In the case of Embassy Property Developments (Private) Limited v. State of Karnataka and Others 2019 SCC OnLine SC 1542 (decided on December 3, 2019), the Supreme Court of India has outlined the scope of jurisdiction of NCLT and intervention by High Courts in cases of orders passed by National Company Law Tribunal (“NCLT”).
Two seminal questions of importance namely:-
- Whether the High Court ought to interfere, under Article 226/227 of the Constitution, with an Order passed by the NCLT in a proceeding under the IBC, 2016, ignoring the availability of a statutory remedy of appeal to the National Company Law Appellate Tribunal (“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, 2016
Facts of the Case
A set of three appeals had been filed before Supreme Court, the first filed by the Resolution Applicant, the second filed by the Corporate Debtor through the Resolution Professional and the third filed by the Committee of Creditors, all of which challenge an Interim Order passed by the Division Bench of High Court of Karnataka in a writ petition, staying the operation of a direction contained in the order of the NCLT on a Miscellaneous Application filed by the Resolution Professional.
A company by the name of M/s. Udhyaman Investments Private Limited (“Financial Creditor”), which was the twelfth respondent in the first appeal, moved an application before the NCLT, Chennai Bench in the capacity of a Financial Creditor against M/s. Tiffins Barytes Asbestos and Paints Limited (“Corporate Debtor”). The Corporate Debtor was also the fourth respondent in the first of these three appeals before the Supreme Court.
By an order dated 12/03/2018, the NCLT, Chennai Bench admitted the application of the Financial Creditor and ordered the commencement of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. Thereafter, an Interim Resolution Professional (“IRP”) was appointed and a moratorium came to be imposed in terms of section 14 of the IBC (moratorium). At the time, the Corporate Debtor held a mining lease granted by the Government of Karnataka which was set to expire on 25/05/2018 under a particular Lease Deed (“Lease Deed”). Due to violation by the Corporate Debtor of the statutory rules, and terms and conditions of the Lease Deed, a notice of premature termination of the lease was also issued to the Corporate Debtor on 09/08/2017. However, no order towards termination as aforesaid had been passed until the date of initiation of CIRP.
Thereafter, the IRP addressed a letter dated 14/03/2018 to the Chairman of the Monitoring Committee and the Director of Mines and Geology, informing these authorities of the commencement of the CIRP and seeking the benefit of deemed extension beyond 25/03/2018 (date of expiry of Lease Deed) and until 31/03/2020 in terms of the Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”). Receiving no response, the IRP was constrained to file a Writ Petition no. 23075 of 2019 (“WP No. 1”) before the High Court of Karnataka, wherein it was sought that the Lease Deed should be deemed to be valid until March 31, 2020. During the pendency of the WP No. 1, the Government of Karnataka passed an order dated 26/09/2018 (“Government Order”) rejecting the proposal for deemed extension, on the grounds of contravention of the terms and conditions of the Lease Deed. In the view of the Government Order as aforesaid, the IRP withdrew the WP No. 1 with liberty to file a fresh writ petition and filed Miscellaneous Application no. 632 of 2018 before the NCLT, Chennai Bench, for setting aside the order of Government of Karnataka and seeking a declaration that the lease should be deemed valid upto 31/03/2020 and also a consequential direction to the Government of Karnataka to execute supplement lease deeds for the period upto 31/03/20220.
Thereafter, the NCLT, Chennai Bench by an Order dated 11/12/2018 (“1st Order “) allowed the Miscellaneous Application by setting aside the Order of Government of Karnataka on the ground that the same was in violation of the moratorium declared on 12/03/2018 in terms of section 14(1) of the IBC. The NCLT, Chennai Bench also directed the Government of Karnataka to execute supplement lease deeds in favour of the Corporate Debtors for the period upto 31/03/2020. Aggrieved by 1st Order , the Government of Karnataka moved Writ Petition no. 5002 of 2019 before the High Court of Karnataka (“WP No. 2”), whereby the High Court of Karnataka by an order dated 22/03/2019, set aside 1st Order. The matter was thereafter remanded back to NCLT, Chennai Bench for a fresh consideration of the Miscellaneous Application.
Before the NCLT, Chennai Bench, the Government of Karnataka filed statement of objections contending, interalia, that NCLT had no jurisdiction to adjudicate disputes arising out of the grant of mining leases under the MMDR Act. However, the NCLT, Chennai Bench overruled the objection of the Government of Karnataka and ordered the execution of supplemental lease deeds by order dated 03/05/2019 (“2nd Order”). The Government of Karnataka, thereafter, filed Writ Petition no. 41029 of 2019 (“WP No. 3”) against 2nd Order, before the High Court of Karnataka, wherein, an Interim Order dated 03/09/2019 (“Interim Order”) was passed. The Interim Order ultimately granted a stay of operation of the direction of the NCLT, Chennai Bench. It was against this Interim Order that the resolution applicant, the IRP and the committee of creditors had filed these appeals before the Supreme Court.
