Do Societies qualify as “Corporate Persons” under Section 3(7) of the IBC?  

Abstract

On August 3, 2021, the National Company Law Appellate Tribunal (“NCLAT”), while dismissing two appeals filed by a financial creditor, held that a society would not qualify as a “corporate person” within the meaning of the term under Section 3(7) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The present Article analyses the import of the NCLAT’s judgement on the right of banks and financial institutions to initiate proceedings under the IBC against entities other than companies and limited liability companies and examines the reasoning proffered in the NCLAT’s judgement in the light of the provisions of the IBC and previous judicial pronouncements in this regard.

Introduction

1.       The IBC was enacted on May 28, 2016 with the objective of overhauling the debt restructuring system in India and to ‘consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons’.[1]

2.       Over the last five years, the provisions of the IBC have been subject of extensive litigation and have resulted in the revival as well as the liquidation of multiple companies. As on June 30, 2021, the corporate insolvency resolution process (“CIRP”) under the IBC has resulted in a resolution plan in 393 instances.[2] Given the number of applications filed under Chapter II of the IBC[3], a fundamental question which still comes up quite often before the tribunals and courts is who can be classified a ‘Corporate Debtor’ for initiation of CIRP under Chapter II of Part II of the IBC.

3.       Even though Section 6 of the IBC expressly identifies the entities/persons who may initiate the CIRP under the IBC[4], the IBC did not contain any provision exhaustively identifying the entities which may be subject to a CIRP or against whom an application under Section 7 or Section 9 of the IBC would be maintainable in case of a ‘default’.[5]

4.       The NCLAT has in its judgement in Asset Reconstruction Company (India) Ltd. v. Mohammadiya Educational Society[6] (“Judgement”), provided valuable insight regarding the manner in which tribunals would be interpreting and applying the Sections 2 and 3(7) of the IBC at the time of deciding whether an application filed under Section 7 (or Section 9) is maintainable or not.

5.       In its Judgement, the NCLAT upheld the common order on March 26, 2019 passed by the National Company Law Tribunal, Hyderabad (“NCLT”) whereby the NCLT had dismissed separate applications filed by the appellant i.e. Asset Reconstruction Company under Section 7 of the IBC against the respondents i.e. ‘M/s Mohammadiya Educational Society’ and ‘Mohammed Vaziruddin Educational Society’ on the ground that the two entities did not fall within the definition of the term ‘corporate persons’ under Section 3(7) of IBC.

Factual Background

6.       The factual matrix before the NCLAT involved two separate applications filed by the appellant, Asset Reconstruction Company under Section 7 of the IBC against two societies which were registered under the AP Societies Registration Act, 2001 (“2001 Act”) at the time of the application. Both the societies were previously registered under the central act which governed societies i.e. Societies Registration Act, 1860 (“1860 Act”) which was repealed in Andhra Pradesh after the 2011 Act was brought into force on October 10, 2011.[7] The Hyderabad bench of the NCLT had dismissed both the applications on the ground that the societies were not “corporate persons” under Section 3(7) of the IBC.[8] Aggrieved by the order of the NCLT, the appellant approached the NCLAT.

Reasoning of the NCLAT

7.       The NCLAT considered the arguments of the parties in the light of the legal provisions governing the status of societies in Andhra Pradesh to determine whether the applications filed against the society were maintainable or not. The Judgement may be understood in two parts: (1) the status of registered societies in Andhra Pradesh. (2) The interplay of the Sections 2 and 3(7) of the IBC with Companies Act, 2013 and the other statutes.

Legal position regarding the status of societies in Andhra Pradesh after the status of registered societies

8.       Section 18 of the 2001 Act confers on societies registered thereunder, the status of a ‘body corporate’ which was not available to societies registered under the 1860 Act. Section 18 of 2001 Act reads as follow:

18. The registration of a society shall render it a body corporate by the name under which it is registered having perpetual succession and a common seal. The society shall be entitled to acquire, hold and dispose of property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all other things necessary for the furtherance of the aim for which it was constituted.”

9.       Section 32(2) of the 2001 Act, however, makes it clear that all acts done under the 1860 Act would be deemed to have been done or taken in exercise of the 2001 Act. Therefore societies which were registered under the 1860 Act would be treated as having been registered under the 2001 Act.

