CASE BRIEF: ANAND RAO KORADA, RESOLUTION PROFESSIONAL v. M/S VARSHA FABRICS (P) LTD

 

NAME OF THE CASE	Anand Rao Korada, Resolution Professional vs. M/s Varsha Fabrics (P) Ltd.
CITATION	Civil Appeal NOS. 8800−8801 OF 2019
DATE OF JUDGEMENT	November 18, 2019
APPELLANT	Anand Rao Korada, Resolution Professional
RESPONDENT	M/s Varsha Fabrics (P) Ltd.
BENCH /JUDGE	Justice R. Subhash Reddy Justice Indu Malhotra
STATUTES INVOLVED	The Insolvency and Bankruptcy Code, 2016
IMPORTANT SECTIONS/ARTICLE	Section 7 of The Insolvency and Bankruptcy Code, 2016. Section 14 of The Insolvency and Bankruptcy Code, 2016. Section 231 of The Insolvency and Bankruptcy Code, 2016. Section 238 of The Insolvency and Bankruptcy Code, 2016.

Overview of the Case

This case involves a jurisdictional conflict between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Odisha High Court's directives regarding the auction of corporate debtor assets. Anand Rao Korada, the Resolution Professional (RP) for M/s Hirakud Industrial Works Ltd., filed an appeal challenging interim orders passed by the Odisha High Court. This, under the orders provided by the above judgment, allowed corporate debtors' assets for auctions to settle workers' claims once the CIRP was initiated under Section 14 of the IBC imposed moratorium. The Supreme Court was to decide whether the moratorium order issued under the IBC prevailed over the orders passed by the Odisha High Court. This judgment reiterates the supremacy of the IBC in insolvency issues. The judgment of the Court underlined that the IBC is complete legislation on the issue of resolution of insolvency and that the provisions of the IBC prevail over any conflicting procedure of law.

Facts of the Case

M/s Hirakud Industrial Works Ltd., being a corporate debtor, suffered a catastrophic decline in its financial fortunes and had to close its factory back in 2007. After the closure, the Hirakud Workers' Union filed writ petitions before the Odisha High Court, impugning an SPA entered into by the corporate debtor with third parties selling off the business concern, and prayed to pay them arrears and current salaries. Orders several times directed the sale of assets under corporate debtors, such as a piece of land, in further recovery of workers' dues, which passed the High Court. Labour court has already quantified and dues calculated at ₹ 45.66 crore as the balance partially paid by receipts through selling proceeds from his asset sale. As the company was facing financial stress, a financial creditor filed an application under Section 7 of the IBC for invoking CIRP. The NCLT admitted the said application on June 4, 2019. Under the IBC, the Section 14 moratorium came into effect. The Odisha High Court, however, continued its proceedings and directed the auction of remaining assets for the purpose of workers' claims, which were violative of the moratorium invoked under the IBC. The appeal before the Supreme Court was based on the argument that the parallel proceedings instituted by the High Court violated the IBC and the moratorium and that such proceedings could not be continued once the CIRP had commenced.

Issue Before the Court

There were 3 primary issues before the Supreme Court to be decided. These were:

1. Whether the orders passed by the Odisha High Court to auction the corporate debtor’s assets to settle workers' dues could continue during the Corporate Insolvency Resolution Process (CIRP) under the IBC?
2. Whether the moratorium imposed under Section 14 of the IBC, which prohibits the sale of assets and the continuation of legal proceedings against the corporate debtor, would take precedence over the High Court's orders? 
3. Whether the IBC had exclusive jurisdiction over the corporate debtor's insolvency proceedings, including the settlement of workers' claims, or whether the High Court’s intervention was justified to protect workers' rights and expedite their payments.