- Raised by Resolution Applicant
The Resolution Applicant assailed the Interim Order on the ground that when an efficacious alternative remedy is available under Section 61 of IBC, 2016, the High Court of Karnataka ought not to have entertained a writ petition and that too against an Order passed by the Chennai Bench of NCLT. The Resolution Applicant further contended that the IRP had a right to move the NCLT for appropriate reliefs for the preservation of the properties of the Corporate Debtor and therefore the only way the steps taken by the Resolution Professional could be set at naught, is to take recourse to the provisions of the IBC alone.
The Resolution Applicant contended that the NCLT has already approved the Resolution Plan, by an order dated 12/06/2019 and that therefore the High Court cannot do anything that will tinker with or destroy the very Resolution Plan approved by the NCLT
- Raised by Resolution Professional
The Resolution Professional contended that the whole object of IBC, 2016 will get defeated, if the Orders of NCLT are declared amenable to review by the High Court under Article 226/227. The Resolution Professional also contended that the provisions of IBC, 2016 are given overriding effect under Section 238, over all other statutes. The Resolution Professional further contented that after taking a stand in their WP No.2 that the dispute relating to the refusal to grant deemed extension of the mining lease falls squarely within the jurisdiction of the Mining Tribunal and after raising a plea that the rejection of the benefit of deemed extension, ought to have been challenged by way of a revision before the Central Government under Section 30 of the MMDR Act, 1957 the State of Karnataka agreed to go back to the NCLT for raising all contentions. Therefore, it was not open to the Government to question the jurisdiction of the NCLT in the next round of litigation. The only ground on which the
Government of Karnataka opposed the Miscellaneous Application of the Resolution Professional was fraud and collusion on the part of the Corporate Debtor and the creditor who initiated the CIRP. The Resolution Professional further contented that in view of the sweep of the jurisdiction conferred upon NCLT under Section 60 (5) (c) of the IBC, 2016, the Tribunal was entitled to investigate even into allegations of fraud. Once it is conceded that NCLT will have jurisdiction even to enquire into allegations of fraud, then the question of invoking the jurisdiction of the High Court under Article 226 as against an order passed by NCLT does not arise. Any recognition by this court of the jurisdiction of the High Court under Article 226 to interfere with the Orders of the NCLT under IBC, 2016, would completely derail the resolution process which is bound to happen within a time frame.
- Raised by Committee of Creditors
The Committee of Creditors submitted that IBC, 2016 being a complete code in itself does not provide any room for challenging the Orders of NCLT. What was sought by the Resolution Professional was a mere recognition of the statutory right of deemed extension of lease conferred by Section 8A of the MMDR Act, 1957 and that therefore NCLT cannot 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.
- Raised by the Attorney General (Respondent)
The Respondent 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. Since the contours of jurisdiction of NCLT are defined in Clauses (a), (b) and (c) of Subsection (5) of Section 60 and also since the powers of the NCLT are defined in Subsection (4) of Section 60, to be akin to those of the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (hereinafter referred to as DRT Act, 1993), it was contended by the Respondent that the jurisdiction of the NCLT is confined only to contractual matters interparties. The Respondent further contented that the NCLT would have no power of judicial review
of such orders. On the basis of the decision in Barnard and Others v. National Dock Labour Board and Others [1 (1953) 2 WLR 995], when an inferior tribunal passes an order which is a nullity, the superior court need not drive a party to the appellate forum stipulated by an act. Therefore, the Government of Karnataka did not have to resort to approaching the NCLAT.
Finding of the Supreme Court
- IBC, 2016 is a single Unified Umbrella Code, covering the entire gamut of the law relating to insolvency resolution of corporate persons and others in a time bound manner. The code provides a three tier mechanism namely
- the NCLT, which is the Adjudicating Authority
- (ii) the NCLAT which is the appellate authority and
- (iii) this court as the final authority, for dealing with all issues that may arise in relation to the reorganisation and insolvency resolution of corporate persons.
- The Supreme Court has clearly observed the scope of the jurisdiction and the nature of the powers exercised by –
- the High Court under Article 226 of the Constitution and
- the NCLT and NCLAT under the provisions of IBC, 2016
After referring several judgments on Article 226 of the Constitution and decision rendered by the House of Lords, by a majority of 3:2 in Anisminic Ltd. vs. Foreign Compensation Commission, the Supreme Court observed that in so far as the question of exercise of the power conferred by Article 226, despite the availability of a statutory alternative remedy, is concerned, Anisminic cannot be relied upon. 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 Supreme Court further considering the contention made by the Respondent that the decision of the Government of Karnataka to refuse the benefit of deemed extension of lease, is in the public law domain, rightly and held the correctness that the said decision can 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 Supreme Court further held that the NCLT is not even a Civil Court, which has jurisdiction by virtue of Section 9 of the Code of Civil Procedure to try all suits of a civil nature excepting suits, of which their cognizance is either expressly or impliedly barred. Therefore 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.
