Published in ICSI's "Chartered Secretary" Magazine January 2020 Issue
In view of Section 238 of the Insolvency and Bankruptcy Code, 2016 (hereinafter, “the Code” or “IBC”) which gives overriding effect of the Code over all other statutes, there is a general feeling that any matter which calls for adjudication by the Adjudicating Authority (AA), i.e., National Company Law Tribunal (NCLT) in respect of corporate insolvency resolution process (CIRP) of a corporate debtor, the directions given by the AA are required to be followed/ adhered to by the concerned parties, be they the State Government, any other statutory authority created under any special statute or even any other private party. This aforesaid line of thinking no doubt enables adhering to the timeline prescribed under the IBC for adjudication of CIRP and also gives certainty to the directions by the AA, yet there are certain instances when such decisions of the AA are questioned by the affected party either before the National Company Law Appellate Tribunal (NCLAT) under the provisions of IBC or by availing the writ jurisdiction under Article 226/227 or Article 32 of the Constitution of India.
The recent Supreme Court (SC) judgement dated 3rd December 2019, in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka & Ors. (Civil Appeal Nos.9170; 9171 and 9172 of 2019) deals with this contentious issue, which will have tremendous impact on the functioning of the NCLT (AA) or its Appellate Authority, i.e., the NCLAT. The SC held that even though there is a statutory forum created for redressal of grievances, the affected party can invoke writ jurisdiction available under the Constitution of India and that if the NCLT has passed an order concerning issues that are in the realm of public law, then the High Court can exercise its powers under Article 226 of the Constitution.
Three-Judge Bench of the SC was hearing three appeals, one filed by the Resolution Applicant, the second filed by the Corporate Debtor (CD) through the Resolution Professional (RP) and the third filed by the Committee of Creditors (COC), all of which challenged an Interim Order passed by the Division Bench of High Court of Karnataka (Karnataka HC) in a writ petition, staying the operation of a direction contained in the order of the NCLT, on an application filed by the RP.
The brief facts leading to the aforesaid three appeals, are that M/s. Udhyaman Investments Pvt. Ltd. (Financial Creditor), moved an application before the NCLT, Chennai, under Section 7 of the IBC against M/s. Tiffins Barytes Asbestos & Paints Ltd. (the CD) and the NCLT vide order dated 12.03.2018 admitted the said application, and ordered the commencement of CIRP and appointed an Interim Resolution Professional (IRP). During this time, the CD held a mining lease granted by the Government of Karnataka, which was to expire by 25.05.2018. Though a notice for premature termination of the lease had already been issued on 09.08.2017 by the Karnataka Government, on the allegation of violation of statutory rules and the terms and conditions of the lease, no order of termination had been passed till the date of initiation of CIRP. Thereafter, the IRP wrote a letter to the Karnataka Government informing them of the commencement of CIRP and vide another letter he sought for a deemed extension of the lease beyond 25.05.2018 upto 31.3.2020 in terms of Section 8A(6) of the Mines & Minerals (Development and Regulation) Act, 1957 (hereinafter “the MMDR Act”). Finding that there was no response, the IRP also filed a writ petition in Karnataka High Court, seeking a declaration that the mining lease should be deemed to be valid upto 31.03.2020. During the pendency of the writ petition, the Karnataka Government passed an order dated 26.09.2018, rejecting the proposal for deemed extension, on the ground that the CD had contravened not only the terms and conditions of the Lease Deed but also the provisions of Rule 37 of the Mineral Concession Rules, 1960 and Rule 24 of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Rules, 2016.
In view of the said order of rejection, the IRP on behalf of the CD, withdrew the Writ Petition with liberty to file a fresh writ petition. However, instead of filing a fresh writ petition, the RP moved an application before NCLT, praying for setting aside the Karnataka Government’s rejection order and seeking a declaration that the lease should be deemed to be valid upto 31.03.2020 and also a consequential direction to Karnataka Government to execute Supplement Lease Deeds for the period upto 31.03.2020.
The NCLT vide order dated 11.12.2018 allowed the said application and set aside the order of the Karnataka Government on the ground that the same was in violation of the moratorium declared on 12.03.2018 in terms of Section 14(1) of IBC. The NCLT also directed the Karnataka Government to execute Supplement Lease Deeds in favour of the CD for the period upto 31.03.2020.
Aggrieved by the said NCLT order, the Karnataka Government moved a writ petition before the Karnataka High Court. It is relevant to note that the said NCLT order dated 11.12.2018, was passed exparte, on the ground that the State did not choose to appear despite service of notice. Therefore, the High Court vide order dated 22.03.2019, set aside the NCLT order and remanded the matter back to NCLT for fresh consideration. Thereafter, the State of Karnataka filed a Statement of Objections before NCLT, primarily raising two objections: (1) relating to the jurisdiction of NCLT to adjudicate upon disputes arising out of the grant of mining leases under the MMDR Act between the StateLessor and the Lessee; and (2) relating to the fraudulent and collusive manner in which the entire resolution process was initiated by the related parties of the CD themselves, solely with a view to corner the benefits of the mining lease.
Overruling the objections, the NCLT passed an order allowing the application and set aside the order of rejection and directed the State Government to execute Supplemental Lease Deeds. Challenging the aforesaid NCLT order, the State Government moved a writ petition before the Karnataka HC. On behalf of the CD, the RP appeared through Counsel. Thereafter, the High Court granted a stay of operation of the NCLT Order dated 03.05.2019. Interim Stay was necessitated in view of a Contempt Application moved by the RP before the NCLT against the Karnataka Government for their failure to execute Supplement Lease Deeds. It was against the said ad Interim Order granted by the High Court that the Resolution Applicant, the RP and the COC filed appeals before the Supreme Court.
Issues Before the Supreme Court While hearing the appeal, the Supreme Court framed the following two issues:
Whether the High Court ought to interfere under Articles 226/227 of the Constitution, with an order passed by the NCLT in a proceeding under the IBC, ignoring the availability of a statutory remedy of appeal to the NCLAT 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 IBC.
Arguments by both sides On behalf of the RP it was contended that when there is an efficacious alternative remedy available under Section 61 of IBC, the Karnataka HC ought not to have entertained a writ petition and that too, against an Order passed by the NCLT. It was argued that when a statutory forum is created for redressal of grievances, a writ petition should not be entertained and that since the essence of the IBC is the revival of a CD and the resolution of its problems to enable it to survive as a going concern, through the maximization of the value of its assets, the IRP/RP had a right to move the NCLT for appropriate reliefs for the preservation of the properties of the CD and therefore the only way the steps taken by the RP could be set at naught, was to take recourse to the provisions of the IBC alone. The Ld. Senior Counsel contended that IBC is a unified umbrella of code and that remedies provided thereunder are all pervasive and exclusive. On behalf of Resolution Applicant, the Ld. Senior Counsel supplemented the aforesaid arguments and contended that since NCLT had already approved the Resolution Plan by an order dated 12.06.2019, therefore the High Court cannot do anything that will tinker with or destroy the very Resolution Plan approved by the NCLT.
On behalf of the RP, it was contended by the Ld. Senior Counsel that the whole object of the IBC would get defeated, if the Orders of NCLT are declared amenable to review by the High Court under Article 226/227. It was also contended that the provisions of IBC are given overriding effect under Section 238, over all other statutes. He questioned the State Government going back to NCLT for raising all contentions and it was therefore not open to the Government to question the jurisdiction of the NCLT in the next round of litigation. He contended that since the CD’s right to deemed extension of lease would come within the purview of the expression “Property” under Section 3(27) of IBC, the RP was duty-bound to preserve the property of the CD. It was also contended that the only ground on which Karnataka Government opposed extension of lease was fraud and collusion on the part of CD and the creditor who initiated CIRP. Further it was contended that in view of the sweep of the jurisdiction conferred upon NCLT under Section 60(5)(c) of IBC, NCLT only could investigate even into allegations of fraud. Therefore, the question of High Court exercising jurisdiction under Article 226 against an order of NCLT does not arise. It was further argued that any recognition by the Supreme Court of the jurisdiction of the High Court under Article 226 to interfere with the Orders of the NCLT under IBC would completely derail the resolution process which was bound to happen within a time frame. Therefore, he appealed that the Order of the High Court should be set aside on the ground of lack of jurisdiction.
On behalf of the COC, Ld. Senior Counsel submitted that IBC being a complete code in itself does not provide any room for challenging the Orders of NCLT, otherwise than in a manner prescribed by the code itself. What was sought by the RP, according to the Ld. Senior Counsel, was a mere recognition of the statutory right of deemed extension of lease conferred by Section 8A of the MMDR Act and that therefore, NCLT could not be taken to have exercised a jurisdiction not vested in it in law, so as to enable the High Court to invoke the jurisdiction under Article 226.
In response to the aforesaid arguments, on behalf of Karnataka Government, the Ld. Attorney General (AG) submitted that if a case falls under the category of inherent lack of jurisdiction on the part of a Tribunal, the exercise of jurisdiction by the Tribunal would certainly be amenable to the jurisdiction of the High Court under Article 226. It was contended by the Ld. AG that the jurisdiction of NCLT is confined only to contractual matters interparties and an order passed by a statutory/quasijudicial authority under certain special enactments such as the MMDR Act falls in the realm of public law and hence the NCLT would have no power of judicial review of such orders.
To the contention that the Karnataka Government had an efficacious alternative remedy before the NCLAT, the Ld. AG submitted, on the basis of the decision in Barnard and Others vs. National Dock Labour Board & Ors (1953) 2 WLR 995, that when an inferior Tribunal passes an Order which is a nullity, the superior Court need not drive the party to the appellate forum stipulated by the Act. He also relied upon SC’s decision in The State of Uttar Pradesh vs. Mohammad Nooh (1958) SCR 595.
Ruling by the Supreme Court – Reasoning thereof
The Three-Judge Bench of the SC observed that the IBC is a complete code in itself and that it is an exhaustive code on the subject matter of insolvency in relation to corporate entities and others. Thereafter, the Court examined the scope of the jurisdiction and the nature of the powers exercised by – (i) the High Court under Article 226 of the Constitution and (ii) the NCLT and NCLAT under the provisions of IBC. The Court noted that traditionally, the jurisdiction under Article 226 was considered as limited to ensuring that the judicial or quasi-judicial tribunals or administrative bodies do not exercise their powers in excess of their statutory limits. But in view of the use of the expression “any person” in Article 226(1), Courts recognized that the jurisdiction of the High Court extended even over private individuals, provided that the nature of the duties performed by such private individuals are public in nature. Therefore, the remedies provided under Article 226 are public law remedies, which stand in contrast to the remedies available in private law. Public law proceedings serve a different purpose than private law proceedings.