Concepts and Provisions Involved

1. Section 7 IBC This section permits the CIRP to be initiated by a financial creditor in the event of default by the corporate debtor in payment of financial debt. Here, a Section 7 application was filed by a financial creditor, which resulted in the initiation of CIRP.
2. Section 14, IBC (Moratorium): It makes provisions for a moratorium the moment CIRP starts, which restrains continuing suits, proceedings, or transferring assets outside of IBC. The whole essence is to prevent any step which may be considered likely to undermine the CIRP or affect the property of the corporate debtor.
3. Section 238, IBC (Overriding Effect): This provision makes sure that in case of any conflict, the IBC overrides other laws and its provisions become paramount in insolvency proceedings.
4. Section 231, IBC (Bar of Jurisdiction): This section bars civil courts from entertaining matters that fall under the jurisdiction of NCLT or NCLAT under the IBC.
5. IBBI Regulation 9: This is a regulation that provides that the claims for unpaid wages of workers shall be brought before the IRP; therefore, the dues must be dealt with in light of the CIRP.

Arguments for the Appellant

The appellant, Anand Rao Korada, had submitted that the Odisha High Court's actions were directly violating the moratorium under Section 14 of the IBC. The very intent of the moratorium was to stop asset sales and other proceedings outside CIRP, and the orders issued by the High Court for the auction of the assets directly went against the provision. The appellant submitted that the IBC, being a complete code, had overriding authority under Section 238, which meant no interference was possible by the civil courts, including the High Court. This interference would vitiate the order resolution process of the CIRP, thus damaging the interests of all parties involved. The appellant further submitted that the workers' claims should be resolved through the IBC, as it ensures an equitable process for all creditors.

Respondent's Arguments

The respondents, the Hirakud Workers' Union, defended the Odisha High Court's action. They argued that workers' dues were overdue for long, and only intervention by the High Court would enable them to get such claims settled in time. They argued that the processes of the IBC are slow and that there was no guarantee that workers' payments under CIRP would be made in time. All these responses suggested that the respondents appreciated auctioning the assets of the corporate debtor as it was a practical way for the workers to obtain relief from their long outstanding financial distress.

Judgment

The Supreme Court, after considering the arguments, further strengthened the supremacy of the Insolvency and Bankruptcy Code (IBC). It observed that Section 238 of the IBC states that the provisions of the IBC will prevail over any inconsistent laws, and issues relating to insolvency must be resolved within the framework of the IBC. It is held that under Section 14 of the IBC, once the CIRP had started, a blanket bar had been imposed on any proceeding, and this would include the sale of assets. The High Court of Odisha's orders for the auctions of assets were in direct conflict with this provision, and the continuance of such proceedings ran directly contrary to the objective of the IBC, which is centralization and streamlining of insolvency resolution. The Court further clarified that the IBC provides an orderly process for the resolution of claims of all creditors, including workers. The workers' union was directed to file their claims under Regulation 9 of the IBBI regulations, ensuring that their dues were addressed within the framework of the IBC and in a manner consistent with the CIRP. The Supreme Court had set aside the interim orders of the Odisha High Court, which once again restored the authority of the IBC in insolvency matters, thereby ensuring that all claims and proceedings were processed under it. The judgment further elaborated that intervention by civil courts in matters covered under the IBC was also prohibited under Section 231.

Conclusion

The judgment of the Supreme Court in this regard particularly underlined the predominance of the IBC over the provisions of every insolvency proceeding and strictly demands compliance with its contents while conducting the insolvency. By reversing the judgments of the Odisha High Court, the Apex Court has reinforced the prominent status of CIRP regarding the management of an insolvent and protection for all stakeholders in an organized manner and on an equal platform. The order also answered workers' concerns as it instructed them to present their claims under the IBC scheme. Thus, ensuring that the rights of workers were not overlooked but taken into the legal process as required. The Court judgment thus looked into the extent of procedural discipline in considering insolvency cases and established the prohibition on holding parallel proceedings that may hinder the smooth determination of corporate debtor's financial issues. This is the first assertion of the IBC to be regarded as the master law for the matters involving insolvency and bankruptcy cases, ensuring that insolvency matters are handled uniformly with minimum intervention by conflicting procedures.