Further the Supreme Court observed on the jurisdiction and powers of the NCLT/NCLAT and considered that NCLT and NCLAT are constituted, not under the IBC, 2016 but under Sections 408 and 410 of the Companies Act, 2013. Sections 420 and 424 of the Companies Act, 2013 indicate merely the procedure to be followed by the NCLT and NCLAT before passing orders. However, there are no separate provisions in the Companies Act, exclusively dealing with the jurisdiction and powers of NCLT. Sub-sections (4) and (5) of Section 60 of IBC, 2016 give an indication respectively about the powers and jurisdiction of the NCLT. Sub-section (4) of Section 60 of IBC, 2016 states that the NCLT will have all the powers of the DRT as contemplated under Part III of the Code for the purposes of Sub-section (2). The Supreme Court observed that if the object of Subsection (2) of Section 60 is to ensure that the insolvency resolutions of the corporate debtor and its guarantors are dealt with together, then the question that arises is as to why there should be a reference to the powers of the DRT in Sub- section (4). The answer to this question is to be found in Section 179 of IBC, 2016. Under Section 179 (1), it is the DRT which is the Adjudicating Authority in relation to insolvency matters of individuals and firms. This is in contrast to Section 60(1) which names the NCLT as the Adjudicating Authority in relation to insolvency resolution and liquidation of corporate persons including corporate debtors and personal guarantors. Therefore the object of Sub-section (2) of Section 60 is to avoid any confusion that may arise on account of Section 179(1) and to ensure that whenever a CIRP is initiated against a corporate debtor, NCLT will be the Adjudicating Authority not only in respect of such corporate debtor but also in respect of the individual who stood as surety to such corporate debtor, notwithstanding the naming of the DRT under Section 179(1) as the Adjudicating Authority for the insolvency resolution of individuals. Sub-section (2) of Section 179 confers jurisdiction upon DRT to entertain and dispose of (i) any suit or proceeding by or against the individual debtor (ii) any claim made by or against the individual debtor and (iii) any question of priorities or any other question whether of law or facts arising out of or in relation to insolvency and bankruptcy of the individual debtor. Clauses (a), (b) and (c) of Sub-section (2) of Section 179 are identical to Clauses (a), (b) and (c) of Subsection (5) of Section 60. Therefore the only reason why Subsection (4) is incorporated in Section 60 is to ensure that NCLT will exercise jurisdiction – (1) not only to entertain and dispose of matters referred to in Clauses (a), (b) and (c) of Sub-section (5) of Section 60 in relation to the corporate debtor, (2) but also to entertain and dispose of the matters specified in Clauses (a), (b) and (c) of Sub-section (2) of Section 179, whenever the contingency stated in Section 60(2) arises.
The Supreme Court further observed that there are separate provisions both in Part II and Part III of IBC, 2016 ousting the jurisdiction of civil courts. While Section 63 contained in Part II bars the jurisdiction of a civil court in respect of any matter on which NCLT or NCLAT will have jurisdiction, Section 180 contained in Part III bars the jurisdiction of civil courts in respect of any matter on which DRT or DRAT has jurisdiction. Sub-Section (4) of Section 60 is vesting upon the NCLT all the powers of DRT.
The Supreme Court held that the only provision that could help outline the scope of jurisdiction of the NCLT in respect of decisions taken under the MMDR Act was section 60(5) of the IBC. Section 60(5) of the IBC, was recognized to be very broad in its sweep, conferring jurisdiction upon the NCLT in respect of any question of law or fact, arising out of or in relation to insolvency resolution. However, the Supreme Court held that any decision taken by a government or statutory authority in relation to a matter which was in the realm of public law cannot by any stretch of imagination be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution”.
If NCLT has been conferred with the jurisdiction to decide all types of claims to property, of the corporate debtor, section 18(f) (vi) of the IBC would not have made the task of an interim resolution professional in taking control and custody of an asset over which the corporate debtor has ownership rights, subject to the determination of ownership by a court or other authority. Even though section 20(1) of the IBC conferred a duty upon an interim resolution professional to preserve the value of the property of a corporate debtor, the duties of an interim resolution professional are entirely different from what comprises the exact jurisdiction and powers of the NCLT.
The Supreme Court also considered section 25(2)(b) of the IBC, wherein, a resolution professional was duty bound to represent and act on behalf of a corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings. The Supreme Court held that this would mean that whenever a corporate debtor had to exercise rights in judicial, quasi-judicial proceedings, a resolution professional cannot short circuit that procedure and bring a claim before NCLT by taking advantage of the broad sweep of powers conferred upon the NCLT within section 60(5) of the IBC.
