NCLT cannot decide on public law matters under MMDR Act in IBC cases: SC

Embassy Property Developments Pvt. Ltd. v. State of Karnataka¹

Abstract- The jurisdictional lines between the NCLT and High Courts under the Mines and Minerals (Development and Regulation) Act (MMDR Act), 1957, and the Insolvency and Bankruptcy Code (IBC), 2016 are made clear by this Supreme Court ruling. In the case, a business debtor going through insolvency had its mining lease extension denied. The Court ruled that although the NCLT has broad authority under the IBC, it is unable to decide cases involving statutory authorities’ public law rulings. Since public law matters are outside the purview of the NCLT, the High Court’s intervention under Articles 226 and 227 was warranted. The separation between private and public law in insolvency procedures is strengthened by this ruling.

Hon’ble Bench: Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian, JJ.

1. INTRODUCTION

The Insolvency and Bankruptcy Code (IBC),2016² and the Mines and Minerals (Development and Regulation) Act, 1957³ (MMDR Act) provides a substantial jurisdictional issue in this case. The State of Karnataka and the corporate debtor, who was a lessee of mining rights, were involved in a mining lease dispute.

The extent of High Court participation in instances involving rulings issued by the National Company Law Tribunal was delineated by the Supreme Court of India (“SC”) in the December 3, 2019 decision in Embassy Property Developments (Private) Limited v. State of Karnataka and Others.

A resolution applicant, a corporate debtor through the resolution professional, and a committee of creditors regarding the aforementioned corporate debtor (collectively, the “Appellants”) had filed a series of three appeals before the SC to contest an interim order issued by the High Court of Karnataka’s division bench. The aforementioned temporary order halted the implementation of a directive included in the NCLT order.

2. FACTS OF THE CASE

• The State of Karnataka issued a mining lease to Tiffins Barytes Asbestos & Paints Ltd., the corporate debtor, for the purpose of extracting iron ore and red oxide.
• In its capacity as a Financial Creditor, a company named M/s. Udhyaman Investments Private Limited, the twelfth respondent in the first appeal, filed an application against M/s. Tiffins Barytes Asbestos and Paints Limited, the Corporate Debtor, before the NCLT, Chennai Bench. The first of these three appeals before the SC also included the Corporate Debtor as the fourth respondent.
• The NCLT, Chennai Bench granted the Financial Creditor’s plea and directed the start of the Corporate Insolvency Resolution Process against the Corporate Debtor in a judgement dated March 12, 2018.
• Following that, a moratorium was imposed in accordance with section 14 of the IBC and an Interim Resolution Professional was appointed. According to a specific Lease Deed, the Corporate Debtor owned a mining lease at the time that had been awarded by the Karnataka government and was scheduled to expire on May 25, 2018.
• On August 9, 2017, a notice of premature lease termination was also sent to the corporate debtor for violating the terms and conditions of the lease deed and the statutory regulations. However, until the day of CIRP’s beginning, no order had been issued leading to the aforementioned termination.
• In a letter dated March 14, 2018, the IRP informed the Director of Mines and Geology and the Chairman of the Monitoring Committee that the CIRP had begun. The letter requested a deemed extension of the Lease Deed beyond its expiration date of March 25, 2018, until March 31, 2020, in compliance with the Mines and Minerals (Development and Regulation) Act, 1957. The IRP filed Writ Petition No. 23075 of 2019 (“Writ Petition No. 1”) with the Karnataka High Court in anticipation of a response, requesting a declaration that the Lease Deed was still enforceable until March 31, 2020.
• The Karnataka government rejected the presumed extension application on September 26, 2018, while this petition was still underway, citing non-compliance with the terms and circumstances of the lease deed. After this denial, the IRP filed Miscellaneous Application No. 632 of 2018 before the NCLT, Chennai Bench, withdrawing Writ Petition No. 1. In its application, the IRP asked that the Government Order be overturned, that the lease be considered valid until March 31, 2020, and that additional lease documents be executed in accordance with that.

