Supreme Court clarifies High Court’s jurisdiction over NCLT orders in insolvency cases: Embassy Property Developments Pvt. Ltd. vs. State of Karnataka (03 December 2019)

Introduction

Date of the Judgment: 03 December 2019

Citation: (2019) ibclaw.in 126 SC

Judges: Rohinton Fali Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J. (authored the opinion)

Can a High Court use its powers under Article 226/227 of the Constitution to intervene in orders passed by the National Company Law Tribunal (NCLT) during insolvency proceedings, especially when the law provides an appeal mechanism to the National Company Law Appellate Tribunal (NCLAT)? The Supreme Court addressed this critical question in a recent judgment, clarifying the boundaries of judicial intervention in insolvency matters. This case revolves around a dispute over a mining lease and highlights the complex interplay between different legal forums and their respective jurisdictions.

Case Background

The case originated from an application filed by M/s. Udhyaman Investments Pvt. Ltd. (a Financial Creditor) against M/s. Tiffins Barytes Asbestos & Paints Ltd. (the Corporate Debtor) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT, Chennai, admitted the application on 12.03.2018, initiating the Corporate Insolvency Resolution Process (CIRP) and declaring a moratorium under Section 14 of the IBC.

At the time, the Corporate Debtor held a mining lease from the Government of Karnataka, set to expire on 25.05.2018. Although a notice for premature termination of the lease had been issued on 09.08.2017 due to alleged violations, no termination order was passed before the CIRP began. The Interim Resolution Professional (IRP) sought a deemed extension of the lease until 31.03.2020 under Section 8A(6) of the Mines & Minerals (Development and Regulation) Act, 1957 (MMDR Act).

The Government of Karnataka rejected the deemed extension on 26.09.2018, citing contraventions of the lease and statutory rules. Consequently, the IRP withdrew a writ petition filed in the High Court of Karnataka, seeking the deemed extension. Instead, the IRP filed a Miscellaneous Application before the NCLT, Chennai, to set aside the Government’s order and to direct the execution of supplemental lease deeds. The NCLT allowed this application on 11.12.2018, on the grounds that the government order violated the moratorium.

Aggrieved, the Government of Karnataka filed a writ petition before the High Court, which initially remanded the matter back to the NCLT. The NCLT again ruled in favour of the Corporate Debtor on 03.05.2019, leading to another writ petition by the Government. The High Court then stayed the NCLT’s order on 12.09.2019, which led to the current appeals before the Supreme Court by the Resolution Applicant, the Resolution Professional and the Committee of Creditors.

Timeline:

Legal Framework

The case primarily involves the interpretation of the following:

• Article 226/227 of the Constitution of India: Grants High Courts the power to issue writs for the enforcement of fundamental rights and for other purposes.
• The Insolvency and Bankruptcy Code, 2016 (IBC): Provides a framework for the resolution of insolvency of corporate entities.
• Section 7 of the IBC: Allows a financial creditor to initiate CIRP against a corporate debtor.
• Section 14 of the IBC: Provides for a moratorium during CIRP.
• Section 61 of the IBC: Provides for an appeal to the NCLAT against orders of the NCLT.
• Section 60 of the IBC: Defines the jurisdiction of the NCLT.
• Section 8A(6) of the Mines & Minerals (Development and Regulation) Act, 1957 (MMDR Act): Deals with deemed extension of mining leases.
• Section 30 of the MMDR Act: Empowers the Central Government to revise orders made by a State government.
• Section 18 and 25 of the IBC: Defines the duties of the Interim Resolution Professional and Resolution Professional respectively.
• Section 65 of the IBC: Deals with fraudulent or malicious initiation of proceedings.
• Section 3(27) of the IBC: Defines the term ‘property’.

The Supreme Court also considered the interplay between the IBC and the MMDR Act, particularly regarding the jurisdiction of the NCLT over matters related to mining leases.

Arguments

The appellants (Resolution Applicant, Resolution Professional, and Committee of Creditors) argued that:

• The High Court should not have entertained the writ petition as there was an efficacious alternative remedy available under Section 61 of the IBC.
• The IBC is a complete code, and its remedies are pervasive and exclusive.
• The NCLT has the power to grant reliefs necessary for the preservation of the Corporate Debtor’s properties.
• The NCLT has jurisdiction to investigate allegations of fraud under Section 60(5)(c) of the IBC.
• The High Court should have adopted a “hands-off” approach, especially since the NCLT had already approved the Resolution Plan.
• The term “property” under Section 3(27) of the IBC includes the right to a deemed extension of a lease, which the Resolution Professional has a duty to preserve.