The Court also examined caselaw which dealt with the distinction between cases where a statutory/quasi-judicial authority exercised jurisdiction not vested in it in law; and cases where there was a wrongful exercise of the available jurisdiction. It also noted that an error of jurisdiction was always distinguished from “in excess of jurisdiction” and in regard this, the Supreme Court analysed relevant judicial precedents on this subject wherein it was held that “before a court can be held to have jurisdiction to decide a particular matter it must not only have jurisdiction to try the suit brought, but must also have the authority to pass the orders sought for.” The Court also pointed out that it is not sufficient that it has some jurisdiction in relation to the subject matter of the suit, but its jurisdiction must include (1) the power to hear and decide the questions at issue and (2) the power to grant the relief asked for.
Therefore, in so far as the question of exercise of the power conferred by Article 226, despite the availability of a statutory alternative remedy, the distinction between the lack of jurisdiction and the wrongful exercise of the available jurisdiction, should certainly be taken into account by High Courts, when Article 226 is sought to be invoked bypassing a statutory alternative remedy provided by a special statute.
The SC also observed that the MMDR Act is a Parliamentary enactment traceable to Entry 54 of the Union List in Seventh Schedule of the Constitution. Section 2 of the Act declares that it is expedient in public interest that the Union should take under its control, the regulation of mines and development of minerals. The Act also imposes restrictions on the grant of mining leases. Insofar as minor minerals are concerned, the State government is empowered to make rules for regulating the grant of mining leases.
The SC noted that in the case on hand, the land which formed the subject matter of mining lease belonged to the State Government. Therefore, the relationship between the Corporate Debtor and the State Government under the mining lease was not just contractual but also statutorily governed. Also, the element of “public interest” finds a place in Section 2 of the MMDR Act in the form of a declaration.
Therefore the SC held that Karnataka Government’s decision to refuse the benefit of deemed extension of lease, was in the public law domain and hence the correctness of the said decision could be called into question only in a superior Court which is vested with the power of judicial review over administrative action. 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. The SC observed that NCLT was not even a Civil Court which has jurisdiction by virtue of Section 9 of CPC to try all civil suits. Therefore, in respect of IBC matters, the NCLT can exercise only such powers within the contours of jurisdiction as prescribed by the statute, the law in respect of which, it is called upon to administer as AA.
The SC noted that there are no separate provisions in the Companies Act, exclusively dealing with the jurisdiction and powers of NCLT. In contrast, Section 60(4) and (5) of IBC give an indication about the powers and jurisdiction of NCLT as AA and Section 60(5)(c) was very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. The SC held that however, a decision taken by the government or a statutory authority in relation to a matter which is 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” appearing in Clause (c) of Subsection (5). Therefore the Court observed that the jurisdiction of the NCLT delineated in Section 60(5) cannot be stretched so far as to bring absurd results.
With regard to the appellants’ argument that the IRP is duty bound under Section 20(1) of IBC to preserve the value of the property of the CD, the Supreme Court observed that the duties of the RP are entirely different from the jurisdictions and powers of the NCLT. The Court also noted that under Section 25(2)(b) of IBC, the RP is obliged to represent and act on behalf of the CD with third parties and exercise rights for the benefit of the CD in judicial, quasijudicial and arbitration proceedings but the RP cannot shortcircuit the same and bring a claim before NCLT taking advantage of Section 60(5).
Thus, the SC held that in light of the statutory scheme as examined from various provisions of the IBC, it was clear that wherever the CD has to exercise a right that falls outside the purview of the IBC, especially in the realm of the public law, they cannot, through the RP, take a bypass and go before NCLT for the enforcement of such a right.
The Court held that moratorium declared under Section 14 of IBC could not have any impact upon State Government’s right to refuse the extension of mining lease granted to the CD. The purpose of moratorium is only to preserve the status quo and not to create a new right.
Hence, the SC held that NCLT did not have jurisdiction to entertain an application against the Karnataka Government for a direction to execute Supplemental Lease Deeds for the extension of the mining lease. Since NCLT chose to exercise a jurisdiction not vested in it in law, the Karnataka High Court was justified in entertaining the writ petition, on the basis that NCLT was coram non judice.
SC Holds NCLT can inquire into Allegations of Fraud
On the issue as to whether NCLT is competent to enquire into allegations of fraud, especially in the matter of the very initiation of CIRP, the Karnataka Government had contended that there was a fraudulent and collusive manner in which CIRP was initiated by one of the related parties of the CD themselves and that the Resolution Applicant namely, M/s. Embassy Property Development Pvt. Ltd. as well as the Financial Creditor who initiated CIRP namely, M/s. Udhyaman Investments Pvt. Ltd. were all related parties, and thus the Karnataka Government thought it fit to invoke the jurisdiction of the High Court under Article 226 without taking recourse to the statutory alternative remedy of appeal before the NCLAT.
The SC examined and noted that Section 65 of IBC specifically deals with fraudulent or malicious initiation of proceedings and observed that even fraudulent trading carried on by the CD during CIRP, could be inquired into by the AA under Section 66. Further, Section 69 makes an officer of the CD and the CD itself liable for punishment, for carrying on transactions with a view to defraud creditors.
The SC, thus, held that NCLT was vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions and had jurisdiction to enquire into allegations of fraud. As a corollary, the Court held that NCLAT would also have jurisdiction. Thus, it was held by SC that fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in Section 61. However, the Court observed that though NCLT and NCLAT would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes such as those arising under MMDR Act and hence, the High Court was justified in entertaining the writ petition.
The IBC Amendment Ordinance 2019 which was promulgated on 28.12.19 also makes a provision for ensuring certain supplies during the moratorium period. One such amendment proposed is insertion of Explanation in sub-section (1) of Section 14, which, inter-alia, clarifies that during the moratorium period, Government permits, grants or licences etc. shall not be suspended on ground of insolvency alone,provided there is no default in payment of current dues to such Authority. In view of the SC’s decision in Embassy Property (supra) dated 3.12.19, how the aforesaid amendment will be harmoniously construed is yet to seen.
1. In a landmark judgment dated 28th February, 2019 in the case of Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir  103 taxmann.com 18, the Hon'ble Supreme Court of India has held that where allowances paid by an establishment to its employees were essentially a part of the basic wage "camouflaged as an allowance" so as to avoid deduction and contribution to provident fund (PF) amount of employees, the order of the authority under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (in short "EPF Act") that special allowancewas to be included in "basic wage" under section 2(b)(ii), read with section 6 of the EPF Act for computation of deduction towards provident fund was upheld. In the aforesaid judgment, the Supreme Court was hearing several civil appeals/transferred cases on the aforesaid important question of law and disposed them of by a common order dated 28th February, 2019 as aforesaid. Brief Facts of some of the civil appeals before the Apex Court 2. In titled as Regional PF Commissioner (II) (supra), the Respondent was an unaided school which was giving special allowance by way of incentive to teaching and non-teaching staff pursuant to an agreement between the staff and the management. The incentive was reviewed from time-to-time upon enhancement of the tuition fees of the students. The authority under the EPF Act held that the special allowance was to be included in "basic wage" for deduction of provident fund. The Single Judge set aside the said order. The Division Bench, after examining the salary structure allowed the appeal on 13.01.2005 holding that the special allowance as a part of the dearness allowance was liable to deduction. However, the order was recalled on 16.01.2007 at the behest of the Respondent as none had appeared on its behalf. The subsequent Division Bench dismissed the appeal holding that the special allowance was not linked to the consumer price index, and, therefore, would not fall within the definition of "basic wage" and, thus, was not liable to deduction. In Civil Appeal Nos. 3965-66 of 2013, the Appellant was paying basic wage plus variable dearness allowance (VDA) plus house rent allowance (HRA) plus travel allowance plus washing allowance plus canteen allowance plus lunch incentive. The special allowances were not included in the "basic wage" and, hence, deduction for provident fund was not made from the same. The authority under the EPF Act held that only washing allowance was to be excluded from the basic wage. The High Court partially allowed the writ petition by excluding lunch incentive from basic wage. A review petition against the same by the Appellant was dismissed, resulting in filing of appeal in the Supreme Court of India. In Civil Appeal Nos.3969-70 of 2013, it was stated that the appellant was not deducting provident fund contribution on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from "basic wage". The authority under the EPF Act held that the allowances had to be taken into account as basic wages for deduction. The High Court dismissed the writ petition and the review petition filed by the Appellant, resulting in filing of appeal in the Supreme Court of India. What are the parameters of 'Basic Wage' vis-à-vis the object of the EPF Act? 3. During the course of arguments, it was stressed upon that the EPF Act is a social beneficial welfare legislation meant for protection of the weaker sections of the society, i.e., the workmen, and is, therefore, required to be interpreted in a manner to sub-serve and advance the purpose of the legislation. As per section 6 of the EPF Act, the employer is liable to pay contribution to the provident fund on basic wages, dearness allowance and retaining allowance (if any). To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output. On behalf of the Appellant-Regional PF Commissioner (supra), it was submitted that the special allowance paid to the teaching and non-teaching staff of the Respondent-school was nothing but camouflaged dearness allowance liable to deduction as part of basic wage. Section 2(b)(ii) defined dearness allowance as all cash payment by whatever name called paid to an employee on account of a rise in the cost of living. The allowance shall, therefore, fall within the term dearness allowance, irrespective of the nomenclature, it being paid to all employees on account of rise in the cost of living. The special allowance had all the indices of a dearness allowance. A bare perusal of the breakup of the different ingredients of the salary noticed in the order of the Division Bench of the High Court made it apparent that it formed part of the component of pay falling within dearness allowance. The special allowance was also subject to increment on a time scale. Reliance was placed on an earlier decision of the Supreme Court in re: Bridge and Roof Co. (India) Ltd. v. Union of India  3 SCR 978 and it was submitted that whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction u/s. 6 of the EPF Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage, but a production bonus or incentive wage which would then fall outside the purview of basic wage u/s. 2(b) of the Act. Since the special allowance was earned by all teaching and non-teaching staff of the Respondent-school, it had to be included for the purpose of deduction u/s. 6 of the Act, as the special allowance was, in the present case, part of the salary breakup payable to all employees and did not have any nexus with extra output produced by the employees and, thus, it fell within the definition of "basic wage". On behalf of other appellants it was submitted that the basic wages defined u/s. 2(b) of the Act contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment. It is only those emoluments earned by an employee in accordance with the terms of employment which would qualify as basic wages and discretionary allowance not earned in accordance with the terms of employment would not be covered by basic wage. The statute itself excludes certain allowances from the term basic wages. The exclusion of dearness allowance in section 2(b)(ii) is an exception, but that exception has been corrected by including dearness allowance in section 6 for the purpose of contribution. For example, "attendance incentive" was not paid in terms of the contract of employment and was not legally enforceable by an employee. It would, therefore, not fall within "basic wage" as it was not paid to all employees of the concern. Likewise, transport/conveyance allowance was in the nature of reimbursement to an employee and such payments are not made universally, ordinarily and necessarily to all employees and, therefore, will not fall within the definition of "basic wage". But, to hold that conveyance allowance paid to all employees of the establishment without any proof in respect thereof, was unsustainable. Observations Made by the Supreme Court of India 4. The Court noted that basic wage would not ipso-facto take within its ambit the salary breakup structure to hold it liable for provident fund deductions when it was paid as special incentive or production bonus to more meritorious workmen who put in extra output, which had a direct nexus and linkage with the output by the eligible workmen. When a worker produces beyond the base or stand, what he earns is not "basic wage" and thus, this incentive wage will fall outside the purview of "basic wage". Reference was also made to an earlier decision of the Supreme Court in the case of Muir Mills Col.Ltd. Kanpur v. Its Workmen AIR 1960-SC-985 wherein it was observed that "basic wage" never includes the additional emoluments which some workmen may earn, on the basis of a system of bonuses related to the production. The quantum of earning in such bonuses varies from individual to individual according to their efficiency and diligence: it will vary sometimes from season-to-season with the variations of working conditions in the factory or other place where the work is done; it will vary also with variations in the rate of supplies of raw materials or in the assistance obtainable from machinery. This very element of variation excludes this part of workmen's emoluments from the connotation of "basic wage". In Manipal Academy of Higher Education v. PF Commissioner  5 SCC 428, relying upon Bridge Roof"s case (supra), the Supreme Court had observed that: "10. The basic principles as laid down in Bridge Roof's case (supra) on a combined reading of sections 2(b) and 6 are as follows :- (a) Where the wage is universally, necessarily and ordinarily paid to all across the broad, such emoluments are basic wages. (b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example, it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment, but because it may not be earned by all employees of a concern, it is excluded from basic wages. (c) Conversely, any payment by way of a special incentive or work is not basic wages."For 'Extra Allowances' to be excluded from 'Basic Wage', they must be linked to extra output produced by concerned employees 5. The Court noted that the term "basic wage" has not been defined under the EPF Act and when an expression is not defined, one can take into account the definition given to such an expression in a Statute, as also the dictionary meaning. In the aforesaid judgment dated 28.2.2019, the Supreme Court was of the opinion that those wages which are universally, necessarily and ordinary paid to all employees across the board are "basic wages". Where the payment is available to those who avail of the opportunity more than others, the amount paid for that cannot be included in the basic wage. For example, overtime allowance, though it is generally enforced across the board, but not earned by all employees equally. Overtime wages or for that matter, leave encashment may be available to each workman, but it may vary from one workman to other. The extra bonus depends upon the extra hour of work done by the workman, whereas leave encashment shall depend upon the number of days of leave available to workman. Both are variable. In view of what was observed above, the Supreme Court was of the opinion that the amounts received as leave encashment and overtime wages are not fit to be included for calculating basic wage. Supreme Court clarifies what are permissible deductions 6. Applying the aforesaid tests to the facts of the present appeals, the Supreme Court observed that no material had been placed by the establishments to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that the allowances in question were not paid across the board to all employees in a particular category or were being paid especially to those who availed the opportunity. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he is otherwise required to put in. The Court also observed that there was no data available on record to show the norms of work prescribed for those workmen during the relevant period and, therefore,due to this it was not possible to ascertain whether extra amounts paid to the workmen were in-fact-paid for the extra work which had exceeded the normal output prescribed for them. The Supreme Court noted that the wage structure and components of salary had been examined on facts, both by the authority and the appellate authority under the Act, who had arrived at a factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees. The Supreme Court, therefore, held that there was no occasion to interfere with the concurrent conclusions of facts and, therefore, the appeals preferred by the establishments did not merit any interference and conversely, the Court allowed the appeals preferred by the Regional PF Commissioner. Conclusion 7. The aforesaid Supreme Court's judgment has tremendous significance both for the employers as well as for employees. Though there has been lot of litigation and ambiguity surrounding what constitutes 'basic wage' for deduction of provident fund (which, at this point in time, is 12% for establishments having 20 or more employees and 10% for establishments with less than 10 employees), it is hoped that when the employers keep in mind the welfare of employees and the goodwill associated with taking good care of its employees, the reputation of such establishments would enhance in society. The basic objective of the EPF Act will get fulfilled only when the provisions of the Act are harmoniously considered, keeping in view the social welfare objective in mind. ■■
DELEP GOSWAMI, FCS Advocate Supreme Court of India, New Delhi
Anirrud Goswami Advocate, Supreme Court of India, New Delhi
Introduction 1. In a landmark judgement dated 4th October, 2018, the Hon'ble Supreme Court of India not only dealt with an important issue regarding eligibility criteria under Section 29A of the Insolvency & Bankruptcy Code, 2016 (IBC) for bidding in the resolution plan for a debt-ridden company admitted under section 7 of the IBC, but also dealt with and passed its judgement in respect of many other legal issues relating to the interpretation of many other provisions of the IBC. Since the IBC is going through testing process, it is expected that the said Supreme Court's judgement in the case of Arcelor Mittal India Private Limited –versus- Satish Kumar Gupta (in short "Arcelor Mittal judgement") will serve as a guide to the Resolution Professionals ('RP') and the creditors forming part of the Committee of Creditors (COC) as well as the Resolution Applicants ('RA'). In this article some of the important aspects of the judgement have been discussed.
Background of the case and the complex structure of the resolution applicants 2. A brief background of the case is that Essar Steel India Limited (ESIL) was one of the initial 12 companies in respect of which the Reserve Bank of India (RBI) directed the lender Banks to file applications at the National Company Law Tribunal ('NCLT') under the IBC for initiating corporate insolvency resolution process. However, ESIL challenged the said directive of the RBI in the Court, but without success. It was reported that ESIL's dues to the financial institutions and other creditors amounted to more than Rs. 54,000 crores. Once the case of ESIL was admitted by the NCLT and the RP was appointed, the corporate insolvency resolution process (CIRP) of ESIL started and the RP invited bids from prospective resolution applicants to submit their proposals. It needs to be highlighted here that in order to prevent the erstwhile promoters and persons acting in concert with them from bidding in the resolution application process, Section 29A was introduced in the IBC, whereby many disqualifications were inserted to disentitle the resolution applicants to be persons connected with the promoters of the debtor company. The provision of section 29A which came for interpretation was "A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person…" (i.e., various sub-clauses mentioned in section 29A)
Two resolution applicants submitted their bids/proposals for ESIL. One was by Arcelor Mittal controlled by Mr. Laxmi Narayan Mittal and another proposal was from Numetal, which was a Special Purpose Vehicle (SPV) created by the Ruias (i.e., the promoters of ESIL) solely for the purpose of bidding and submitting the proposal pursuant to the invitation to the prospective bidders by the RP. It is to be noted here that in the tug of war between bidders, on the one hand was Numetal, which had a complex corporate structure where at the time of incorporation, Mr. Rewant Ruia (son of ESIL promoter Mr. Ravi Ruia) held 100% shareholding (who later on divested his entire shareholding) and on the other hand was Arcelor Mittal which had interest in two other companies, viz., Uttam Galva Steels and KSS Petron, both of which had been declared NPAs by their respective lenders. In a hurry, both these resolution applicants wanted to cure their ineligibility under Section 29A and thus, in the case of Numetal, Rewant Ruia's control was brought down to less than 25% and in the case of Arcelor Mittal, promoter Mittal sold his shares in both the NPA companies, viz., Uttam Galva and KSS Petron. However, the RP found that both the bidders/resolution applicants were ineligible u/s. 29A of the IBC and rejected their proposals. Both these resolution applicants approached the NCLT against the said decision of the RP and the NCLT granted time to both the applicants to cure their ineligibility/defects. Meanwhile, Numetal completely dropped Rewant Ruia from the Numeral's complex structure. When appeals were filed against the said NCLT decision, the Appellate Authority, viz., NCLAT held that Numetal's second resolution plan would be eligible after Rewant Ruia had been completely dropped from the structure of the resolution applicant and the NCLAT also held that Mittal, in order to be eligible, had to pay the dues of the two companies which were declared NPAs, even though Mittal had already divested his shareholdings in these two companies.
Supreme Court examines and interprets provisions of Section 29A of IBC to determine eligibility of the resolution applicant. 3. Appeals were filed by both the RAs to the Supreme Court of India and the Supreme Court, vide its judgement dated 4th October, 2018 held the following while interpreting Section 29A of the IBC :-
"The opening lines of Section 29A of the amended Act refer to a "de-facto", as opposed to a "de-jure" position of the persons mentioned therein. This is a typical instance of a "see through provision", so that one is able to arrive at persons who are actually in "control", whether jointly, or in concert, with other persons. A wooden, literal interpretation would obviously not permit a tearing of the corporate veil when it comes to the "person" whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as Section 29A, alone governs. For example, it is well-settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set-up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Solomon v. A. Solomon and Co. Ltd. (1897-AC22) will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan."
To examine eligibility of resolution applicant, its business structure can be examined by piercing the corporate veil.
Entities prohibited by SEBI : ineligible to submit resolution plan 5. The Supreme Court held that "When we come to sub-clause (f), it is clear that, if any of the persons mentioned in section 29A is prohibited by SEBI from either trading in securities or accessing the securities market – again ineligibility of the person submitting the resolution plan attaches. Under sub-clause (f), if a person situate abroad is subject to any disability which corresponds to sub-clause (f), such person also gets interdicted." Further, the Supreme Court held that "it is clear that if a person is prohibited by a regulator of the securities market in a foreign country from trading in securities or accessing the securities market, the disability under sub-clause (i) would then attach."
