if for the reason of filing Section 95 application, other proceedings initiated by the rival party in relation to the subject matter are slowed down or affected in their progress or stand postponed for some period, then it could not be complained that the invocation of law or remedy in law by other party amounts to abuse of process of law. A litigant is entitled to employ all legal means in pursuit to its right to legal adjudication and availment rights in that regard.

Conclusion

The court concluded that the RP could not go into the merits of the petition filed under section 95 of the IBC because its role at this stage is merely ministerial. The petition will be decided on merits by the NCLT. Accordingly, the present appeal was allowed and the judgment and order of learned Single Judge dated 6th March 2024 passed in writ petition No.26977 of 2023, allowing the petition, is hereby set aside.

Case Title: Buoyant Technology Constellations Pvt. Ltd. vs. Manyata Realty & Ors.

Court: Karnataka High Court

Case Reference: WRIT APPEAL NO.498 OF 2024 (GM-RES)

Judgment Date: 16/10/2024