Special Powers of Supreme Court against Inherent Powers of NCLAT under IBC, 2016 Insolvency application allowed to be withdrawn post admission, by Dheeraj Sharma

Introduction                                                                            

The Supreme Court of India vide its order dated July 24, 2017, in the case of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP[1](Civil Appeal No. 9279 Of 2017), used its special powers under Article 142 of Constitution of India to allow the two organisations to withdraw from insolvency proceedings and settle their loan dispute despite the case having been admitted by the National Company Law Tribunal, Mumbai (NCLT-Mumbai) vide its order[2] dated June 15, 2017 as well as being denied by the National Company Law Appellate Tribunal (NCLAT) vide its order[3] July 13, 2017. The judgment pronounced by Supreme Court is an important one in the course of development of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC 2016” or “the Code”) in which the inherent powers of the Tribunals’ were prayed to invoked by the parties to the suit for settlement of their disputes, which were denied both by the NCLT and NCLAT but the Apex Court used its extraordinary powers to serve justice.

Facts of the Case

In the present case, Nisus Finance and Investment Managers LLP (hereinafter referred to as NFIM or the Appellant) filed a petition u/s 7 of IBC 2016 before the Mumbai Bench of NCLT against Lokhandwala Kataria Constructions Private Limited (hereinafter referred to as LKCPL or the Corporate Debtor) as LKCPL failed honor its guarantee to redeem the debentures issued by its group company namely Vista Homes Private Limited (hereinafter referred to as Vista Homes). Vista Homes borrowed Rs.27.86 crores against issue of debentures and the Appellant being the facility agent on behalf of the pool of debenture holders, initiated the insolvency proceedings upon such default of repayment by the Corporate Debtor.  Based on the petition filed by NFIM, Hon’ble NCLT affirmed that as to the petition, two points are complied with – (i) availing funds, (ii) default in repayment; and hence, the petition u/s7 was admitted. However, the Petitioner and Defendant agreed to settle their dispute between themselves and applied to NCLT for withdrawal of application filed under Section 7 of IBC, 2016 but NCLT declined their request as Rule 8 of I&B (Application to Adjudication Authority) Rules, 2016 (hereinafter referred to as “IBC Rules”) allows the application to be withdraw before its admission. The Appellant reached to the Appellate Tribunal i.e. NCLAT and sought relief of withdrawal of application by requesting the Bench to exercise its inherent power, under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (hereinafter referred to as “NCLAT Rules”). However, NCLAT observed that said Rule 11 has not been adopted for the purpose of IBC 2016 and only Rules 20 to 26 have been adopted. Therefore, the Bench in the absence of any specific inherent power and claiming it to be a case with no merits to invoke such powers declined the request of the Appellant for exercising inherent power and consequently refused to allow withdrawal of application filed upon the Corporate Debtor. The matter was further appealed at the Supreme Court wherein the relief was finally granted to the Appellant and application was allowed to be withdrawn.

Provisions of Law

Section 7 of the IBC 2016, which deals with application by financial creditor reads as follows:

  1. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Rule 8 of I&B (Application to Adjudicating Authority) Rules, 2016, which reads as follows:

  1. 8. Withdrawal of Application – The Adjudicating Authority may permit withdrawal of the application made under Rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.

Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 which reads as follows:

  1. Inherent powers – Noting in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.

Article 142 of the Constitution of India

  1. Enforcement of decrees and orders of Supreme Court and unless as to discovery, etc:

(1) The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe

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Observations of Supreme Court

The Supreme Court while adjudicating the matter observed that the the view of NCLAT for not invoking its inherent powers, prima facie, appears to be the correct position in law but yet the Supreme Court, using its own special powers allowed the parties a second chance to settle their dispute by invoking Article 142 of the Constitution of India to serve justice to the parties.

Judgment of Supreme Court

The Supreme Court despite of acknowledging the fact that the correct position of law does not allow the application to be withdrawn considered the fact that the parties have agreed to some consent terms amongst them outside the court and have submitted the undertaking to abide by such terms. In view of such submissions by the parties the apex court exercised its powers under Article 142 to serve justice by allowing the parties a second chance to settle their disputes and thereby setting aside the order of the Hon’ble NCLAT which refused to invoke its inherent powers to allow the application to be withdrawn.

