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SC Affirms Limitations of Section 66 of IBC Against Third Parties

Gluckrich Capital Private Limited v State of West Bengal


Introduction

On 19.05.2023, the Hon’ble Supreme Court rejected an application filed by Gluckrich Capital Private Limited (‘GCPL’) that sought clarification of an order dated 24.02.2023. The Hon’ble Supreme Court’s order dated 24.02.2023 dismissed GCPL’s Special Leave Petition (‘SLP’)[1] on the grounds that it lacked locus standi in the matter. Consequently, the application seeking clarification was rejected by a bench comprising of Justice Krishna Murari and Justice Sanjay Kumar on the ground that an endeavour by GCPL to get over the judgment and order dated 18.01.2023 in Sudipa Nath v. Union of India & Ors.[2], under the guise of seeking clarification, was impermissible.


While rejecting the clarification application as misconceived, the Hon’ble Supreme Court reaffirmed that section 66 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) cannot be invoked against third parties. The court emphasized that legal remedies available under the law should be pursued for the recovery of outstanding liabilities from such entities.


Brief Facts

  • In the present case, GCPL was an unsecured financial creditor of M/s Leading Hotels Limited which is the Corporate Debtor[3] (‘CD’) before the Principal Bench of the National Company Law Tribunal (‘NCLT’) since May 2020.

  • GCPL sought a clarification to the effect that the rejection of its SLP should not come in its way of persuading the Resolution Professional (‘RP’) to initiate recovery proceedings under section 66 of IBC against those responsible for the fraudulent affairs of the CD and also against other persons and entities with whom any business was carried out by the CD in a fraudulent manner.

  • GCPL argued that the judgment and order dated 18.01.2023 passed by the Tripura High Court in Sudipa Nath (supra) erroneously relied on the decision in Usha Ananthasubramanian v. Union of India[4], which held that section 66 of the IBC could only be applied to individuals responsible for the CD’s business operations and not to other parties, entities, or organizations involved in business transactions with the CD.

Decision

  • The Supreme Court’s judgment and order dated 24.02.2023 dismissed GCPL’s SLP on the basis that GCPL had no connection with the ongoing proceedings before the High Court, as it was neither the informant nor a party, and was not associated with the First Information Report (‘FIR’) lodged by the financial creditors. GPCL was also not a member of the Committee of Creditors (‘COC’).

  • The Supreme Court rejected GCPL’s application for clarification, emphasizing that the same could not be permitted to override a High Court judgment in the same context.

  • Having regard to the judgment in Sudipa Nath (supra), the Apex Court held that the Tripura High Court had correctly relied upon the Supreme Court judgment in Usha Ananthasubramanian (supra) which constituted a binding precedent.

  • The Supreme Court affirmed that section 339(1) of the Companies Act, 2013 was pari materia to section 66 of IBC and that no power has been conferred on NCLT to pass any orders against third parties with whom fraudulent transactions were carried out by the CD.

  • The Supreme Court further reiterated that section 339(1) of the Companies Act, 2013 would apply even in the context 66(1) of the IBC.

  • Consequently, an application under section 66(1) of IBC moved by the RP would not prevent any civil action, initiated by the RP, liquidator, or the CD in its reconstituted form following a successful Corporate Insolvency Resolution Process (‘CIRP’), for the recovery of any outstanding dues owed to the CD by such third party.

Analysis

It should be noted that IBC being a recent law, the legislature has consciously extended the application of the provisions of the Companies Act to those of IBC, instead of limiting the same for solely liquidation purposes. For better understanding, reference may be had to a tabulation of three provisions in Sudipa Nath (supra), section 542 of the Companies Act, 1956, section 339(1) of the Companies Act, 2013 and section 66(1) of the IBC, which clearly showcases that:

  • Under the Companies Act, 2013 or 1956, an application under section 339(1) or section 542 would only be filed during the winding up of a company. Whereas an application under section 66(1) of IBC can be filed during the CIRP or the liquidation process.

  • Under the Companies Act, the application could be filed by the liquidator, any creditor or contributor of the company. However, under section 66(1) of the IBC, only applications filed by the RP can be entertained by NCLT.

  • All three provisions share the common requirement that the business of the CD has been conducted with the intent to defraud the CD’s creditors or for any fraudulent purpose.

  • All three provisions are aimed at fixing the liability of persons responsible for such fraudulent conduct of the CD which requires mens rea.

The rationale behind the decision of the Hon’ble Supreme Court becomes apparent when considering the role of the NCLT in adjudicating applications by the RP under section 66(1) of the IBC. The NCLT has the authority to hold individuals connected to the CD personally responsible if they knowingly participated in fraudulent activities involving the CD. However, it is not within the NCLT’s purview to involve third parties or entities in such matters and demand compensation on behalf of the CD. If the RP, liquidator, or reconstituted CD wish to seek recovery from third-party entities who were also knowingly involved in fraudulent transactions with the CD, they must pursue recourse within the framework of civil recovery laws, without prejudice.


Therefore, the Supreme Court’s interpretation of section 66 of the IBC ensures that the CD is not left without any recourse. Instead, it establishes the proper legal process to be followed when seeking recovery from third-party entities in cases involving fraudulent activities.

[1] Gluckrich Capital Private Limited v. State of West Bengal, SLP (Crl.) Diary No. 6732/2023 [2] MANU/TR/0036/2023 [3] Citron Strategies Private Limited v. Leading Hotels Limited, CP(IB) 1053/2020/PB [4] 1 (2020) 4 SCC 122


Authored by Srishty Jaura, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.


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