Jurisdiction of NCLT under IBC on issues relating to Public Law Domain

Whether NCLT can exercise jurisdiction over matters of public domain in IBC proceedings? Supreme Court clarifies!

Introduction:

Since the coming into force of Insolvency and Bankruptcy Code, 2016 (IBC) and operationalisation of National Company Law Tribunal(s) in India, various new legal issues have cropped up over the last 3 years before the NCLTs and NCLAT, which finally reached before the Hon'ble Supreme Court and still continue to reach for final determination as we speak. Some of these have already been answered/settled by the Hon'ble Supreme Court (major courtesy Hon'ble Mr. Justice R.F. Nariman) and some are still to be set at rest. The major issues which have been settled were relating to -

(i) "pre-existence of dispute between parties before receipt of demand notice- settled in Mobilox vs. Kirusa[1]",

(ii) "scope of section 7 petition and primacy of IBC proceedings/moratorium over all other laws - Innoventive vs. ICICI[2]",

(iii) "applicability of limitation provisions in filing section 7 and 9 petitions - B.K. Educational Services Pvt. Ltd. vs. Parag Gupta[3]",

(iv) "date of NPA to be date of default in Financial Creditor matters - Jignesh Shah vs. Union of India[4] and Gaurav Hargovindbhai Dave vs. ARC (India) Ltd.[5]",

(v) "constitutional validity of various provisions of IBC - Swiss Ribbons vs. Union of India[6] and connected bunch of petitions" etc. and this list continues to grow.

In this order, recently, the Hon'ble Apex Court has decided another important issue relating to the jurisdiction of NCLT under IBC, over matters of public law domain and as to whether NCLT is omnipotent once moratorium period begins to run in respect of a Corporate Debtor entity and whether NCLT can entertain any Application during moratorium period to stay/set aside any Order passed by a public authority in respect of the property of a Corporate Debtor and also whether an Order of NCLT can at all be challenged before High Court by invoking its Writ jurisdiction. This judgment has been rendered in the case of M/s Embassy Property Developments Pvt. Ltd. vs. State of Karnataka & Ors.[7], Civil Appeal No. 9170 of 2019, decided on 03rd December, 2019.

Facts in Brief:

The Financial Creditor ("FC") in the present matter (M/s Udhyaman Investments Pvt. Ltd.) filed application u/s 7 IBC against the Corporate Debtor ("CD") (M/s Tiffins Barytes Asbestos & Paints Ltd.), wherein the NCLT, Chennai vide Order dated 12.03.2018 admitted the application and ordered for initiating Corporate Insolvency Resolution Process (CIRP) of the CD and consequently, also declared the moratorium period u/s 14 IBC.

At the relevant time, the CD was holding a mining lease which was to expire on 25.05.2018. On account of declaration of moratorium period, the Interim Resolution Professional (IRP) appointed in the matter by NCLT immediately issued a letter to the Director of Mines & Geology, Karnataka informing about the commencement of CIRP and thereafter again issued a letter/application to the same authority seeking deemed extension of the mining lease up to 31.03.2020 in terms of relevant provisions of the Mines and Minerals (Development and Regulation) Act, 1957 (for short "MMDR Act, 1957").

When the concerned authority did not respond to such letter, the IRP filed a Writ Petition before High Court of Karnataka with a prayer to declare the validity of mining lease up to 31.03.2020. However, during pendency of such Writ Petition, the concerned Mining Department rejected the application filed by IRP for deemed extension of the mining lease.

Pursuant to this, the IRP instead of challenging such rejection order before the High Court, withdrew the pending Writ Petition and directly filed a Miscellaneous Application (M.A.) before NCLT, Chennai in the pending section 7 petition challenging the rejection order of mining department and wherein the NCLT, Chennai entertained such M.A. and while allowing the prayer(s) made in such M.A., set aside the rejection order of mining department holding the same to be in violation of the moratorium period and directed the department to execute supplementary lease deed up to 31.03.2020.

Aggrieved of such Order of NCLT, Chennai, the Government of Karnataka challenged such Order directly before the High Court of Karnataka by preferring a Writ Petition, wherein the High Court while exercising its extraordinary jurisdiction, stayed the impugned Order of NCLT, Chennai.

Feeling aggrieved of such interim stay order of High Court of Karnataka, the IRP, the Committee of Creditors and the Resolution Applicant in the CIRP proceedings, filed various SLPs before the Hon'ble Supreme Court challenging such interim stay order of High Court, primarily on two grounds that -

(i) whether the High Court under its Writ Jurisdiction, was right in interfering with the Order of NCLT passed in IBC proceedings, ignoring the availability of alternate efficacious remedy of statutory appeal against such Order before the NCLAT and if so, under what circumstances, and

(ii) whether the NCLT/NCLAT can inquire into the questions of fraud in the proceedings under IBC.

