The Insolvency and Bankruptcy Code, 2016 (“the Code”) proved to be a gamechanger with respect to both revival and liquidation of a company. Instead of terming a company on the verge of its extinction as ‘sick’, it focuses upon effective restructuring through plans that even involve mergers and acquisitions. This can be attributed to the objective of the Code, i.e., a time bound revival of a company in default. It facilitates the rebuilding of companies by admitting bona fide initiations of the Corporate Insolvency Resolution Process (“CIRP”) and by-passing liquidation orders where necessary. It can also impose penalties where fraud is alleged, whether in the matter of initiation or any transaction associated with it. The Special Courts under Section 236 of the Code support the tribunal by taking cognizance of offences under the Code, ensuring a smooth CIRP.
The tribunal, under Section 60(5) of the Code, is vested with the power to decide upon matters arising out of and incidental to the insolvency proceeding. While deciding an insolvency proceeding, the tribunal might have to deal with matters falling within the realm of public domain. This blog seeks to study the significance of the Special Courts under the Code, examine the transformation in the role of the National Company Law Tribunal (“NCLT”) in matters relating to insolvency after IBC, and discuss the challenges faced by the tribunal while carrying out its operations in relation to it.
Jurisdiction over parallel Criminal Proceedings
The NCLT is vested with the power to deal with the matters of Board for Industrial and Financial Reconstruction (“BIFR”), the Appellate Authority for Industrial and Financial Reconstruction (“AAIFR”), and the matters of winding up under Companies Act, 2013. The Code in 2016 recognised NCLT as an adjudicatory body for dealing with applications relating to insolvency and winding up. This process can be initiated under the Code either by the Financial Creditor, Operational Creditor or by the Corporate itself, where there exists a ‘default’ of ‘debt’, as defined under the Code.
The Code also allows for initiation of the process of CIRP against corporate bodies, while keeping an eye for misuse of the initiation proceedings. Further, by rendering initiations with a malicious/fraudulent intent as a punishable offence under the Code (Section 65), it seeks to ensure that applications for initiating a CIRP are only for the resolution purposes. In the case of Shobhnath v. Prism Industrial Complex, the possibility of NCLT dealing with cases that involve financial fraud was discussed. The NCLT had dismissed the petition on the grounds of financial fraud and malafide intent on the part of corporate debtors, as under Section 65. Reversing the order, the National Company Law Appellate Tribunal (“NCLAT”) held that no such grounds were present, and the directors of the company might face criminal prosecution for violating the regulations of Securities and Exchange Board of India but the same cannot be the grounds to reject the petition by the financial creditors to initiate CIRP.
In the case of Tayal Cotton (P.) Ltd. v. State of Maharashtra, the Bombay High Court held that ‘suit and other proceedings’ under the imposition of a Section 14 moratorium excludes criminal proceedings. In the case of Lagadapati Ramesh & Ors. v. Ramanathan Bhuvaneshwari & Ors, an appeal to the NCLAT, when CIRP was initiated against the Corporate Debtor, the promoters of the company did not cooperate with the Resolution Professional (“RP”). Furthermore, the company did not have any assets except for its receivables. When an application was filed against the promoters, the authority referred the matter to the Serious Fraud Investigation Office, the order from which the present appeal lies. The Court observed that the Insolvency and Bankruptcy Board of India (“IBBI”) and Central Government could not be made parties to all the proceedings, and even if the matter was referred to the regulatory body, the IBBI cannot refer the matter to the Special Courts as constituted under the Act, without any prior investigation. The Tribunal, after laying down an elaborate process to be followed, held that it may refer the matter to the Central Government, who upon further investigation, if satisfied on the violation under Sections 68 – 74 of the Code, can refer the matter to the Special Courts.
Although the NCLT does have the power to look into financial fraud, its power is limited in the sense that the Adjudicating Authority does not have any authority to pass an order with regard to any matter pending before a criminal court. In accordance with Section 236 of the Code, any offence listed under this Code shall be tried by the Special Courts as established under Chapter XXVIII of the Companies Act, 2013. This way, offences under the Code do not interfere with the time bound CIRP, except when the offence is regarding fraudulent initiation, which warrants to be dealt before continuing with the CIRP process. Therefore, the Special Courts facilitate the efficient functioning of the tribunal.
