Background: In a significant judgement delivered on April 22, 2021, the Hon’ble Supreme Court of India (“SC”) in Sandeep Khaitan, Resolution Professional v. JVSM Plywood Industries Ltd. held that inherent powers of the High Court under Section 482 of the Criminal Procedure Code (“CrPC”) cannot be used to override the statutory provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
1. What were the facts of the case?
• The appeal was filed by Mr. Sandeep Khaitan, (“RP/ Appellant”) challenging the order of the Hon’ble Guwahati High Court allowing JSVM Plywood Ltd. (“Respondent”) to operate its bank account over which lien had been created.
• The Appellant was appointed as the Interim Resolution Professional (“IRP”) after the Hon’ble National Company Law Tribunal, Guwahati Bench (“AA”), admitted an application under Section 7 of the IBC against National Plywood Industries Ltd., the Corporate Debtor (“CD”) and subsequently confirmed as the RP.
• The Appellant alleged that the Respondent transferred INR 32.50 Lakhs from the CD’s bank account without the Appellant’s sanction in violation of Section 14 of the IBC. Thereafter, the RP filed an FIR which was challenged by the Respondent in a Section 482 petition before the Hon’ble Guwahati High Court. The Respondent also filed an application for allowing it to use its bank account over which lien had been created and the frozen accounts of its creditors.
• In its order, the Hon’ble Guwahati High Court (a) lifted the lien created on the Respondent’s bank account noting that the freezing of bank accounts resulted in unnecessary hardship which had no bearing on the investigation of the FIR, and (b) allowed the Respondent to operate the bank account over which lien had been created and the accounts of its creditors frozen in connection with the FIR.
2. What did the Hon’ble Supreme Court of India rule?
• The Hon’ble SC noted that the High Court order went beyond the pale of the powers vested in it under Section 482 of the CrPC. The Hon’ble Court further went on to observe that jurisdiction under Section 482 CrPC cannot be exercised to override the statutory provisions under the IBC, while stating that the words “securing the ends of justice” in Section 482 cannot be used to circumvent the mandate of Sections 14 and 17 of the IBC.
• The Court observed that the IRP is vested with the power to manage the CD’s affairs. On the appointment of the IRP, the powers of the Board of Directors of CD get suspended. The Court noted that such powers are to be exercised by the IRP as provided in Section 17 of the IBC. Given this position, the transaction of INR 32.50 Lakhs without the Appellant’s consent was not in accordance with law.
• Consequently, the Hon’ble SC held that the High Court’s order allowing the Respondent to operate the account without first remitting INR 32.50 Lakhs into the account of the CD was violative of the moratorium in Section 14 of the IBC.
• While concluding the judgment, the Hon’ble SC modified the High Court’s order to the effect that the Respondent would be allowed to operate its account subject to the payment of INR 32.50 Lakhs into the CD’s account.
3. Significance of the decision?
The decision is important on two counts: first, the Hon’ble Supreme Court of India clarified the scope of Section 482 of the CrPC in the context of moratoriums under Section 14 and the powers of the IRP in Section 17 of IBC and second, the Hon’ble Supreme Court of India’s reasoning was underpinned by the need to give effect to the object of the IB Code even when confronted with the inherent power of the High Court under Section 482 CrPC.
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