Time-limit of maximum 270 days prescribed under the IBC : not extendable. 6. On the question as to whether adhering to the time limit set out in the IBC for approval of the resolution plan was mandatory or not, the Supreme Court held that "in fact, even the literal language of section 12(1) makes it clear that the provision must be read as being mandatory. The expression "shall be completed" is used. Further, sub-section (3) makes it clear that the duration of 180 days may be extended further "but not exceeding 90 days", making it clear that a maximum of 270 days is laid down statutorily. Also, the proviso to section 12 makes it clear that the extension 'shall not be granted more than once'". Further, the Supreme Court held that "what is important to note is that a consequence is provided in the event that the said period ends either without receipt of a resolution plan or after rejection of a resolution plan under Section 31.This consequence is provided by Section 33, which makes it clear that when either of these two contingencies occurs, the corporate debtor is required to be liquidated in the manner laid down in Chapter III. Section 12, construed in the light of the object sought to be achieved by the Code, and in the light of the consequence provided by Section 33, makes it clear that the periods previously mentioned are mandatory and cannot be extended." However, the Supreme Court further held that the act of the Court shall harm no man and this is a maxim firmly rooted in our jurisprudence and that a reasonable and balanced construction of the Statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, time taken in litigation ought to be excluded, as otherwise a good resolution plan may have to be shelved resulting in corporate death and the consequent displacement of employees and workers.
RP cannot "decide", but only examine legality of the Resolution Plan for consideration of CoC. 7. With regard to the role and duty of the RP especially if the resolution plan received by him conform to the norms set out in the IBC and connected Regulations, the Supreme Court held that "what has now to be determined is whether any challenge can be made at various stages of the corporate insolvency resolution process. Suppose a resolution plan is turned down at the threshold by a Resolution Professional under section 30(2). At this stage is it open to the concerned resolution applicant to challenge the Resolution Professional's rejection? It is settled law that a statute is designed to be workable and the interpretation thereof should be designed to make it so workable." It further stated that "given the timeline referred to above and given the fact that a resolution applicant has no vested right that his resolution plan be considered, it is clear that no challenge can be preferred to the Adjudicating Authority at this stage. A writ petition under Article 226 filed before a High Court would also be turned down on the ground that no right, much less a fundamental right, is affected at this stage. This is also made clear by the first proviso to section 30(4), whereby a Resolution Professional may only invite fresh resolution plans, if no other resolution plan has passed muster. However, it must not be forgotten that a Resolution Professional is only to "examine" and "confirm" that each resolution plan conforms to what is provided by Section 30(2). Under Section 25(2)(i), the Resolution Professional shall undertake to present all resolution plans at the meetings of the Committee of Creditors. This is followed by section 30(3), which states that the Resolution Professional shall present to the Committee of Creditors, for its approval, such resolution plans which confirm the conditions referred to in sub-section(2). This provision has to be read in conjunction with Section 25(2)(i), and with the second proviso to Section 30(4),which provides that where a resolution applicant is found to be ineligible under Section 29A(c) the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30 days, to make payment of overdue amounts in accordance with the proviso to Section 29A(c). A conspectus of all these provisions would show that the Resolution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects before submitting it to the Committee of Creditors. The Resolution Professional is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the Committee of Creditors, who may or may not approve it…… His prima-facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to "decide" whether resolution does or does not contravene the provisions of law." The Supreme Court further held that even though it is not necessary for the RP to give reasons while submitting a resolution plan to the COC, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration and state briefly as to why it does, or does not conform to the law.
Adjudicating Authority to finally decide the recommendation of the CoC and approve/disapprove the resolution plan and the appeal provisions. 8. With regard to the question as to when the aggrieved resolution applicant can approach the Court, the Supreme Court's judgement held that an aggrieved resolution applicant can approach the NCLT (i.e., the Adjudicating Authority) for relief only after a resolution plan has been considered by the CoC after voting and not prior to that. The AA acting quasi-judicially, can determine whether the resolution plan violates provisions of any law, including section 29A of the IBC, after hearing arguments from the RA, as well as the CoC, after which an appeal can be preferred from the AA's decision to the NCLAT. The NCLAT decision can further be challenged u/s. 62 of the IBC before the Supreme Court on the question of law arising out of such an order of the NCLAT. Supreme Court invoking the provisions of Article 142 of the Constitution of India 9. In ESIL's case, the Supreme Court found that both the resolution applicants were ineligible and hit by section 29A (c). However, acceding to the request made on behalf of the CoC, the Supreme Court in order to do complete justice under Article 142 of the Constitution of India and also for the reason that the law on Section 29A has been laid down for the first time by its judgement, gave one more opportunity to both the RAs to pay off the NPAs of their related corporate debtor companies within a period of two weeks and allowed the RAs to resubmit their resolution plans to the CoC, who were then given a period of 8 weeks from the date of the judgement, to accept by requisite majority, the best amongst the plans submitted, including the resolution plan submitted by Vedanta.
Events happening after the Supreme Court judgement 10. The various newspaper reports indicate that the CoC of ESIL voted to approve Arcelor Mittal's bid, with upfront payment of Rs. 42,000 crore towards ESIL's resolution debt and that Arcelor Mittal will further inject Rs. 8000 towards capital to support operational improvement, increase production and enhanced productivity. The said plan is now awaiting approval of the NCLT. After such NCLT approval, Arcelor Mittal will own and operate ESIL in partnership with Nippon Steel and Sumitomo Metal Corporation. However, it is reported that the promoters of ESIL are invoking the provision of Section 12A in the IBC which allows withdrawal of the debtor's case 90% of the lenders agree to it. Meanwhile 29 operational creditors of ESIL to whom ESIL owed Rs. 381 crores have moved application before the NCLT to direct the successful bidder to pay them in full or allow the proposal of the owners of ESIL to bring in Rs. 54,389 crores which will enable full payment to the operational creditors. Another operational creditor First Orissa Stevedores to whom ESIL owed Rs. 20.46 has also moved application before the NCLT to direct the CoC to consider the proposal of the owners of ESIL which talks of full payment to the operational creditors.
All these later developments indicate that despite Supreme Court's clear verdict, further legal battles will ensue from what NCLT decides on the recommendation of the CoC of ESIL. It is hoped that once the ESIL case reaches finality, it will pave way for smoother processes for other debt-ridden companies under IBC jurisdiction. ■■
SUPREME COURT OF INDIA NEW DELHI firstname.lastname@example.org Ph: (+91) 9891169035
ANIRRUD GOSWAMI ADVOCATE
GOSWAMI & GOSWAMI NEW DELHI email@example.com Ph: (+91) 9711117019
As Published in ICSI's Journal 'CHARTERED SECRETARY' SEPTEMBER 2018 ISSUE
In a significant judgement dated 14th August, 2018, the Hon’ble Supreme Court of India in State Bank of India versus V. Ramakrishnan & Anr (Civil Appeal No.3595/2018) has held that the moratorium contained in Section 14 of the Insolvency and Bankruptcy Code, 2016 does not apply to the personal guarantor who stood guarantee for the loan obtained by the corporate debtor. This judgement of the Supreme Court has cleared the confusion that was created by the order of National Company Law Tribunal, Chennai Bench in V. Ramakrishnan versus Veesons Energy Systems Pvt. Ltd.where the NCLT held that after admission of insolvency proceedings against the corporate debtor and the initiation of corporate insolvency resolution process (CIRP) and participation by the Committee of Creditors (CoC), the lender/creditor of loans given to the corporate debtor, cannot invoke the guarantee that was given by the guarantor to secure the loan obtained by the corporate debtor. When this decision of the NCLT (Chennai) was appealed against, the Appellate Authority, namely, the National Company Law Appellate Tribunal (NCLAT), vide its final order dated 28th February 2019 also upheld the decision of the NCLT in the said matter. The NCLAT held that the moratorium imposed under Section 14 of the Code would also apply to the personal guarantor. The impact of the aforesaid NCLT order of 18th September, 2017 and the subsequent NCLAT order of 28th February, 2018 created a difficult situation for lender banks/creditors who wanted to invoke the personal guarantee of the guarantor even though the debtor company was under the CIRP.
The brief background of the appeal filed by the State Bank of India before the Supreme Court is that the Respondent No.1 was the Managing Director of the corporate debtor, namely, the Respondent No.2 company, and also the personal guarantor in respect of credit facilities that had been availed from the Appellant. The Guarantee Agreement entered into between the Appellant and the Respondent No.1 was dated 22.02.2014. As the Respondent No.2 company did not pay its debts in time, the account of Respondent No.2 was classified as a “non-performing asset” on 26.05.2017. Consequent thereto, the Appellant issued a notice dated 4.8.2015 u/s 13(2) of the SARFAESI Act demanding an outstanding amount of Rs.61,13,28,785.48 from the Respondents within the statutory period of 60 days. As no payment was forthcoming, a possession notice u/s 13(4) of the SARFAESI Act was issued on 18.11.2016.
As matter stood thus, an application was filed by the corporate debtor under section 10 of the IBC on 20.5.2017 to initiate the CIRP against itself. On 19.6.2017, the said application was admitted, followed by the moratorium that is imposed statutorily u/s 14 of the IBC. During pendency of the proceedings, an interim application was filed by Respondent No.1 as personal guarantor to the corporate debtor, where he took up the plea that section 14 of the IBC would apply to the personal guarantor as well, as a result of which proceedings against the personal guarantor and his property would have to be stayed. The Adjudicating Authority before whom the proceedings under the IBC were pending, vide order dated 18.9.2017 held that since u/s 31 of the IBC, a Resolution Plan made thereunder would bind the personal guarantor as well, and since, after the creditor is proceeded against, the guarantor stands in the shoes of the creditor, s.14 would apply in favour of the personal guarantor as well. The interim application filed by Respondent No.1 was thus allowed and the Appellant was restrained from moving against Respondent No.1.
An appeal filed by the SBI before the NCLAT against the aforesaid NCLT order was dismissed. The NCLAT, vide the impugned judgement dated 28.2.2018 relied upon s.60(2) and s.60(3) as well as s.31 of the IBC to hold that moratorium imposed u/s 14 would also apply to the personal guarantor. The reasoning was that since the personal guarantor can also be proceeded against, and forms part of a Resolution Plan which is binding on him, he is very much part of the insolvency process against the corporate debtor, and that, therefore, the moratorium imposed u/s 14 should apply to the personal guarantor as well.
