REMEDIES AGAINST THIRD PARTY UNDER IBC

[Dr. Sanjiv Agarwal]

Insolvency and Bankruptcy Code, 2016 (IBC) does not provides for remedies against third party, though section 66 of IBC deals with fraudulent trading or wrongful trading done in the course of corporate insolvency resolution process or any liquidation proceedings.

Section 66 of IBC specifically provides for fraudulent trading or wrongful trading. It provides as follows:  

“ (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.

For this purpose, a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.”

Supreme Court in GLUCKRICH CAPITAL PVT. LTD. VERSUS THE STATE OF WEST BENGAL & ORS. - 2023 (5) TMI 1161 - SC ORDER; , has recently held that section 66 of IBC does not provide for any remedy against third party and civil remedies which may be available in law, are independent of section 66 of IBC and it is for Resolution Professional (RP) or Successful Resolution Applicant (SRA) to take such civil remedies against third party, for recovery of dues payable to corporate debtor, which might be available in law.

On factual matrix, in this case, the CIRP was initiated against the corporate debtor and, the RP was appointed. During the pendency of insolvency proceedings before the National Company Law Tribunal (NCLT), and order was passed directing the RP not to proceed with the approval of the resolution plan. Thereafter, the applicant unsecured financial creditor of the corporate debtor filed an appeal against the said order before the National Company Law Appellate Tribunal (NCLAT) and same was dismissed by the NCLAT. Further, financial creditor, who were member of the committee of creditors lodged FIR against respondents suspended director of the corporate debtor. Meanwhile, the respondents filed a writ before High Court challenging the FIR lodged against them. The High Court in its interim order, extended the transit anticipatory bail granted to the respondents.

The applicant filed a petition before the Supreme Court challenging the interim order of the High Court and alleged that he was an interested party to challenge the extension of anticipatory transit bail granted to the respondents against which the insolvency proceedings were pending under IBC.

The Supreme Court, dismissed said petition on ground the that the applicant was neither informant nor a party to the proceedings pending before the High Court and was totally unconnected with the FIR lodged by the financial creditors and, therefore, the petitioner had no locus in matter.  The applicant again filed an application before the Supreme Court seeking clarification of said order to the effect that it would not come in the way of the applicant, persuading the RP to consider initiation of proceedings for recovery under section 66 against the persons who, prima facie, appeared to be primarily responsible for the fraudulent affairs of the corporate debtors, and also qua other persons and organizations with whom any business was carried out by the corporate debtor, fraudulently and illegally with mala fide intention.

Under Section 62 of IBC, appeals can be filed before Supreme Court. Accordingly, any person aggrieved by an order of the National Company Law Appellate Tribunal may file an appeal to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order. The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause from filing an appeal within forty-five days, allow the appeal to be filed within a further period not exceeding fifteen days.

The Apex Court followed the judgment in USHA ANANTHASUBRAMANIAN VERSUS UNION OF INDIA - 2020 (2) TMI 1081 - SUPREME COURT and approved the High Court judgment in SMT. SUDIPA NATH VERSUS UNION OF INDIA REPRESENTED BY MINISTRY OF CORPORATE AFFAIRS, THE SECRETARY, MINISTRY OF CORPORATE AFFAIRS, INSOLVENCY BANKRUPTCY BOARD OF INDIA - 2023 (1) TMI 921 - TRIPURA HIGH COURT.

The Apex Court observed that the Tripura High Court has rightly relied upon the observations made by this Court in a binding precedent, in Usha Ananthasubramanian v. Union of India, which pertains to a matter under Section 339(1) of the Companies Act, 2013 which is pari materia with Section 66 of IBC. The High Court in the case of Sudipa Nath case (Supra) has rightly observed that :-

“13….. That Section 66 (1) also directed towards making such persons personally liable for such fraudulent trading to recouping losses incurred thereby and to provide that the NCLT can pass order holding such persons liable to make such contributions to the assets of the corporate debtor as it may deem fit. No power has been conferred on NCLT to pass such orders against other organizations/legal entities (other than corporate debtors) with whom such business was carried out against any person responsible in such other organizations/legal entities for carrying on business with corporate debtor. For the said purpose, the ratio of the judgment of the Hon'ble Supreme Court in Usha Ananthasubramanian (supra) in the context of section 339 (1) one of the companies Act, 2013 as extracted above would clearly apply even in the context 66(1) of IBC.

Accordingly, an application under Section 66(1) by the resolution professional would not bar any civil action in accordance with law, either at the instance of resolution professional or liquidator or by the corporate debtor in its new avatar on a successful CIRP for recovery of any dues payable to the corporate debtor by such organization / legal entities. Such legal action is independent of Section 66(1).”

The court therefore, held that in such circumstances, it is for the Resolution Professional or the successful resolution applicant, as the case may be, to take such civil remedies against third party, for recovery of dues payable to corporate debtor, which may be available in law. The remedy against third party, however, is not available under Section 66 of IBC, and the civil remedies which may be available in law, are independent of the said Section.

The Supreme Court therefore, dismissed the application as wholly misconceived.