The Supreme Court of India rendered a significant judgement in the case involving Hirakud Industrial Works Ltd., addressing the auction of assets during insolvency proceedings. The judgement reinforces the provisions of the Insolvency and Bankruptcy Code, safeguarding stakeholders’ interests and upholding the moratorium declared under the IBC. This ruling establishes clarity on the legality of asset disposal during corporate insolvency resolution processes, setting a crucial precedent for future cases.
Facts
- M/s Varsha Fabrics Pvt. Ltd., India Finance Ltd., Mudrika Commercial Pvt. Ltd., Hirakud Industrial Works Ltd., and Industrial Development Corporation of Orissa Ltd. entered into a Share Purchase Agreement on 10.07.2006.
- As per the agreement, Industrial Development Corporation of Orissa Ltd. divested its 100% shareholding in Hirakud Industrial Works Ltd. in favor of the other parties.
- Hirakud Industrial Works Ltd. shut down its factory on 08.05.2007.
- The Insolvency Resolution Professional filed Civil Appeals challenging the Interim Orders dated 14.08.2019 and 05.09.2019 passed by the Odisha High Court in W.P. (Civil) No 7939/2011 due to the commencement of Corporate Insolvency Resolution Process against Hirakud Industrial Works Ltd.
- Nandakini Contractors Pvt. Ltd., a Financial Creditor, filed a petition for initiation of Corporate Insolvency Resolution Process against Hirakud Industrial Works Ltd. due to default in payment of financial debt.
- Various proceedings were initiated, including valuation of assets and payment of dues to workmen during the pendency of the insolvency process.
- The NCLT admitted the insolvency petition on 04.06.2019 and declared a moratorium in accordance with the IBC provisions.
- Hirakud Workers’ Union filed W.P. (Civil) No 12479/2009 before the Odisha High Court for cancellation of SPA dated 10.07.2006 and payment of arrears and current salaries of the workmen.
- High Court directed Deputy Labour Commissioner to sell a parcel of land admeasuring 157.27 acres to the Hirakud Dam Project.
- Labour Court quantified the amount payable to the workmen as Rs. 45,66,67,133/- in an order dated 11.11.2016.
- Court’s order dated 03.08.2015 directed quantification of compensation by Labour Court and sale of assets of Respondent No 4 through public auction if payment not made to workmen.
- High Court recorded comments from Resolution Professional about other companies interested in participating in the public auction in a further order dated 05.09.2019.
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Analysis
- The High Court’s Orders for auctioning the assets of the Corporate Debtor before the NCLT were deemed unjustified.
- Alienating assets during IBC proceedings would harm all stakeholders’ interests.
- The IBC aims to resolve insolvency promptly and balance stakeholders’ interests effectively.
- The CIRP can be initiated by financial creditors, operational creditors, or the corporate debtor itself.
- Section 12 of the IBC sets a timeframe for completing the CIRP.
- The property subject to auction was substantial, comprising 330 acres with railway lines and buildings.
- The High Court should not have proceeded with the auction once the moratorium under IBC was in effect.
- The High Court’s orders were issued post the initiation of CIRP in this case.
- Section 14 of the IBC provides for a moratorium to be declared by the Adjudicating Authority on the insolvency commencement date.
- The moratorium prohibits the institution of suits, continuation of pending suits, or proceedings against the corporate debtor.
- It also includes the execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or any other authority.
- The moratorium also prohibits the transferring, encumbering, alienating, or disposing off of any assets or legal rights by the corporate debtor.
- It further prohibits actions to foreclose, recover, or enforce any security interest created by the corporate debtor.
- The supply of essential goods or services to the corporate debtor is not terminated, suspended, or interrupted during the moratorium period.
- Exceptions to the moratorium include transactions notified by the Central Government in consultation with financial regulators and a surety in a contract of guarantee to a corporate debtor.
- The moratorium remains in effect until the completion of the corporate insolvency resolution process, unless a resolution plan is approved or liquidation is ordered.
- Section 238 of the IBC gives overriding effect to the Code over all other laws.
- It vests exclusive jurisdiction on the NCLT and NCLAT to deal with insolvency issues and asset disposal.
- Section 231 of the IBC bars the jurisdiction of civil courts in matters where the Adjudicating Authority is empowered to pass orders.
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Decision
- Civil Appeals allowed with leave granted.
- Permission granted to file an application before the appropriate authority to decide objections raised by Mr. X.
- Parties have liberty to pursue remedies in accordance with law.
- Setting aside of impugned Interim Orders dated 14.08.2019 and 05.09.2019 by Odisha High Court.
- Governance of sale or liquidation of assets of Mr. Y under IBC provisions.
- Open option for Mr. Z (Hirakud Workers’ Union) to file application under Regulation 9 for arrears, salaries, and other dues.
- Regulation 9 outlines the process for claims by workmen and employees.
- Objections raised to stay of auction proceedings, with reservation of right to raise pleas and contentions.
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Case Title: ANAND RAO KORADA RESOLUTION PROFESSIONAL Vs. M/S VARSHA FABRICS (P) LTD.
Case Number: C.A. No.-008800-008801 / 2019