Further, whenever a corporate debtor has to exercise a right that fell outside the purview of IBC, especially in the realm of public law, no bypass can be undertaken by going to the NCLT. The Supreme Court held that in the present case, the IRP, clearly understood this legal position. This was mainly because when the Government of Karnataka refused to grant the benefit of deemed extension, the IRP moved WP No. 1 before the High Court of Karnataka instead of the NCLT, as he understood that such manner of right could not be enforced before the NCLT. Whence after filing of the Writ Petition No. 1, the Government of Karnataka rejected the claim of the IRP, the latter withdrew the WP No. 1. If the NCLT was not considered by the IRP in the very first instance, to be empowered to issue a declaration of deemed extension of lease, NCLT could not be considered to have power of judicial review over the Government Order.
Further, the Supreme Court held that moratorium provided for as per section 14 of the IBC would not have any impact on the right of the Government of Karnataka to refuse extension of lease. Basically, the right to not to be dispossessed under section 14 of the IBC had nothing to do with the rights conferred by a mining lease on a government land. As such, what was prohibited under section 14 of the IBC was only the right not to be dispossessed. It however, did not imply the right to have renewal of a lease. Therefore, section 14 of the IBC may not have an application in cases of rights conferred by way of a mining lease especially on a government land.
In view of the aforesaid, the Supreme Court with respect to the first question held that NCLT did not have jurisdiction to entertain an application against the Government of Karnataka for a direction to execute Supplemental Lease Deeds for the extension of the mining lease. Since NCLT chose to exercise a jurisdiction not vested in it in law, the High Court of Karnataka was justified in entertaining the writ petition, on the basis that NCLT was coram non judice.
With respect to second question, the Supreme Court also perused the submission of the Government of Karnataka regarding the fraudulent and collusive manner in which the CIRP was initiated. The Government of Karnataka had submitted that it had chosen to challenge 2nd Order before the High Court of Karnataka instead of the NCLAT, as the CIRP was initiated by one of the related parties to the Corporate Debtor. In view of the averments pleaded in the WP No. 2, the Government of Karnataka thought 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. But the contention of the appellants (i.e. Resolution Professional, Resolution Applicant and Committee of Creditors) herein is that allegations of fraud and collusion can also be inquired into by NCLT and NCLAT and that therefore the Government could not have bypassed the statutory remedy.
The Supreme Court held that the fraudulent trading carried out by the Corporate Debtor during the insolvency resolution can be inquired into by the Adjudicating Authority under section 66. Section 69 makes an officer of the corporate debtor and corporate debtor liable for punishment for carrying on transaction with a view to defraud creditors. The Supreme Court held that the contention raised by the Government of Karnataka would fall squarely within the mischief addressed by Section 65 (1). Therefore, the Supreme Court made it clear that the NCLT has jurisdiction to enquire into allegation of fraud. As a corollary, NCLAT will also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be ground to bypass the alternative remedy of appeal provided in Section 61.
NCLT and NCLAT would have jurisdiction to enquire into questions of fraud but the tribunal would not have jurisdiction to adjudge upon the disputes arsing under MMDR Act, 1957, especially when the disputes revolve around the decision of statutory or quasi-judicial authorities which can be corrected only by way of judicial review of administrative action. Hence the High Court of Karnataka in WP No. 3 rightly entertained the said WP No.3.
This judgment has undertaken notable steps by defining the precise scope of NCLT’s jurisdiction in respect of the issues pertaining to public law wherein the corporate debtors are undergoing CIRP.
This judgment has also pointed out that the decision with respect to public law domain, can be called into question only in a superior court which is vested with the power of judicial review over administrative action. 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.
This judgment has also pointed out that Section 60 is to ensure that NCLT will exercise jurisdiction to entertain and dispose of the matter referred in 60(5) and also the matter specified in section 179(2), whenever the contingency stated in Section 60(2) arises. Under Section 179 (1), it is the DRT which is the Adjudicating Authority in relation to insolvency matters of individuals and firms.
This judgment points out that Section 63 contained in Part II bars the jurisdiction of a civil court in respect of any matter on which NCLT or NCLAT will have jurisdiction and Section 180 contained in Part III bars the jurisdiction of civil courts in respect of any matter on which DRT or DRAT has jurisdiction. Section 60(4) has vested upon the NCLT all the powers of DRT.
In view of the above, it can be said that the IBC confers a sweep of jurisdiction on NCLT/NCLAT but it does not imply that all the issues would fall under the purview of the NCLT/NCLAT.
It can be concluded in the end that disputes revolving around decisions of statutory or quasi-judicial authorities, can be resolved only by judicial review of administrative action.
Ruchi Doshi, Jr. Associate
Advocates & Solicitors
Tel: (022) 2267 4729
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