The order was passed by Justice HP Sandesh while allowing a petition filed by the Insolvency Resolution Professional (IRP) questioning the legality of parallel proceedings initiated by the State government under the Act.
The Karnataka High Court recently ruled that the Insolvency and Bankruptcy Code, 2016 (IBC) would take precedence over the Karnataka Protection of Depositors' Interests in Financial Establishments Act, 2004 (Act), quashing parallel proceedings brought by the State government against Dreamz Infra India Private Limited (Dreamz Infra India Limited v. Competent Authority).
Justice HP Sandesh issued the ruling after accepting a plea submitted by the Insolvency Resolution Professional (IRP) appointed by the National Company Law Tribunal (NCLT) for Dreamz Infra, which questioned the constitutionality of the state government's parallel procedures 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-company
The 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.