Tripura High Court
Presently Residing At Lake ... vs Union Of India on 18 January, 2023
HIGH COURT OF TRIPURA
AGARTALA
WP(C) (PIL) 04 of 2023
Smt. Sudipa Nath
D/o Mr. Sujit Kumar Nath,
Permanent resident of West Chandrapur,
PS: Dharmanagar, PO: Chandrapur,
District- North Tripura, PIN: 799251
Presently residing at Lake Chowmuhani,
Supari Bagan, Krishna Nagar, PIN: 799001.
----Petitioner(s)
Versus
1. Union of India
Represented by Ministry of Corporate Affairs Government of India,
having its office at Shastri Bhavan, New Delhi-110001
2. The Secretary, Ministry of Corporate Affairs
Having his office at Shastri Bhavan, New Delhi, 110001.
3. Insolvency Bankruptcy Board of India
Represented by its Chairperson, 2nd Floor jeevan Vihar Building,
Parliament Street, New Delhi 110001.
---- Respondent(s)
For Appellant (s) : Mr. Krishnan, Sr. Adv.
Ms. R. Guha, Adv.
Mr. Angshuman Khound, Adv.
For Respondent(s) : Mr. B. Majumder, Deputy SGI
Date of hearing : 18.01.2023
Date of pronouncement : 18.01.2023
Whether fit for reporting : YES
HON'BLE THE CHIEF JUSTICE (ACTING)
HON'BLE MR. JUSTICE ARINDAM LODH
Judgment & Order
The petitioner is a practicing advocate and a resident of state of
Tripura. The petitioner is before this court claiming public interest and no
direct or indirect personal motive /interest and prays as follows:
(a) This is an application under Article 226 of Constitution of India for
issuance of a writ of Mandamus and/or in the nature thereof to issue
appropriate orders or direction, directing the respondent to forthwith
take steps to declare Section 66(1) of the Insolvency and Bankruptcy
Code, 2016 as ultra vires on the vice of Article 14 of the Constitution of
India for being manifestly arbitrary and unconstitutional, unless to save
if from unconstitutionality and in consonance with the scheme and
object of IBC, scope thereof is enlarged by this Hon'ble Court by
expanding the powers and jurisdiction of the NCLT by enabling it to
declare fraudulent business transactions as void under Section 66
independent as void under Section 66 independent of Sections 43, 45,
47, 49 and 50.
(b) This is an application under Article 226 of Constitution of India for
issuance of a writ of Mandamus and/or in the nature thereof to issue
appropriate orders or direction, directing the respondent to forthwith
take steps to declare section 66(1) of the Insolvency and Bankruptcy
Code, 2016 as ultra vires on the vice of Article 14 of the Constitution
of India for being, manifestly arbitrary and unconstitutional, unless to
save if from unconstitutionality and in consonance with the scheme and
object of IBC, scope thereof is enlarged by this Hon'ble Court by
expanding the powers and jurisdiction of the NCLT by enabling it to
entertain application under Section 66(1) on its merits even if filed by
any creditor or contributory of the Corporate Debtor;
(c) This is also an application under Article 226 of Constitution of India for
issuance of a writ of Mandamus and/or in the nature thereof to issue
appropriate orders or direction, directing the Respondent to forthwith
take steps to declare Section 66(1) of the Insolvency and Bankruptcy
Code, 2016 as ultra vires on the vice of Article 14 of the Constitution of
India for being manifestly arbitrary and unconstitutional, unless to save
it from unconstitutionality and in consonance with the scheme and
object of IBC, scope thereof is enlarged by this Hon'ble Court by
expanding the powers and jurisdiction of the NCLT by enabling it to
pass an Order making liable to make such contributions to the assets of
the corporate debtor as it may deem fit, not only against any persons
who were knowingly parties to the carrying on of the business of the
Corporate Debtor in such manner but also against other organizations
legal entities (other than the corporate debtor) with whom such
business was carried out;
(d) In addition the petitioner filed this application under Article 226 of
Constitution of India for issuance of a writ of Mandamus and/or in the
nature thereof to issue appropriate orders or direction, directing the
Respondent to forthwith take steps to declare Section 66(1) of the
Insolvency and Bankruptcy Code, 2016 as ultra vires on the vice of
Article 14 of the Constitution of India for being manifestly arbitrary and
unconstitutional, unless to save it from unconstitutionality and in
consonance with the scheme and object of IBC, scope thereof is
enlarged by this Hon'ble Court by expanding the powers and
jurisdiction of the NCLT by enabling it pass an Order making liable to
make such contributions to the assets of the corporate debtor as it may
deem fit, not only against any persons who were knowingly parties to
the carrying on of the business of the Corporate Debtor in such manner
but also against any persons responsible for carrying on the business
with Corporate Debtor in such organizations/legal entities;
(e) The petitioner also filed this application under Article 226 of
Constitution of India for issuance of a writ of Mandamus and/or in the
nature thereof to issue appropriate orders or direction, directing the
Respondents to forthwith consider introducing. appropriate
amendments in Section 66(1) of Insolvency and Bankruptcy Code,
2016 expanding the powers and jurisdiction of the NCLT.
