NCLT cannot assume power to declare IBC 2016 provisions and Regulations as illegal and Ultra Virus

IBBIVs. STATE BANK OF INDIA & ORS
Date of decision: 28th November 2022
W.P.(C) 10189/2018 & CM APPL. 39715/2018
Hon'ble Delhi High Court

DELHI HIGH COURT HELD THAT

NCLT cannot assume power to declare IBC,2016 provisions and Regulations as illegal and Ultra Virus.

BRIEF FACTS

1. The present writ petition has been filed by the Petitioner - Insolvency and Bankruptcy Board of India (hereinafter, "IBBI") challenging the impugned order dated 5th September, 2018 passed by the NCLT in CA809(PB)/2018 titled State Bank of India v. Su Kam Power Systems Ltd. Vide the said impugned order, the NCLT has held that Regulation 36A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("Regulation 36A") is ultra vires Section 240(1) of the Insolvency and Bankruptcy Code, 2016 ("IBC").

The said provision reads:

"36A. INVITATION OF RESOLUTION PLANS

(1) The resolution professional shall issue an invitation, including evaluation matrix, to theprospective resolution applicants in accordance with clause (h) of sub-section (2) of section 25, to submit resolution plans at least thirty days before the last date of submission of resolution plans.

(2) Where the invitation does not contain the evaluation matrix, the resolution professional shall issue, with the approval of the committee, the evaluation matrix to the prospective resolution applicants at least fifteen days before the last date for submission of resolution plans.

(3) The resolution professional may modify the invitation, the evaluation matrix or both with the approval of the committee within the timelines given under sub regulation (1) or sub regulation (2), as the case may be.

(4) The timelines specified under this regulation shall not apply to an ongoing corporate insolvency resolution process- (a) where a period of less than thirty-seven days is left for submission of resolution plans under sub regulation (1); (b) where a period of less than eighteen days is left for submission of resolution plans under sub-regulation (2).

(5) The resolution professional shall publish brief particulars of the invitation in Form G of the Schedule: (a) on the website, if any, of the corporate debtor; and (b) on the website, if any, designated by the Board for the purpose."
Section 25(2)h of the IBC, 2016

For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely:- (a) to (g)……… (h) invite prospective lenders, investors, and any other persons to put forward resolution plans;"

2. The matter came to the NCLT by way of an application filed under Section 12(2) of the IBC by the Respondent No. 1 - State Bank of India (SBI) where extension was sought for the completion of the Corporate Insolvency Resolution Process (CIRP) by a further period of 90 days. During the course of hearing this application, the NCLT noticed that an expression of interest was floated however, no resolution plans were filed in response to the same.

3. This splitting of the CIRP into inviting expression of interest and then seeking resolution plans as provided in Regulation 36A became the subject matter of the impugned order. The NCLT then held Regulation 36A to be ultra vires of Section 240(1) of the IBC, despite there being no specific challenge to the said Regulation.The reason given by the NCLT was that it was contrary to the speedy disposal of the Resolution Process.

Process

The operative portion of the impugned order reads as under: "We are further of the view that Section 25 (2) (h) added on 23.11.2017 by way of amendment does not contemplate floating of any expression of interest. It is beyond our understanding as to how the IBBI has taken upon itself the task of framing Regulation 36A of IBBI (Insolvency Resolution Process for Corporate Persons), Regulations, 2016 using the expression 'invitation of expression of interest' along with Form 'G'. Such an assumption of power would be beyond the competence of IBBI as the source of power to frame Regulation under the IBC is drawn from Section 240 of IBC, 2016. Section 240(1) in categorical terms provides that the IBBI may by notification make regulation consistent with the Insolvency and Bankruptcy Code, and further subject to the Rulesframed by the Government under Section 239 of IBC, 2016 for carrying out the provisions of the Code. It has been repeatedly emphasised culminating in the rendered in aforesaid judgment that speed is the essence of CIR Process and inviting 'expression of interest' would impede to the speed. In the case of Innoventive Industries Ltd. v. ICICI Bank Ltd. (2018) 1 see 407 passed by Hon'ble Supreme Court has highlighted that the speed is one of the salient features of the IBC, 2016. By use of the words 'expression of interest' the speed is retarted and time is wasted. In the present case on 04.06.2018 'expression of interest' was invited and last date for expressing interest to submit the resolution plan was 18.06.2018 without in fact inviting any resolution plan. Such a course is negation of the salient features highlighted by Supreme Court that the speed is essence of the IBC, 2016, therefore, we have no other option except to declare Regulation 36A as ultra-vires of Section 240(1) of IBC, 2016. The IBBI is directed to frame Regulation according to its competence and the source of power as given to it by the Code. We do not say anything more on this aspect."