At the Supreme Court, the Appellants argued that the corporate debtor and personal guarantor are separate entities and that a corporate debtor undergoing insolvency proceeding under the IBC would not mean that a personal guarantor is also under the same process. As the guarantor’s liability is distinct and separate from that the corporate debtor, a suit can be maintained against the surety, though the principal debtor has not been sued. Reliance was heavily placed on s.128 of the Indian Contract Act, 1872 and the reasoning contained in a judgement of the Single Judge of the Bombay High Court in M/s Sicom Investments and Finance Limited versus Rajesh Kumar Drolia & Anr. [(2017) SCC Online Bom 9725]. The Appellants also referred to Part III of the IBC, and in particular to Sections 96 and 101. Although Part III of the IBC has not been brought into force, it is clear that if an insolvency resolution process is to be carried out against a personal guarantor, it can be done only under Part III, which contains a separate moratorium provision, namely, sections 96 and 101, both of which apply only if a separate insolvency process were carried out as against the personal guarantor. The Appellant relied heavily upon the difference in language between sections 14 and 101 of the IBC and stressed that section 14, in all its sub-sections, speaks only of the corporate debtor. When contrasted with section 101, it becomes clear that section 14 cannot possibly attach to a personal guarantor as well, as section 101 does not speak of a “debtor”, but speaks “in relation to the debt” and is not only wider than section 14, but would attach only if Part III proceedings were to be instituted against the personal guarantor.
The Appellants also relied heavily upon the Amendment Ordinance dated 6.6.2018, by which section 14(3) of the IBC was substituted, including a surety in a contract of guarantee to a corporate debtor. Reliance was placed upon the proceedings of the Insolvency Law Committee (ILC) which led to the aforesaid amendment, stating that it had been recommended to clarify, by way of an explanation, that all assets of such guarantors to the corporate debtor shall be outside the scope of the moratorium imposed under section 14 of the IBC. Interestingly, the same impugned judgement that was assailed in the present proceedings before the Supreme Court, was also referred to by the ILC stating that such broad interpretation of section 14 would curtail significant rights of the creditor. They relied upon judgements which made it clear that clarificatory statutes, like this amendment, would have retrospective operation and that, therefore, in any case, the impugned judgement would have to be set aside.
On the other hand, the Respondents took shelter under section 60(2) of the IBC and contended that the said section precludes Banks from proceeding against the personal guarantor under SARFAESI Act or any other Act outside the IBC. They also relied upon the reasoning of the NCLT and took shelter under Section 31 of IBC. Reliance was also placed on Allahabad High Court’s judgement in Sanjeev Shriya Vs. State Bank of India & Ors. (2018) 2 All LJ 769, which stated that as the proceeding relatable to the corporate debtor is pending adjudication in two forums, it is not permissible to proceed against the personal guarantor and that a financial creditor cannot operate in a manner that imperils the value of the property of the personal debtor. The Respondents also referred to the Insolvency and Bankruptcy Code (Amendment) Act, 2018 which came into effect on 23rd November 2017, by which, Clause (e) of Section 2 of IBC was substituted so as to include within the sweep of the IBC, personal guarantors to corporate debtors. The Respondent’s counsel also relied upon the Statement of Objects of the Amendment Act of 2018 which was, inter alia, to extend the provisions of IBC to personal guarantors of the corporate debtors, to further strengthen the CIRP. He further relied on certain statutory forms under the IBC which provide that information as to personal guarantees have to be given in relation to the debts of the corporate debtor when an insolvency process is initiated against the corporate debtor and that all this would show that since the personal guarantor is very much part of the overall process, the moratorium contained in Section 14 of the IBC should apply to the personal guarantor as well.
The Supreme Court had appointed an Amicus Curiae who pointed out that the whole idea of the IBC was that the history of debt recovery had shown that the earlier statutes were loaded heavily in favour of the corporate debtors and that, as a result, huge outstanding debts to banks and financial institutions had not been repaid. He also pointed out that Section 22 of the Sick Industrial Companies (Special Provisions) Act 1985 applied to guarantors as well and as a result the creditors could not proceed against the guarantors as well after the company had been declared sick industrial company under the said Act, without permission from the Board for Industrial and Financial Reconstruction (BIFR). Now that SICA had been repealed and the fact that several later enactments, including the Companies Act 2013 had omitted a provision akin to Section 22 of the SICA, it would go to show that the enactment of Section 14 of the IBC was deliberate and that the idea was that there should be no stay of proceedings against a guarantor while the corporate debtor is undergoing an insolvency proceeding. For this, the Amicus Curiae cited various judgements and also relied upon the Amendment Act of 2018 and stated that since the Act was to get over the impugned judgement of the NCLT in particular, and since it was clarificatory, the position in law would be that it would be retrospective, and would thus govern the SBI Appeal that was being heard by the Supreme Court.
After referring to various applicable provisions of the IBC, some of which are yet to be enforced, the Supreme Court observed that Section 14 refers to four matters that may be prohibited once the moratorium comes into effect. However, moratorium against the personal guarantor is conspicuous by its absence because the corporate debtor is the only one referred to in that Section of the Code. The Court also noted that a plain reading of the said Section 14 leads to the conclusion that the moratorium referred to therein can have no manner of application to personal guarantors of a corporate debtor.
The Supreme Court thereafter observed that under the scheme of Section 60(2) and (3), the moment there is a proceeding against the corporate debtor pending under the 2016 Code, any bankruptcy proceeding against the individual personal guarantor will, if already initiated before the proceeding against the corporate debtor, be transferred to the NCLT or, if initiated after such proceedings had been commenced against the corporate debtor, be filed only in the same bench of the NCLT where the proceedings were pending. However, the Tribunal is to decide such proceedings only in accordance with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be. It is clear that Section 60(4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal (DRT), as contemplated under Part III of this Code, for the purposes of sub-section (2), would not take effect, as the DRT has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. The Court further noted that as could be seen from Section 249, dealing with the consequential amendment of the Recovery of Debts Act to empower DRTs to try such proceedings, has also not been brought into force. It is thus clear that Section 2(e), which was brought into force on 23.11.2017 would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3), as stated hereinabove. This is what is meant by strengthening the CIRP in the Statement of Objects of the Amendment Act, 2018.
In the abovementioned SBI Appeal in the Supreme Court, the Respondents strongly relied upon Section 31 of the IBC. However, it was noted that section 31 only states that once a Resolution Plan, as approved by the CoC takes effect, it shall be binding on the corporate debtor, as well as the guarantor. This is for the reason that otherwise, under section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. It was pointed out that in fact section 31(1) of IBC makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI (e) to Form 6 contained in the Rules and Regulation 36(2) require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. The Court observed that far from supporting the stand of the Respondents, it is clear that in point of fact, Section 31 of IBC is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.
The Supreme Court also noted that Section 14 of the IBC refers to debts due by the corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies and that the object of IBC is not to allow such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why the provisions of section 14 of IBC are applied to them. For the purposes of interpretation, the Supreme Court observed that it is certainly open for the court to contrast section 14 with sections 96 and 101, as sections 96 and 101 are laws made by the Legislature, even though they have not yet been brought into force.
With regard to the difficulties faced by the Creditors to enforce personal guarantees in respect of sick industrial companies, the Supreme Court also noted that as per provisions of section 22(1) of the SICA (since repealed on 1.2.2016), suits for the enforcement of any guarantee in respect of loans or advances granted to the sick industrial company, could not lie or proceeded with further, expect with the consent of the BIFR and that by notification dated 30.11.2016, section 14 of the IBC was brought into force with effect from 1.12.2016. In this regard, the Supreme Court referred to the judgement in re. Madras Petrochem Limited and Another versus BIFR & Ors (2016-4-SCC-1) wherein it was observed that even the Companies Amendment Act, 2002 omitted a provision similar to section 22(1) of SICA and consequently creditors were given liberty to file suits or initiate other proceedings for recovery of dues despite pendency of proceedings for the revival or rehabilitation of sick industrial companies before the NCLT. The Court also noted that Chapter 19 of the Companies Act, 2013 which contains provisions of sections 253 to 269 dealing with revival and rehabilitation of sick companies along the lines of sections 424A to 424H of the amended Companies Act, 1956, yet, conspicuous by its absence was a provision akin to section 22(1) of the SICA. The Supreme Court thus observed that it is clear that for this reason also, it is obvious that Parliament when it enacted section 14 had this history in mind and specifically did not provide for any moratorium along the lines of section 22 of SICA into section 14 of IBC. The Supreme Court also observed that the reasoning of the Bombay HC in Sicom Investments (supra) commends itself to the SC and that the reasoning of the Allahabad HC on the other hand was not acceptable.
The Supreme Court also noted that the amendment of 2018 which makes it clear that section 14(3) is now substituted to read that the provisions of sub-section (1) of section 14 shall not apply to a surety in a contract of guarantee for corporate debtor. The Supreme Court also noted that the Insolvency Law Committee, appointed by the Ministry of Corporate Affairs, by its Report dated 26.3.2018 made certain key recommendations, one of which was:- “(iv) to clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-à-vis the moratorium on the assets of the corporate debtor, it has been recommended to clarify by way of an explanation that all assets of such guarantors to the corporate debtor shall be outside the scope of moratorium imposed under the Code.”
The said Committee had also noted that there have been contradicting views on the scope of the moratorium regarding its application to third parties affected by the debt of the corporate debtor, like guarantors or sureties. While some courts have taken the view that section 14 may be interpreted literally to mean that it only restricts actions against the assets of the corporate debtor, a few others have taken an interpretation that the stay applies on enforcement of guarantee as well, if a CIRP is going on against the corporate debtor then the debt owed by the corporate debtor is not final till the resolution plan is approved and thus the liability of the surety would also be unclear. Hence, until the debt of the corporate debtor is crystallised, the guarantor’s liability may not be triggered. The Committee also took note of the decision of the NCLAT (which was impugned before the Supreme Court) and felt that a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee. The Committee also noted that as per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence. The Committee further noted that a literal interpretation of section 14 is prudent, and a broader interpretation my not be necessary in the context of cases admitted by the Adjudicating Authority under the IBC. The Committee also noted that to abuse the provision of moratorium, many companies have filed applications u/s 10 of IBC to initiate corporate insolvency resolution process primarily to save their personal assets/guarantees which were given to the lender banks/institutions/creditors to secure the loans obtained by the corporate debtor company promoted by them. The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section 14 of the IBC and that the scope of the moratorium may be restricted to the assets of the corporate debtor only.
The Supreme Court noted and observed that the said Committee makes it clear that the object of the amendment to the IBC was to clarify and set at rest what the Committee thought was an overbroad interpretation of section 14 of IBC and that such clarificatory amendment is retrospective in nature and in this regard relied on the earlier SC judgement in CIT versus Shelly Products (2003-5-SCC-461) and the decision in CIT versus Vatika Township (2015-1-SCC-1) and held that the amendment basically clarified the law so as to remove doubts and being clarificatory in nature, it must be held to be retrospective, in the facts and circumstances of the case. The SC also noted that an explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act and it is well settled that if a statute is curative or merely declaratory of the previous law, it is in plain terms retrospective in the absence of clear words indicating that the amendment Act is to be applied prospectively. For all these reasons, the SC set aside the impugned judgement of the NCLAT and the appeals filed by SBI were allowed.
