Pending Civil Suits Cannot Be Dismissed Merely Because Insolvency Proceedings Begin Later: Calcutta High Court

The Calcutta High Court has recently held that a civil suit filed before insolvency proceedings are initiated cannot be dismissed merely because proceedings under the Insolvency and Bankruptcy Code (IBC) begin later.

It observed that the law protects the insolvency process from interference but does not automatically bar civil courts from hearing pending suits.

A division bench of Justice Debangsu Basak and Justice Md. Shabbar Rashidi delivered the ruling while setting aside a commercial court order that had rejected a suit filed by two personal guarantors against Canara Bank and other consortium lenders. The bench remanded the suit to the trial court for fresh adjudication.

"When these specific provisions of stay and ouster of jurisdiction do not require dismissal of a pending proceeding. Section 231 of the Insolvency and Bankruptcy Code, 2016 should not be read to prescribe ouster of jurisdiction of Civil Court en masse on the initiation of proceeding under the Insolvency and Bankruptcy Code, 2016. Section 231 of the Insolvency and Bankruptcy Code, 2016 mandates and require that order of Civil Courts do not impede the due conclusion of the proceeding before the Adjudicating Authority or the Board.", the court held.

The dispute centered on personal guarantees furnished for loans extended to a company. After Canara Bank issued a demand notice, the guarantors approached the civil court seeking a declaration that their guarantees had already stood discharged. The bank later initiated insolvency proceedings before the National Company Law Tribunal, following which the commercial court dismissed the suit.

The high court found that the suit had been filed before the insolvency proceedings commenced. It held that the earlier demand notice did not trigger the statutory moratorium because the moratorium begins only after an insolvency application is filed before the National Company Law Tribunal.

"Section 96 of the Insolvency and Bankruptcy Code, 2016 comes into operation only after an application under Section 94 or 95 has been filed before the NCLT. It has no manner of application when, a notice has been issued.", the court ruled. 

The bench also rejected the argument that the suit could be thrown out because only some of the consortium lenders had initiated insolvency proceedings before the National Company Law Tribunal. It noted that not all the lenders had approached the tribunal and a plaint cannot be rejected only against some defendants.

"The plaint cannot be rejected in part, that is to say that, it cannot be rejected only for the defendants who had approached the NCLT. Appellants as plaintiffs were entitled to file a suit before a civil court to have declaration and perpetual injunction as prayed for therein as against all the defendants. As has been noted, all the defendants have not approached the NCLT. The suit was therefore maintainable as against the defendants who did not approach the NCLT, if not as against all.", the court held.

Holding that there was no legal bar preventing the guarantors from approaching the civil court before insolvency proceedings were initiated, the high court set aside the commercial court's order. It remanded the suit to the trial court for fresh adjudication.

For Appellants: Advocates Chayan Gupta, Shounak Mukhopadhyay, Tanay Agarwal, Shivam Bhimsaria, Akansha Singhania

For Respondent: Advocates Supriyo Mahapatra, Kishwar Rahman