IMPACT OF STAY ORDER AGAINST THE ADMISSION ORDER OF CORPORATE INSOLVENCY RESOLUTION PROCESS

[Mr. M. GOVINDARAJAN]

Stay order

It is used to obtain stay order when a litigant files an appeal before the Appellate Authority/Court from operation of the impugned order by filing an interim application in the appeal.  Stay order is a restraint order but not a quashing order.  There is a difference between stay order and quashing of an order.  Quashing of an order results in the restoration of the position as it stood on the date of the passing of the order which has been quashed.  The stay of operation of an order does not, however, lead to such a result. It only means that the order which has been stayed would not be operative from the date of the passing of the stay order and it does not mean that the said order has been wiped out from existence.

Stay order against admission of corporate insolvency resolution process

The provisions of the Insolvency and Bankruptcy Code, 2016 provides for initiation of corporation insolvency resolution process either by financial creditor under section 7 of the Code or by the operational creditor under section 9 of the Code or by the corporate applicant under section 10 of the Code.  If the application is in order and subject to the satisfaction of the Adjudicating Authority the application will be allowed and the corporate insolvency resolution process will commence on the date of order.  Any person aggrieved by the said order may file appeal to the National Company Law Appellate Tribunal (‘NCLAT’ for short) in the prescribed form and in the prescribed manner after making prescribed fees.  Some time the NCLAT may stay the order of the Adjudicating Authority admitting the application for initiating corporate insolvency resolution.

What is the impact on the stay order of NCLAT on the stakeholders in the insolvency process?  The same has been explained in ASHOK KUMAR TYAGI VERSUS UCO BANK, MR. SANTANU BRAHMA - 2022 (11) TMI 984 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI.

In the above said case the UCO bank filed an application under section 7 of the Code to initiate corporate insolvency resolution process against the corporate debtor – Darjeeling Organic Tea Estates Private Limited, Kolkata.  On 28.10.2022 the Adjudicating Authority admitted the application.  The appellant, the suspended director of the Corporate Debtor filed an appeal before the NCLAT challenging the order of the Adjudicating Authority.

The NCLAT has taken up the appeal and on 04.11.2022 passed an interim order directing the interim resolution professional not to constitute Committee of Creditors.  NCLAT further took the appeal on 07.11.2022.  Before NCLAT, the  Uco Bank contended that the One Time Settlement has already been received by the Bank and time of few weeks is required to consider the proposal.  NCLAT listed the case for next hearing on 10.01.2023.  However NCLAT stayed the order of Adjudicating Authority admitting the application for corporate insolvency resolution process.

The appellant filed an IA 4291 of 2022 before NCLAT with the following prayers-

• Since the order of Adjudicating Authority has been stayed by NCLAT the Interim Resolution Professional (‘IRP’ for short)  shall not act further in the management and control of the Company and the Board of Directors will continue in the management and control of the company and run the affairs and the day to day activities of the Company.
• The Board of Directors and persons authorized by them are permitted to operate the Bank Accounts of the Company and remit the expenses/liabilities of the Company including salary payments, electricity dues and other expenses incurred for the running of the Company.
• The Board of Directors can manage continuous operations of the Company and take all appropriate decisions regarding the operations, contracts and activities of the Company including sale and purchase of its products.

The IRP also filed an IA No.4340 of 2022 in which he sought to clarify the role of IRP on the stay order granted by NCLAT.  Whether he may continue to act as IRP of the Corporate Debtor and take all steps to keep the Corporate Debtor as a going concern.  In the event NCLAT directs the Applicant to maintain status quo and direct that the Corporate Debtor continues as a going concern, then necessary directions be passed on the applicant to facilitate raising of interim finance to the tune of Rs.9 Crores in order to keep the operation of the Corporate Debtor as a going concern which shall deem to comply with the provision of Section 28 of the Insolvency and Bankruptcy Code, 2016.

The appellant submitted the following before NCLAT-

• In view of the Interim Order passed by NCLAT on 07.11.2022, the IRP is not entitled to carry on any function qua the Corporate Debtor.
• The Corporate Debtor has been managing Tea Garden where large number of workers is working who have to be paid their wages weekly.
• Ration is also required to be paid to the workers apart from other necessary expenses like Electricity, Diesel, etc.
• No payments have been received by the workers causing a serious law and order problem.
• The Appellant has already approached the UCO Bank for Settlement who is considering the prayer of the Appellant for Settlement.
• The IRP has no role to play after the Interim Order dated 07.11.2022 has been passed and the Corporate Debtor is entitled to function and discharge all its obligation including payment of wages, etc.

The IRP submitted that-

• He has received the request for payment of wages and other expenses which are required to be urgently paid.
• The stay order of NCLAT does not ask for closure of the CIRP nor relieves the IRP.

Therefore the IRP prayed for clarification of his role on the event of stay order granted by NCLAT against the admission order passed by the Adjudicating Authority.

The NCLAT considered the question to be answered in the present applications is the consequences and effect of stay order dated 07.11.2022 granted by NCLAT against the order of Adjudicating Authority as to whether the Corporate Debtor is entitled to be restored and permitted to function prior to 28.10.2022 when the Adjudicating Authority admitted the application for initiating corporate insolvency resolution process against the corporate debtor. 

NCLAT relied on some judgments of Supreme Court in this regard.  The NCLAT observed that in the event on the stay of the admission of Section 7 application, the Corporate Debtor is allowed to function and position as was existing prior to 28.10.2022 is restored, there shall be no difference in staying an Order and quashing of an Order.  In the present appeal the appellants are asking/praying is restoration of the position as was prior to admission of Section 7 application.  NCLAT did not accept the prayer of the appellant.  The Admission Order of Section 7 Application has only been stayed and not quashed thus the Corporate Debtor cannot be permitted to function as it was functioning prior to 28.10.2022.

NCLAT held that-

• In view of the stay of the Order dated 28.10.2022, the IRP cannot carry on any functions since the IRP was appointed by the same order and by stay of the Order, no further action can be taken by the IRP in pursuance of the Order dated 28.10.2022.
• The Order dated 28.10.2022 has become inoperative in view of the Interim Order of this NCLAT dated 07.11.2022.
• When IRP is not entitled to discharge any function and the Corporate Debtor also cannot be restored as it was functioning prior to 28.10.2022.

For the purposes of payment of wages to the workers and distribution of ration, payment of electricity dues and other necessary expenses, ways and means have to be found out so that Corporate Debtor may continue as a going concern.  In this regard NCLAT held that-

• The Chief Executive Officer/Officers of the Corporate Debtor authorized to operate the Bank Accounts are permitted to make payment of wages of workers, workmen and employees as was being paid earlier to passing of the order dated 28.10.2022.
• The payment of Electricity Dues and other necessary expenses may also be carried out by the officials as mentioned above subject to submitting all details of expenditure on weekly basis to the IRP as well as to the Suspended Managing Director of the Corporate Debtor.
• For making any other payment it is always open for the Appellant to file an appropriate application for seeking leave of NCLAT.