Can Insolvency Proceedings Be Stayed by a Higher Court?

Under the Insolvency and Bankruptcy Code (IBC), insolvency proceedings are meant to be expeditious and aimed at resolving financial distress in a corporate debtor. However, there are instances where higher courts, including the Supreme Court and High Courts, may intervene and stay these proceedings. A stay can occur at various stages of the insolvency process, and understanding the legal grounds for such an intervention is crucial for stakeholders in insolvency cases.

Can Insolvency Proceedings Be Stayed by a Higher Court?

Stay by the National Company Law Appellate Tribunal (NCLAT):

The NCLAT is the primary appellate forum for challenging orders passed by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).

If an aggrieved party files an appeal before the NCLAT, they can request a stay on the NCLT’s order (e.g., the initiation of Corporate Insolvency Resolution Process (CIRP)) until the appeal is decided.

The NCLAT has the discretion to grant or deny a stay based on the merits of the case and the need to balance the interests of the stakeholders involved in the insolvency proceedings.

Stay by the High Court:

A High Court can intervene in insolvency proceedings under limited circumstances. Specifically, the High Court may issue an order to stay or suspend the insolvency process if it is convinced that the NCLT’s order is procedurally flawed, is based on misinterpretation of law, or if there are other exceptional grounds.

For example, if a company in insolvency proceedings has filed a writ petition challenging the legality of the NCLT's decision, the High Court may issue an interim stay on the insolvency proceedings to maintain the status quo until it decides the case.

However, in practice, the High Court’s intervention is rare in insolvency matters, and it typically respects the tribunal-based process set out in the IBC.

Stay by the Supreme Court:

The Supreme Court of India can stay insolvency proceedings under its constitutional powers if a writ petition is filed before it, challenging the order of the NCLT or NCLAT.

The Supreme Court may intervene in cases where legal principles or issues of national importance are involved, or if it finds that the insolvency process is being misused or is against the principles of natural justice.

The Supreme Court generally exercises its powers of judicial review in exceptional cases, and a stay will not be granted lightly. For example, if the IBC process is already in progress, the Supreme Court may only intervene if it finds that there has been a substantial error of law or an irregularity in the procedure followed by the NCLT.

Grounds for a Stay:

• Legality of the NCLT Order: If the NCLT order initiating CIRP is alleged to be legally flawed, a higher court may stay the proceedings.
• Irregularities in the Process: Any procedural errors or lack of due process in the CIRP can be a basis for seeking a stay.
• Fraudulent Actions or Misrepresentation: If there are allegations of fraudulent activities by parties involved in the insolvency process, such as misrepresentation of facts or concealment of assets, a higher court may stay proceedings to allow for further investigation.
• Violation of Principles of Natural Justice: If the corporate debtor or any stakeholders were not provided a fair opportunity to be heard, the court may stay proceedings to uphold natural justice.

Effect of a Stay on Insolvency Proceedings:

When a higher court grants a stay, it temporarily halts the insolvency proceedings until the court hears the appeal or petition and gives a final ruling.

The stay order may also extend to specific actions such as liquidation, CIRP, or the approval of a resolution plan, depending on the nature of the case.

The stay does not invalidate the IBC process, but it delays or suspends the procedural steps until the legal issues are resolved.

Impact of Stay on Creditors and Stakeholders:

A stay order can delay the payment to creditors, the approval of resolution plans, and other critical stages in the insolvency resolution process.

Stakeholders may seek to challenge a stay if it hampers the resolution process or prolongs their recovery from the insolvency estate.

Example:

Let’s consider a scenario where XYZ Ltd., a corporate debtor, is undergoing CIRP under the supervision of an insolvency professional. The NCLT has passed an order to initiate the process, and a Resolution Plan is being considered.

A creditor, dissatisfied with the initiation of CIRP, files a writ petition before the High Court claiming that the NCLT’s order was passed without proper investigation into the debt claims.

The High Court may grant a temporary stay on the CIRP until it reviews the case. The CIRP process will be suspended during this period, and the Resolution Professional cannot proceed with activities like calling for resolutions or approving a plan.

After reviewing the legal aspects, the High Court may either lift the stay or continue it, depending on its findings.

Conclusion:

Insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) can be stayed by higher courts like the High Court or Supreme Court under certain conditions. This typically happens when the court finds procedural errors, violations of natural justice, or other substantial legal issues that need to be addressed. While NCLT and NCLAT are the primary forums for handling insolvency matters, higher courts have the authority to intervene in exceptional circumstances, potentially delaying the insolvency process. However, such interventions are rare and generally involve significant legal grounds.