(2) The petitioner contended the frauds of gigantic proportion are being played
by the corporate to defraud the gullible creditors to siphon off public money.
He contended that introduction of Insolvency Bankruptcy Code (IBC) itself is
in public interest. According to him, grant of the prayer made by him would
serve public interest and would enable maximum recoveries under IBC for
the creditors of a corporate debtor.
(3) The petitioner further submitted that there is urgent need of passing
appropriate directions as prayed for by him in the interest of justice. The
prayers if granted would strengthen the framework for insolvency &
bankruptcy and would cause immense benefit to the creditors at large who
would be able to make higher recoveries.
(4) The petitioner also submitted that to the best of his knowledge, the issue
raised herein has never been raised in any petition, pending or disposed of,
before any court.
(5) The petitioner submitted that although broadly Section 339(1) of the Companies
Act, 2013/Section 542 of the Companies Act, 1956 may appear to be pari
materia to Section 66(1), there is clear distinction in the application of the
provisions and the scheme under the Companies Act vis a vis IBC.
(6) While making submission, the petitioner relied on the judgments of the Hon'ble
Supreme Court in Usha Ananthasubramanian vs. Union of India (2020) 4
SCC 122 which is the context of Section 339(1) of the Companies Act, 2013,
of Hon'ble Kerala High Court in South India Paper Mills Pvt. Ltd vs. Sree
Rama Vilasam Press & Publications 1980 SCC Online Ker 298 which is in the
context of Section 542 of the Companies Act, 1956, and of the Hon'ble
Calcutta High Court in Prashant Properties Limited vs. SPS Steels Rolling
Mills Ltd. MANU/WB/2456/2019 which is in the context of Section 66 of
IBC. Relying on the aforesaid mentioned judgments, the petitioner submitted
that those shall be wholly inapplicable for considering the powers and
jurisdiction of National Company Law Tribunal (NCLT) under Section 66(1) of
IBC. The petitioner further submitted that in Jaypee Infratech Ltd. Interim
Resolution Professional v. Axis Bank Ltd-(2020) 8 SCC 401, particularly in
paragraph 32.1 thereof is mere orbiter and not ratio decidendi, thus are also
not binding. He has also referred to the orders passed by National Company
Law Appellate Tribunal (NCLAT) and of Hon'ble Supreme Court in the matter
of Deepak Parasuraman vs. Sripriay Kumar to claim that even though the
application was filed by resolution Professional under Section 43 and Section
66 read with Section 60(5) of IBC, NCLT shall have power to pass same order
if the application was solely under Section 66 of IBC. He further submits that
in any event none of the judgments are in the context of challenge to the
validity of the impugned provision. The three provisions discussed are as
under:
Section 542 of Section 339(1) of Section 66(1) of
Companies Act, 1956 Companies Act, 2013 Insolvency and
Bankruptcy Code, 2016
542. Liability for 339. Liability for 66. Fraudulent trading
fraudulent conduct of fraudulent conduct of or wrongful trading
business. business (1) if during the
(1) if in the course of the (1) if in the course of corporate insolvency
winding up of a the winding-up of a resolution process or a
company, it appears that company, it appears liquidation process, it is
any business of the that any business of the found that any
company has been company has been business of the
carried on, with intent to carried on with intent to corporate debtor has
defraud creditors of the defraud creditors of the been carried on with
company or any other company or any other intent to defraud
persons or for any persons or for any creditors of the
fraudulent purpose, the fraudulent purpose, the corporate debtor or for
Court, on the application Tribunal, on the any fraudulent
of the Official Liquidator, application of the Official purpose, the
or the liquidator or nay Liquidator or any adjudicating Authority
creditor or contributory creditor or contributory of the resolution
of the company, may, if of the company, may, if professional pass an
it thinks it proper so to it thinks it proper so to order that any persons