It needs to be appreciated that the IBC has prescribed certain limitations which are inbuilt and must not be overlooked. The moratorium imposed under Section 14 of the IBC shall prohibit action against the properties reflected in the balance sheet of the corporate debtor and that moratorium has no application on the properties beyond the ownership of the corporate debtor. Therefore, the plain language of Section 14 is that on the commencement of insolvency process, the moratorium shall be declared prohibiting any action to recover or enforce any security interest created by the corporate debtor in respect of “its property”.
The way bad debts and non-performing assets have mounted up and adversely affected the Indian economy and put a question mark on the way the banks indiscriminately granted loans to business entities/industrial companies, it needs forensic audit of the debtor companies and unless stricter measures are initiated to recover the outstanding debt amounts, it is feared that the system would collapse. At this juncture, the aforesaid SC judgement will at least pave the way for recovery of outstanding amount by invoking personal guarantee given by the promoters/other personal guarantors in respect of companies undergoing corporate insolvency resolution process under the IBC. ======================
Delep Goswami, FCS, Advocate, Supreme Court of India, New Delhi
Anirrud Goswami, Advocate, Goswami & Goswami, New Delhi
Published in July 2018 issue of Chartered Secretary (ICSI)
Paramount Need for Ethical Governance
While inaugurating the ICSI Centre of Excellence at Hyderabad in September 2017, the Hon’ble Vice President of India, Sri M. Venkaiah Naidu said that strong foundation in ethical values should be the basis for exemplary corporate governance. He also said that in the wake of globalization and increasing role of corporates in driving the economies, it has become imperative for professionals like company secretaries to acquire cutting-edge knowledge and skills that are not only in tune with the best practices, but also facilitate and promote good corporate governance. He further said that India, with its inherent spiritual strength, rich traditions and strong value systems – which form the core of many family-run businesses – can emerge as a role model for other countries in corporate governance and that the practitioners of corporate governance, like the Company Secretaries, should play a leading role in making India a global leader in their field. He also emphasised that before looking elsewhere for lessons in corporate governance, one should look inwards and what better than Kautilya’s Arthashashtra, because the principles and practices on economic management written by Kautilya in the 4th Century B.C. are relevant even now. He lauded the role of the Institute of Company Secretaries of India (ICSI) for coming out with a vision “to be a global leader in promoting good corporate governance” and a mission “to develop high calibre professionals facilitating good corporate governance”. He further emphasized that the ICSI should ensure that these objectives do not remain as mere slogans and are achieved in the fullest manner. He also said that the Company Secretary is not only the conscience keeper of a corporate business enterprise but he/she also has a larger social responsibility. No doubt, Company Secretaries are key managerial personnel, but they also represent internal and external stakeholders and as such, play a pivotal role in ensuring compliances and implementing principles of good corporate governance. He was also emphasized that the Company Secretaries should constantly update themselves with the changes in the laws for proper guidance of the management and other stakeholders. The Hon’ble Vice President of India also stressed that money-laundering through “shell companies” is one of the menaces that affect the economy of a country and he commended the decision of the ICSI to sensitize all its members and other stakeholders on the deleterious impact not only of the shell companies, but also of shell NGO’s.
While, the speech given by the Hon’ble Vice President of India briefly outlines the expectation of the Government and the society on the professional acumen and good ethical values to be perpetrated by the Company Secretaries for good corporate governance, this article will also highlight some of the observations of SEBI about the role of Company Secretaries and also about the role, responsibility and liabilities of Practicing Company Secretaries (PCS’s) by analysing some of the decisions of the Disciplinary Committee (DC) of the ICSI.
It is pertinent to mention that while inaugurating the two-day Golden Jubilee National Conference of Practicing Company Secretaries, on the theme of “PCS – A Value-Driven Professional”, organized by ICSI Mumbai on 18th May 2018, the Chairman of SEBI, Shri Ajay Tyagi pointed out that the Company Secretaries have transformed themselves from secretaries to the board and management, into a key managerial personnel in corporate governance and have made a mark on the corporate landscape by becoming gatekeepers of corporate governance. The said event also discussed and explored utmost adherence to the values of independence, integrity, professional competence and ethical conduct of the role of Company Secretaries. The SEBI Chairman also emphasized that not only shareholders but other stakeholders also become gatekeepers of corporate governance of the company. The SEBI Chairman, however, pointed out that he came across an analysis on secretarial audit standards in companies, which was undertaken by the National Stock Exchange in February 2018 and he was rather disappointed to see that many secretarial audits did not report non-compliances, penalties or compliance of action taken events as pointed out by the stock exchange. Mr. Tyagi, therefore, urged all the Company Secretaries to submit quarterly secretarial audit reports so as to demonstrate commitment and good practices in governance of commercial and financial management of companies.
Mr. Tyagi also spoke on ethics in good corporate governance and said that though all rules and regulations exist, but in the end, it all boils down to good governance. Compliance with regulations and an attitude of integrity has to be developed in operations. A stronger ethical culture will strengthen investors’ faith in the capital market, he said. He also emphasized that the Company Secretary, has been recognized as one of the most important pillars of good governance of all corporates and if the CS discharges his/her duties diligently, the quality of good corporate governance can be brought at par with the best in the world.
In the context of paradigm shift in the provisions of the Companies Act in 2013 and the stringent rules and regulations made thereunder, onerous duties and responsibilities have been cast upon the board of directors, the key managerial personnel including the CFO and CEO and the Company Secretary, to ensure compliances with the provisions of the Companies Act, 2013, as amended from time to time and the other applicable provisions of the related laws and regulations. A new set of guidelines on the appointment and duties of Independent Directors in all listed companies and in certain companies beyond a particular size, have been made with a view that there has to be an independent evaluation of the functioning of the Board of Directors and the executives who are entrusted with the responsibility for following the company decisions and that legal non-compliances, fraudulent practices, diversion of corporate funds to non-eligible legal entities either in the group company or in the promoter’s controlled companies, are pointed out and immediate corrective actions are taken to prevent such mismanagement and misgovernance. However, despite these stringent provisions of the law and the power being exercised by the regulatory authorities, there have been cases after the infamous Satyam scam by scams by companies like Kingfisher Airlines, United Spirits, Ricoh India, Fortis, and Nirav Modi’s companies and many such companies which are coming out of the closet in public domain.
The public at large is sceptical of the intention of the legislative changes and the intent of the regulatory authorities in timely detection and intervention and to take steps by arresting the Directors involved and the CFOs and CEOs who certify the financial statement of companies as per the requirement of the Companies Act, 2013. Instance can be made of the arrest of the CFO of Kingfisher has perhaps not yet sent the right signal to the corporate professionals about having the need to display courage in due diligence and identifying and reporting corporate misdeeds and misgovernance.
Duties and Responsibility of CS and PCS under Companies Act 2013 and Rules In the context of the duties and responsibilities of the Company Secretaries under the Companies Act, 2013 and the rules made thereunder, some of the important provisions are highlighted hereunder:
As per Section 92 of the Companies Act, 2013 read with Rule 11 of the Companies (Management and Administration) Rules 2014, every listed company and companies having paid-up share capital of Rs.10 crore or more and companies having a turnover of Rs.50 crore or more, need to get their annual returns certified by a Company Secretary in Practice (PCS).
As per Section 177 and Section 178 of the Companies Act, 2013 read with Rule 6 of the Companies (Meeting of Board and its Powers) Rules 2014, every listed company and every company having paid-up share capital of Rs.10 crore or turnover of Rs.100 crore or more or where the outstanding loans, debentures, deposits exceed Rs.50 crore, are required to mandatorily constitute an Audit Committee and Nomination and Remuneration Committee.
As per Section 177 of the Companies Act 2013 read with Rule 7 of the Companies (Meeting of Board and its Powers) Rules 2014, every listed company and every company which accepts deposits from the public or whose borrowings from banks and financial institutions exceed Rs.50 crore, is required to establish a vigil mechanism for Directors and employees to report their genuine concerns about on unethical behavior / misconduct / actual or suspected frauds / violation of code of conduct.
Section 203 of the Companies Act, 2013 read with Rules 8 and 8A of the Companies (Appointment and Remuneration) Rules, 2014, stipulates that every listed company and public companies with paid-up share capital of Rs.10 crore or more shall have a whole time key managerial personnel and a company having paid-up share capital or Rs.5 crore or more shall have a whole time company secretary.
Section 204 of the Companies Act, 2013 read with Rule 9 of the relevant Rules mandates secretarial audit of all listed companies and public companies with a paid up share capital of Rs.50 crores or more or with turnover of Rs.250 crores or more.
Under Section 205(1), the functions of the company secretary include--
to report to the Board about compliance with the provisions of the Act, the rules made there under and other laws applicable to the company;
to ensure that the company complies with the applicable secretarial standards;
to discharge such other duties as may be prescribed.
Further, Rule 10 under authority of Section 205(1)(c) entrust following duties on a Company Secretary:
to provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers;
to facilitate the convening of meetings and attend Board, committee and general meetings and maintain the minutes of these meetings;
to obtain approvals from the Board, general meeting, the government and such other authorities as required under the provisions of the Act;
to represent before various regulators, and other authorities under the Act in connection with discharge of various duties under the Act;
to assist the Board in the conduct of the affairs of the company;
to assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and
to discharge such other duties as have been specified under the Act or rules; and
such other duties as may be assigned by the Board from time to time.
With regard to borrowing of money, Section 180 of the Act stipulates certain procedures that require approval of shareholders by special resolution. With regard to loans and investments in excess of 60 per cent of the paid-up capital and free reserves etc., Section 186 mandates approvals of shareholders by a special resolution.
Section 188 mandates prior shareholders’ approval in case of “related party transactions” as stipulated therein.
Subject to companies meeting the applicable threshold limits prescribed in the following sections:
Under Section 138 of the Companies Act 2013 read with Rule 13 of the Companies (Accounts) Rules 2014, a CS is required to ensure the appointment of internal auditors.
Under Section 135 of the Act read with the Companies (CSR Policy) Rules 2014, the CS is to ensure that a CSR Committee is constituted.
Under Section 139 of the Companies Act 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014, the CS has to ensure rotation of statutory auditors in a company.
