India: Supreme Court: Scope Of Intervention By High Courts In Cases Of Orders Passed By The National Company Law Tribunal

In the case of Embassy Property Developments (Private) Limited v. State of Karnataka and Others (decided on December 3, 2019), the Supreme Court of India ("SC") outlined the scope of intervention by High Courts in cases of orders passed by the National Company Law Tribunal ("NCLT").

A set of three appeals had been filed before the SC by a resolution applicant, a corporate debtor through the resolution professional and committee of creditors in respect of the said corporate debtor (collectively, "Appellants"), in order to challenge an interim order passed by the division bench of the High Court of Karnataka ("KHC"). The said interim order stayed the operation of a direction contained in the order of the NCLT.

Facts

A company by the name of M/s. Udhyaman Investments Private Limited ("Financial Creditor"), which was the twelfth respondent in the first appeal, moved an application before the NCLT, Chennai Bench in the capacity of a Financial Creditor against M/s. Tiffins Barytes Asbestos and Paints Limited ("Corporate Debtor"). The Corporate Debtor was also the fourth respondent in the first of these three appeals before the SC.

By an order dated March 12, 2018, the NCLT, Chennai Bench admitted the application of the Financial Creditor and ordered the commencement of the Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. Thereafter, an Interim Resolution Professional ("IRP") was appointed and a moratorium came to be imposed in terms of section 14 of the IBC (moratorium). At the time, the Corporate Debtor held a mining lease granted by the Government of Karnataka which was set to expire on May 25, 2018 under a particular Lease Deed ("Lease Deed"). Due to violation by the Corporate Debtor of the statutory rules, and terms and conditions of the Lease Deed, a notice of premature termination of the lease was also issued to the Corporate Debtor on August 09, 2017. However, no order towards termination as aforesaid had been passed until the date of initiation of CIRP.

Thereafter, the IRP addressed a letter dated March 14, 2018 to the Chairman of the Monitoring Committee and the Director of Mines and Geology, informing these authorities of the commencement of the CIRP and seeking the benefit of deemed extension beyond March 25, 2018 (date of expiry of Lease Deed) and until March 31, 2020 in terms of the Mines and Minerals (Development and Regulation) Act, 1957 ("MMDR Act"). Receiving no response, the IRP was constrained to file a Writ Petition no. 23075 of 2019 ("Writ Petition No. 1") before the KHC, wherein it was sought that the Lease Deed should be deemed to be valid until March 31, 2020. During the pendency of the Writ Petition No. 1, the Government of Karnataka passed an order dated September 26, 2018 ("Government Order") rejecting the proposal for deemed extension, on the grounds of contravention of, the terms and conditions of the Lease Deed. In the aftermath of the Government Order as aforesaid, the IRP withdrew the Writ Petition No. 1 and filed Miscellaneous Application no. 632 of 2018 ("Miscellaneous Application") before the NCLT, Chennai Bench, wherein it was prayed that the Government Order should be set aside and that the lease should be deemed valid until March 31, 2020. Further, it was also prayed that supplement lease deeds should be executed in relation thereto.

Thereafter, the NCLT, Chennai Bench set aside the Government Order by an order dated December 11, 2018 ("Order 1") on the ground that the same was in violation of the moratorium declared in terms of section 14 of the IBC. The NCLT, Chennai Bench also directed the Government of Karnataka to execute supplement lease deeds. Aggrieved by Order 1, the Government of Karnataka moved Writ Petition no. 5002 of 2019 before the KHC ("Writ Petition No. 2"), whereby the KHC by an order dated March 22, 2019, set aside Order 1. The matter was thereafter remanded back to NCLT, Chennai Bench for a fresh consideration.

Before the NCLT, Chennai Bench, the Government of Karnataka filed statement of objections contending, interalia, that NCLT had no jurisdiction to adjudicate disputes arising out of the grant of mining leases under the MMDR Act. However, the NCLT, Chennai Bench overruled the objection of the Government of Karnataka and ordered the execution of supplemental lease deeds by order dated May 03, 2019 ("Order 2"). The Government of Karnataka, thereafter, filed Writ Petition no. 41029 of 2019 ("Writ Petition No. 3") against Order 2, before the KHC, wherein, an Interim Order dated September, 2019 ("Interim Order") was passed. The Interim Order ultimately granted a stay of operation of the direction of the NCLT, Chennai Bench. It was against this Interim Order that the resolution applicant, the IRP and the committee of creditors had filed these appeals before the SC.

