LIMITATION ON ROLE OF ADJUDICATING AUTHORITY

-Richa Saraf (resolution@vinodkothari.com)

It is a well settled principle that a writ petition may be entertained by the High Courts only in absence of any efficacious alternate remedy. However, one of the exceptions to the said rule is where there is lack of jurisdiction on the part of the statutory/ quasi- judicial authority, against whose order a judicial review is sought. In the recent case of Embassy Property Developments Pvt. Ltd. vs. State of Karnataka & Ors.[1], the primary issue for consideration before the Hon’ble Supreme Court was with regard to the jurisdiction of High Court to grant relief against the order of NCLT, disrupting the hierarchy laid down by the Code. For the said purpose, the Apex Court examined the limitations on the power exercisable by the Adjudicating Authority, and held that in case any party is aggrieved by the decision of NCLT, the Code provides for filing of an appeal before NCLAT, however, considering the exercise of excess jurisdiction by the NCLT, the High Court may entertain a petition under Article 226/ 227 of the Constitution.

The article analyses the impact of the ruling on the jurisdiction of NCLT to deal with various matters related to the corporate debtor under insolvency or liquidation.

FACTS OF THE CASE

The National Company Law Tribunal, Chennai Bench vide order dated 12.03.2018 ordered for initiation of corporate insolvency resolution process of Tiffins Barytes Asbestos & Paints Ltd. (“Corporate Debtor”).

The Corporate Debtor held a mining lease granted by the Government of Karnataka, which was to expire on 25.05.2018. A notice for pre- termination of the lease was issued by the Government of Karnataka before CIRP commencement, on ground of violation of various statutory rules, and terms and conditions of the lease agreement, however, the order of termination was passed by the Government of Karnataka after the commencement of CIRP.

The RP filed an application before NCLT, Chennai, praying for setting aside of the order of Government of Karnataka, and seeking a declaration that the lease should be deemed to be valid until 31.03.2020 in terms of Section 8A(6) of the Mines & Minerals (Development and Regulation) Act, 1957 (“Mines Act”), and also, a consequential direction on the Government of Karnataka to enter into a supplemental lease deed. The Adjudicating Authority allowed the RP’s application, setting aside the order of Government of Karnataka on the ground that the same is in violation to the moratorium under Section 14 of the Insolvency and Bankruptcy Code. Challenging the order of NCLT, Government of Karnataka moved a writ petition before High Court of Karnataka, wherein the Hon’ble High Court granted a stay of operation of the NCLT directions. The RP, the Resolution Applicant and the Committee of Creditors (“Appellants”) then filed an appeal before the Supreme Court against the interim order passed by the High Court.

CONTENTIONS W.R.T. JURISDICTION OF NCLT AND THE OBSERVATIONS OF THE SUPREME COURT:

1. IBC is a complete code in itself and has an overriding effect over other laws: The Code covers the entire gamut of law relating to insolvency resolution of corporate persons and others in a time bound manner, therefore, one of the contentions raised in the matter was that there exists no room to challenge the orders of NCLT, otherwise than in the manner provided in the Code.  In this regard, it was contended that Section 60(5) provides an exclusive jurisdiction to NCTL to deal with all the matters relating to the corporate debtor. The relevant extract is reproduced below for reference:

“Notwithstanding anything to the contrary contained in any other law for the time being in force, NCLT shall have jurisdiction to entertain or dispose of –

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”

 Further, since Section 238 stipulates that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law, the only option available with the RP is to move an application before NCLT under the provisions of the Code.

The Apex Court discussed the limitation on the jurisdiction of NCLT to exercise its power under Section 60(5). It held that NCLT is a creature of a special statute to discharge certain specific functions, and it cannot be elevated to the status of a superior court having the power of judicial review over administrative action. Observing that NCLT is not even a civil court, which has been granted the jurisdiction, by virtue of Section 9 of the Code of Civil procedure, to try suits of civil nature, and therefore, NCLT can only exercise only such powers which are within the contours of jurisdiction prescribed by the statute, which it is required to administer.

Citing an instance where a corporate debtor may have suffered an order at the hands of the Income Tax Appellate Tribunal, at the time of initiation of CIRP, the Apex Court observed that if Section 60(5)(c) of the Code is interpreted to include all questions of law or facts under the sky, an RP will then claim a right to challenge the order of the Income Tax Appellate Tribunal before the NCLT, instead of moving a statutory appeal under Section 260A of the Income Tax Act, 1961, and the jurisdiction of NCLT laid down in Section 60(5) cannot be stretched so far as to bring such absurd results.

2. Measure to protect the asset of the Corporate Debtor: Section 25(1) of the Code stipulates that it shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, and therefore, the IRP moved the NCLT for appropriate reliefs, for the purpose of preservation of properties of the Corporate Debtor.

It was further contended by the counsel of the IRP that Section 14 of the IBC granted a deemed extension of lease, and therefore, the application before NCLT was only for declaration of that the lease is valid. In this regard, reliance was placed on Section 14(1)(d) which prohibits, during the period of moratorium, the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The Supreme Court observed that the moratorium provided for in Section 14 cannot have any impact on the right of the Government to refuse extension of lease. The Apex Court discussed the purpose and scope of moratorium and held that moratorium is only to preserve the “status quo and not to create a new right. Analysing the provision contained in Section 14(1)(d), it was held that the said section will not go to the rescue of the Corporate Debtor since what is provided therein is only the right not to be dispossessed but does not by itself provides the right which the Corporate Debtor does not otherwise have (in the instant case, the right to have the renewal of lease). Further, considering that there existed disputes arising under the Mines Act, and those revolving around decisions of statutory or quasi-judicial authorities, the Supreme Court deliberated on the provisions contained in Section 18(f)(vi) of the Code-

The IRP shall take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets, including assets subject to the determination of ownership by a court or authority.”