Our Analysis

It is a clearly laid down under the IBC 2016 that before admission of any application under Section 7, it is open to the financial creditor to withdraw the application under Rule 8 of IBC Rules but the same can only be exercised before its admission as once it is admitted, it cannot be withdrawn and is required to follow the procedures laid down under Sections 13, 14, 15, 16 and 17 of IBC 2016 for the revival of the entity. As stated by Hon’ble NCLAT, even the financial creditor who filed the application cannot be allowed to withdraw the application once admitted, until claims of all the creditors are satisfied by the corporate debtor. The view pronounced by the Hon’ble NCLAT goes with the spirit of the IBC 2016 which provides remedy for all the creditors at large instead of one to one recovery or settlements of the companies with its creditors. It has to be kept in mind that once the process of insolvency is commenced against any company, the remaining course of action is set to an auto-pilot mode and even the Hon’ble NCLT or NCLAT are left with very limited powers and they are to largely oversee the implementation of the provisions of the Code. Unfortunately, the apex court has missed on this particular occasion to give an eye to details and exercised its special powers which the Hon’ble NCLAT refused to invoke as it found no merits for invoking the same due to presence of specific provisions under the Code, 2016.

Inherent powers means powers which are not, expressly or impliedly, specified in law. These exist as an age-old and well-established principle that every court has power to act ex debito justitiae to do that real and substantial justice for the administration of which alone it exists and to prevent the abuse of the process of the court. Though, it is pertinent to note that the inherent power of the Court cannot be invoked to nullify a statutory provision. Hon’ble Supreme Court in Arjun Singh vs. Mohindra Kumar and others[4] 1963 stated that –

“It is common ground that the inherent power of the Court cannot override the express provisions of the law. In other words, if there are specific provisions of the Code[5] dealing with a Particular topic and they expressly or by necessary implication exhaust the scope of the powers of the Court or the jurisdiction that may be exercised in relation to a matter the inherent power of the Court cannot be invoked in order to cut across the powers conferred by the Code. The prohibition contained in the Code need not be express but may be implied or be implicit from the very nature of the provisions that it makes for covering the contingencies to which it relates.”

From the above, it is a clear precedent which was sent long by the Hon’ble Supreme Court that inherent powers cannot be invoked in cases to override provisions of law which expressly prohibit for any remedy. If provision has been made for every contingency, it stands to reason that there is no scope for, the invocation of the inherent powers of the Court to make an order necessary for meeting the ends of justice. In the instant case, Rule 8 clearly lays down that application cannot be with withdrawn once the same has been admitted by the Tribunal but Supreme Court has set a wrong foot by overlooking such express prohibition and allowing the entity to withdraw its application. While exercising the inherent power, there is no such legislative guidance to deal with those special situations of the case and so the exercise of power depends upon the discretion and wisdom of the court exercising it, and also upon the facts and circumstances of the case. However, the same should not be treated as a carte blanche to grant any relief by overlooking the express or implied provisions contained in the law and therefore the inherent powers of the court being complementary to the powers specifically conferred, are free to be exercised by the court subject to its exercise being in a way that it should not be in conflict with what has been expressly provided in the law.

Impact of Judgment

In our view, Article 142 of the Constitution in our view has been provided to supplement the powers of the apex court to serve justice and it is justified to exercise this power if there is any gap in law which creates an unknown walkout from justice, and hence Article 142 is to serve justice to the parties by supplementing those gaps. However, under the provisions of the IBC 2016 there is a reasoning for not allowing withdrawal of an application after its admission as the aim is not to resolve dispute of merely two parties but an overall revival of the entity by devising a suitable resolution plan so that the economy at large does not have to face the issues of increasing NPAs. Once the application is admitted by the NCLT, it triggers the whole process of insolvency resolution process which is an auto-pilot procedure as all the steps and actions are pre-definitive and time bound. The intent of the IBC 2016 is to provide every creditor a chance to participate in this process to safeguard the interest of all of them together instead on individual basis and which is why NCLAT could not use it inherent powers to allow the Appellant to withdraw his application. The verdict of Supreme Court has not be seen as against the provisions of the Code 2016 but an exceptional case, where the parties were allowed a second chance. This however, should not be used as a precedent to seek relief for withdrawal of applications under IBC 2016 because the use of special powers by Supreme Court and inherent powers by NCLAT can only be done in cases where its required to meet the ends of justice. To sum up, it can be said that the verdict shall go long way in the history of the Code and assure justice to be served to parties in the rarest cases where justice is being prejudiced under the stringent provisions of the Code, 2016.

[1] http://supremecourtofindia.nic.in/supremecourt/2017/21226/21226_2017_Order_24-Jul-2017.pdf

[2] http://nclt.c2k.in/OtherNCLT/Publication/Mumbai_Bench/2017/Other/355.pdf

[3] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/13072017AT952017.pdf

[4] https://indiankanoon.org/doc/1608703/   Citation – (1964 AIR 993 SCR(5) 946)

[5] Code here refers to Civil Procedure Code

by Dheeraj Sharma (resolution@vinodkothari.com)

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