However, for the purpose of this Article, we shall deal with the first ground above, as answered by the Hon'ble Supreme Court.

Jurisprudential Discussion and Decision:

The Hon'ble Supreme Court while dismissing the Appeals, affirmed the interim order of High Court of staying the Order of NCLT and held that High Court was well within its jurisdiction in interfering with the Order of NCLT despite availability of statutory appellate remedy for challenging such Order. While, doing so, it relied on the principle of inherent lack of jurisdiction on the part of the Tribunal and held that NCLT doesn't have power of judicial review of Order(s) passed by a public statutory authority under certain special enactments such as MMDR Act, 1957.

The Hon'ble Court while reiterating the fact that IBC is a complete code in itself for the purpose of insolvency of corporate entities and others and that NCLT has been vested with the power to exercise jurisdiction in respect of all insolvency matters relating to corporate debtors under IBC, further held that however, the IBC is a private law remedy as against public law remedy, wherein the private disputes inter-se parties gets decided / settled and accordingly, the NCLT being also a creation of statute and given powers inter-alia to adjudicate matters relating to IBC, can only exercise jurisdiction as provided for in the statute (i.e. IBC) and not beyond.

The Hon'ble Court while discussing the principle of inherent lack of jurisdiction, relied upon various decisions rendered by English Courts and primarily on Anisminic Ltd. vs. Foreign Compensation Commission[8], wherein they culled out a distinction between cases where a statutory/quasi -judicial authority exercised a jurisdiction not vested in it in law and cases where there was a wrongful exercise of the available jurisdiction. In all these cases discussed, an “error of jurisdiction” was always distinguished from “in excess of jurisdiction”. To make it more clear, it was held in Anisminic that the real question was not whether an authority made a wrong decision but whether they enquired into and decided a matter which they had no right to consider.

The Hon'ble Bench while also discussing various judgments passed by its predecessors in the past made distinction between "jurisdictional error" and "error of law within jurisdiction".

Further, on the question of exercising extraordinary jurisdiction by High Court under Article 226 despite availability of statutory alternate remedy is concerned, the Hon'ble Supreme Court held that while doing so, the High Court(s) should take into account the distinction between 'lack of jurisdiction' and 'wrongful exercise of the available jurisdiction' by the lower authority/tribunal/court etc. whose decision is under challenge and if it’s a case of 'lack of jurisdiction', then the High Court(s) may not hesitate in exercising its power of judicial review available under Article 226.

Thereafter, taking into account the intent, object and purpose of MMDR Act, 1957 and the powers given therein to the Government to issue and cancel mining lease(s) and to also grant deemed extension of such lease(s) and also considering that this Act has been enacted in public interest, it was held that the issue of grant of mining lease is statutorily governed and it is not just a contractual relation between the Government and the person to whom the mining lease has been allotted. Based on this, it was held that the decision of the Government of Karnataka to refuse the benefit of deemed extension of lease, is in the public law domain and hence the correctness of 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 Hon'ble Court further also looked into the jurisdiction of NCLT as provided in section 60 sub-section (5) and held that though, clause (c) of section 60(5) is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution, but even then, a decision taken by the government or a statutory authority in relation to a matter which is 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” appearing in Clause (c) of section 60(5). The Hon'ble Court further held that the jurisdiction of the NCLT delineated in Section 60(5) cannot be stretched so far as to bring absurd results.

Also taking note of duties of an IRP and a RP provided in sections 18 and 25 IBC respectively, the Hon'ble Court pointed out that as per these sections, an IRP or an RP as the case may be, is obliged to represent and act on behalf of the corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings whenever the need arises at the time of taking control and custody of an asset over which the corporate debtor has ownership rights or thereafter. This shows that wherever the corporate debtor has to exercise rights in judicial, quasi-judicial proceedings, the resolution professional cannot short circuit the same and bring a claim before NCLT directly taking advantage of Section 60(5).

Finally, on the basis of discussing the entire statutory scheme of IBC, the Hon'ble Supreme Court came out to the conclusion that wherever the corporate debtor has to exercise a right that falls outside the purview of the IBC, 2016 especially in the realm of the public law, they cannot, through the resolution professional, take a bypass and go before NCLT for the enforcement of such a right.