• The Government Order was then overturned by the NCLT, Chennai Bench in an order dated December 11, 2018 (“Order 1”), citing a violation of the moratorium established under section 14 of the IBC. The Karnataka government was also instructed to sign additional lease deeds by the NCLT, Chennai Bench. Disappointed by Order 1, the Karnataka government filed Writ Petition No. 5002 of 2019 before the KHC, also known as “Writ Petition No. 2.” On March 22, 2019, the KHC issued an order nullifying Order 1. After that, the case was remanded to the Chennai Bench of the NCLT for a further hearing.
• The Karnataka government filed a statement of objections before the NCLT, Chennai Bench, arguing among other things that the NCLT lacked the authority to decide disputes pertaining to the MMDR Act’s mining license grants. By judgement dated May 3, 2019 (“Order 2”), the NCLT, Chennai Bench, however, overturned the Karnataka government’s objection and mandated the execution of supplemental lease documents.
• An Interim Order dated September 2019 (“Interim Order”) was issued after the Karnataka government filed Writ Petition No. 41029 of 2019 (“Writ Petition No. 3”) against Order 2 before the KHC. In the end, the Interim Order issued a stay on the NCLT, Chennai Bench’s directive. These appeals were submitted to the SC by the resolution applicant, the IRP, and the committee of creditors in opposition to this Interim Order.

3. ISSUES

I. Whether the Karnataka High Court should intervene under Article 226/227⁴ of the Indian Constitution to overrule an NCLT ruling in an IBC matter just because there was a National Company Law Appellate Tribunal appeal available as a substitute remedy.

II. Whether the NCLT has the authority to look into claims of fraud, particularly given the nature of the CIRP’s inception.

4. ARGUMENTS OF THE APPELLANTS

I. Resolution applicant’s argument: The Karnataka High Court should not have granted the Writ Petition No. 3, which challenged an NCLT order (Order 2), since there was a viable alternative remedy available through the filing of an appeal before the NCLAT under section 61 (appeals and appellate authority) of the IBC. The IRP had the authority to petition the NCLT for the necessary reliefs since it was concerned with allowing a corporate debtor to continue as a going concern. Steps made by the IRP could only be overturned by applying the IBC’s provisions, which means appealing the NCLAT. Additionally, it was argued that all of the remedies offered by the IBC were widespread and exclusive. Furthermore, it was argued that in situations like these, the KHC had to adopt a hands-off approach.

Regardless, the resolution plan was previously accepted by the NCLT, Chennai Bench, and any action taken by the KHC would alter or nullify the NCLT-approved resolution plan.

II. According to the IRP, permitting the NCLT’s orders to be reviewed under Articles 226 and 227 of the Constitution would defeat the IBC’s primary goal. This stance is further supported by Section 238 of the IBC, which expressly gives it precedence over competing statutes. Notably, the Karnataka government contended in Writ Petition No. 2 that the mining tribunal had the sole authority to decide disputes pertaining to the denial of a purported extension of a mining licence. The state finally consented to make its case before the NCLT, despite its original assertion that such rejections ought to be contested before the Central Government through a revision under the MMDR Act. As a result, it can no longer contest the tribunal’s jurisdiction in a later case.

Furthermore, the IRP is required to protect the corporate debtor’s assets because the deemed extension of a lease is considered “property” under Section 3(27) of the IBC. The IBC’s Section 60(5)(c) gives the NCLT broad jurisdiction to handle matters of law, fact, and priority, including fraud claims. The Karnataka High Court cannot interfere due to this jurisdictional scope. The resolution procedure, which is intended to follow precise deadlines, would be in danger if the Supreme Court acknowledged the KHC’s power to overturn NCLT orders.

III. Committee of Creditors Contentions: The NCLT’s orders could only be contested in accordance with the IBC’s guidelines. In order for the KHC to invoke jurisdiction under Article 226 of the Indian Constitution, the NCLT could not be said to have exercised a jurisdiction not granted to it by law, as the IRP was only requesting recognition of the statutory right of deemed extension of lease granted by the MMDR Act.