4. The Petitioner has challenged the said impugned order before this Court on several grounds including on the ground that the NCLT does not have the jurisdiction and power to decide upon the validity and legality of Regulations.

5. Vide previous order dated 26th September 2018, this court directed that the impugned order passed by the NCLT shall not come in the way of the matters where ‘Expression of Interest' has already been issued. The relevant part of the said order is as follows:

"4.The question involved in the present petition is whether the National Company Law Tribunal(hereafter "the NCLT") could strike down the provisions of Section 36A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016. The NCLT has held that the procedure for calling for 'Expression of Interest' is ultra-vires of the Insolvency and Bankruptcy Code, 2016 given the time bound manner in which the process is to be completed.

5. At this stage, this Court is not inclined to interfere with the impugned order. However, it is pointed out that in some cases, the 'Expression of Interest' has already been issued by the Resolution Professionals. This Court is of the view that the process in those cases, need not be interdicted. Therefore, it is directed that the impugned order dated 05.09.2018 passed by NCLT in the matter of State Bank of India vs. Su Kam Power Systems Ltd.: CA-809(PB)/2018 in (IB)- 540(PB)/2017 shall not come in the way of the matters where 'Expression of Interest' has already been issued.

6. An appeal was preferred by the IBBI, challenging the said order being LPA No.566/2018 titled Insolvency & Bankruptcy Board of India v. State Bank of India & Ors. Vide order dated 5 th October 2018, the ld. Division Bench granted an interim order in the following terms:

In the meanwhile, there shall be stay of the order dated 5th September 2018 passed by the National Company Law Tribunal, Principal Bench, New Delhi to the extent it declares Regulation 36A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)Regulations, 2016 as ultra vires, shall remain stayed.

7. Thereafter, vide order dated 4th May 2022, the Appeal being LPA No.566/2018 was disposed of in the following terms:

"1. This appeal is directed against an interlocutory order dated 26.09.2018, passed by the learned single judge in W.P.(C) No.10189/2018.

2. Via the impugned order, the learned single judge allowed the existing ‘Expression of Interest', which had been issued by the Resolution Professional [in short "RP"], to progress further.

2.1. The learned single judge has also observed in the very same order, that in view of the said direction, the order dated 05.09.2018 passed by the National Company Law Tribunal [in short "NCLT"] in the matter of State Bank of India vs. Su Kam Power Systems Ltd will not come in the way in matters wherein ‘Expression of Interest' has already been issued by the RPs.

2.2. The record shows that the appellant had assailed by way of W.P.(C) No.10189/2018, the order dated 05.09.2018 passed by the NCLT, which is referred to hereinabove.

2.3. Clearly, the said writ petition i.e., W.P.(C) No. 10189/2018 is pending adjudication before the learned single judge.

3. Furthermore, the record also shows that the predecessor Bench in the instant appeal vide order dated 05.10.2018, has stayed the operation of the order dated 05.09.2018 passed by the NCLT.

3.1. In effect, Regulation 36A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 continues to operate.

4. Given this position, in our view, the writ petition needs to be heard and a final decision is required to be rendered in the said writ petition.

5. Accordingly, the appeal is disposed of, with a request to the learned single judge to take up the writ petition for hearing and final disposal.

6. It is further directed that pending the disposal of the writ petition, interim order dated 05.10.2018 passed bythe Division Bench will continue to operate. 7. Consequently, pending application shall stand closed."

DECISION OF DELHI HIGH COURT

8. In the present case, a conjoint reading of the provisions of the IBC clearly shows that the NCLT is the adjudicating authority under the IBC. Under Section 60(5) the categories of cases which can be adjudicated have been clearly enumerated. The jurisdiction to deal with the validity and legality of the Regulations framed under the IBC is not conferred upon the NCLT.

9. The NCLT being a creature of the IBC, cannot assume to itself the power of declaring any provisions of the IBC or the Regulations as illegal or ultra vires.

10. This is the clear view even of the NCLAT in M/s Mohan Gems & Jewels Pvt. Ltd. (supra).

11. In view of the aforementioned discussion, since Regulation 36A has been amended and passed in accordance with law by the IBBI, the NCLT did not have the power to declare the same as being ultra vires merely on the ground that the two stage process provided in it i.e., of inviting an expression of interest first and then the financial bids, would be contrary to the speedier resolution of the Insolvency Resolution Process.

12. The impugned order dated 5th September 2018 passed by the NCLT to the extent it holds Regulation 36A as ultra vires is accordingly set aside.

13. It is however made clear that, before this Court, no challenge has been raised on merits to the validity or legality of Regulation 36A

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