Facts of the Case
Facts before the National Company Law Tribunal (NCLT), Mumbai
The Central Government (CG), looking at the actions of the management of IL&FS, filed a petition for oppression and mismanagement under Section 241 of the Companies Act 2013, before the NCLT. As the actions of the existing board were in a manner prejudicial to the public interests, the CG pleaded to change the existing management of the entity. It subsequently moved an application for interim relief seeking moratorium qua IL&FS, on the following activities:
- The institution or continuation of suits or any other proceedings by any party against IL&FS and any of its group entities.
- Any action by any party to foreclose, recover or enforce any security interest created over the assets of the IL&FS or any of its group entities.
- The acceleration, premature withdrawal or other withdrawal, invocation of any term loan, corporate loan, bridge loan, commercial paper, debentures, fixed deposits, guarantees, letter of support, commitment or comfort and other financial facilities or obligations vailed by the IL&FS or any of its group entities.
The NCLT accepted the petition for mismanagement and passed an order for appointment of new management for the company. It, however, refused to pass an order for imposition of a moratorium on the actions claimed by the CG. The NCLT reasoned it by mentioning that such actions are impermissible under the scope of Section 242 of the Companies Act 2013. It further mentioned that such orders could be made by the NCLT only under Section 14 of the Insolvency and Bankruptcy Code (IBC), which doesn’t apply to the financial services providers such as IL&FS. The CG appealed against the order passed by the NCLT, before the NCLAT.
Facts leading to an interim order passed by the NCLAT
On 15th October 2018, the matter was taken up for hearing by the NCLAT. The appellants claimed that the powers granted to the tribunals under Section 241 and 242 are vast in their scope of applicability. Hence, they claimed that issuance of a moratorium under by the NCLAT would be well within the powers specified under Section 241 of the Companies Act 2013. While taking into account the arguments put forth by the appellants, the NCLAT passed an order declaring the issuance of a moratorium on the claimed activities, until the passing of any subsequent orders by it.
While considering the nature of the case, larger public interest and economy of the nation, the NCLAT allowed the Union of India and IL&FS to engage Hon’ble Justice (Retd.) D.K. Jain to supervise the operation of the resolution process. It further allowed the management to get clearance from Hon’ble Justice (Retd.) D.K. Jain who is supervising the resolution process of different Group Companies.
Following the order, a Committee of creditors of ILFS group of companies was constituted, which divided the group of companies based on their debt repayment capacity, into three segments:
- ‘Green Companies’: Entities which continued to meet all the credit obligations
- ‘Amber companies’: Entities which could not meet the obligation of financial creditors, but were able to repay their operational debt.
- ‘Red Companies’: Entities which could repay neither operational nor Financial debt.
The resolution process of the companies was done according to there classification.
Challenges to the interim order before the NCLAT
After more than a year of initiating a various number of ‘resolution processes’ concerning more than fifty Companies, some Financial Creditors/Secured Creditors who had already taken advantage of the interim order passed by the NCLAT, challenged the jurisdiction of the tribunal to pass such an interim order passed on 15th October 2018.
Issues before the NCLAT
The ambit of Section 241 and Section 242
The appellants challenged that these provisions restricted to:
- Verifying the commission of an action amounting to oppression and mismanagement.
- Passing an order to change the existing management.
It was contended that after the appointment of new management, the tribunal had no power to issue any order which amounted to any interference with the business of the company. The creditors cited the judgement of P. Ramesh Kumar v. Dr Shankernarayan Gupta (2011) 100 CLA 125 (CLB) wherein, the Company Law Board held that the tribunals do not have the jurisdiction under Section 242 of the Companies Act 2013 to interfere with the day to day management of the affairs of a company. Such powers, according to the tribunal, are vested with the shareholders and Board of Directors of the concerned Company.
Since a new board, after the filing of a petition under Section 241 was appointed by the NCLT, the power to manage the affairs of the company, and to resolve the issues about the company’s debt, lies with the new Board of Directors (BOD). Thus, the constitution of a committee of creditors, and issuance of a moratorium on the affairs of the company amounts to interference with the powers vested with BOD.
Further reliance was made on the cases of Bennet Coleman and Company v. Union of India, and Needle Industries (India ) Ltd v. Needle Industries Newey (India) Holding Ltd. And Ors, wherein it was held that there must a nexus between the matters complained off and the remedy granted by the tribunal. Through these cases, the creditors complained that application filed under Section 241 before the NCLT was alleging the mismanagement of the companies. Therefore the power of the Tribunals in that context was limited to curtailing mismanagement by the appointment of the new BOD. Thus, after the appointment of BOD, any further order of the tribunals would be beyond the scope of Section 241 and 242.
The appellants contended that in the public interest, a specific entity wise resolution/ repayment model should not be adopted especially in the case like ILFS. It was a further contention that the insolvency resolution of companies as a ‘group entity’ is beyond the powers under either IBC or Companies Act 2013.
Scope of Section 241 and Section 242
The NCLAT refuted challenges to the validity of its interim order declaring the moratorium and initiation of ‘group insolvency’ of the ILFS. The tribunal, while giving an extensive read to Section 242 of, the tribunal mentioned that it empowered the tribunal to pass any interim order which is just and equitable in its view. Further, the tribunal read into section 424 (Procedure before the Appellate Tribunals) of the Companies Act to conclude that it empowered the tribunal to follow principles of natural justice and other provisions of the ‘Companies Act, 2013’ or the ‘Insolvency and Bankruptcy Code’, and ‘any such rules made thereunder. Since these rules vest the power to follow the procedure under IBC, in addition to the procedure under the Companies Act, and the rules made thereunder, the interim order passed by the NCLAT was well within its powers.
To substantiate, the NCLAT cited the case of Swiss Ribbons Pvt. Ltd. V Union of India (2019) 4 SCC 17, which mentioned the objectives of the IBC as “ to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its management and a corporate death by liquidation.” , Therefore, maximization of value of the assets of such CD’s is a very important objective of the IBC. Hence, by applying the rule of ‘harmonious construction’, the NCLAT’s interim order was in pertinence to the objectives of the IBC.
Challenges to the combined resolution of all entities
The NCLAT mentioned that because of the interim order, there is a likelihood of getting Rs. 10,000 crores to 20,000 crores more. After the imposition of the moratorium, the resolution was successful in transforming ‘33’ ‘Amber’, and ‘Red’ entities into ‘Green Entity’. It further substantiated that since there are no provisions for ‘group insolvency’ in India, separate resolution of each entity (out of 348 subsidiaries in total), individual petitions before the NCLT would lead to pilling up of abundant cases before tribunal all over India. In the absence of provisions under the IBC and Companies Act, those provisions could not be clubbed together. Thus, keeping in mind these issues, the NCLAT ruled in favour of the validity of the interim order.
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