If the intent of the Code was to confer with NCLT the jurisdiction to decide all types of claims relating to the asset of the corporate debtor, Section 18(f)(vi) would not have provided for determination of ownership by a court or other authority, and therefore, the Apex Court held that wherever the corporate debtor has to exercise rights in judicial, quasi- judicial proceedings, the RP cannot short- circuit the same and bring a claim before NCLT taking advantage of Section 60(5).

3. Jurisdiction based on consensus between parties: One of the contentions raised in the appeal was that since the State of Karnataka recognised the jurisdiction of NCLT for raising all its contentions, it was not open to the Government to later question the jurisdiction of the NCLT in next round of litigation. The Apex Court held that the fact that the Government of Karnataka conceded to the jurisdiction of the NCLT does not ipso facto provide NCLT with the jurisdiction to entertain any application. NCLT is a creature of statue, any jurisdiction to the NCLT has also been granted by the statute, and the mere agreement between parties to approach a particular court or tribunal does not automatically provide jurisdiction to a court.

CONCLUSION

From the above discussion, it is clear that the jurisdiction of Adjudicating Authority is confined only to contractual matters between parties, and an order passed by a statutory/ quasi- judicial authority under certain special laws, or which falls in the realm of public law, cannot be determined by NCLT. A decision taken by the government or a statutory authority cannot, by any stretch of imagination, be brought within the fold of “arising out of or in relation to insolvency resolution” as appearing in Section 60 of the Code. The correctness of the said decision can be called into question only in a superior court vested with the power of judicial review over administrative action.

 

[1] https://main.sci.gov.in/supremecourt/2019/33953/33953_2019_4_1501_18757_Judgement_03-Dec-2019.pdf

Concerns on Going Concern: Proposed amendments in Liquidation Regulations need relook

–  Vinod Kothari

 

The possibility of going concern sales in liquidations, visualised by Adjudicating Authorities in several early cases, got a regulatory recognition vide IBBI (Liquidation Process) (Second Amendment) Regulations, 2018. Since then, there has been a lot of work on how exactly will going concern sale work in liquidation. Our previous write- ups on going concern sale are Liquidation sale as going concern: The concern is dead, long live the concern! and Enabling Going Concern Sale in Liquidation. IBBI itself has organised several meetings around this; there have been meetings organised by other groups such as Society of Insolvency Practitioners of India (SIPI).

 

Recently, the IBBI released a draft of the amendments to the Liquidation Regulations[1], which includes regulatory amendments pertaining to going concern sale as well.

 

This Note highlights the need to have a relook at these proposed amendments, in context of going concern sale.

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Cross-Breeding of Entities: NCLT upholds the view!

Pammy Jaiswal

Partner, Vinod Kothari and Company

[corplaw@vinodkothari.com]

Background

Even though each time when law is amended, the stakeholders do expect the change will be a gap filing exercise or a step towards making it more liberal or strict, as the case may be. However, sometimes such amendment comes with a lacuna. Earlier under the Companies Act, 1956 (‘Act, 1956’), sections 391 – 394 dealt with the provisions of compromises, arrangements, amalgamation and reconstruction. The said provisions were re-casted under the Companies Act, 2013 (‘Act, 2013’) under sections 230 – 234. The said provision under the Act, 2013 suffers from a significant gap.

This write-up is an attempt to foreclose the lacuna under the new provision under law and how the quasi-judicial body has correctly interpreted the said gap in law. Read more

No separate Application is required where 100% Subsidiary seeks Amalgamation with its Holding Company: NCLT Bengaluru Bench

In the recent ruling of National Company Law Tribunal[1]Bengaluru Bench (‘the Hon’ble NCLT’), the Bench has held that no separate application is required to be filed by the transferee company in case of merger of a wholly owned subsidiary company with its parent company by virtue of scheme of amalgamation.

Below we discuss the same in details along with analysis of the impact of the ruling. Read more

RBI proposed draft regulations for Cross Border Mergers by Somesh Lund

The Reserve Bank of India (RBI) on 28th April, 2017[1] proposed draft of Foreign Exchange Management (Cross border Merger) Regulations, 2017 under Foreign Exchange Management Act, 1999 in relation to cross border mergers and is accepting public comments till 9th May, 2017. These regulations cover merger, demerger, amalgamation or arrangements between Indian company (ies) and foreign company (ies).

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Companies Act now permits cross border mergers by Meenakshi Lakshmanan

Cross border merger is not a novel concept in the corporate arena. This concept has taken shape stage by stage. The origin of the cross border merger started with the foreign trade which extended to branch establishments in the foreign territory and later merging with entities of the foreign country. When it comes it Indian scenario, the initial step towards cross border mergers was taken in 2005 by the JJ Irani committee. The need for widening the scope of business internationally and the necessity of ensuring compliance with law is a mammoth task for all the jurisdictions to balance.

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SEBIs’ circular on Scheme of Arrangement: Aligning the compliances with the Companies Act, 2013, by Barsha Dikshit and Trupti Upadhyay

Introduction

 

After such a long wait of around 3 months since the enforcement of provisions of the Companies Act, 2013 (‘Act, 2013’) dealing with Compromise or arrangements, Securities of Exchange Board of India (‘SEBI’) finally came up with a Circular [1]dated March 10, 2017 (‘the Circular’) aligning the provisions to be followed by listed companies pertaining to the Scheme of Arrangements with the provisions of the Act, 2013. Provisions of the Act, 2013 dealing with the Compromise and arrangements have already been enforced by MCA. However, since nothing had been Read more