10.   The NCLAT relied on the interpretation of the two acts in various judgements of the Supreme Court, Andhra Pradesh High Court and the Telangana High Court and noted that even though the 1860 Act did not confer the status of body corporate on the societies registered thereunder[9], by operation of Section 18 of the 2001 Act, a society which was registered under the 1860 Act would also be granted the status of a body corporate, a separate legal existence, perpetual succession and the ability to enter into contract as well as institute and defend suits. Further the members of the society would not have any beneficial or proprietary interest in the property of the society.[10]

The interplay of Sections 2 and 3(7) of the IBC with the 2001 Act

11.   The NCLAT, after having considered the status of registered societies in Andhra Pradesh and held that the best case for the appellant was that the societies were body corporates incorporated under a special act by virtue of being registered societies under the 2001 Act.[11] After considering the definition of “corporate person” under Section 3(7) of the IBC and Section 2 which sets out the scope and applicability of the IBC, the NCLAT made the following observations[12]:

i.    Even though Section 18 of 2011 Act confers the status of a body corporate upon registration, the status of a body corporate is limited to the purposes mentioned in Section 18 and society registered under the 2001 Act cannot be treated at par with a company incorporated.

ii.    Further societies, whether registered or otherwise, fall within the definition of the term “company” under Section 2(20) of the Companies Act, 2013 or a limited liability partnership.

iii.   There is nothing in the 2001 Act which suggests that Societies are persons incorporated under 2001 Act or that such incorporation is with limited liability.

iv.  In order for Section 2(d) of the IBC to be applicable to societies, it necessary that the Central government specifically extend the applicability of the code to societies by a notification in the official gazette.[13]

12.   The NCLAT accepted the submissions made on behalf of the respondent societies that the status of body corporate granted by Section 18 of the 2001 Act was for the limited purpose of Section 18 and a society which is registered as opposed to incorporated cannot be equated with a company incorporated under the Companies Act, 2013[14]  and accordingly concluded that the respondent societies do not qualify as ‘corporate persons’ under the IBC and dismissed the appeals.[15]

Analysis and Take-aways

13.   The NCLAT’s conclusion that an application under Section 7 of the IBC may be filed only against a “corporate person” is fortified by the phraseology employed in Section 3(8) and Section 7 of the IBC. Section 7 of the IBC makes it amply clear that the remedy available thereunder can be exercised only against a “corporate debtor” which in turn is defined in Section 3(8) of the IBC in the following terms:

“Corporate Debtor” means a corporate person who owes a debt to any person;”

14.   The use of the word ‘means’ as opposed to the word ‘includes’ in the definition of “corporate debtor” shows that the definition is exhaustive[16] and is limited to entities which fall with the definition of ‘corporate persons’. This confirms the reasoning and conclusion of the NCLAT that an application under Section 7 of the IBC is limited to entities which fulfill the requirements of Section 3(7) of the IBC.

15.   Further the NCLAT’s reasoning is in line with the interpretation of Section 3(7) of the IBC adopted by the Hon’ble Supreme Court in Hindustan Construction Company and Anr. v. Union of India and Anr.[17] (“Hindustan Construction Company”). In Hindustan Construction Company, the Apex Court while adopting a similar line of reasoning clarified that the term “corporate persons” is restricted to a company as defined under Section 2(20) of the Companies Act, 2013.

16.   The definition of the term ‘corporate person’ was interpreted by the Kolkata bench of the NCLT in Asharam Leasing and Finance Private Ltd. v. Punjab National Bank[18] (“Asharam Leasing and Finance”) wherein the NCLT clarified that the corporate debtor being an Non-Banking Financial Company (“NBFC”) registered with the Reserve Bank of India was not a ‘corporate person’ within the meaning of the term under Section 3(7) of the IBC and held that the application filed against the NBFC was not maintainable.[19] However, the judgement of the NCLT does not seem to offer any guidance or clarify the legal position regarding the definition of ‘corporate persons’.

17.   The NCLAT’s reasoning in the Judgement and that of the NCLT in Asharam Leasing and Finance would apply with equal force to applications filed by operational creditors under Section 9. The phraseology used in Sections 8 and 9 of the IBC makes it evident that an application under Section 9 of the IBC can be filed only against a “corporate debtor”.