do, declare that any do, declare that any who were knowingly
persons who were person, who is or has parties to the carrying
knowingly parties to the been a director, on of the business in
carrying on of the manager, or officer of such manner shall be
business in the manner the company or any liable to make such
aforesaid shall be persons who were contributions to assets
personally responsible, knowingly parties to the of the corporate debtor
without any limitation of carrying on of the as it may deem fit.
liability, for all or any of business in the manner
the debts or other aforesaid shall be
liabilities of the company personally responsible,
as the Court may direct. without any limitation of
On the hearing of an liability, for all or any of
application under this the debts or other
sub-section, the Official liabilities of the
Liquidator or the company as the Tribunal
liquidator, as the case may direct:
may be, may himself Provided that on the
give evidence or call hearing of an application
witness. under this sub-section,
the Official Liquidator or
the Company Liquidator,
as the case may be,
may himself give
evidence or call witness.
(7) The above tabulation of three provisions in the context of prayer would show:
(a) Under the Companies Act, 2013 or 1956, the application under
Section 339(1) or Section 542 as the case may be would be filed
only in the course of the winding up of company. However, an
application under Section 66(1) of IBC can be filed during the
corporate insolvency resolution process or a liquidation process.
Corporate Insolvency Resolution Process (CIRP) having been
introduced laid down vide IBC, the legislature has consciously
extended the application of the provisions even to the matters
during corporate insolvency resolution process, instead of restricting
it during the liquidation process.
(b) In all three provisions, the common mandatory pre-requisite
satisfaction is that if any business of the company/corporate debtor
has been either carried on
(i) Intent to defraud creditors of the company/ corporate debtor or
(ii) For any fraudulent purpose
(c) Under the Companies Act, the application filed by the official
liquidator or the liquidator or any creditor or contributory of the
company could be entertained. However, under section 66(1) of the
IBC, only an application filed by resolution professional can be
entertained by NCLT.
(d) All the three provisions are aimed at fixing the liability of persons
responsible for such conduct of business of the company/corporate
debtor which is with fraudulent purpose and a required mens rea.
(e) Under the Companies Act, the provision empowers the court/tribunal
to hold such persons personally responsible before taking limitation
of liability for all or in of the debts or any other liability of the
company and the court may direct. However, under Section 66(1) of
IBC, the NCLT can pass an order holding such person liable to make
contribution to the assets of the corporate debtor or it may deem fit.
The legislature has carefully made this distinction in Section 66(1) of
the IBC that this section may also apply during corporate insolvency
resolution process and need not be only during liquidation. If no
resolution plan is received under IBC or in any event has provided in
IBC, corporate debtor would be subject to liquidation and the assets
of the corporate debtor would be distributed amongst the creditors
in the manner provided in IBC.
(8) In the context of companies Act, 2013 in Usha Ananthasubramanian vs.
Union of India (2020) 4 SCC 122, the Hon'ble Supreme Court was pleased to
consider the extent of application of section 339(1) and was pleased to
observe as under:
7) Section 337 refers to penalty for frauds by an officer of the
company in which mis-management has taken place. Likewise, Section
339 refers to any business of the company which has been carried on
with intent to defraud creditors of that company. Obviously, the
persons referred to in Section 339(1) as persons who are other than
the parties "to the carrying on of the business in the manner
aforesaid" which again refers to the business of the company which is
being mismanaged and not to the business of another company or
other persons.
