Supreme Court Upholds Natural Justice: NCLAT Order Set Aside in Insolvency Case (8 March 2019)

Introduction

Date of the Judgment: 8 March 2019
Citation: Not Available in the provided text
Judges: N.V. Ramana J., Mohan M. Shantanagoudar J.
Can an appellate tribunal pass an order without ensuring that all parties have been properly notified and given a chance to present their case? The Supreme Court of India recently addressed this critical question of natural justice in an insolvency case, emphasizing the importance of adhering to procedural rules. This case highlights the necessity for tribunals to ensure that all parties are heard before making a decision. The judgment was delivered by a two-judge bench comprising Justice N.V. Ramana and Justice Mohan M. Shantanagoudar, with Justice N.V. Ramana authoring the opinion.

Case Background

The case involves an appeal against an order by the National Company Law Appellate Tribunal (NCLAT), New Delhi. The NCLAT had set aside an order of the National Company Law Tribunal (NCLT), Calcutta, and directed the NCLT to admit an application filed by State Bank of India (respondent no. 1) against Jai Balaji Industries Limited (the appellant) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant contended that they were not given a hearing before the NCLAT, violating the principle of natural justice.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Calcutta, had initially passed an order that was challenged before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, in its order dated 08.02.2019, set aside the NCLT’s order and directed the NCLT to admit the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant, Jai Balaji Industries Limited, then appealed to the Supreme Court, arguing that they were not given a proper hearing by the NCLAT.

Legal Framework

The Supreme Court considered the following legal provisions:

• Rule 48 of the NCLAT Rules, 2016: This rule stipulates the procedure for issuing notice of an appeal or petition. It mandates that when the NCLAT issues a notice, copies of the appeal, supporting affidavits, and other relevant documents must be served along with the notice to the other side. The rule states:
  
  “48. Issue of notice- (1) Where notice of an appeal or petition or interlocutory application is issued by the Appellate Tribunal, copies of the same, the affidavit in support thereof and if so ordered by the Appellate Tribunal the copy of other documents filed therewith, if any, shall be served along with the notice on the other side.”
• Rule 52 of the NCLAT Rules, 2016: This rule requires the judicial section of the NCLAT registry to record details regarding the completion of service of notice on respondents in the “Notes of the Registry” column of the order sheet. The rule states:
  
  “52. Entries regarding service of notice or process. The Judicial Section of the Registry shall record in the column in the order sheet ‘Notes of the Registry’, the details regarding completion of service of notice on the respondents, such as date of issue of notice, date of service, date of return of notice, if unserved, steps taken for issuing fresh notice and date of completion of services etc.”

Arguments

Appellant’s Arguments:

• The appellant argued that their right to be heard (audi alteram partem), a fundamental principle of natural justice, was violated.
• They contended that they were not served with a notice of the appeal before the NCLAT, nor were they given a hearing.
• The appellant submitted that the NCLAT’s order was contrary to law because it failed to comply with Rule 48 of the NCLAT Rules, which requires that a copy of the appeal and documents be served along with the notice.
• The appellant stated that although the NCLAT directed the issuance of notice, they never received it, and the NCLAT erroneously noted that it had heard all parties.
• The appellant further submitted that the respondent no. 1 did not file process fee for issuance of summons in terms of the order dated 02.01.2019, nor was the same served upon the appellant.

Respondent’s Arguments:

• The respondent argued that an advance copy of the appeal paperbook was delivered by post to the appellant’s registered office, showing intent to challenge the NCLT order.
• They submitted that despite this, the appellant’s counsel did not appear before the NCLAT.
• The respondent referred to proceedings before the Calcutta High Court to suggest that the appellant was employing delay tactics to stall the insolvency proceedings.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the NCLAT had violated the principles of natural justice by not ensuring the appellant was properly served with notice and given an opportunity to be heard.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court relied on the following authorities:

• Ghaziabad Development Authority v. Machhla Devi, 2018 SCC OnLine SC 2178, Supreme Court of India: This case was cited to emphasize the importance of the principle of audi alteram partem, which mandates that no one should be condemned unheard.

