‘Fraud Allegations’ within the Jurisdiction of NCLT; Public Law beyond its Realm, Rules the Supreme Court!

The Hon’ble Supreme Court bench comprising
of Justice Rohinton Fali Nariman, Justice Anirudhha Bose and Justice V.
Ramasubramanian in the judgement dated December 3, 2019, in the matter titled ‘M/s
Embassy Property Developments Pvt. Ltd. versus State of Karnataka & Ors.[1]
held that National Company Law Tribunal (“NCLT”) and National
Company Law Appellate Tribunal (“NCLAT”)
are empowered to enquire into the allegations of fraud, however, it is corum non judice to adjudicate upon a matter
that falls in the realm of public law or revolve around the decisions passed by
statutory or quasi-judicial authorities.

Facts

A company namely M/s Udhayaman Investments Pvt. Ltd. claiming to be a Financial Creditor filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) against M/s Tiffins Barytes Asbestos & Paints Ltd. (“Corporate Debtor”) before NCLT, Chennai. The application got admitted and vide order dated March 12, 2018, Corporate Insolvency Resolution Process (“CIRP”) commenced, an Interim Resolution Professional (“IRP”) was appointed and a moratorium was declared as warranted by Section 14 of the IBC, 2016. At that point of time, the Corporate Debtor held a mining license valid up to May 25, 2018 granted by the Government of Karnataka. Due to allegations of violation of statutory rules and the terms and conditions of the lease, premature-termination notice dated August 9, 2017 was issued, however, no termination order was passed till the date of commencement of CIRP.

The IRP vide letter dated April 21,
2018, addressed to the Director of Mines and Geology, sought the benefit of
deemed extension of the lease beyond May 25,2018 till March 31, 2020 in terms
of Section 8-A (6) of the Mines and Minerals (Development and Regulation) Act,
1957 (MMDR Act, 1957”). As the said letter met with no response, IRP
invoked writ jurisdiction of the High Court of Karnataka and sought a declaration
of extension of the mining lease. During the pendency of the writ, the Government
of Karnataka vide order dated September 26, 2018, rejected the proposal of
deemed extension. Resultantly, the writ petition was withdrawn with a liberty
to file afresh and the rejection order was challenged before the NCLT, Chennai.
NCLT, Chennai while proceeding ex-parte
as the State despite service of the Notice failed to appear, was pleased to set
aside the rejection order being violative of moratorium. It further directed
the Government of Karnataka to execute Supplement Lease Deeds in favour of the
Corporate Debtor till March 31, 2020. The said order was challenged by the State
of Karnataka before the High Court of Karnataka that set aside the order passed
by NCLT, Chennai and remanded the matter for fresh consideration. Before the
NCLT, Chennai the State of Karnataka contended that NCLT lacks jurisdiction to
adjudicate upon the matter qua grant of mining leases under the MMDR Act, 1957
and that the entire resolution process was initiated fraudulently and in
collusion by the related parties of Corporate Debtor to corner the benefits of
the mining lease. The NCLT, Chennai vide order dated May 3, 2019 set aside the
rejection order and directed the Government of Karnataka to execute
Supplemental Lease Deeds. 

Aggrieved and dissatisfied by the
aforesaid orders of NCLT, Chennai, the Government of Karnataka invoked writ
jurisdiction of the High Court of Karnataka. During the admission hearing, the
Corporate Debtor was represented by the Resolution Professional (“RP”) who appeared through a counsel,
took notice and sought time to seek instructions. Subsequently, the RP filed a
contempt application before the NCLT, Chennai against the Government of
Karnataka as they failed to execute Supplement Lease Deeds. Resultantly, the
High Court adjourned the matter and stayed the operation of the orders passed
by NCLT, Chennai.

The said ad Interim Order passed by the High Court was appealed by the
Resolution Applicant, the Resolution Professional and the Committee of
Creditors (“CoC”) before the Hon’ble
Apex Court.

Issues

The Hon’ble
Supreme Court adjudicated upon the following seminal questions of importance:

1. Whether and under what circumstances, the High Court is empowered under Article 226/227 of the Constitution to intervene in the order passed by NCLT in the proceedings initiated under IBC, 2016, ignoring the statutory remedy of appeal to National Company Law Appellate Tribunal [NCLAT]?
2. Whether NCLT/NCLAT is empowered to enquire and adjudicate upon the question of fraud in the proceedings initiated under the IBC, 2016?

