INTERVENTION OF HIGH COURTS IN PROCEEDINGS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

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Before the enactment of Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016) (“IBC”), there was no single comprehensive law in India dealing with the insolvency and bankruptcy of companies, individual and partnership firms. Insolvency and bankruptcy of companies was dealt with in accordance with the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) and the Companies Act, 2013 while individual insolvency and bankruptcy was dealt with under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

Multiplicity of legislations led to creation of several tribunals and appellate tribunals which resulted in forum shopping. In short, the legal framework for insolvency and bankruptcy in existence pre-IBC was inadequate, ineffective and resulted in undue delays in resolution. It is in this scenario that the Bankruptcy Law Reforms Committee (“BLRC”) was constituted by the Ministry of Finance, India on August 22, 2014 to consolidate the insolvency and bankruptcy laws in India.

Enactment of IBC

IBC, which came in force on May 28, 2016, was enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.[i] IBC designated National Company Law Tribunal (“NCLT”) as the Adjudicating Authority for corporate persons and Debts Recovery Tribunal (“DRT”) as the Adjudicating Authority for individuals and partnership firms (except in some situations), thereby providing for the insolvency resolution, liquidation and bankruptcy of corporate persons, partnership firms and individuals. With IBC coming into force, SICA was repealed with effect from December 1, 2016 and other laws such as Indian Partnership Act, 1932[ii], Central Excise Act, 1944[iii], Income Tax Act, 1961[iv], Recovery of Debts and Bankruptcy Act, 1993 (formerly, Recovery of Debts due to Banks and Financial Institutions Act, 1993)[v], Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[vi], Limited Liability Partnership Act, 2008[vii] and Companies Act, 2013[viii] were amended accordingly.

IBC a complete code in itself

As stated above, IBC was enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. The Hon’ble Supreme Court of India (“Supreme Court”) in its landmark ruling in Innoventive Industries[ix] relied, inter alia, on an earlier Division Bench judgment of the Supreme Court in Joseph Peter[x] where the Supreme Court had observed and held that “A Code is complete and that marks the distinction between a Code and an ordinary enactment…”. The Supreme Court in Innoventive Industries, after examining various provisions of the IBC and the legislative intent and factors behind the enactment thereof as well as the judicial rulings on the rule of construction applicable to consolidating laws, held that IBC “is a Parliamentary law that is an exhaustive code on the subject matter of insolvency in relation to corporate entities, and is made under Entry 9, List III in the 7th Schedule…”. The Supreme Court had further observed that “a consolidating and amending act like the present Central enactment (IBC) forms a code complete in itself and is exhaustive of the matters dealt with therein.

A bare perusal of the preamble as well as the legal provisions contained in IBC would further show that the legislature intended it to be a complete and exhaustive code in itself. Section 60(5) of IBC[xi], for instance, states that “notwithstanding anything to the contrary contained in any other law for the time being in force, the NCLT shall have jurisdiction to entertain or dispose of –

· any application or proceeding by or against the corporate debtor or corporate person;

· any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

· any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

Sections 63[xii], 180[xiii] and 231[xiv] of IBC are the ouster clauses which bar the jurisdiction of a civil court in respect of matters where the Adjudicating Authority (NCLTs and/or DRTs) or the Insolvency and Bankruptcy Board of India (“IBBI”) is empowered under this Code to pass any order. Sections 180 and 231 further prohibit any court or other authority from granting injunction over any action taken or to be taken, in pursuance of any order passed by the Adjudicating Authority or IBBI under IBC. Section 238 of IBC[xv] is the overriding provision which states that the provisions of IBC shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