Under Section 149 read with Rules 3 and 4 of the Companies (Appointment and Qualifications of Directors) Rules 2014, the CS is to ensure that the company appoints a woman Director.
Secretarial Audit by PCS
As mandated in Section 204(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014, the companies covered under the prescribed threshold limits therein are mandatorily required to get a secretarial audit carried out by a qualified Company Secretary in Practice (PCS) and such secretarial audit report is to be annexed with the Board of Directors’ Report to the shareholders and it has to comply with the format prescribed in Form MR-3, ensuring compliances with the provisions of the Companies Act, the SCRA, the Depositories Act, the Foreign Exchange Management Act, the SEBI Act and Regulations and also to report to compliances of “other laws” as may be applicable to the company concerned.
Secretarial Audit ensures objective evaluation by an independent qualified professional and helps in accomplishing the objectives of the company concerned by evaluating and improving the risk-management, control and governance processes, keeping in view the compliances mandated for the companies. Section 448 of the Companies Act 2013 provides that if any return, report, certificate, financial statement, prospectus, statement or other document required by or for the purposes of any of the provisions of the Act or the Rules made thereunder, any person who makes a statement which is false in material particulars, knowing that it to be false; or which omits any material fact, knowing it to be material, such person shall be liable for punishment under Section 447 which deals with “Punishment for Fraud”.
Complaints Against PCS And Punishment by Disciplinary Commitee Since the Institute of Company Secretaries of India (ICSI) has a significant role in controlling the conduct of CS, be they in whole-time service or Practicing Company Secretaries (PCS), it becomes necessary to understand the provisions of the Company Secretaries Act, 1980 and the relevant Schedules attached thereto. As per the First Schedule in Part I of the Act which deals with professional misconduct in relation to Company Secretaries in Practice, it stipulates that a PCS shall be deemed to be guilty of professional misconduct in certain areas which basically cover how he/she should practice. Part II of the same First Schedule to the Act elucidates professional conduct in relation to the members of the ICSI in service and it also deems certain misconduct in relation to the Company Secretaries in employment. Part III and Part IV of the said First Schedule deal with professional misconduct in relation to members of the ICSI generally and other misconduct in relation to members of ICSI.
It is only in the Second Schedule to the CS Act, 1980, that Part I thereof stipulates inter-alia, in para 7 that the PCS shall be deemed to be guilty of professional misconduct where he does not exercise due diligence or is grossly negligent in the conduct of his professional duties and fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion. If the PCS fails to invite attention to any material departure from the generally accepted procedure related to the secretarial practice, he/she shall be deemed to be guilty of professional misconduct.
Further, a PCS shall be deemed to be guilty of professional misconduct if he/she fails to disclose a material fact known to him/her in his report/statement but the disclosure of which is necessary in making such report/statement, where he/she is concerned with such report/statement in a professional capacity. Further, it is also stipulated that failure of the PCS to report a material misstatement known to him/her, with which such PCS is concerned in a professional capacity, shall be deemed to be professional misconduct and such PCS can be held guilty.
Similarly in Part II of the Second Schedule of the CS Act, 1980, a member of ICSI, whether in practice or not, shall be deemed to be guilty of professional misconduct if inter-alia, he/she contravenes any of the provisions of the CS Act, 1980 or the regulations made thereunder or the guidelines issued by the ICSI or if such members defalcates or embezzles money received in his/her professional capacity. Part III of the Second Schedule of the CS Act, 1980 stipulates that a member of the ICSI, whether in practice or not, shall be deemed to be guilty of other misconduct, if he/she is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.
The CS Act, 1980 and regulations also prescribe the Procedure for Inquiries in Relation to Misconduct of Members of the ICSI and the provisions of appeal therefrom. It is pertinent to note that a complaint can be made under Section 21 of the Company Secretaries Act, 1980 read with Sub-Rule 4 of Rule 3 of the Company Secretaries (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules 2007, against a PCS for not exercising due-diligence or in gross negligence in the conduct of his/her professional duties.
In this regard, it needs to be highlighted that the Disciplinary Committee of the ICSI is conscious of its role in looking into complaints against erring Company Secretaries, be they in service or in practice. Also, as mandated in the CS Act, 1980, an Appellate Authority has also been constituted with retired High Court Judge for considering appeals against the decisions of the Disciplinary Committee of the ICSI. Incidentally, the Disciplinary Committee of the ICSI had, on the basis of complaints received regarding compliance certificate issued by the PCS without exercising due diligence or without complying with the standards and requirements pertaining to compliance certificate, held the PCS liable for professional misconduct. Wherever needed, the Disciplinary Committee has “reprimanded” the erring PCS and also imposed penalty by way of monetary fine. In certain cases, depending on the gravity of the professional misconduct, the Disciplinary Committee had also awarded punishment by way of removal of the name of the concerned PCS from the Register of Members of ICSI for a specified period. These disciplinary proceedings and orders of the Committee act as a deterrent for the PCS and encourages them to be more vigilant and cautious in exercising due diligence while certifying documents for companies.
Such orders of the Disciplinary Committee of the ICSI and its Appellate Authority constituted under the CS Act, 1980, fully demonstrate that the ICSI is committed to ensuring that its members adhere to the ethical code of conduct and exercise abundant caution and due diligence when ensuring/certifying the compliances with the requirements of the law under the Companies Act, 2013 and the rules made thereunder so that a culture of ethical values in corporate governance is not only professed but also seen to be implemented and restored.
Disciplinary Orders of IBBI Against Resolution Professionals
On top of it, the implementation of the Insolvency and Bankruptcy Code, 2016, that has led to the filing of numerous applications before the Adjudicating Authority (National Company Law Tribunal) and the cases coming up before its Appellate Authority (namely, the National Company Law Appellate Tribunal), also reveal how the comfort and cushion enjoyed by the corporate borrowers in remaining in control of the debt-ridden company has been shattered due to the provisions of the Code and the stringent orders passed by the Adjudicating Authority divesting the Board of Directors of such debt-ridden borrower company from exercising control over such company till the time the Resolution Professional appointed by the Adjudicating Authority is involved in finalization and approval of the corporate insolvency resolution process by the Adjudicating Authority. Unfortunately, several orders have recently been passed against Insolvency Resolution Professionals (Incidentally, some members of the ICSI are also qualified Insolvency Resolution Professionals) for indulging in corrupt practices and malpractices in misusing the power entrusted to them under the Insolvency & Bankruptcy Code. Fortunately, the IBBI, i.e., the Insolvency and Bankruptcy Board of India, has been keeping a vigilant eye on the conduct of insolvency professionals and the IBBI has taken action against such identified insolvency professionals.
Strict vigil being exercised by the ICSI as the regulatory body for the profession of Company Secretaries highlights the importance and need for Company Secretaries to adhere to provisions of the Companies Act, 2013 and the Company Secretaries Act, 1980 in maintaining ethics and good governance in the management and affairs of companies and also highlights that failure to comply with such provisions of the said Acts and rules will not only bring disrepute to the ICSI but also to its members. It is felt that from time to time, regular training courses, seminars and workshops be organized so that corporate professionals can be reminded from time to time about the importance of ethics and good governance and the best practices. *****
[Published in Chartered Secretary magazine of ICSI April 2018 Issue]
By Delep Goswami, FCS, Advocate, Supreme Court of India, New Delhi [firstname.lastname@example.org]
Anirrud Goswami, Advocate, Goswami & Goswami Advocates, New Delhi [email@example.com]
In a significant judgement dated 30th January, 2018 in Authorised Officer, State Bank of Travancore and Another Versus Mathew K.C. (hereinafter referred to as the “SB Travancore judgement”), the Hon’ble Supreme Court has held therein that in financial matters like recovery of loans by banks, the High Court, when approached by way of a writ petition filed under Article 226 of the Constitution of India without the petitioner having exhausted alternate efficacious remedy available under a statute, ought not to have passed interim orders without following the settled position of law. The Apex Court, in Para 17 of the aforesaid judgement, has observed that:
“17. The writ petition ought not to have been entertained and the interim order granted for the mere asking without assigning special reasons, and that too without even granting opportunity to the Appellant to contest the maintainability of the writ petition and failure to notice the subsequent developments in the interregnum…”
Importantly, the Supreme Court has further observed that it is the solemn duty of the Court to apply the correct law without waiting for an objection to be raised by a party, especially when the law stands well settled. Any departure, if permissible, has to be for reasons discussed, of the case falling under a defined exception, duly discussed after noticing the relevant law. In financial matters grant of ex-parte interim orders can have a deleterious effect and it is not sufficient to say that the aggrieved has the remedy to move for vacating the interim order. Loans by financial institutions are granted from public money generated at the tax payers’ expense and that such loan does not become the property of the person taking the loan, but retains its character of public money given in a fiduciary capacity as entrustment by the public. Timely repayment also ensures liquidity to facilitate loan to another in need, by circulation of the money and cannot be permitted to be blocked by frivolous litigation by those who can afford the luxury of the same.
With regard to the tendency of the High Courts to grant stay of recovery of taxes, dues, etc. payable to the financial institutions and banks and the deleterious effect of such stay orders, in the aforesaid judgement, the Supreme Court referred to its earlier decision passed in United Bank of India vs. Satyawati Tandon and others (2010 (8) SCC 110), wherein at Para 46, it was observed that:
“46. It must be remembered that stay of an action initiated by the State and/or its agencies/instrumentalities for recovery of taxes, cess, fees, etc. seriously impedes execution of projects of public importance and disables them from discharging their constitutional and legal obligations towards the citizens. In cases relating to recovery of the dues of banks, financial institutions and secured creditors, stay granted by the High Court would have serious adverse impact on the financial health of such bodies/institutions, which ultimately prove detrimental to the economy of the nation. Therefore, the High Court should be extremely careful and circumspect in exercising its discretion to grant stay in such matters. Of course, if the petitioner is able to show that its case falls within any of the exceptions carved out in Baburam Prakash Chandra Maheshwari v. Antarim Zila Parishad, Whirlpool Corpn. v. Registrar of Trade Marks and Harbanslal Sahnia v. Indian Oil Corpn. Ltd. and some other judgments, then the High Court may, after considering all the relevant parameters and public interest, pass an appropriate interim order.”