8) This being the case, it is clear that powers under these sections
cannot possibly be utilized in order that a person who may be the head
of some other organization be roped in, and his or her assets be
attached. This being the case, we set aside the impugned order passed
by the NCLAT and well as the NCLT. The appeal is allowed in the
aforesaid terms.
9) We may clarify that nothing stated in this judgment will have any
effect insofar as the investigation conducted by the CBI or the
investigation by the Serious Fraud Investigation Office (SFIO) is
concerned.
(9) In the context of Companies Act, 1956 in South India Paper Mills Pvt. Ltd. Vs
Sree Rama Vilasam Press & Publications, 1980 SCC Online Ker 298, the High
Court of Kerala was pleased to observe that
"5. It will be useful to compare the provisions of Section 542 with
those of Sections 543 and 531. Section 543 empowers the court to
assess damages against delinquent directors and others who occupy a
fiduciary position in relation to a company. They are expected to act at
all times in the interests of the company, eschewing fraud, underhand
dealings and motives of personal aggrandisement. They also owe a
duty of care. If they are found to be in breach of the duties attached to
their special position, they are liable in damages under Section 543,
and the court can order them to make good the loss sustained by the
company as a result of their conduct. Misfeasance proceedings under
the section lies for breach of any duty, even if it does not amount to a
perpetration of fraud. The thrust of Section 531, on the other hand, is
against "fraudulent preference", i.e., parting with the assets of the
company in favour of a few creditors with a view to defeating the
others. The court is given power under this section to invalidate such
transfers made on the eve of winding-up. The three sections are thus
part of a scheme for reducing the liabilities of the company, recovering
its assets and recouping its losses, if the conditions prescribed by
them are found to exist on an examination of its affairs, after winding-
up. While Section 542 seeks to relieve the company of the liabilities
incurred by fraudulent trading making those responsible for the fraud
personally answerable, the purpose of Section 531 is to recover assets
which should have belonged to the company but for fraudulent
preference. Fraud is a common ingredient for both, whereas the
proceedings under Section 543 are designed to recoup losses
sustained by a breach of duty which may fall short of fraud.
(10) In Prashant Properties Limited vs. SPS Steels Rolling Mills Ltd
MANU/WB/2456/2019 in the context of Section 66 of IBC, the Calcutta High
Court was pleased to observe as under:
29. Even if Section 66 of the IBC applied to past transactions, unlike
Sections 44, 48 and 51 IBC (under which the NCLT, as Adjudicating
Authority, can avoid past transactions), under Section 66, the NCLT
cannot avoid past transactions, even if fraudulent, but under Section
66(2) can only direct the Director/partner of the Corporate Debtor,
and not other parties to the transaction, to make contribution to
assets of the Corporate Debtor......."
"64. Upon hearing both sides, it is seen that Sections 43 and 44, as
well as Section 45 of the IBC are inapplicable to the present case, in
view of those being maintainable only at the instance of a liquidator or
a resolution professional..."
