Madras High Court on determining the validity of foreign decrees under IBC

Recently, the National Company Law Tribunal (NCLAT) had ruled that the adjudicating authority, while hearing an application under the Insolvency and Bankruptcy Code (IBC), is not required to determine the validity of a foreign decree. This stance taken by the NCLAT was upheld by the Supreme Court as well. The Commercial Division of the Madras High Court recently dealt with a petition that required it to determine the validity of such a foreign decree..In two cases, the NCLAT held that the NCLT, while hearing an application under the IBC, is only required to be satisfied that there is a ‘debt’ and that default has occurred. Both cases were filed by creditors who relied upon decrees passed by foreign courts, as proof of debt. The NCLAT ruled that in applications filed for commencement of the Corporate Insolvency Resolution Process (CIRP), the NCLT is not required to get into the merits of such a foreign decree, because the ‘adjudicating authority’ under the IBC does not have the powers of a Civil Court. Accordingly, the appropriate forum to determine the question of validity of a decree would be a Civil Court..Read: NCLAT on NCLT’s power to determine legality of a foreign decree.An appeal filed against the NCLAT judgment was dismissed by the Supreme Court, which held,.“We do not find any reason to interfere with the impugned order dated 29.08.2018 passed by the NCLAT“..Based on the NCLAT ruling which found that a Civil Court would be the appropriate authority to determine the legality of a foreign decree, two (suspended) directors of Rajkumar Impex Private Limited (RIPL) filed a petition before the Madras High Court seeking to challenge the legality of the foreign decree, the basis on which RIPL was admitted into CIRP. RIPL was admitted into the CIRP as the guarantor that defaulted for its subsidiary based in Ghana. Stanbic Bank, the creditor that triggered the CIRP, did so on the basis of a decree obtained in a UK Court. There were two broad questions which the High Court had to answer in this case:.1. Whether NCLT would be the appropriate forum for determining legality of a foreign decree and;.2. Who is the appropriate person for instituting proceedings for determination of the foreign decree..On the point of the correct forum for determining the issue at hand, the High Court applied the doctrine of merger to rule that the order of the NCLAT has merged with that of the Supreme Court. It observed that when the NCLAT ruled against NCLT’s power to determine the legality of a foreign decree, and when the Supreme Court refused to interfere with the NCLAT order, both the orders were merged and the Supreme Court’s order on the subject would be binding. Accordingly, a Civil Court would be the appropriate forum for determining the legality of a foreign decree..Read also: Can you proceed against the Corporate Guarantor before proceeding against the Corporate Debtor? NCLAT answers in this Judgment.On the second point, the petitioners claimed that this was a derivative action brought by them, in the interest of the corporate debtor. The derivative claim argument was made to avoid Section 14(1)(a) of the IBC, which prevents institution of suits against the corporate debtor while under CIRP. The Bench, however, noted the Foss v. Harbottle principle, where it was held that the company is the right person to sue if any wrong is done to it..The principle has three basic exceptions:.a) when an act is ultra vires the company or it is illegal;.b) when an act constitutes a flaw against the minority and the wrongdoers themselves are in control of the company; or.c) when a resolution that requires to be passed by a qualified majority, has been passed by a simple majority..The Bench noted that in the instant case, both plaintiffs collectively held the entire shareholding of the corporate debtor, and thus this could not be treated as derivate action..Based on a reading of Section 25 of the IBC, the High Court further found that the appropriate person to take any action in the present situation would be the Resolution Professional (RP) of RIPL. However, the RP argued that it did not have locus to bring about such an action..The Bench then went into the legislative intent behind inclusion of this provision, and found that the RP should be allowed to proceed against any party to protect the corporate debtor. It, however, left this question open for the NCLT to decide,.“ this Commercial Division deems it appropriate to leave it open to the corporate debtor to assail the stand of the RP that she does not have the locus standi, authority or power to challenge or initiate proceedings before a Court. This can be done by the corporate debtor by taking resort to Section 60(5) of the IBC ”..Senior Advocate Arvindh Pandian, briefed by S Aravindan of Fox Mandal & Associates, appeared on behalf of two plaintiffs. Anirudh Krishnan appeared for Ghana-based Stanic Bank, while Venkatavaradhan appeared for the RP..Read Judgment