Section 9/Operational Debt, whether Central Govt approval is needed

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5120 OF 2019 in the matter of Duncans Industries Ltd. .. Appellant Versus A. J. Agrochem .. Respondent/

Facts of the case.

1. The appellant is a Corporate Debtor. It is a company which owns and manages 14 tea gardens. Out of 14 tea gardens, the Central Government vide notification dated 28.01.2016, in exercise of its power under Section 16E of the Tea Act, 1953 has taken over the control of 7 tea gardens. The Corporate Debtor(Appellant) owes Rs. 41,55,500/- to Operational Creditor(Who is the respondent in this appeal), against the supply of pesticides etc. The respondent initiated the proceedings against the appellant corporate debtor before the NCLT under Section 9 of the IBC. Appellant opposed the move on the grounds the that the Govt had already taken over the management of tea unit uner Tea Act and hence the insolvency proceedings cannot be initiated without consent of Government. NCLT held that as the prior consent of the central government has not been obtained the proceedings under section 9(operational debt) is not maintainable.

2. In an appeal before the NCLAT by the respondent­ operational creditor, by the impugned judgment and order, the NCLAT has reversed the order passed by the NCLT, Kolkata and has held that the respondent’s application under Section 9 of the IBC would be maintainable even without the consent of the Central Government in terms of Section 16G of the Tea Act. HENCE THIS APPEAL BEFORE HON: SUPREME COURT.

Arguments that came before the Hon: Supreme Court in favour of the Appellant(CD)

1. Tea Act is a special Act for the purpose of providing control by the Union of India of the Tea Industry. Section 16D(1) ofthe Tea Act, 1953 provides for taking over the tea unit and the tea undertaking inter alia if the Central Government is of the opinion that the tea unit is being managed in a manner highly detrimental to the tea industry or to public interest.

2. Section 16E of the Tea Act refers to the power of the Central Government to restart the tea undertaking if it is found necessary in the interest of the general public.

3. It was submitted that an insolvency process is also meant to culminate in liquidation, if there is no revival.

4. It was submitted that since the Tea Act permits for the Central Government to take over the management of a tea estate which is not run properly, the prior permission under Section 16G is applicable to such an estate, the management of which has been taken over by the Government

5. The applicability of section 238 of the IBC has been discussed in the light of the judgements issued by Hon:Supreme Court in the matter of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 as well as the recent decision of this Court dated 14.08.2019 in the case of K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd. And argued that since there is no inconsistency between the Tea Act and the IBC, there is no occasion to apply Section 238 of the IBC to give overriding effect.

Arguments that came before the Hon: Supreme Court in favour of the Respondent(OC)

1. It was submitted that the IBC is a consolidating and amending law relating to reorganization and insolvency resolution and for matters connected therewith or incidental thereto.

2. It was submitted that the Code, which was promulgated in 2016, has not provided for the prerequisite of obtaining consent from the Central Government for initiating corporate insolvency resolution process like the Tea Act, which is an earlier Act enacted in 1953.

3. It was submitted that, thus, such a pre­requisite of obtaining consent cannot be imported and/or read into the Code when the self ­contained Code itself does not provide for it.

4. Swiss Ribbons Pvt. Ltd. v. Union of India [AIR 2019 SC 739 : (2019) 4 SCC 17] was reffered and threby submitted that in the event of any conflict between the two legislations, the provisions of the IBC would prevail by virtue of Section 238 of the IBC.

Question before the Hon:Supreme Court

The short question which is posed for consideration of this Court is whether before initiation of the proceedings under Section 9 of the IBC, a consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act, 1953 is required and/or whether in absence of any such consent of the Central Government the proceedings initiated by the respondent­ 15 operational creditor under Section 9 of the IBC would be maintainable or not?

Observation and Order of the Hon:Supreme Court

1. It is observed that the management and control of the tea gardens are still with the Corporate Debtor. Hence Section 16G(1)(c) shall not be applicable at all, as the appellant­ corporate debtor is continued to be in management and control of the tea units/gardens.

2. The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time­bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. s [Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 : (2018) 1 SCC (Civ) 356]

3. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.

4. As observed by this Court in Swiss Ribbons Pvt. Ltd. (supra), referred to herein above, the primary focus of the legislation while enacting the IBC is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate debt by liquidation and such corporate insolvency resolution process is to be completed in a time­-bound manner. Therefore, the entire “corporate insolvency resolution process” as such cannot be equated with “winding up proceedings”.

5. If the submission on behalf of the appellant that before initiation of proceedings under Section 9 of the IBC, the consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act is to be obtained, in that case, the main object and purpose of the IBC, namely, to complete the “corporate insolvency resolution process” in a time­-bound manner, shall be frustrated.

6. The sum and substance of the above discussion would be that the provisions of the IBC would have an over­riding effect over the Tea Act, 1953 and that no prior consent of the Central Government before initiation of the proceedings under Section 7 or Section 9 of the IBC would be required and even without such consent of the Central Government, the insolvency proceedings under Section 7 or Section 9 of the IBC initiated by the operational creditor shall be maintainable.

7. The impugned judgment and order dated 20.06.2019 passed by the learned NCLAT holding that insolvency petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 initiated by the respondent­ operation creditor shall be maintainable, is hereby confirmed.