5. ARGUMENTS OF THE RESPONDENT

The Karnataka High Court authority under Article 226 of the Indian Constitution would undoubtedly apply to the NCLT’s exercise of jurisdiction if it lacked inherent jurisdiction over a case. Therefore, NCLT’s jurisdiction is limited to inter-party contractual concerns. On the other hand, an order issued by a quasi-judicial body under laws like the MMDR Act would be immediately covered by public law. As a result, the NCLT would not have the authority to review such orders. According to the ruling in Barnard and Others v. National Dock Labour Board and Others [1 (1953) 2 WLR 995], the superior court does not have to send a party to the appellate forum designated by an act when a subordinate tribunal issues an order that is a nullity. As a result, the Karnataka government did not need to contact the NCLAT.

6. JUDGEMENT

The Supreme Court emphasised that High Courts must carefully evaluate jurisdictional issues, particularly under Article 226 of the Constitution, in order to avoid the NCLAT’s appellate remedy.

In this instance, the mining lease that the Karnataka government gave to the corporate debtor under the Mineral Concession Rules, 1960, was regulated by statute and contract. Since the government owned the land in question, public law applied when the decision to reject the presumed lease extension was made. Therefore, the only court that could examine such administrative decisions was a superior court with judicial review authority. To exercise its authority, the NCLT, which was created by a unique statute, could not be compared to a superior court.

Although the NCLT’s authority in areas pertaining to insolvency resolution is widely defined by Section 60(5) of the IBC, the Court made it clear that decisions made by statutory or governmental agencies in public law are not within its purview. Moreover, the responsibilities of resolution experts are outlined in the IBC’s Sections 18(f)(vi), 20(1), and 25(2)(b), which do not include circumventing established judicial or administrative processes by utilising the NCLT’s jurisdiction.

The Court observed that, acknowledging the NCLT’s lack of jurisdiction in such circumstances, the Interim Resolution Professional (IRP) properly filed a writ petition in the High Court when the Government of Karnataka denied the presumed extension of the lease. Since Section 14 of the IBC merely prohibits dispossession and does not grant the right to lease renewal, the moratorium was likewise judged inapplicable in this situation.

The Karnataka High Court’s intervention through a writ petition was ultimately justified by the NCLT’s exercise of jurisdiction in this matter being ruled unlawful. The Supreme Court also addressed concerns about the fraudulent start of the CIRP, stating that claims of fraud are under the jurisdiction of the NCLT and NCLAT and cannot be used as an excuse to avoid the IBC’s appellate remedies.

7. ANALYSIS OF THE JUDGEMENT

This ruling is a crucial step in establishing the exact parameters of the NCLT’s authority over public law cases involving corporate debtors going through CIRP. The Supreme Court has upheld the authority of NCLT and NCLAT to look into claims of fraud within a CIRP, stating that these remedies cannot be circumvented. Despite the broad power conferred under the IBC, the Court has wisely stated that not all issues fall within the purview of “arising out of or in relation to the insolvency resolution,”. The Court concluded that disputes pertaining to quasi-judicial or statutory decisions are reserved for judicial review. In order to determine the best course of action for resolving disputes, parties must carefully consider whether a certain problem falls within public law.

It was decided that while the NCLT would have the authority to investigate fraud-related issues, the tribunal lacked the authority to decide cases involving the MMDR Act. When disagreements centred on rulings from statutory or quasi-judicial agencies, this distinction was particularly crucial. Only judicial scrutiny of administrative action could correct such decisions. Therefore, the Karnataka High Court had good reason to consider Writ Petition No. 3, and as a result, the KHC’s ruling could not be overturned.

Notes:

¹ MANU/SC/1661/2019

² Insolvency and Bankruptcy Code, 2016,No. 31 Acts of Parliament, 2016 (India).

³ Mines and Minerals (Development and Regulation) Act, 1957 No. 67 Acts of Parliament, 1957 (India).

⁴ INDIA CONST. art.226