Issues

1. Whether the KHC ought to interfere under Article 226/227 of the Constitution of India against an order passed by NCLT in a proceeding under the IBC, merely because an alternative remedy was available by way of an appeal to the National Company Law Appellate Tribunal ("NCLAT").
2. Whether the NCLT is competent to enquire into allegations of fraud especially in the nature of the very initiation of CIRP.

Arguments

Contentions raised by the Appellants:

1. Contentions of the resolution applicant:

An efficacious alternative remedy was available by way of filing of an appeal before the NCLAT under section 61 (appeals and appellate authority) of the IBC, and therefore the KHC should not have entertained the Writ Petition No. 3, against an order passed by the NCLT (Order 2). As such, the IRP was concerned with the enabling survival of a corporate debtor as a going concern, and therefore, the IRP had a right to move the NCLT for appropriate reliefs. The only way steps taken by the IRP could be set aside was by taking recourse to the provisions of IBC, that is, by approaching the NCLAT. It was also contended that the remedies provided under the IBC were all pervasive and exclusive.

It was further contended that the KHC was obliged to switch over the hands-off mode in matters of such nature. In any case, the NCLT, Chennai Bench had already approved the resolution plan and anything done by the KHC would tinker with or destroy the resolution plan approved by the NCLT.

2. Contentions of the IRP:

The whole object of IBC would be defeated if orders of NCLT were to be declared to become amenable to review under Article 226/227 of the Constitution of India. Moreover, the provisions of IBC were given overriding effect over all other statutes by virtue of section 238 (provisions of the IBC to override other laws) of the IBC. It was also notable that the Government of Karnataka in Writ Petition No. 2 had taken a stand that dispute relating to refusal to grant deemed extension of the mining lease fell squarely within the jurisdiction of the mining tribunal. After raising a plea that the rejection of the benefit of deemed extension ought to have been challenged by way of revision before the Central Government under the MMDR Act, the Government of Karnataka had agreed to go back to NCLT for raising all contentions. Therefore, it was not open to the Government of Karnataka to question the jurisdiction of the NCLT in the next round of litigation.

Further, it was notable that the right to deemed extension of lease would come within the purview of the expression 'property' as defined in section 3(27) of the IBC, and as such, it was the duty of the IRP to preserve property of a corporate debtor. Further, the sweep of jurisdiction conferred upon NCLT under section 60(5)(c) (NCLT shall have jurisdiction to entertain any question of priorities, law or facts under the IBC) of the IBC, entitled the tribunal to investigate into allegations of fraud, as a result of which, the jurisdiction of the KHC does not arise. Consequently, any recognition by the SC of the jurisdiction of the KHC to interfere with the orders of the NCLT would completely derail the resolution process that was essentially bound to happen within a time frame.

3. Contentions of the committee of creditors:

There was no room for challenging the orders of the NCLT other than in the manner prescribed by the IBC. The IRP was only seeking recognition of the statutory right of deemed extension of lease conferred by the MMDR Act and therefore, the NCLT could not be said to have exercised a jurisdiction not vested in it by law, so as to enable the KHC to invoke jurisdiction under Article 226 of the Constitution of India.

Contentions raised by the Respondents:

If NCLT lacked the inherent jurisdiction in respect of a case, the exercise of jurisdiction by NCLT would certainly be amenable to the jurisdiction of the KHC under Article 226 of the Constitution of India. As such, the jurisdiction of NCLT is confined only to contractual matters inter parties. By contrast, an order passed by a quasi-judicial authority under enactments such as the MMDR Act would directly fall under the realm of public law. Therefore, the NCLT would not have power of judicial review over such orders. On the basis of the decision in Barnard and Others v. National Dock Labour Board and Others [1 (1953) 2 WLR 995], when an inferior tribunal passes an order which is a nullity, the superior court need not drive a party to the appellate forum stipulated by an act. Therefore, the Government of Karnataka did not have to resort to approaching the NCLAT.

Decision of the Supreme Court

The conflict between the lack of jurisdiction and the wrongful exercise of jurisdiction should be certainly taken into account by High Courts when Article 226 of the Constitution of India is sought to be invoked. This is important as such invocation may ultimately result in bypassing the remedy of appeal to NCLAT.

