IBC has overriding effect over State Act: Karnataka High Court quashes parallel proceedings by State Govt authority against Dreamz Infra India

The Insolvency and Bankruptcy Code, 2016 (IBC) would have an overriding effect over the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (Act), the Karnataka High Court recently ruled, quashing parallel proceedings initiated by the State government against Dreamz Infra India Private Limited (Dreamz Infra India Limited v. Competent Authority)..The order was passed by Justice HP Sandesh while allowing a petition filed by the Insolvency Resolution Professional (IRP) appointed by the National Company Law Tribunal (NCLT) for Dreamz Infra, questioning the legality of the parallel proceedings initiated by the State government under the Act.."Under the circumstances, I am of the opinion that there is a force in the contention of the petitioner’s counsel that the provisions of the IBC is having overriding effect over other laws and the same would prevail in view of Section 238 of the Code. Hence, the petitioner has made out grounds to quash the proceedings initiated against the petitioner under Section 7(1) of the Act, 2004," the Court ruled. .By way of background, the Company had collected Rs. 385 crores from around 3,600 home buyers promising them flats in its projects but it failed to deliver the flats..Consequently, the respondent, a Constituted Authority, appointed by the Government of Karnataka under Section 5(1) of the Karnataka Protection of Interest of Depositors in Financial Establishment Act, 2004 initiated action against the petitioner and the same was admitted by the Principal City Civil and Sessions Judge (Special Judge), Metropolitan Area, Bengaluru on January 9, 2020.Meanwhile, three homebuyers aggrieved by the actions of the petitioner-company, moved a petition before the NCLT under Section 7 of the IBC. The NCLT proceeded to admit the petition in August, 2019 and directed to initiate Corporate Insolvency Resolution Process as contemplated under the code. By way of the same order, one Ashok Kriplani was appointed as Interim Resolution Professional to over look the activities of petitioner-companyThe petitioners contended that the respondent-authority, owing to various complaints lodged against the promoters and directors of the petitioner-Company, invoked the Act and attached all the properties of the petitioner-company since 2018.The respondent was informed that due to Section 14 of IBC, 2016 the proceeding against the petitioner has been stayed. Further, the IRP also requested the respondent not to initiate any other proceedings which could hamper the interest of the creditors/ homebuyers, in their attempt to recover the money from the petitioner. However, the respondent, it was alleged, acted unilaterally showing no due regard to the interest of the various parties involved. It was also alleged that the respondent allowed sale transactions and Court transfers without restrictions of properties, leading to loss of prime properties in the hands of few self-centered people.Aggrieved by this, the petitioners approached the High Court seeking to quash the case before the subordinate Court. .Arguments raised .The counsel appearing for the petitioner contended that the State has no right to invoke the 2004 Act since the provisions of Sections 14 and 238 of the IBC have overriding effect and would prevail over the State Act.There cannot be two parallel proceedings against the petitioner when the matter is ceased of before the NCLT, it was argued. It was further contended that the petitioner is not a financial establishment and hence, the Act cannot be invoked against the petitioner.On the other hand, the High Court Government Pleader (GP), appearing for the respondent-State, vehemently contended that the petition was filed seeking the relief of quashing of the proceedings initiated under Section 7 of the Act, 2004 and not for taking any cognizance for the offence under the said Act.Section 9 of the Act, it was submitted by the GO, confers all powers and the same vests with the government. It was pointed out that an amount of Rs. 385 crores was collected by the petitioner and no flats were allotted which prompted the State to attached the properties and issue notice against the petitioner under Section 12 of the Act, 2004. What the Court held After examining the facts of the case as well as judicial precedents, the High Court said that IBC would prevail over the State enactments and there cannot be any other civil proceedings when the matter is sub-judice before the NCLT.In this regard, reliance was placed on Supreme Court judgments in Innoventive Industries Limited v. ICICI Bank and Another, Anand Rao Korada, Resolution Professional v. Varsha Fabrics (P). Ltd and Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited. "It is also important to note that the Apex Court in Innoventive Industries Limited’s case had discussed with regard to the repugnancy of State law and in Anand Rao Korada, Resolution Professional’s case, the Apex Court discussed with regard to Sections 14 and Section 238 of the Code in respect of the moratorium which has got overriding effect over other laws and so also in Alchemist Asset Reconstruction Company Limited’s case, the Apex Court held that the IBC prevails over the State enactment," the judgment said. In the present case, the Court noted that the the matter was already before the NCLT before the 2004 proceedings were initiated.The apex court recently in J.Manivannan's case held that there cannot be any other civil proceedings when the matter has been ceased and already some homebuyers have approached the NCLT and so also the Resolution Professional was also appointed, the Court said. "Under the circumstances, I am of the opinion that there is a force in the contention of the petitioner’s counsel that the provisions of the IBC is having overriding effect over other laws and the same would prevail in view of Section 238 of the Code," the Court reiterated. Hence, the Court quashed the proceedings initiated against the petitioner under Section 7(1) of the 2004 Act.However, the Court clarified that if the need arises, the State authorities can proceed against the company after the conclusion of the proceedings before the NCLT.The court also declined to accept the petitioner's contention that it was Dreamz Infra is not a financial institution for invoking provisions of the 2004 Act. "The petitioner-Company is also not disputing the fact that they have collected the money and they have neither refunded the money nor allotted the flats to the homebuyers, who invested the money. Hence, the main contention of the petitioner’s counsel that the petitioner is not the financial establishment and thus, the Act, 2004 is not applicable, cannot be accepted," the judgment said. [Read Judgment]