The respondent (Government of Karnataka) argued that:

• The NCLT lacked jurisdiction to adjudicate disputes arising out of mining leases under the MMDR Act.
• The NCLT’s powers are limited to contractual matters between parties and do not extend to public law matters.
• The decision to refuse the deemed extension of the mining lease was a matter of public law and could only be reviewed by a superior court with judicial review powers.
• The CIRP was initiated fraudulently and collusively by related parties of the Corporate Debtor, solely to corner the benefits of the mining lease.
• The order of the NCLT was a nullity, and therefore, the High Court was not obligated to direct the State to the appellate forum.

The Attorney General argued that if a case falls under the category of inherent lack of jurisdiction on the part of a Tribunal, the exercise of jurisdiction by the Tribunal would certainly be amenable to the jurisdiction of the High Court under Article 226.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the High Court ought to interfere, under Article 226/227 of the Constitution, with an order passed by the NCLT in a proceeding under the IBC, 2016, ignoring the availability of a statutory remedy of appeal to the NCLAT, and if so, under what circumstances; and
2. Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the Insolvency and Bankruptcy Code, 2016.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court dismissed the appeals, upholding the High Court’s decision to entertain the writ petition.

How each authority was viewed by the Court:

• M/s Innoventive Industries Limited vs. ICICI Bank [CITATION]: The Court agreed that the IBC is a complete code but clarified that the NCLT’s jurisdiction is limited and does not extend to all matters.
• Nilabati Behera @ Babita Behera vs. State of Orissa [CITATION]: The Court used this to distinguish between public law and private law remedies, indicating that the NCLT’s jurisdiction is limited to private law matters.
• Anisminic Ltd. vs. Foreign Compensation Commission [CITATION]: The Court discussed the concept of “error of jurisdiction” and its impact on judicial review, but clarified that this case could not be relied upon to bypass alternative remedies.
• Official Trustee, West Bengal & Others vs. Sachindra Nath Chatterjee & Another [CITATION]: The Court used this to highlight that a court must have the authority to pass the orders sought for, not just the jurisdiction to try a suit.
• Indian Farmers Fertiliser Co­operative Ltd. vs. Bhadra Products [CITATION]: The Court used this to highlight that a court must have the authority to pass the orders sought for, not just the jurisdiction to try a suit.
• Mafatlal Industries & Others vs. Union of India [CITATION]: The Court used this case as a case that discussed Anisminic with approval.
• M.L. Sethi vs. R.P. Kapur [CITATION]: The Court used this to discuss the effect of the dicta in Anisminic.
• Hari Prasad Mulshanker Trivedi vs. V.B Raju [CITATION]: The Court used this to highlight that the distinction between lack of jurisdiction and erroneous exercise of it has become thin with Anisminic.
• Smith vs. East Elloe Rural District Council [CITATION]: The Court used this to show difficulties in cases where jurisdiction of a superior court is questioned on the basis of ouster clauses.
• R vs. Secretary of State for the Environment, Ex p. Ostler [CITATION]: The Court used this to show that the availability of a statutory right to challenge within a specified time limit provides a basis for distinguishing Anisminic.
• Wolverhampton New Waterworks Co. vs. Hawkesford [CITATION]: The Court used this to highlight the rule that where a statute creates a liability and provides a special remedy, that remedy must be followed.
• Union Bank of India vs. Satyawati Tandon [CITATION]: The Court used this to state that the availability of a remedy of appeal under the DRT Act, 1993 and SARFAESI Act, 2002 should deter the High Courts from exercising the jurisdiction under Article 226.
• Sadhana Lodh vs. National Insurance Co. [CITATION]: The Court used this to state that the availability of remedy of appeal under Section 173 of the Motor Vehicles Act, 1988 as against an award of the Accidents Claims Tribunal was sufficient for the High Court to refuse to exercise its supervisory jurisdiction.
• Nivedita Sharma vs. Cellular Operators Association of India [CITATION]: The Court used this to state that the availability of remedy of appeal under the Consumer Protection Act, 1986 was sufficient for the High Court to refuse to exercise its supervisory jurisdiction.
• Cicily Kallarackal vs. Vehicle Factory [CITATION]: The Court used this to state that the availability of remedy of appeal under the Consumer Protection Act, 1986 was sufficient for the High Court to refuse to exercise its supervisory jurisdiction.
• Sub­Committee on Judicial Accountability vs. Union of India [CITATION]: The Court used this to state that judicial review flows from the concept of a higher law, namely the Constitution.
• Barnard and Others vs. National Dock Labour Board and Others [CITATION]: The Court used this to state that when an inferior Tribunal passes an Order which is a nullity, the superior Court need not drive the party to the appellate forum stipulated by the Act.
• The State of Uttar Pradesh vs. Mohammad Nooh [CITATION]: The Court used this to state that when an inferior Tribunal passes an Order which is a nullity, the superior Court need not drive the party to the appellate forum stipulated by the Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Jurisdictional Limits: The Court emphasized that the NCLT is a creature of statute with limited jurisdiction. It cannot act as a superior court with powers of judicial review over administrative actions, especially those related to public law matters like mining leases.
• Public Law vs. Private Law: The Court distinguished between disputes arising from private contracts and those involving public law, stating that the NCLT’s jurisdiction is primarily limited to private law matters.
• Statutory Remedies: The Court acknowledged the importance of statutory remedies but clarified that these remedies do not apply when the lower tribunal lacks inherent jurisdiction.
• Fraudulent Intent: The Court recognized that the NCLT has the power to investigate allegations of fraud in the initiation of CIRP, but this did not negate the High Court’s power to intervene when the NCLT exceeded its jurisdiction.
• Preservation of Assets vs. Jurisdiction: While the Court agreed that the Resolution Professional has a duty to preserve the value of the property, it clarified that this duty does not give the NCLT jurisdiction over matters outside the scope of the IBC.