Submissions

Learned Senior Counsel appearing on behalf of the appellants
assailed the impugned order on the ground that the High Court of Karnataka
should not have entertained a writ petition against the orders of NCLT, Chennai
as the grievances ought to have been addressed to and redressed by the
statutory forum under the remedy available under Section of 61 of IBC, 2016. It
was further contended that IRP/Resolution Professional was well within its
right to move to the NCLT for appropriate reliefs for the preservation of
properties of Corporate Debtor as the essence of IBC, 2016 is the revival of a corporate
debtor and resolution of its problems to enable it to survive as a going
concern through the maximization of the value of assets.

Learned Senior Counsel for the
appellant further submitted that the High Court ought not to tinker with or
destroy the very Resolution Plan approved by NCLT. Moreover, the whole purpose
of IBC, 2016 would get defeated if the orders passed by NCLT begin to fall
under the purview of review by the High Court under Article 226/227 of the
Constitution as it would derail the entire time-bound process. It was also
submitted that section 3(27) of the IBC, 2016 defines the term ‘property’
and includes every description of interest including
present/future/vested/contingent arising out of or incidental to property. Hence,
right to deemed extension of lease would fall within the ambit of ‘property’
and the Resolution Professional has duty to preserve the property and maintain
status quo during period of moratorium. It was also submitted that the NCLT is
empowered to enquire into the allegations of fraud.

On the contrary, learned Attorney General
Sh. K.K. Venugopal submitted that the jurisdiction of NCLT is confined only to
contractual matters inter-parties and orders passed by statutory/quasi-judicial
authority under special enactments like MMDR Act, 1957 fall under the realm of
public law, because of which NCLT lacks authority and power to judicially
review such orders. He placed reliance on Barnard
and Others versus National Dock Labour Board and Others[2]
to submit that when the order passed by an inferior tribunal is null and void, the superior court need
not direct the party to approach the appellate forum stipulated by the act.  

Judgment

The Hon’ble Supreme Court while
deciding upon the issue laid reliance upon M/s
Innoventive Industries Limited versus ICICI Bank[3]
and stated that IBC, 2016 is an exhaustive code on the subject matter of
insolvency w.r.t. corporate entities and others and it is beyond any doubt that
IBC, 2016 is a time-bound and the single unified code encompassing the entire
gamut of insolvency resolution law.

The Hon’ble Bench observed that MMDR
Act, 1957 is a parliamentary enactment (Entry 54, Union List, Seventh Schedule)
that declares that it is expedient in the public interest that the Union should
take under its control the regulation of mines and the development of minerals[4],
hence, the same falls under the realm of public law. Consequently, Hon’ble apex
court held that correctness of any decision touching upon public law domain can
be challenged only before a superior court vested with the power of judicial
review over administrative action. The apex court observed that High Courts
must distinguish between the lack of jurisdiction and wrongful exercise of
jurisdiction when Article 226 is sought to be invoked by passing an alternative
remedy provided by the special statute.  As
the NCLT has been created by a special statute to discharge specific functions,
it cannot be elevated to the status of a superior court that has the power of
judicial review over administrative action. Hence, as NCLT was corum non judice and it exercised
jurisdiction not vested by law, the High Court of Karnataka was justified in
entertaining the writ petition.

The Hon’ble Bench further held that the
collective reading of Section 65, 66 and 69 of IBC, 2016 makes it abundantly
clear that the NCLT is vested with the powers to inquire into fraudulent
initiation of proceedings and fraudulent transactions. Furthermore, the act
envisages punishment and penalties for a Corporate Debtor for carrying on
transactions with a view to defraud creditors. 

Conclusion

In the final analysis, it can be
rightly concluded that though IBC, 2016 and MMDR Act, 1957 are special
enactments to achieve the aim of greater good but public interest is of
paramount importance. The Hon’ble Supreme Court put to rest all the
speculations and has rightly held that NCLT can only adjudicate upon the issues
that squarely falls within the ambit of its jurisdiction, as the Corporate
Debtor cannot be all allowed to circumvent the law to claim rights and reliefs in
judicial and quasi-judicial proceedings by bringing a claim before NCLT as at
times, disputes qua decisions of statutory or quasi-judicial authorities warrants
judicial review of the administrative action.

• [1] Civil Appeal No. 9170 of 2019
• [2] (1953) 2 WLR 995
• [3] AIR 2017 SC 4084
• [4] Section 2 MMDR Act, 1957

Contributed By – Richa K Gaurav
Designation – Associate

King Stubb & Kasiva,
Advocates & Attorneys

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