The mining lease granted to the Corporate Debtor by the Government of Karnataka was issued in accordance with the Mineral Concession Rules, 1960. Therefore, the relationship between the Corporate Debtor and the Government of Karnataka was not only contractual but also statutorily governed. Moreover, the land which formed the subject matter of the Lease Deed, belonged to the Government of Karnataka. In view of the above, it was rightly contended by the Respondent that the decision of Government of Karnataka to refuse the benefit of deemed extension of lease, was in the public law domain. In lieu of the same, the correctness of the decision of the Government of Karnataka could be called into question only in a superior court which was vested with the power of judicial review over administrative action. Clearly, NCLT being a creature of a special statute to discharge specific functions, could not be elevated to the status of a superior court having the power of judicial review over administrative action.

The SC held that the only provision that could help outline the scope of jurisdiction of the NCLT in respect of decisions taken under the MMDR Act was section 60(5) of the IBC. Section 60(5) of the IBC, was recognized to be very broad in its sweep, conferring jurisdiction upon the NCLT in respect of any question of law or fact, arising out of or in relation to insolvency resolution. However, the SC held that any decision taken by a government or statutory authority in relation to a matter which was in the realm of public law, cannot by any stretch of imagination be brought within the fold of the phrase "arising out of or in relation to the insolvency resolution".

If NCLT has been conferred with the jurisdiction to decide all types of claims to property, of the corporate debtor, section 18(f)(vi) of the IBC would not have made the task of an interim resolution professional in taking control and custody of an asset over which the corporate debtor has ownership rights, subject to the determination of ownership by a court or other authority. Even though section 20(1) of the IBC conferred a duty upon an interim resolution professional to preserve the value of the property of a corporate debtor, the duties of an interim resolution professional are entirely different from what comprises the exact jurisdiction and powers of the NCLT.

The SC also considered section 25(2)(b) of the IBC, wherein, a resolution professional was duty bound to represent and act on behalf of a corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings. The SC held that this would mean that whenever a corporate debtor had to exercise rights in judicial, quasi-judicial proceedings, a resolution professional cannot short circuit that procedure and bring a claim before NCLT by taking advantage of the broad sweep of powers conferred upon the NCLT within section 60(5) of the IBC.

Further, whenever a corporate debtor has to exercise a right that fell outside the purview of IBC, especially in the realm of public law, no bypass can be undertaken by going to the NCLT. The SC held that in the present case, the IRP, clearly understood this legal position. This was mainly because when the Government of Karnataka refused to grant the benefit of deemed extension, the IRP moved Writ Petition No. 1 before the KHC instead of the NCLT, as he understood that such manner of right could not be enforced before the NCLT. Whence after filing of the Writ Petition No. 1, the Government of Karnataka rejected the claim of the IRP, the latter withdrew the Writ Petition No. 1. If the NCLT was not considered by the IRP in the very first instance, to be empowered to issue a declaration of deemed extension of lease, NCLT could not be considered to have power of judicial review over the Government Order.

Further, the SC held that moratorium provided for as per section 14 of the IBC would not have any impact on the right of the Government of Karnataka to refuse extension of lease. Basically, the right to not to be dispossessed under section 14 of the IBC had nothing to do with the rights conferred by a mining lease on a government land. As such, what was prohibited under section 14 of the IBC was only the right not to be dispossessed. It however, did not imply the right to have renewal of a lease. Therefore, section 14 of the IBC may not have an application in cases of rights conferred by way of a mining lease especially on a government land. Thus, NCLT did not have jurisdiction to entertain an application against the Government of Karnataka for a direction to execute supplemental lease deeds for the extension of the mining lease. Consequently, owing to the fact that the NCLT had chosen to exercise a jurisdiction not vested in it in law, the KHC was justified in entertaining the Writ Petition No. 2 on the basis that the NCLT was coram non judice.

The SC also analyzed the submission of the Government of Karnataka regarding the fraudulent and collusive manner in which the CIRP was initiated. The Government of Karnataka had submitted that it had chosen to challenge Order 2 before the KHC instead of the NCLAT, as the CIRP was initiated by one of the related parties to the Corporate Debtor. The SC held that it was clear from the provisions of IBC that the NCLT has jurisdiction to enquire into allegation of fraud, and as a corollary, NCLAT would also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in the IBC.

Conclusion

It was held that although NCLT would have jurisdiction to enquire into questions of fraud, the tribunal did not have jurisdiction to adjudicate upon disputes such as those arising under the MMDR Act. This distinction was especially important when the disputes revolved around decisions of statutory or quasi-judicial authorities. Such decisions could be corrected only by way of judicial review of administrative action. Hence, the KHC was justified in entertaining the Writ Petition No. 3, and therefore, it was that the decision of the KHC could not be interfered with.

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