Therefore, while answering the question of law in affirmative, the Hon'ble Supreme Court held that the 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.

Ratio in brief:

The Hon'ble Supreme Court held that NCLT is a statutory body created by a statute and as far as its jurisdiction under IBC is concerned, it has to decide inter-se dispute(s) between private parties i.e. one being either Financial or Operational Creditor and another being Corporate Debtor relating to their financial transaction(s) and therefore it does not have any jurisdiction to entertain and decide any issue(s) relating to public law domain involving decisions of statutory or quasi-judicial authorities even if it concerns the parties before it in a section 7 or 9 petition,

secondly, if the NCLT entertains and passes an Order without jurisdiction (being Coram Non Judice), then such Order can be challenged before High Court by invoking its extra ordinary jurisdiction and in such a case, availability of statutory appellate remedy would be no bar to entertain a writ petition challenging such non-est order of NCLT.

Obiter:

A Tribunal which is the creature of a statute cannot be clothed with jurisdiction, by any concession made by a party.

Effect of this Judgment vis-à-vis recent Amendment to Section 14 IBC:

The Central Government has, vide Notification dated 13.03.2020, notified the IBC Amendment Act, 2020 (which has come into force retrospectively from 28.12.2019). Vide this Amendment Act, inter-alia, an Explanation has been inserted in Clause 1 of Section 14 as under -

"Explanation.—For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;"

Therefore, the moot question today is, whether through insertion of this Explanation, the legislature has tried to dilute/overrule the dictum of Hon'ble Supreme Court in the above discussed case that NCLT cannot have jurisdiction in IBC proceedings over matters relating to public law domain and that it cannot sit in judicial review over decisions of other public authorities even if the same affects any corporate debtor against whom CIRP is pending. Whether this insertion of Explanation means giving jurisdiction to NCLT which it did not have earlier and thereby giving it power of judicial review?

In my view, this is not the case. The purpose of inserting any 'Explanation' to a provision sensu stricto is only to clarify the meaning/intent of that provision and not to add anything further to it. Therefore, by an Explanation, in my view, the legislature cannot arm NCLT with jurisdiction which it did not have earlier.

This Explanation, as per its language would only bar any public authority (as mentioned therein) to suspend or terminate any license / permit etc., on the ground of insolvency wherein if a public authority passes an Order either suspending or terminating any license / permit etc. only on the ground of insolvency proceedings being initiated against any Corporate Debtor, then such an Order shall be non-est in the eyes of law pursuant to this Amendment and such Order can be stayed / set aside by NCLT. To this little extent, the Explanation has clarified the jurisdiction of NCLT to entertain any Application and pass necessary Order(s) therein. However, even this conferment of jurisdiction is with a condition that if the Order of a public authority to suspend or terminate any license / permit etc. is on the ground of insolvency along with default in payment of current dues for the use or continuation of the license / permit etc. during the moratorium period or otherwise only on this second ground, then the NCLT shall not have jurisdiction to interfere in such Order(s).

Therefore, this is a plenary power clarified to have been vesting with the NCLT and exercise of jurisdiction as per the new Explanation would also not amount to judicial review as the jurisdiction in such a case would be very narrow and would not require decision by NCLT on merits.

Apart from this, if the public authority suspends or terminates any license / permit etc. of a corporate debtor on any other ground than that of initiation of insolvency or refuses to extend the license/permit etc. which is expiring during the moratorium period (as was the case in judgment above) then as per the decision of Hon'ble Supreme Court, the NCLT would still not have jurisdiction in any manner even after insertion of this Explanation.

Therefore, the Explanation, in my view, doesn't dilute/overrule the dictum of Hon'ble Supreme Court in Embassy supra by conferring jurisdiction on NCLT which it did not have earlier but it has only clarified the intent of legislature which was there while enacting this provision.

[1] Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353.

[2] Innoventive Industries Ltd. vs. ICICI Bank and Ors., (2018) 1 SCC 407.

[3] B.K. Educational Services Private Limited vs. Parag Gupta and Associates, (2019) 11 SCC 633.

[4]Jignesh Shah and Others vs. Union of India and Others, (2019) 10 SCC 750.

[5] Gaurav Hargovind bhai Dave vs. Asset Reconstruction Company (India) Ltd. and Another, (2019) 10 SCC 572.

[6] Swiss Ribbons Pvt. Ltd. and Another vs. Union of India and Others, (2019) 4 SCC 17.

[7] M/s Embassy Property Developments Pvt. Ltd. vs. State of Karnataka & Others, 2019 (17) SCALE 37.

[8] (1969) 2 WLR 163.