18.   It is surprising that the NCLAT, in its judgement, did not make any reference to the observations of the Supreme Court in its judgement in Hindustan Construction Company or the order passed by the NCLT in Asharam Leasing and Finance. As such, in the humble opinion of the authors, the NCLAT missed an opportunity to provide much needed clarity on the scope of the definition of “corporate persons” under Section 3(7) of the IBC. Given the volume of litigation initiated under the IBC in the past five years, a judgement setting out the test for determining the kinds of entities which may be subject to a CIRP under the IBC would have been a welcome clarification.

Conclusion

19.   From the above discussion, it is clear that the remedy of filing an application under Section 7 of the IBC is restricted to entities which fall within the definition of the term “corporate person” and that the definition cannot be expanded to include within its remit every juristic entity which is capable of suing or being sued.

20.   As societies do not qualify as “corporate persons” under Section 3(7) of the IBC, the NCLAT has rightly concluded that an application under Section 7 of the IBC would not be maintainable against a society. The Judgement of the NCLAT when read and understood in light of the observations of the Supreme Court in Hindustan Construction Company and the order of NCLT in Asharam Leasing and Finance make it clear that an application under Section 7 and 9 of the IBC would not be maintainable against an entity which does not fall within the definition of the term “corporate person”.

Foot Notes:
[1] Preamble to the IBC. See further report of the Standing Committee on Finance on ‘Implementation of Insolvency and Bankruptcy Code (IBC)-Pitfalls and Solutions’ on August 3, 2021 at p. 1 [available at : https://www.ibbi.gov.in/uploads/whatsnew/fc8fd95f0816acc5b6ab9e64c0a892ac.pdf] [Last accessed on: September 11, 2021] (“Standing Committee Report”)
[2] Report of the Insolvency and Bankruptcy Board of India on Corporate Insolvency Resolution Processes Yielding Resolution Plans [available at: https://www.ibbi.gov.in/uploads/whatsnew/4d28beb81834647ee39303caf874fe53.pdf] [Last accessed on: September 10 , 2021]
[3] Standing Committee Report at pgs. 6 and 7,[at paras 13 to 15].
[4] Section 6 of the IBC reads as follows:

“6. Persons who may initiate corporate insolvency resolution process –

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.”
[5] Section 3(12) of the IBC.
[6] Company Appeal (AT) (Insolvency) No. 495 & 496 of 2019.
[7] Section 32(1) of the 2001 Act.
[8] Judgement [at paras 1 and 2].
[9]  Judgement [at paras 27 to 30] relying on Illachi Devi v. Jain Society, Protection of Orphans India, (2003) 8 SCC 413 [at paras 21-23, 26, 31, 38 53 and 55].
[10] Judgement [at paras 4 to 14 and 21 to 25] citing Satyadeva Sannakaru Rythu Sangham v. State of Andhra Pradesh and Ors, MANU/AP/0497/2011 (Writ Petition No. 488 of 2006] [at para 32] V. Kameshwar Rao v. District Legal Services Authority- cum-VII Additional District and Session Judge Court (Lok Adalat), Vijayawada, Krishna District and Ors., (2014) SCCOnline Hyd 1467 [at paras 25 to 27]; All India SC and ST Railway Employees Association, Zonal Office at Secunderabad v. E. venkatashwarlu and Others (2003) SCCOnline AP 97 [at para 5].
[11] Judgement [at para 18].
[12] Judgement [at para 20].
[13] Section 3(22) of the IBC.
[14] Judgement [at para 20 and 31]
[15] Judgement [at para 32 and 33]
[16] Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union, (2007) 4 SCC 685 [at para 23]; G.P. Singh, Principles of Statutory Interpretation, 15th Edn, Lexis Nexis at p. 140..
[17] 2019 SCCOnline SC 1520.
[18] I.A No. 164/KB/2020 in CP (IB) No. 2029/KB/2020 (Order dated May 12, 2021).
[19] Asharam Leasing and Finance case [at para 8].

Authors:
Vatsala Rai, Counsel
Ravilochan Daliparthi, Associate

Date: September 15, 2021