Relief to Dreamz Infra India: Karnataka High Court quashes Parallel Proceedings by State Govt. as IBC to override State Act [Read Order]

Dreamz Infra India - Karnataka High Court - State Govt - IBC - State Act - Taxscan

The Karnataka High Court while quashing the parallel Proceedings by the State Government against Dreamz Infra India ruled that the Insolvency and Bankruptcy Code, (2016 (IBC) will have an overriding effect on State Act.

The petitioner,  M/s Dreamz Infra India is a real estate company involved in the development of various housing and apartment projects and had floated multiple projects since its inception in 2012. The petitioner-Company had executed an Agreement of Sale and Memorandum of Understanding with thousands of homebuyers for the sale of apartments in these under-construction projects. As per the agreement, the homebuyers were asked to pay a certain amount as advance money or earnestly in lieu of booking their apartments in the said projects. The apartments were not handed over after collecting advance money from the home buyers.

The respondent is 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 vide notification bearing dated 20.06.2019. Consequently, the respondent has initiated Section 7(1) of the Act, 2004 against the petitioner and the same has been admitted by the Principal City Civil and Sessions Judge (Special Judge), Metropolitan Area, Bengaluru.

Hence, the petitioners contended that the respondent-Authority owing to various complaints lodged against the promoters and directors of the petitioner-Company invoked the Act, 2004 and attached all the properties of the petitioner- Company since 2018. The respondent-Authority on the understanding of law that the petitioner-Company falls under the scope and ambit of the Act, 2004 initiated action before Principal City Civil and Sessions Judge (Spl. Judge), Metropolitan Area, Bengaluru stating that the petitioner has accepted the deposits from 3668 depositors to the tune of Rs. 385 Crores.

Mr. A. Mahesh Chowdhary, the counsel appearing for the petitioner vehemently contends that the State has no right to invoke the Act, 2004. The provisions of Sections 14 and 238 of the IBC has overriding effect and as such the said provisions would prevail over the State Act. Learned counsel also would vehemently contend that an order has been passed by the NCLT and a moratorium has been commenced. When the moratorium is in force, the present proceeding has been initiated against the petitioner herein. There cannot be two parallel proceedings against the petitioner herein when the matter is ceased before the NCLT.

On the other hand, Mr. H.R.Showri, High Court Government Pleader appearing for the respondent-State urged that this petition is filed seeking the relief of quashing of the proceedings initiated under Section 7 of the Act, 2004 and not taken any cognizance for the offence under the said Act. Section 9 of the Act confers all powers and the same vests with the Government. In the case on hand, the learned High Court Government Pleader would vehemently contend that an amount of Rs.385 Crores was collected by the petitioner herein and not allotted any flats. Hence, the State has attached the properties and the notice is also issued against the petitioner under Section 12 of the Act, 2004. The very petition itself is not maintainable.

The Single Judge Bench of Justice H.P.Sandesh held that there is a force in the contention of the petitioner’s counsel that the provisions of the IBC is having an 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 said, “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”.

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