1. High Court can interfere under Article 226/227 of the Constitution against NCLT order, which lacks jurisdiction on a particular matter.
Embassy Property Development Private Limited Vs State of
Karnataka & Ors.
[Civil Appeal No. 9171 of 2019 and Civil Appeal No. 9172 of 2019.]
In above referred civil appeals, the questions before the Hon'ble Supreme Court were:
- Whether the High Court ought to interfere, under Article 226/227 of the Constitution, with an Order passed by the National Company Law Tribunal in a proceeding under the Insolvency and Bankruptcy Code 2016, ignoring the availability of a statutory remedy of appeal to the National Company Law Appellate Tribunal and if so, under what circumstances; and
- Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the Insolvency and Bankruptcy Code, 2016.
The brief facts of the case were that CIRP proceedings had been initiated against the Corporate Debtor, namely Tiffins Barytes Asbestos & Paints Limited vide order dated 12.03.2018 of Ld' NCLT Chennai. During the CIRP proceeding, the mining lease granted by the Government of Karnataka was expired on 25.05.2018. It would be though important to mention that notice for premature termination of the lease had already been issued on 09.08.2017 against the Corporate Debtor on the allegation of violation of statutory rules and the terms and conditions of the lease deed, no order of termination had been passed till the date of initiation of CIRP. The Interim Resolution Professional appointed by NCLT Chennai immediately on taking over of the management of the Corporate Debtor wrote a letter to the Chairman of the Monitoring Committee as well as the Director of Mines and Geology informing them of the commencement of the CIRP. He also wrote a letter to the Director of Mines and Geology seeking the benefit of the deemed extension of the lease beyond 25.05.2018 up to 31.03.2020 in terms of Section 8-A (6) of the Mines & Minerals (Development and Regulation) Act, 1957. The Government of Karnataka vide an order dated 26.09.2018, rejected the proposal for a deemed extension on the ground that the Corporate Debtor had contravened not only the terms and conditions of lease deed but also various other provisions of relevant statutes and rules applicable. The Interim Resolution Professional thereafter filed an application before NCLT, Chennai for setting aside the order of Government of Karnataka and seeking a declaration that the lease should be deemed to be valid up to declaration 31.03.2010 and also a consequential direction to the Government of Karnataka to execute Supplement Lease Deeds for the period up to 31.03.2020. The NCLT, Chennai allowed the application and set aside the Order of Government of Karnataka on the ground that same was in violation of the moratorium declared on 12.03.2018 in terms of Section 14(1) of I&B Code 2016. Aggrieved by order of the NCLT, Chennai, the Government of Karnataka moved a writ petition before the High Court of Karnataka. The matter was remanded by High Court to NCLT since one of the pleas taken by the Government of Karnataka was the matter was heard by NCLT ex parte.
The Government of Karnataka accordingly filed its objections before NCLT, including the objection w.r.t jurisdiction of NCLT and also w.r.t fraudulent and collusive manner in which the entire resolution process was initiated by the related parties of the Corporate Debtor themselves, solely with a view to corner the benefits of the mining lease.
The NCLT overruled the objections and passed an order of setting aside the order of rejection and directing the Government of Karnataka to execute supplemental lease deeds.
Challenging the order of NCLT, the Government of Karnataka filed a Writ Petition before High Court of Karnataka, which was objected on the ground of lack of jurisdiction of High Court to entertain matters relating to I&B Code 2016 and the challenge of the order of the NCLT can only be made in NCLAT.
After listening to the arguments of the parties including w.r.t powers of NCLT, the Hon'ble High Court held that "the NCLT, being a creature of a special statute to discharge certain specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action." In the present case, administrative action was the termination of the mining lease.
Aggrieved by order of Hon'ble High Court, the Respondents filed the Civil Appeal before Hon'ble Supreme Court, who upheld the decision of the Hon'ble High Court.
The Hon'ble Supreme Court on the argument that Resolution Professional has to protect the property of the Corporate Debtor to keep it a going concern so termination of lease deed will hamper his duties prescribed under the Code, the Hon'ble Court held that "the duties of a resolution professional are entirely different from the jurisdiction and powers of NCLT."
