Petition Against Partnership Firm/Directors Not Maintainable U/S 95 of IBC Before NCLT: Karnataka HC

The Karnataka High Court has observed that a petition against a partnership firm or its Directors is not fileable or maintainable under Section 95 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal.

The Bench of Justice M Nagaprasanna observed that, "The maintainability of the petition before the Tribunal cuts at the root of the matter, as it relates to jurisdiction, to entertain the petition by the Tribunal. The Code does not permit it. If that be so, even a speck of paper cannot move before a fora that has no jurisdiction. It is ununderstandable as to how and why the petitioners have to go before the Tribunal and tell the Tribunal that it has no jurisdiction to entertain the petition. The very acceptance of filing by the Tribunal is contrary to law."

Senior Counsel Om Prakash, Senior Counsel CK Nandakumar and Counsel Vishwas N appeared with the petitioner, while DSGI H Shanthi Bhushan, along with others, appeared for the respondents.

The case involved petitions filed by a firm and its directors challenging the invocation of Section 95 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT). The dispute arose from a Joint Development Agreement between the firm and a company, leading to arbitration proceedings initiated by both parties.

However, the company subsequently issued a notice under Section 95 of the IBC, prompting the firm to contest its jurisdiction over non-corporate debtors. The firm argued that the IBC did not cover insolvency resolution for individuals or partnership firms, while the company asserted that the firm's conduct equated its directors to personal guarantors, justifying NCLT jurisdiction. Both sides presented their arguments regarding the tribunal's jurisdiction, with the firm seeking dismissal of the petition and continuation of arbitration proceedings.

The issue before the Court was “Whether a petition against a partnership firm or its Directors is fileable and maintainable under Section 95 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal?”

The Court observed that, "The effect of filing of a petition under Sections 94 or 95 of the Code is the immediate kicking in of Section 96 of the Code. Section 96 supra has some serious consequences. The moment a petition is filed under Section 95 of the Code, interim moratorium is axiomatic. Interim moratorium places any corporate debtor in a state of stillness, as found in 96(1)(b) of the Code. Section 96(2) of the Code mandates that when an application is made under Section 95, it shall operate against all the partners of the firm as on the date of the application. Yet another axiomatic consequence of a petition being registered is, appointment of a Resolution Professional. The moment an application is filed, the proceedings are immediately placed before the Resolution Professional and he would commence his functions of summoning of documents to submit a report within 10 days of his appointment. These are the consequences of filing an application before the Tribunal."

Subsequently, the petitioners were allowed, and it was declared by the Court that the filing of the petitioners under Section 95 of the Insolvency and Bankruptcy Code, 2016 as non est and illegal and consequently, the proceedings before the National Company Law Tribunal were quashed.

Appearances:

Petitioner: Senior Counsels Om Prakash, CK Nandakumar, Counsel Vishwas N

Respondents: DGSI H Shanthi Bhushan, CGC Anupama Hegde, Senior Counsel MS Shyam Sundar, Counsel Anish Acharya

Cause Title: M/s Manyata Reality vs The Registrar, National Company Law Tribunal & Ors.

Click here to read/download the Judgment