Need to embrace NCLT’s independence
The NCLT acts as a specialised adjudicatory body that facilitates for feasible solutions related to the field of insolvency, after the introduction of the Code.[i] The matters were vested with the Tribunal as it is an exclusive body comprising both judicial persons and persons with technical expertise and specific know-how, and therefore is better prepared and equipped to adjudge upon these matters.
The judiciary has also recognised the importance and independence of the tribunal. The Bombay High Court elucidated that the admission of a winding up petition by the jurisdictional High Court cannot be taken to mean that the Tribunal loses jurisdiction or cannot exercise jurisdiction in case of a petition to initiate CIRP, filed by another creditor. If the legislature so intended that the jurisdictional High Courts would have supremacy over the Tribunal, then it would have been clarified, either under the Code, or under transfer rule notifications. Hence, the Court reiterated that the Code should prevail over the Companies Act, 2013 just as its predecessor, Sick Industrial Companies Act [repealed] was held to prevail over the Act during its operation.
The Code highlights the independent working of the Tribunal through an express provision that bars the jurisdiction of civil court to entertain suits on matters over which the NCLT has jurisdiction. Further, under Section 231, the powers of civil courts or any other authority have been curtailed to restrain any action taken or to be taken before the Tribunal. Most importantly, the Tribunal is vested with the power to adjudicate with respect to matters arising out of and incidental to the proceedings. However, the notion that the Tribunal is one that is subservient to the high courts is still prevalent and there is a need to address the same.
On that note, is pertinent to discuss the recent Apex Court’s judgment in Embassy Property Developments v. State of Karnataka. The Karnataka High Court had stayed the NCLT’s order against the Government of Karnataka to extend the lease granted under the Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”) to the corporate debtor undergoing CIRP. The Tribunal had made the said lease extension order on the grounds that the rejection of the application for lease extension by the Government of Karnataka is in violation of the moratorium declared under Section 14 of the Code. On Appeal, the Supreme Court (“SC“) upheld the High Court’s order, finding that the Tribunal had acted outside its jurisdiction by passing an order under the MMDR Act. The SC also held that the Tribunal is competent to inquire into the allegations of fraud, especially in the matter of initiation of CIRP. It should be noted that the relief sought for, was not a renewal of the lease but in fact a deemed extension right, that is already vested in the Corporate Debtor. The intent behind moratorium is that the corporate debtor shall act as a going concern even during the process of CIRP. It is a settled principle that though the writ jurisdictions of the high courts and the Supreme Court cannot be constrained by way of any enactment, the courts ought to have due regard to the legislative intent and exercise their jurisdiction in consistence with the spirit and the provisions of an Act. By allowing the high courts to interfere in the CIRP through their power of judicial review, the SC set an unsafe precedent.
The changing dynamics with respect to the winding up or revival of a company and the resultant expansion of the role and responsibilities of the tribunal needs to be acknowledged. Considering that the CIRP is quick, the vesting of powers in Special Courts to identify the offences helps in the exclusion of the prosecution of these offences without hindering the time – bound process. The practice of exclusion of high court’s jurisdiction by way of a commission of a tribunal for the purposes of specialisation is not new. Although the high courts have power of intervention when an act of the Tribunal is ultra vires or against the principles of natural justice, the power is only that of judicial review and is not akin to appellate power. When the appropriate statutory remedy lies with the NCLAT, interventions in the absence of circumstances when a specific constitutional remedy is prayed for would result in the frustration of the CIRP itself. Additionally, creditors and debtors should not be encouraged to meddle with CIRP by resorting to individual enforcement mechanisms in unwarranted circumstances.
This article has been authored by Aishwarya V and Raghavi R, students at Tamil Nadu National Law University.
[i] Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, An Empirical Analysis of the Early Days of the Insolvency and Bankruptcy Code, 2016, 30 NLSI Rev 89 (2018).