The Supreme Court in passing by has also observed that Section 14(1)(d) of I&B Code 2016, which prohibits the recovery of any property by an owner or lessor where such property is occupied by or in possession of the Corporate Debtor, will not go the rescue of the Corporate Debtor since what is prohibited therein, is only the right not to be dispossessed, but not the right to have renewal of the lease of such property. In fact, the right not to be dispossessed, found in Section 14(1)(d), will have nothing to do with the rights conferred by a mining lease (in the present case), especially on the government land.
W.r.t other objection regarding the jurisdiction of NCLT to inquire into fraudulent initiation of proceedings as well as (ii) fraudulent transactions, the Hon'ble Supreme Court held that NCLT is vested with the power. The Court further held that Section 65(1) of the Code deals with a situation where CIRP is initiated fraudulently "for any purpose other than for the resolution of insolvency or liquidation."
2. Exemption of Government Bodies (like NHAI) under the I&B Code is not discriminatory.
Hindustan Construction Company Limited & Anr vs.
Union of India & Ors
[Writ Petition (Civil) No. 1074 of 2019]
The Hon'ble Supreme Court rejected the challenge made to the various provisions of Insolvency and Bankruptcy Code, 2016 including of being giving discriminatory treatment to Companies vis a vis Government Bodies (NHAI in the case concerned) i.e., the Government Bodies can initiate the insolvency resolution process against companies, but it is not vice versa and also using the definition of financial position at the stage of resolution applicants and not at the stage of triggering the Insolvency Code.
The Hon'ble Supreme Court while rejecting the said challenge held that
- NHAI is a statutory body that functions as an extended limb of Central Government and performs government functions, which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other Corporate Body. Nor can such Authority ultimately be wound-up under the Insolvency Code. Therefore, it is not possible to read in or read down the definition of "Corporate Person" in Section 3(7) of the Insolvency Code.
- The contention of the Appellant that under Section 5(9) of the Insolvency Code, "financial position" is defined, which is only taken into account after a resolution professional is appointed and is not taken into account when adjudicating "default" under Section 3(12) of the Insolvency Code is arbitrary for the reason that it is already held in "Pioneer Urban Land and Infrastructure Limited and Anr. V/s Union of India and Ors (2019) 8 SCC 416", the Insolvency Code is not meant to be a recovery mechanism-the idea of the Insolvency Code being a mechanism which is triggered in order that resolution of stressed assets then take place. For this purpose, the definition of "dispute" under 5(6), "claim" under Section 3(6), "debt" under Section 3(11), and "default" under Section 3(12) have all to be read together.
The Hon'ble Supreme Court also rejected the plea that a mechanism is included under Section 6 of I&B Code 2016, wherein the debtors of a Corporate Debtor be forced to make payments to avoid Insolvency of such Corporate Debtors on the ground that Insolvency Code is not meant to be a debt recovery legislation.
3. IBC Has Overriding Effect over Tea Act 1953
Duncans Industries Ltd vs. A. J. Agrochem
[Civil Appeal No. 5120 of 2019]
The Hon'ble Apex Court held that the provisions of the Insolvency and Bankruptcy Code 2016 ('IBC' or 'Code') would have an overriding effect over the Tea Act, 1953 and that no prior consent of the Central Government is required before initiation of the proceedings under Section 7 or Section 9 of the IBC.
Corporate Debtor preferred an appeal against the order of Hon'ble Appellant Authority for initiating the Corporate Insolvency Resolution Process ('CIRP') against Corporate Debtor. The main contention of Corporate Debtor was the Central Government in the exercise of its power under section 16E of the Tea Act, 1953, has taken over the control of assets of Corporate Debtor. Further section 16G(1)(c) of the Tea Act 1953 provides that once the management of tea unit has been taken over by the Central Government, then the proceedings for winding up or appointment of receiver cannot be initiated without the consent of the Central Government and Insolvency Proceedings initiated against the Corporate Debtor without the permission of Central Government would be highly detrimental to tea industry or public interest.
Corporate Debtor further submitted that the judgment passed by Hon'ble Appellant Authority solely relied upon section 238 of the Code, which states that in case of any conflict between two legislations, IBC will have an overriding effect over all other Act. However, there was no conflict between IBC and tea Act reliance was placed on relied upon the decision of the Hon'ble Apex Court in the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674, K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662 and Swiss Ribbons Pvt. Ltd. v. Union of India AIR 2019 SC 739 on the non-applicability of Section 238 of the IBC.
