Liquidators' powers of Debt Recovery - SC to decide on recent Amendment
Published: Jun 05, 2020
TIOLCORPLAWS News Service
NEW DELHI, MAY 05, 2020: IF you tend to believe that insolvency ends with liquidation, it is time to rethink - What if insolvency begins during liquidation? Very Confusing? Not if the story is well sewn.
The Supreme Court, vide order dated 4.6.20 passed in the case of Abhay N. Manudhane v Gupta Coal India Pvt. Ltd. [D.No. 43752/2019] has issued notice and sought to consider the above issue. Can the Liquidator initiate Insolvency Proceedings against the Debtors of the Company under liquidation? Can these applications, instead of being prosecuted in multiple places across the country, be dealt with by the Original NCLT bench which permitted liquidation? Can the 2019 Ordinance and 2020 amendment to section 11 of the IBC have an all pervading effect?
The underlying premise of the matter is that Gupta Coal, being a heavily debt ridden Nagpur based company (running with debts in excess of Rs 3000 crores), approached the NCLT, Mumbai to get itself declared insolvent and was permitted to do so. In spite of the best efforts, the IRP [later RP] and the COC could not revive the company. Resigning to fate, the leave of the NCLT was sought to liquidate the Company and permission was granted. The RP now became the Liquidator.
Donning this position, the Liquidator was faced with a typical challenge - How to make the liquidation fruitful particularly when the Company had debtors in excess of Rs 1300 crores who refused to pay up. To add to the woes of the liquidator, the debtors were spread far and wide across the country. This meant that suits or conventional proceedings against these persons in the respective NCLT's would not only take ages but would also be meaningless (liquidation being a time bound process).
Duty Bound, the liquidator sought the necessary leave from the Mumbai NCLT to proceed against these debtors across India through the best means available- including Insolvency Proceedings. This was permitted. Since it was practically impossible to launch proceedings in the jurisdictional NCLT's across India, the Liquidator filed all these cases before the NCLT Mumbai where the parent proceedings emanated from.
The Registry of the NCLT Mumbai was baffled and took exception to this. It made it clear that NCLT Mumbai does not have an All India Jurisdiction and is restricted to entities in Maharashtra and Goa. The Liquidator was of the view that since the current Insolvency proceedings emanate from a parent matter before the Mumbai NCLT, the same should be consolidated in Mumbai owing to the Special provisions of Section 60(5) anf 33(5) of the IB Code and the precedent of consolidated jurisdiction set by the Hon'ble Supreme Court in the case of Sudarshan Chits (I.) Ltd. v G. Sukumaran Pillai 1984 AIR 1579, 1985 SCR (1) 511.
The NCLT Mumbai held that such Consolidated Jurisdiction does not exist. Upon appeal the NCLAT went on another tangent and held that forget Consolidated filing, the liquidator could not have filed any Insolvency proceedings. It was held that the bar was implied in Section 11(d) of the IBC wherein 'Corporate Debtor under liquidation' has been made ineligible to file Insolvency Proceedings.
Via an appeal filed and prosecuted through Adv Krishnamohan Menon, AOR, of Mimansa Law Offices, the order of the NCLAT was challenged before the Supreme Court. It was the case therein that Section 11(d) barred only the Corporate Debtor under liquidation from contesting and not the Liquidator itself. The liquidator is duty bound to maximize the assets of the Liquidating Company and if not permitted to use the tools of IBC and that too in a consolidated manner, then no liquidation would ever reach any logical conclusion.
While this appeal was lodged in the 2nd week of December 2019, the Govt took note of the same and the gravity of the issues raised therein. If the Liquidators are sent to civil courts, lifetimes would be wasted in recovery with no fruits. To advance the purpose of IBC, the Govt immediately introduced the IBC (Amendment) Ordinance, 2019 on 28.12.19 w.e.f. from 12.12.19 and added an explanation to Section 11(d) of IBC to clarify that "Corporate Debtors under liquidation can initiate Insolvency process against other Corporate Debtors". This was subsequently retrospectively ratified by an Amendment Act of 2020 passed on 28.3.20.
Now the Supreme Court was faced with two questions:
1. Will these amendments be available to liquidation processes commenced before the amendments?
2. Can the parent NCLT where liquidation commenced exercise Consolidated jurisdiction and hear cases against various debtors of Liquidating Company located outside its jurisdiction?
Seeing merits, the Court has sought to consider the same. Amendments by way of explanations are usually given retrospective effect and Consolidation of jurisdiction has been done by the Supreme Court in the past under the Companies Act. Whether history will be repeated is to be seen. The real question is, if it is not, then what will be the meaning of liquidation?