Judgment

How each authority was viewed by the Court?

• Ghaziabad Development Authority v. Machhla Devi, 2018 SCC OnLine SC 2178: The Supreme Court relied on this case to reaffirm the principle of audi alteram partem, emphasizing that a party must be given a fair opportunity to be heard before any decision is made against them.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the violation of natural justice, specifically the failure to adhere to the procedural requirements for serving notice. The Court emphasized that regardless of any prior knowledge or advance copies, the NCLAT was bound to follow Rule 48 of the NCLAT Rules, which mandates formal service of notice. The absence of any record of service in the registry, as required by Rule 52, further solidified the Court’s view that the appellant was not given a fair opportunity to be heard. The Court’s reasoning focused on ensuring procedural fairness and upholding the principles of natural justice, which are paramount in any judicial or quasi-judicial proceeding.

The Court’s reasoning was as follows:

The Supreme Court found that the NCLAT erred in its procedure by not ensuring proper service of notice to the appellant. The Court emphasized that the principle of audi alteram partem was violated, as the appellant was not given a fair opportunity to be heard. The Court stated:

“Thus, in view of the above position, it is abundantly clear that no notice was served upon the appellant before the NCLAT as stipulated under the rules, and the right of the appellant to be heard, audi alteram partem , has been violated.”

The Court also noted that the NCLAT’s observation that all parties were heard was erroneous, as the record did not reflect the appearance of counsel for the appellant. The Court observed:

“In fact, even the impugned order does not note the appearance of the counsels on behalf of appellant herein.”

The Court clarified that an advance copy of the appeal cannot substitute the formal service of notice as required under Rule 48 of the NCLAT Rules. The Court stated:

“While the respondent no. 1 has submitted that an advanced copy of the appeal was served on the appellant, the same cannot be treated as service of notice as stipulated under Rule 48 of the NCLAT Rules”

The Court also highlighted that the registry of the NCLAT failed to record the details regarding completion of service of notice, as required under Rule 52 of the NCLAT Rules.

The Court did not delve into the merits of the case and remanded it back to the NCLAT for fresh consideration.

Key Takeaways

• Importance of Natural Justice: The judgment underscores the crucial importance of adhering to the principles of natural justice, particularly the right to be heard (audi alteram partem).
• Procedural Compliance: Tribunals must strictly follow procedural rules, such as those laid down in the NCLAT Rules, to ensure fairness and transparency.
• Formal Service of Notice: An advance copy of an appeal cannot substitute the formal service of notice as required by law.
• Registry’s Role: The registry of a tribunal has a critical role in maintaining records of service of notice, which is essential for ensuring that all parties are properly informed and have an opportunity to participate in the proceedings.

Directions

The Supreme Court set aside the order of the NCLAT and remanded the matter back to the NCLAT for fresh consideration. The NCLAT was directed to dispose of the matter expeditiously after affording an opportunity of hearing to all parties. The appellant and respondents were directed to approach the NCLAT on March 13, 2019, for early listing of the matter. The Supreme Court clarified that there was no need for the NCLAT to issue any fresh notice to the appellant.

Development of Law

The ratio decidendi of this case is that strict adherence to procedural rules, particularly those concerning service of notice, is essential to uphold the principles of natural justice. The judgment reinforces the importance of the audi alteram partem rule and clarifies that an advance copy of an appeal does not substitute formal service of notice. This case does not introduce a new legal principle but reaffirms existing legal standards for procedural fairness in judicial and quasi-judicial proceedings.

Conclusion

The Supreme Court’s decision in Jai Balaji Industries Limited vs. State Bank of India & Ors. highlights the importance of procedural fairness and adherence to the principles of natural justice. By setting aside the NCLAT’s order and remanding the matter for fresh consideration, the Court emphasized that no party should be condemned unheard. This judgment serves as a reminder to all tribunals to ensure that proper notice is served and that all parties are given a fair opportunity to present their case.