NCLT: Objections Raised By Corporation Debtors To Applications Filed Under Section 7 Of The Insolvency And Bankruptcy Code

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A company named M/s Uddhyaman Investments Pvt Ltd claiming itself to be a financial creditor moved an application before the National Company Law Tribunal (herein referred to as NCLT) Chennai, under section 7 of the Insolvency and bankruptcy code 2016 (herein referred as the IBC code) against M/s. Tiffin’s Barytes Asbestos & Paints Ltd., the Corporate Debtor.

NCLT accepted the application and subsequently a moratorium was also declared in terms of section 14 of IBC along with a corporate resolution process, at that time the corporate debtor also held a mining lease granted by the state of Karnataka, which owing to the violation of certain rules by the debtor was to end prematurely, however, no order of termination was passed till the beginning of the corporate process.

The interim resolution professional (RP) issued a letter to the chairman of the monitor committee and also to the chairman of the mines and geology, seeking the benefit of extension of the lease till the year 2020. Since there was no response the RP filed a petition before the High Court of Karnataka, seeking the validity of the extension till 2020 as per the MMDR Act 1957.

Meanwhile, during the pendency of the petition, the state government rejected the proposal for the deemed extension on the grounds of several violations by the corporate debtor, because of which the corporate debtor represented by the RP (resolution professional), filed a Miscellaneous application before the NCLT, praying the court to set aside the order of the state government and grant the extension of the lease, and direct Government of Karnataka to execute Supplement Lease Deeds in favour of the Corporate Debtor for the period up to 31.03.2020, the same was passed by the NCLT giving the above-mentioned relief. Aggrieved by the decision of the NCLT, the state government filed a petition before the HC, and the HC set aside the order of the NCLT and directed the NCLT for the matter to be considered fresh in place of the miscellaneous application.

The state of Karnataka raised two issues before the NCLT, which are covered in the issues section of this summary, and the same was rejected by NCLT allowing the Miscellaneous Application, setting aside the order of rejection and directing the Government of Karnataka to execute Supplemental Lease Deeds.

Challenging the Order of the NCLT, Chennai, and the Government of Karnataka moved a writ petition, before the High Court of Karnataka, which adjourned the matter and granted a stay of the operation, it is against the said ad Interim Order granted by High Court that the Resolution Applicant, the Resolution Professional and the Committee of Creditors have come up with the present appeals.

Issues before the Court

  1. Whether the High Court ought to interfere, under Article 226/227 when an Order passed by the NCLT, ignoring the availability of a statutory remedy of appeal to the NCLAT and if so, under which circumstances?
  2. Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the I & B Code?

Appellant’s Arguments

The appellant contended by assailing the impugned judgement of the High Court, on the ground that when an efficacious alternative remedy was available under the section 61 of the IBC 2016, the HC shouldn’t have intervened by entertaining the writ petition against the order passed by the NCLT. The appellant also 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.

Kapil Sibal, the learned Senior Counsel appearing for 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 High Court under Article 226/227, and that the provisions of IBC, 2016 are given overriding effect under Section 238, overall other statutes.

He contended that the State of Karnataka took a stand in the first writ petition that the dispute regarding the rejection extension of the lease falls within the ambit of the mining tribunal and after raising the plea that the rejection of the extension, ought to have been challenged by way of revision before the central government under section 30 of the MMDR act 1957 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.

That IBC, 2016 being a complete code in itself does not provide any room for challenging with orders of NCLT, otherwise than in a manner prescribed by the code itself. The resolution professional sought merely an extension of the lease which was statutorily recognized, therefore NCLT cannot be said to be having exercised a jurisdiction not vested in it by law.

Respondent’s Arguments

The respondent represented by the Attorney General contended that the jurisdiction of NCLT is defined in Section 60(5) and its power is defined in Section 60(4) of the IBC 2016, which is 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, 19930, hence jurisdiction of the NCLT is only confined to contractual matters inter parties.

An order passed by a statutory/quasi-judicial authority under certain special enactments such as the MMDR Act, 1957 falls in the realm of public law and hence it was contended by the learned Attorney General that the NCLT would have no power of judicial review of such orders.

On the contention of the appellant that the state government had an efficacious alternative remedy, the respondent took the support from Barnard and Others v. National Dock Labour Board 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.

Judgement

To deal with the first issue, that is the power of the High Court to interfere with the decision of the NCLT, the apex court examined the scope of jurisdiction of the NCLT and NCLAT, under the provision of IBC 2016, the court observed that the contractual arrangement between the state government and the corporate debtor is a matter of public interest which is statutorily governed, this was buttressed by looking at the provisions of the MMDR Act 1957, whereby Section 7 states that-

It is hereby declared that it is expedient in the public interest that Union should take under its control the regulation of mines and development of minerals to the extent hereinafter provided.

The Apex Court observed that the decision taken by the state government is a matter which is of public interest governed by a statute, hence the decision can only be reviewed by a superior court which has the power of judicial review, it stated that the NCLT is a quasi-judicial body created by a statute cannot be elevated to the status of a superior court having he power of judicial review, reference for this can be made to para 29 of the judgement where the court observed:

The NCLT is not even a Civil Court, which has jurisdiction under 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’.

It refuted the contention of the appellant that the rejection of the plea for the extension of the lease goes against the provision of IBC 2016, it observed that:

We do not think that the moratorium provided for in Section 14 could have any impact upon the right of the Government to refuse the extension of the lease. The purpose of the moratorium is only to preserve the status quo and not to create a new right’.

In regards to the second issue, the Court observed that about Section 65 and Section 69 of the IBC, NCLT and NCLAT has the jurisdiction to enquire into the question of fraud.


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