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.