(11) In Jaypee Infratech Ltd. Interim Resolution Professional v Axis Bank Ltd
(2020) 8 SCC 401, inter alia, in the context of Section 66 of IBC, the Hon'ble
Supreme Court was pleased to observe that:
"32.1. It is noticed that in the present case, the IRP moved one
composite application purportedly under Sections 43, 45 and 66 of the
Code while alleging that the transactions in question were preferential
as also undervalued and fraudulent. In our view, in the scheme of the
Code, the parameters and the requisite enquiries as also the
consequences in relation to these aspects are different and such
difference is explicit in the related provisions. As noticed, the question
of intent is not involved in Section 43 and by virtue of legal fiction,
upon existence of the given ingredients, a transaction is deemed to be
of giving preference at a relevant time. However, whether a
transaction is undervalued requires a different enquiry as per Sections
45 and 46 of the Code and significantly, such application can also be
made by the creditor under Section 47 of the Code. The consequences
of undervaluation are contained in Sections 48 and 49. Per Section 49,
if the undervalued transaction is referable to sub-section (2) of
Section 45, the adjudicating authority may look at the intent to
examine if such undervaluation was to defraud the creditors. On the
other hand, the provisions of Section 66 related to fraudulent trading
and wrongful trading entail the liabilities on the persons responsible
therefore. We are not elaborating on all these aspects for being not
necessary as the transactions in question are already held preferential
and hence, the order for their avoidance is required to be approved;
but it appears expedient to observe that the arena and scope of the
requisite enquiries, to find if the transaction is undervalued or is
intended to defraud the creditors or had been of wrongful/fraudulent
trading are entirely different. Specific material facts are required to be
pleaded if a transaction is sought to be brought under the mischief
sought to be remedied by Sections 45/46/47 or Section 66 of the
Code. As noticed the scope of enquiry in relation to the questions as to
whether a transaction is of giving preference at a relevant time, is
entirely different. Hence, it would be expected of any resolution
professional to keep such requirements in view while making a motion
to the adjudicating authority."
(12) In the matter of Deepak Parasuraman vs. Sripriya Kumar vide an order
dated 21.09.2021 in Company Appeal (AT) (Insolvency) No.349 of 2020, the
NCALT was pleased to confirm an order passed by NCLT allowing the
application filed by resolution professional under Section 43 and 46 read with
section 60(5) of IBC.
(13) As evident from the aforesaid precedence Section 339 or Companies Act,
2013 and pari material, the provisions of section 542 of Companies Act, 1956
was aimed at conferring jurisdiction in the course of winding up of company
to proceed against the persons responsible for fraudulent conduct of the
business of the company. Both these provisions were aimed at making such
persons personally liable for such fraudulent trading to recouping losses
incurred thereby and to relief the company of the liabilities incurred by
fraudulent trading. That Section 66(1) also directed towards making such
persons personally liable for such fraudulent trading to recouping losses
incurred thereby and to provide that the NCLT can pass order holding such
persons liable to make such contributions to the assets of the corporate
debtor as it may deem fit. No power has been conferred on NCLT to pass
such orders against other organizations/legal entities (other than corporate
debtors) with whom such business was carried out against any person
responsible in such other organizations/legal entities for carrying on business
with corporate debtor. For the said purpose, the ratio of the judgment of the
Hon'ble Supreme Court in Usha Ananthasubramanian (supra) in the context
of section 339 (1) one of the companies Act, 2013 as extracted above would
clearly apply even in the context 66(1) of IBC. Accordingly, an application
under Section 66(1) by the resolution professional would not bar any civil
action in accordance with law, either at the instance of resolution professional
or liquidator or by the corporate debtor in its new avatar on a successful CIRP
for recovery of any dues payable to the corporate debtor by such
organization/legal entities. Such legal action is independent of section 66(1).
Similarly, any application under section 66(1) will have no effect on legality
or validity of any independent criminal action in accordance with law against
such organization/legal entities and persons responsible for conduct of their
business with corporate debtor.
(14) Regulation certified "preferential or other transaction"
All the insolvency and bankruptcy Board of India (Insolvency resolution
process for corporate persons) regulations 2016 stipulates strict time limits
for formation of requisite action by the resolution professional by any
transaction to be hit Sections 43, 45, 50 and 66 for making determination
thereof under the intimation to the Board and also for applying to NCLT for
appropriate relief.
(15) Further, in Phoenix ARC (P) Ltd. Vs. Spade Financial Services Ltd. (2021) 3
SCC 475 the Hon'ble Supreme Court inter alia observed that:
51. The IBC has made provisions for identifying, annulling or
disregarding "avoidable transactions" which distressed companies
may have undertaken to hamper recovery of creditors in the event of
the initiation of CIRP. Such avoidable transactions include:
(i) preferential transactions under Section 43 of the IBC;
(ii) undervalued transactions under Section 45(2) of the IBC;
(iii) transactions defrauding creditors under Section 49 of the IBC;
and
(iv) extortionate transactions under Section 50 of the IBC. The IBC
recognizes that for the success of an insolvency regime, the
real nature of the transactions has to be unearthed in order to
prevent any person from taking undue benefit of its provisions
to the detriment of the rights of legitimate creditors."