The court’s reasoning was heavily influenced by legal principles and statutory interpretations rather than the factual aspects of the case.

Logical Reasoning:

The Court considered alternative interpretations but rejected them, emphasizing the limited jurisdiction of the NCLT and the importance of maintaining the separation of powers between different legal forums. The Court emphasized that the NCLT is not a superior court with powers of judicial review over administrative actions.

The Supreme Court held that while the NCLT has jurisdiction to investigate allegations of fraud, it cannot adjudicate on disputes arising under the MMDR Act, 1957, and the rules issued thereunder. The court also held that a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution”.

The Court also clarified that the purpose of moratorium is only to preserve the status quo and not to create a new right.

The Court quoted the following from the judgment:

“before a court can be held to have jurisdiction to decide a particular matter it must not only have jurisdiction to try the suit brought, but must also have the authority to pass the orders sought for.”

“It is hereby declared that it is expedient in the public interest that Union should take under its control the regulation of mines and the development of minerals to the extent hereinafter provided.”

“If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with maliciousintention for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but which may extend to one crore rupees.”

“The moratorium has the effect of keeping the Corporate Debtor’s assets together during the insolvency resolution process, and it is not intended to create new rights or obligations.”

Conclusion

The Supreme Court’s judgment in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka clarifies the jurisdiction of High Courts over orders passed by the NCLT during insolvency proceedings. The Court held that High Courts can intervene under Article 226/227 of the Constitution when the NCLT exceeds its jurisdiction, particularly in matters involving public law. The judgment emphasizes the limited jurisdiction of the NCLT and the importance of maintaining the separation of powers between different legal forums. The ruling also underscores that the IBC is a complete code, but its remedies are not absolute and do not extend to matters outside its purview.

Implications:

• Limited Jurisdiction of NCLT: The judgment reinforces that the NCLT’s jurisdiction is limited to matters within the scope of the IBC and does not extend to public law matters.
• High Court’s Supervisory Role: High Courts retain their supervisory role and can intervene when the NCLT exceeds its jurisdiction or acts without jurisdiction.
• Importance of Statutory Remedies: The judgment acknowledges the importance of statutory remedies but clarifies that these remedies are not applicable when the lower tribunal lacks inherent jurisdiction.
• Distinction between Public Law and Private Law: The judgment highlights the distinction between disputes arising from private contracts and those involving public law, emphasizing that the NCLT’s jurisdiction is primarily limited to private law matters.
• Fraudulent Initiation of CIRP: The judgment acknowledges the NCLT’s power to investigate allegations of fraud in the initiation of CIRP but clarifies that this does not negate the High Court’s power to intervene when the NCLT exceeds its jurisdiction.

This judgment serves as a crucial guide for understanding the interplay between different legal forums in insolvency matters and underscores the importance of adhering to jurisdictional limits. It also clarifies that the NCLT cannot exercise powers of judicial review over administrative actions.