The Operational Creditor contended that the Hon'ble Appellant Authority has rightly held that Section 16G(1)(c) relates to winding up and, on the other hand, Section 9 of the IBC is not a proceeding for winding up, but for initiation of CIRP to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its management and corporate debt by liquidation and such CIRP is to be completed in a time-bound manner.
Considering the above, the Hon'ble Apex Court held IBC would have an overriding effect over the Tea Act, 1953, and CIRP initiated by Operational Creditor shall be maintainable.
4. Issue of jurisdiction upon initiating CIRP when parallelly scheme of revival under Companies Act is pending before Hon'ble High Court.
Sunil Kumar Dahiya V/s Union of India and
WP(C) 11706/2019 and other CM applications
The Hon'ble High Court of Delhi vide its order dated 08.11.2019, stayed the order dated 10.10.2019 of Ld' NCLT wherein the application filed under Section 7 of I&B Code 2016 by a financial creditor was admitted by the NCLT and accordingly an Interim Resolution Professional was appointed. The Hon'ble High Court had stayed the order on the ground that w.r.t the Corporate Debtor there is already a scheme of revival as per the provisions of Section 391 of the Companies Act, 1956 is pending before the Hon'ble High Court and the Hon'ble High Court has reserved its order on the same.
The Hon'ble High Court referring to the Judgment of Hon'ble Supreme Court passed in Forech India Limited V/s Edelweiss Assets Reconstructions Co. Limited (Civil Appeal No. 818/2018) has held that the NCLT has failed to appreciate that the objective of Forech India Limited judgment of NCLT having the exclusive jurisdiction to adjudicate the dispute w.r.t Company was to ensure that there are no parallel proceedings before the High Court and before the NCLT. The Hon'ble High Court then proceeded with referring to the relevant paragraph of the Fortech Case, which reads as under:
"17. The resultant position in law is that, as a first step, when the code was enacted, only winding-up petitions, where no notice under Rule 26 of the Companies (Court) Rules was served, were to be transferred to the NCLT and treated as petitions under the Code. However, on working on the Code, the Government realized those parallel proceedings in the High Courts as well as before the adjudicating authority in the Code would stultify the objective sought to be achieved by the Code, which is to resuscitate the corporate debtors who are in the red. In accordance with this objective, the Rules kept being amended, until finally Section 434 was itself substituted in 2018, in which a proviso was added by which even in winding up petitions where notice has been served and which are pending in the High Courts, any person could apply for transfer of such petitions to the NCLT under the Code, which would then have to be transferred by the High Court to the adjudicating authority and treated as an insolvency petition under the Code.".
The Hon'ble High Court further held that since in the present case of the Corporate Debtor, the Company Court in the Delhi High Court is completely seized of the revival of the Company. The Company, as also the various stakeholders, has been duly represented before the Company Court. The Company court being seized of the matter and judgment having been reserved by the Court, the same is awaited. The revival scheme has been formulated after deliberations for more than five years before the High Court. The entire effort and labor put into the revival of the company would be completely defeated if, at this stage, an IRP is appointed, and the moratorium is declared.
While disposing the applications, though the Hon'ble High Court keeping in mind the provisions of Section 63 of the I&B Code 2016 which bars the civil court jurisdiction held that there is no doubt that the jurisdiction of this court is not to be exercised under Article 227 if there is an alternative remedy available, in order to avoid conflicting orders from operating in respect of the company to the detriment of the creditors and other stakeholders, this court is of the opinion that, while relegating the Petitioner to the NCLAT, the impugned order of the NCLT deserves to be kept in abeyance. In view of the remedy of an appeal is available to the Petitioner, to approach the NCLAT, the Petitioner is permitted to approach the NCLAT within four weeks. Further, in view of the peculiar facts and circumstances of the present case, it is directed that the order dated 10th October 2019, passed by the NCLT, shall remain until the pronouncement of the judgment by the Delhi High Court w.r.t revival scheme (CP 885/2015) or until the matter is finally decided by the NCLAT, whichever is earlier.
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