Supreme Court: High Courts Are Barred To Exercise Inherent Powers Undermining Sections 14 & 17 of IBC

Supreme Court: High Courts Are Barred To Exercise Inherent Powers Undermining Sections 14 & 17 of IBC; Insolvency and Bankruptcy Code, 2016

The Supreme Court (SC) ruled in Sandeep Khaitan, Resolution Professional (Appellants) v. JSVM Plywood Industries (Respondents) that the High Courts (HCs) should not use its' inherent powers provisioned under Section 482 of the Code of Criminal Procedure (CrPC) to undermine the statutory provisions provided under Sections 14 and 17 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The SC bench comprising of Justices UU Lalit and KM Joseph held that "The High Court appears to have, in passing the impugned order, which is an interim order for that matter, overlooked the salutary limits on its power under Section 482."

The factual matrix of the case is that an application under Section 7 of the IBC was admitted against one National Plywood Industries Limited (NPIL). The appellant was appointed as the Interim Resolution Professional (IRP) and a moratorium was also passed under Section 14 of the IBC.

Section 7 deals with 'initiation of corporate insolvency resolution process by the financial creditor'; Section 14 deals with 'Moratorium' which means 'temporary prohibition of an activity' and Section 17 of the IBC deals with 'management of affairs of corporate debtor by interim resolution professional'.

The appellant alleged that the former Managing Director of the Corporate Debtor in conspiracy with the respondent engaged in an illegal transaction of Rs 32.50 lakh without authority from the appellant and the said act was in violation of Section 14 of the IBC.

A cyber-complaint and an FIR were lodged against the respondent by the appellant. The appellant also filed an application under Section 19 read with Section 23 (2) of the IBC wherein it was alleged that there was non-corporation by the previous management of the Corporate Debtor.

Subsequently, a lien was created by the ICICI Bank upon the bank account of the respondent based on the allegedly illegal transaction. The respondent challenged the FIR through a criminal petition under Section 482 of CrPC before the HC.

The respondent also filed an application before the Court seeking permission to operate their bank accounts over which lien had been created and those accounts which had been frozen based on the FIR. The HC allowed an interlocutory application filed by Respondent No. 1 allowing it to operate the bank account maintained with the ICICI Bank.

The HC further directed in its' order to unfreeze the bank account of its creditors over which the lien has been created and the accounts were frozen pursuant to the lodging of an FIR by the appellant, that was made subject to certain conditions.

An appeal was filed before the Top Court against the order of the HC. The Apex Court clarified in the instant matter that the power of the HCs under Section 482 of the CrPC is available for countenance the breach of a statuary provision.

It added that the expression mentioned in Section 482 of the CrPC i.e. 'to secure the ends of justice' does not refer to overlook the undermining of a statutory dictate, specifically regarding the provisions of Section 14, and Section 17 of the IBC.

The Court further held that the impact of the moratorium under IBC includes the prohibition of transferring, encumbering, alienating, or disposing of by the Corporate Debtor of any of its assets.

It further stated that "The contours of the jurisdiction under 482 of the CrPC are far too well settled to require articulation or reiteration."

The Court added that "The provisions of the IBC contemplate resolution of the insolvency if possible, in the first instance and should it not be possible, the winding up of the Corporate Debtor. The role of the insolvency professional is neatly carved out. From the date of admission of application and the appointment of Interim Resolution Professional, the management of the affairs of the Corporate Debtor is to vest in the Interim Resolution Professional."

The SC concluded that the HC has exercised its inherent powers beyond its limit and said that the orders passed by the National Company Law Tribunal (NCLT) of allowing the application u/s 7 and ordering of moratorium u/s 14 and its other orders and also the order of the HC that resulted to unfreeze the accounts of respondent no. 1 without reimbursement of the debt of Rs 32.50 lakh, all these orders cannot be sustained.

The SC bench modified the orders of the HC and it permitted the respondent to operate its account after clearing the dues of Rs 32.50 lakh. It further directed that the assets of the Corporate Debtor shall be managed strictly in terms of the provisions of the IBC.

The SC directed in its order that "The judgment will not stand in the way of Respondent No.1 pursuing its claim with regard to its entitlement to a sum of Rs 32.50 lakhs and any other sum from the Corporate Debtor or any other person in the appropriate forum and in accordance with law."