Inherent power of NCLT for passing “ad-interim relief” order

The National Company Law Appellate Tribunal, Delhi (“NCLAT”) vide its judgment dated July 17,2019  in the matter of NUI Pulp and Paper Industries Pvt. Ltd. Vs. Ms. Roxcel Trading GMBH bearing Company Appeal (AT) (Insolvency) No. 664 of 2019 held that a National Company Law Tribunal (NCLT) is empowered to pass the ad-interim order under Rule 11 of the National Company Law Tribunal Rules, 2016 [“NCLT Rules, 2016”] before admitting any application filed under sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (“IB Code, 2016”). Rule 11 of NCLT Rules, 2016, authorize an NCLT to pass any such orders as may be necessary for meeting the ends of justice.

Rule 11 of the National Company
Law Tribunal Rules, 2016 is concerned with the ‘inherent powers’ of the
National Company Law Tribunal and reads thus:

“11.
Inherent Powers- Nothing in these rules shall
be deemed to limit or otherwise affect the inherent powers of the Tribunal to
make such orders as may be necessary for meeting the ends of justice or to
prevent abuse of the process of the Tribunal.”

Facts of the
Case

• An insolvency petition under section 9 of IB Code, 2016 was filed by M/s. Roxcel Trading GMBH [Operational Creditor]. It claimed an amount of INR 7,64,54,285.20 against the Corporate Debtor i.e. NUI Pulp and Paper Industries Private Limited before the bench of Chennai NCLT. On the submission of the counsel of Corporate Debtor that there is an existing dispute between the parties, Hon’ble NCLT allowed the Corporate Debtor to file the reply.

• A Misc. Application under section 60(5)(c) of IB Code, 2016 seeking the interim relief was also filed by M/s. Roxcel Trading by stating that they reliably understand that the Corporate Debtor is intending to sell the assets of the Company in order to defeat the purpose of Insolvency and Bankruptcy Code and which will engender unjust losses to all the creditors including the Operational Creditor.

• An objection on the Misc. Application was made by the Corporate Debtor with respect to the maintainability of the Application Under Section 60(5)(c) of IBC, 2016 which was also appreciated by the NCLT. However, NCLT stated that the assets of the Company need to be maintained, till the time of either admission or rejection of the Application.

• The interim order to restrain the directors of Corporate Debtor from alienating, encumbering or creating any third-party interest on the assets of Corporate Debtor was challenged by the Corporate Debtor who filed an appeal before the National Company Law Appellate Tribunal, New Delhi.

Interim Order of National Company Law Tribunal (NCLT)

Application under section
60(5)(c) of the IB Code, 2016 is only maintainable in the situation when CIRP
is initiated against the Company or the Company is under liquidation and since
the Miscellaneous Application filed by the Operational Creditor was under
section 60(5)(c) of the IB Code, 2016, therefore Hon’ble NCLT did not entertain
the Miscellaneous Application filed under section 60(5)(c).

However, Hon’ble NCLT
considered the apprehension of the Operational Creditor with respect to the
isolation of the assets of the Company and passed an ad-interim order under the
power conferred under Rule 11 of NCLT Rules, 2016 restraining the Corporate
Debtor and its directors from alienating, encumbering or creating any third
party interest on the assets of the Company till further orders.

Appeal to the NCLAT

NUI Pulp and Paper Industries
Pvt. Ltd. challenged said ad-interim order by filing an appeal before the
NCLAT, Delhi. Said appeal was filed on the ground that before admission of an
application under section 7 or 9, the NCLT has no jurisdiction to restrain the
‘Corporate Debtor’ and its directors from alienating, encumbering or creating
any third party interest of the assets of the Corporate Debtor as the same corresponds to the arising of a situation when an application
filed under section 7 or 9 gets admitted and CIRP is initiated.

It was also argued on behalf of
Corporate Debtor i.e. Appellant that:

“Inherent power under Rule 11
of NCLT Rules, 2016 can be exercised by the NCLT, if it comes to the knowledge
on receipt of reply that the “Corporate Debtor” is trying to get adjournment or
to alienate the matter after filing of the Application under section 7 or 9 of
IB Code, 2016.”

However, during the hearing
Hon’ble NCLAT observed that Counsel of Corporate Debtor i.e. Appellant
submitted that Corporate Debtor cannot give any assurance that they are not
intending to sell or alienate or transfer or create any third party interest on
the assets of the Corporate Debtor as it will act taking into consideration the
necessity of the Corporate Debtor for its day to day functioning.

Finally, Hon’ble NCLAT observed
in para-9 of the Judgment that:

“From the aforesaid Rule 11, it is clear that the
Tribunal (Adjudicating Authority herein) can make any such order as may be
necessary for meeting the ends of justice or to prevent abuse of the process of
the Tribunal.”

Observations

It is thus clear that NCLT holds
the power to pass the ad-interim order and can direct the Corporate Debtor and
its director to maintain the accounts of the Corporate Debtor on dated except
withdrawal of the legitimate expenses required for carrying on the day to day
expenses, before admission or rejection of any application filed under sections
7 or 9 of the Insolvency and Bankruptcy Code 2016.

This can be labelled as a good
initiative for restraining the Corporate Debtor during the adjudication of
Application for admission or rejection because nowadays and in some cases the
process of admission of Application has taken a year, whereas the intention of
the lawmakers was 14 days only.

Said judgment can be treated as
Path-breaking judgment of ‘moratorium’ before initiation of insolvency and the
same has kicked a new era. I think this is the first time when NCLT is using
its inherent power given under rule 11 of NCLT Rule, 2016 to restrain the
company from alienating its assets. However, we still need to see the judicial
view of the Hon’ble Apex Court on the same. But the way judiciary has supported
IBC till date, it appears to be a welcome go-ahead for Insolvency.

Now after the said judgment of National Company Law Tribunal (NCLT), a question may arise “whether an adjudicating authority can use the inherent powers given in rule 11 of NCLT Rules, 2016 for the insolvency and bankruptcy proceedings”. However, I remember that Hon’ble Apex Court had affirmed recently in Swiss Ribbons (P.) Ltd. v. Union of India [2019] that National Company Law Tribunal (NCLT) can invoke Rule 11 of NCLT Rules, 2016 in IBC proceedings which is a contrary observation of the Hon’ble Apex Court in accordance with its previous judgment in the matter of Uttara Foods & Feeds (P.) Ltd. Vs. Mona Pharmachem [2018]. Though these judgments were in respect of settlement but the question was of applicability of NCLT rules in insolvency proceedings.

Contributed By – Mirza Aslam Beg
Designation – Partner

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