HC can entertain Writ Petition against order passed by NCLT under IBC

M/s. Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. (Supreme Court)

High Court Can Entertain Writ Petition Against Order Passed By NCLT Under Insolvency and Bankruptcy Code, 2016

FACTUAL BACKGROUND:

In this case, Corporate Insolvency Resolution Process was initiated against the Corporate Debtor in lieu of which Moratorium was declared.

The writ petition was filed by the Resolution Professional in the High Court of Karnataka regarding a mining lease in the name of Corporate Debtor.

However, the writ petition was withdrawn and a fresh application was filed in the NCLT, Chennai Bench against the Government of Karnataka with respect to their order on the renewal of the lease deed.

The NCLT in its order set aside the order of the Government of Karnataka as it was in violation of the moratorium.

The Government of Karnataka moved to the High Court against the order of the NCLT and the High Court of Karnataka granted a stay on the order, pertaining to the operations, of the NCLT.

Thus, the Resolution Applicant, the Resolution Professional and the Committee of Creditors had come up with the present appeal before the Supreme Court of India.

ISSUES:

1. Whether the High Court ought to interfere, under Article 226/227 when an Order passed by the NCLT, ignoring the availability of a statutory remedy of appeal to the NCLAT and if so, under which circumstances?

2. Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the I & B Code ?

CONCLUDING VIEW:

The Hon’ble Supreme Court has dealt with the first issue in a two-fold manner, by seeing the jurisdiction and powers exercised by the High Court under Article 226 and the NCLT and NCLAT under the provisions of I & B Code, 2016.

It was pointed out by the Court that the relationship between the Corporate Debtor and the Government of Karnataka under the mining lease is not just contractual but statutorily governed.

Hence, the Court referred to Section 2 of MMDR Act, 1957 in order to establish the presence of ‘public policy’ in the Act, which stated:

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

Therefore, it was positively construed in the Court that the decision of the Government of Karnataka was issued in public interest and hence the said decision can only be called into question in a superior court which is vested with the power of judicial review over administration action.

NCLT does not have the status of a superior Court having power of judicial review over administrative action. This rationale was applied by the Court to conclude that:

29. The NCLT is not even a Civil Court, which has jurisdiction by virtue of Section 9 of the Code of Civil Procedure to try all suits of a civil nature excepting suits, of which their cognizance is either expressly or impliedly barred. Therefore NCLT can exercise only such powers within the contours of jurisdiction as prescribed by the statute, the law in respect of which, it is called upon to administer. 

The Supreme Court held that the refusal of the Government for the renewal of lease was not against the Section 14 of I & B Code because (i) moratorium is not to create a new right but to maintain a status quo (ii) the land was not exclusively of the Corporate Debtor.

In regards to the second issue the Court held that claiming a fraudulent initiation of CIRP cannot be a ground to dismantle the remedy of appeal u/s 61 of I & B Code and hence NCLT has jurisdiction to enquire into allegations of fraud and so does the NCLAT.

AMLEGALS REMARKS:

The Hon’ble Supreme Court in the present case, with a very lucid interpretation of the law, has laid down the principle which was much needed in the mechanism of Corporate Insolvency Resolution Process.

It was not long before this case that in a case of very similar nature, a Financial Creditor had been awarded a ‘stay’ by the High Court against the order of the NCLT to initiate insolvency for Flipkart. The problem of the hour is the delay in the mechanism owing to such prolonged litigation.

The decision in the present case brings certain clarity over the jurisdictions of NCLT to entertain specific suits and the correct implementation of ‘moratorium’.

In the light of the interpretation done well, a breakthrough principle has been laid down that the NCLT is an adjudicating authority established under a special statue and cannot entertain civil suits of all kinds.

Further, it does not have the jurisdiction of ‘judicial review’ over administrative action. However, NCLT still has the authority to deal with the cases of fraudulent nature which perspire under IBC or Companies Act.

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