Further, in the aforesaid judgement of Satyawati Tandon (supra), it was also observed by the Supreme Court that:
“55. It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability of statutory remedies under the DRT Act and the SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High Courts will exercise their discretion in such matters with greater caution, care and circumspection.” In respect of lender banks exercising action for recovery of their dues from the borrower by invoking the powers under Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’), it was noticed by the Supreme Court that under Section 17 of the SARFAESI Act, the aggrieved party has an efficacious remedy available to challenge the said action of the lender banks by instituting appropriate proceedings before the appellate authority. The SARFAESI Act is a complete code by itself, providing for expeditious recovery of dues arising out of loans granted by financial institutions, the remedy of appeal by the aggrieved under Section 17 before the Debt Recovery Tribunal, followed by a right to appeal before the Appellate Tribunal under Section 18 of the SARFAESI Act.
With regard to the tendency of the defaulting borrowers to rush to the High Court with writ petitions under Article 226 of the Constitution, without having first exhausted the alternate efficacious remedy available under the relevant statute, the Supreme Court of India, in General Manager, Sri Siddeshwara Cooperative Bank Limited and another vs. Ikbal and others [2013 (10) SCC 83] observed and held that filing of a writ petition under Article 226 of the Constitution of India, without exhausting the alternate efficacious remedy available under the SARFAESI Act was not permitted and that such writ petitions ought to be dismissed at the threshold on the ground of maintainability and the High Court ought not to have entertained the writ petition in view of the adequate alternate statutory remedies available to the aggrieved respondent. The Supreme Court, in this connection, further observed as under:
“27. No doubt an alternative remedy is not an absolute bar to the exercise of extraordinary jurisdiction under Article 226 but by now it is well settled that where a statute provides efficacious and adequate remedy, the High Court will do well in not entertaining a petition under Article 226. On misplaced considerations, statutory procedures cannot be allowed to be circumvented…
28. …In our view, there was no justification whatsoever for the learned Single Judge to allow the borrower to bypass the efficacious remedy provided to him under Section 17 and invoke the extraordinary jurisdiction in his favour when he had disentitled himself for such relief by his conduct. The Single Judge was clearly in error in invoking his extraordinary jurisdiction under Article 226 in light of the peculiar facts indicated above. The Division Bench also erred in affirming the erroneous order of the Single Judge.”
The Supreme Court, in the above-mentioned SB Travancore judgement case (supra) has also observed that the discretionary jurisdiction under Article 226 of the Indian Constitution, is not absolute, but has to be exercised judiciously in the given facts of the case and in accordance with law. The Court further opined that the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well defined exceptions as observed by the Supreme Court in its earlier decision of Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal [2014 (1) SCC 603], where at Para 15, it was observed that:
“Thus, while it can be said that this Court has recognised some exceptions to the rule of alternative remedy i.e. where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titaghur Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.”
The brief facts leading to the aforesaid SB Travancore case (supra) are that the loan account of the respondent was declared as a non-performing asset (NPA) on 28.12.2014 and the outstanding dues as on that date amounted to Rs.41,82,560/-. However, despite repeated notices by the appellant bank, the respondent failed and neglected to pay the outstanding dues and thereupon statutory notice under Section 13(2) of the SARFAESI Act was issued by the bank to the respondent on 21.01.2015. The objections raised by the respondent under Section 13(3A) of SARFAESI Act were considered and rejection was communicated by the appellant bank to the respondent on 31.03.2015. Thereafter, the lender bank issued possession notice under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002 on 21.04.2015.
On behalf of the respondent, it was contended that the respondent was desirous to repay the loan, and merely sought for regularisation of the loan account. It was further submitted by the respondent that its inability to service the loan was genuine, occasioned due to market fluctuations causing huge loss in business, beyond the control of the respondent. Upon the failure of the appellant Bank to consider the request for regularisation of the loan account and the apparent absence of a right to appeal under Section 17 of the SARFAESI Act against the order passed under Section 13(3A), the respondent submitted that it was left with no option but to prefer the writ application as the respondent genuinely desired to discharge the loans. The respondent further contended that the collateral security offered included agricultural lands also, which had to be excluded under Section 31 of the SARFAESI Act and that there had been violation of the principles of natural justice. The respondent submitted that although a large number of similar writ applications are pending before the High Court preferred by the concerned borrowers, but the appellant Bank had, in the instant case, singled out the present respondent alone for a challenge before the Supreme Court.
In response to the respondent’s submissions, the Supreme Court observed that the pleadings in the writ petition are very bald and contain no statement that the grievances fell within any of the well defined exceptions for invoking the writ jurisdiction of the High Court. The allegation for violation of principles of natural justice is rhetorical, without any details of the prejudice caused thereby. It harps only on a desire for regularisation of the loan account, even while the Respondent acknowledges its own inability to service the loan account for reasons attributable to it alone. The writ petition was filed in undue haste in March 2015 immediately after disposal of objections under Section 13(3A).
The Supreme Court noted that the legislative scheme in the SARFAESI Act, in order to expedite the recovery proceedings, does not envisage grievance redressal procedure at this stage, by virtue of the explanation added to Section 17 of the Act, by Amendment Act 30 of 2004, as follows
“Explanation.—For the removal of doubts, it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including the borrower) to make an application to the Debts Recovery Tribunal under this sub-section.”
In the instant case, the statutory notice under Section 13(4) along with possession notice under Rule 8 was issued on 21.04.2015. The remedy under Section 17 of the SARFAESI Act was now available to the respondent if it was aggrieved. The Supreme Court observed that these developments were not brought on record or placed before the High Court when the impugned interim order came to be passed by the High Court on 24.04.2015. The writ petition was, clearly not instituted bonafide, but patently to stall further action for recovery. The Supreme Court also observed that the respondent did not make any pleading to state why the remedy available under Section 17 of the Act before the Debt Recovery Tribunal was not efficacious and the compelling reasons for it having by-passed the same. The Supreme Court noted that unfortunately, the High Court also did not dwell upon the same or record any special reasons for grant of interim relief by direction to deposit.
The Supreme Court further examined the statement of objects and reasons of the SARFAESI Act which states that the banking and financial sector in the country was felt not to have a level playing field in comparison to other participants in the financial markets in the world. The financial institutions in India did not have the power to take possession of securities and sell them. The existing legal framework relating to commercial transactions had not kept pace with changing commercial practices and financial sector reforms resulting in tardy recovery of defaulting loans and mounting non-performing assets of banks and financial institutions. The Narasimhan CommitteeI and II as also the Andhyarujina Committee constituted by the Central Government Act had suggested enactment of new legislation for securitisation and empowering banks and financial institutions to take possession of securities and sell them without court intervention which would enable them to realise long term assets, manage problems of liquidity, asset liability mismatches and improve recovery. The proceedings under the Recovery of Debts due to Banks and Financial Institutions Act, 1993, (hereinafter referred to as ‘the DRT Act’) with passage of time, had become synonymous with those before regular courts affecting expeditious adjudication. The Supreme Court observed that all the aforesaid aspects had not been kept in mind and considered before the High Court passed the impugned order in the writ petition filed by the respondent Mathew K.C.
The Supreme Court in SB Travancore judgement (supra) thereafter referred to its earlier decisions on how the Apex Court has dealt with the issue of High Courts passing interim orders under writ jurisdiction despite alternate statutory remedies being available but not exhausted by the concerned litigant. In Punjab National Bank vs. O.C. Krishnan and others [(2001) 6 SCC 569], while dealing with availability of alternate statutory remedy under the DRT Act, the Supreme Court had observed as follows:
“The Act has been enacted with a view to provide a special procedure for recovery of debts due to the banks and the financial institutions. There is a hierarchy of appeal provided in the Act, namely, filing of an appeal under Section 20 and this fast-track procedure cannot be allowed to be derailed either by taking recourse to proceedings under Articles 226 and 227 of the Constitution or by filing a civil suit, which is expressly barred. Even though a provision under an Act cannot expressly oust the jurisdiction of the court under Articles 226 and 227 of the Constitution, nevertheless, when there is an alternative remedy available, judicial prudence demands that the Court refrains from exercising its jurisdiction under the said constitutional provisions. This was a case where the High Court should not have entertained the petition under Article 227 of the Constitution and should have directed the respondent to take recourse to the appeal mechanism provided by the Act.”
Further, in Union Bank of India and another vs. Panchanan Subudhi [2010 (15) SCC 552], where the High Court had, in exercise of its writ jurisdiction, stayed further proceedings under Section 13(4) of the SARFAESI Act subject to deposit of Rs.10,00,000/-, the Supreme Court, on an appeal, had observed as follows:
“In our view, the approach adopted by the High Court was clearly erroneous. When the respondent failed to abide by the terms of one-time settlement, there was no justification for the High Court to entertain the writ petition and that too by ignoring the fact that a statutory alternative remedy was available to the respondent under Section 17 of the Act.”
Thereafter, in Kanaiyalal Lalchand Sachdev and others vs. State of Maharashtra and others [2011 (2) SCC 782] where the High Court had dismissed a writ petition filed by the appellant while proceedings had been initiated against the appellant under the SARFAESI Act, the Supreme Court of India while dismissing the appeal held that:
“23. In our opinion, therefore, the High Court rightly dismissed the petition on the ground that an efficacious remedy was available to the appellants under Section 17 of the Act. It is well settled that ordinarily relief under Articles 226/227 of the Constitution of India is not available if an efficacious alternative remedy is available to any aggrieved person. (See Sadhana Lodh v. National Insurance Co. Ltd.; Surya Dev Rai v. Ram Chander Rai and SBI v. Allied Chemical Laboratories.)”
In the aforesaid SB Travancore judgement (supra), the Supreme Court relied upon the principle enunciated by it in Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. and Another [1997 (6) SCC 450], wherein it was observed that:
“When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops.”
Thus, in the SB Travancore judgement (supra), the Supreme Court set aside the interim order passed by the High Court as it held to be contrary to the law laid down by the Supreme Court under Article 141 of the Constitution and hence, unsustainable. In view of the settled position of law that unless the aggrieved party exhausts the alternate efficacious remedies available to it under statute, it cannot simpliciter file writ petitions before the High Court under Article 226 of the Indian Constitution and the Supreme Court has been emphatic in its disapproval of interim orders passed by the High Court in such writ petitions filed in ignorance of the settled position of the law on the subject. Conclusion The above-mentioned judgement of the Supreme Court of India stresses the importance of recovery of loans and outstanding dues by banks and financial institutions from the defaulting borrowers and also emphasises that any attempt by such defaulting borrowers to somehow bypass the statute and to invoke the writ jurisdiction of the High Court to stall/thwart the attempts of the lenders, shall be sustained in view the principles laid down by the Supreme Court in the aforementioned important judgements. Simultaneously, the professionals associated with the borrower companies are required to exercise caution in suggesting remedies against the principles laid down by the Apex Court.