(16) Thus, the IBC specially empowers NCLT to consider application to declare
certain transaction namely preferential, undervalued or extortionate credit
transaction as void and to pass appropriate orders under Section 44 (orders
in case of preferential transaction) Section 48 (orders in case of undervalued
transaction) Section 51 (orders of adjudicating authority in respect of
extortionate credit transaction). Such orders are aimed at reversing adverse
effect by the concerned transaction inter-alia requiring the person who
benefits from any such transaction to pay back any gain he may have made
as a result of the transaction, if an application for avoidance of such
transaction is made.
(a) By a liquidator or resolution professional under section 43 (in case a
preferential transaction) section 45 (in case undervalued transaction) or
section 50 (in case extortionate credit transaction) respectively.
(b) By a creditor member or partner or corporate debtor under section 47 (in
case of undervalued transaction) not reported to NCLT by the liquidator
or resolution professional.
Further, IBC empower NCLT to make an order under section 49 (in case
of transaction, defrauding, creditor. In interest of the victims of
undervalued transaction referred in section 45 (2) of the IBC. If it is
established that such transaction was deliberately entered into by
corporate debtor for defrauding creditors.
(17) IBC contains adequate measures to make appropriate application by
liquidator or resolution professional or by creditor or member or partner of
corporate debtor for avoiding certain transaction under appropriate provisions
of sections 43, 45, 47, and 50. It is clear from the language of section 66(1)
that unlike application provided under section 43, section 45, section 50 and
section 47 or avoiding of such transaction and dehors these provisions. An
application contemplated exclusively under section 66(1) is not made for
avoidance of any transaction. Even if fraudulent but to fix the liabilities of the
persons reasonable for conducting the business of corporate debtor which is
fraudulent or wrongful, that too an application made by resolution
professional during the CIRP or a liquidation process.
(18) In Swiss Ribbons (P) Ltd. vs. Union of India 2019 4 SCC 17 that the
primary focus of the legislature to ensure revival and continuation of
corporate debtor by protecting it from its own management and from a
corporate by liquidation. Even its long title does not in any manner refer to
liquidation which is only availed of as a last resort. If there is either no
resolution plan or the resolution plan submitted are not upto the mark. The
IBC is a beneficiary legislature which puts the corporate debtor back on its
feet not being a mere recovery legislature for creditors.
(19) Therefore, in legislature wisdom and as apparent from the text of 66(1) it is
clear that firstly it confers no jurisdiction but declaring any transaction as
void, even if fraudulent, but confers jurisdiction on NCLT to fix the liabilities
on the persons responsible for conducting business of corporate debtor which
is fraudulent or wrongful. Secondly section 66(1) contemplates an application
thereunder only by the resolution professional and by none other. Thirdly
section 66 (1) also restricts the power of NCLT subject to being satisfy with
pre-requisite that any business of the corporate debtor has been carried on
with intent to defraud creditors or the corporate debtors or for any fraudulent
purpose and if satisfied it powers to pass an order is only against such person
who are responsible for the conduct of such fraudulent business of the
corporate debtor with mens rea to make them personally liable to make
such contributions to the assets of the corporate debtor as it may deem fit.
(20) There is no arbitrariness, matchless manifest arbitrariness in section 66(1) of
IBC to entertain the instant petition to declare the said provisions as ultra
vires of Article 14 and unconstitutional as alleged or otherwise. There is no
merit in the submission of the petitioner and the prayers made cannot be
considered.
(21) With the above observation this court has no hesitation to dismiss the
present writ petition. Accordingly the writ petition stands dismissed.
JUDGE JUDGE
Dipak JUDGE CHIEF JUSTICE (ACTING)
Dipak
