Source: Supreme Court 

Why in News?

Recently, the Supreme Court in the matter of CoC of KSK Mahanadi Power Company Ltd. v. Uttar Pradesh Power Corporation Ltd. and Ors. has held that the High Court of Telangana has breached the procedure laid down in the Bankruptcy laws and the Supreme Court disapproves the High Court’s decision of deferring the CIRP process. 

What was the Background of the CoC of KSK Mahanadi Power Company Ltd. v. Uttar Pradesh Power Corporation Ltd. and Ors. Case?  

• In this case, KSK Mahanadi Power Company Limited (petitioner), a public limited company engaged in electricity generation, is currently undergoing Corporate Insolvency Resolution Process (CIRP). 
• Uttar Pradesh Power Corporation Limited (respondent) filed a petition under Article 226 of the Constitution in the High Court of Telangana. 
• The petition sought consolidation of the CIRP of the petitioner company with two other companies 
• The consolidation was requested to be carried out before the National Company Law Tribunal (NCLT), through the respective Resolution Professionals of the three companies. 
• Previously, a Financial Creditor had filed an application before the NCLT seeking similar consolidation of CIRP for these Corporate Debtors. 
• The NCLT rejected this application on 12th February 2021. 
• The Financial Creditor then filed an appeal with the National Company Law Appellate Tribunal (NCLAT) challenging the NCLT's rejection. 
• During the pendency of this appeal, the Financial Creditor filed two more applications with the NCLT. 
• The NCLT deferred the Resolution Process and stayed the CIRP proceedings, subject to the outcome of the appeal pending before the NCLAT. 
• The High Court of Telangana refused to consolidate the CIRP of both the companies and deferred the CIRP proceedings of both the companies and  
• The Committee of Creditors (CoC) of the petitioner company appealed to the Supreme Court, challenging an order passed by the Single Judge of the High Court of Telangana. 

What were the Court’s Observations? 

• The Supreme Court made the following observations:  
  • That the High Court had no justification to direct the deferment of the CIRP. 
  • The decision was made by the High Court while exercising its jurisdiction under Article 226 of the Constitution. 
  • The High Court had declined to grant the main relief sought in the petition, which was the consolidation of the CIRP of three corporate entities. Despite this, the High Court still proceeded to direct the deferment of the CIRP. 
  • The Supreme Court noted that the High Court's direction to defer the CIRP under Article 226 breaches the discipline of the law laid down in the Insolvency and Bankruptcy Code 2016 (IBC). 
  • The order passed by High Court was without issuing notice to the CoC or the other respondents, which was procedural irregularity. 
  • That by directing the deferment of the CIRP, the High Court had overstepped its jurisdictional boundaries under Article 226 of the Constitution. 
  • That once the High Court had declined to grant the main relief of consolidation, there was no reason to exercise its jurisdiction under Article 226 to defer the CIRP. 
•  The Supreme Court's analysis suggests that such interventions by the High Court could disrupt the structured process laid out in the IBC. 
• The Supreme Court found that the High Court's decision to defer the CIRP was unwarranted, procedurally flawed, and inconsistent with the principles of the insolvency law framework. 

How Did the High Court Applied Article 226 of the Constitution in the Present Case? 

• Jurisdiction under Article 226: 
  • Article 226 of the Indian Constitution gives High Courts the power to issue writs, directions, or orders to any person or authority, including the government, to enforce fundamental rights or for any other purpose. 
• Initial petition: 
  • The respondent company filed a petition under Article 226 in the High Court of Telangana, seeking consolidation of the CIRP of three companies. 
• Denial of main relief: 
  • The High Court denied to grant the main relief sought in the petition, which was the consolidation of the CIRP. 
• Alternative direction: 
  • Despite denying the main relief, the High Court used its power under Article 226 to issue a direction that wasn't directly requested. 
• Deferment order: 
  • The High Court directed that the Resolution Process should be deferred until a new application could be filed with the NCLT and decided upon. 
• Time limit imposed: 
  • The High Court also directed the NCLT to examine any such new application and pass appropriate orders within two weeks. 
• Interim measure: 
  • This deferment was essentially an interim measure, imposed by the High Court using its powers under Article 226. 
  • The High Court used its broad powers under Article 226 to issue a direction that affected the ongoing CIRP.