Karnataka HC quashes parallel proceedings initiated against company

The High Court of Karnataka has said that the provisions of the Karnataka Protection of Interest of Depositors in Financial Establishment (KPIDFE) Act, 2004, cannot be invoked against a company after the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016.

Justice H.P. Sandesh delivered the verdict while quashing the separate proceedings initiated under the KPIDFE Act against Dreamz Infra India Pvt. Ltd., a real estate company, for recovering ₹385 crore. The amount was collected by the firm from around 3,600 home buyers promising them flats in its projects, but it failed to deliver the flats.

The court passed the order while allowing a petition filed by the Insolvency Resolution Professional (IRP) appointed by the National Company Law Tribunal (NCLT) for Dreamz Infra questioning the legality of the parallel proceedings initiated by the State government under the KPIDFE Act.

The court noted that the NCLT, in August 2019, had initiated the Insolvency and Bankruptcy Code based on petitions filed by home buyers and the State government had invoked the proceedings under the KPIDFE Act, 2004.

Pointing out that the apex court had held that IBC prevails over the State enactments and there cannot be any other civil proceedings when the matter is sub judice before the NCLT, the High Court said that in the present case the home buyers had invoked the IBC.

However, the court made it clear that the State authorities, if the need arose, could proceed against the company after the conclusion of the proceedings before the NCLT.

The court declined to accept the claim made on behalf of the company that it was not a financial institution for invoking provisions of the KPIDFE Act. It pointed out that the company itself had not disputed the fact that it had collected the money but then neither refunded the money nor allotted the flats to the home buyers who invested their money.

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