Appeals and Appellate authority under IBC

Under the scheme of IBC, any person aggrieved by the order of the Adjudicating Authority under Part II of IBC (insolvency resolution and liquidation for corporate persons), viz. NCLT, may prefer an appeal to the National Company Law Appellate Tribunal (“NCLAT”) under Section 61. A person aggrieved by the order of the Adjudicating Authority under Part III of IBC (insolvency resolution and bankruptcy for individuals and partnership firms), viz. DRT, may prefer an appeal to the Debt Recovery Appellate Tribunal (“DRAT”) under Section 181. Thus, statutory forums in the form of NCLAT and DRAT have been designated as the appellate authority under IBC for redressal of grievances arising out of an order of the Adjudicating Authority under Part II and Part III of IBC respectively. Further, any person aggrieved by an order of the NCLAT or DRAT may file an appeal to the Supreme Court on a question of law arising out of such order. Thus, IBC provides for a three-tier adjudicatory mechanism, for dealing with all issues that may arise in relation to the insolvency resolution and liquidation for corporate persons and insolvency resolution and bankruptcy for individuals and partnership firms, namely (i) NCLT/DRT; (ii) the NCLAT/DRAT (iii) the Supreme Court.

Grounds for HC intervention in IBC proceedings

Initially, the writ jurisdiction of the High Court under Article 226 of the Constitution of India was invoked to challenge the constitutionality of IBC in cases like Sree Metaliks[xvi], Shivam Water Treaters[xvii] and Akshay Jhunjhunwala[xviii]. However, the questions revolving around the constitutionality of IBC were put to rest in Swiss Ribbons[xix] by the Supreme Court.

The Division Bench of the Bombay High Court in Anthony Raphael Kallarakkal[xx], while considering the tenability of writ petition in view of availability of alternate efficacious remedy of appeal before NCLAT under Section 61 of IBC, observed that non-exercise of jurisdiction under Article 226 on the ground of availability of alternate remedy is a self-imposed restraint and where exceptional facts and circumstances have been made out, the High Court can exercise writ jurisdiction under Article 226 in spite of availability of alternate remedy. In Anthony Raphael Kallarakkal however, the Bombay High Court had dismissed the writ petition on ground of availability of alternate and equally efficacious remedies under Section 61 of IBC to prefer an appeal before NCLAT and, a further remedy under Section 62 of IBC to prefer an appeal before the Supreme Court from NCLAT.

Subsequently, a Full Bench of the Supreme Court was called upon in Embassy Property Developments[xxi] to decide, inter alia, whether High Courts could exercise the writ jurisdiction under Article 226/227 of the Constitution and interfere with the NCLT’s order in IBC proceedings when a statutory remedy of appeal to NCLAT was available and, the grounds for such intervention. The Supreme Court, vide order dated December 3, 2019, held that “NCLT, being the creation of a special statute to discharge specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action” which is a concept flowing from the Constitution. The Supreme Court further observed that “a decision taken by the government or statutory or quasi-judicial authorities in relation to a matter which is in the realm of public law cannot be treated as one “arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor” under Section 60(5) of IBC and the same can be corrected only by way of judicial review of administrative action”. As NCLT Chennai had exercised jurisdiction which was not vested upon it in law, the Karnataka High Court in this case was held to be justified in entertaining the writ petition.

In Kamal K Singh[xxii], the Petitioner had filed a writ petition under Article 226 of the Constitution before Bombay High Court, challenging the admission order of NCLT Mumbai in an application filed under Section 7 against Rolta India (“Corporate Debtor”). The Petitioner, being the Chairman and Managing Director of Corporate Debtor, had averred that the impugned NCLT order dated October 22, 2019 was bad in law and without jurisdiction, for being in violation of the principles of natural justice and Rules 150 and 152(2) of the NCLT Rules, 2016 as per which the impugned admission order was required to be pronounced by the Bench. The Division Bench of the Bombay High Court, vide order dated November 29, 2019, issued the writ of certiorari for quashing and setting aside the impugned NCLT order on the ground that the same was not pronounced in accordance with Rules 150 to 152 of NCLT Rules, 2016. As the defect in this case was not curable in nature and had vitiated the proceedings in their entirety, the Bombay High Court directed NCLT Mumbai to hear the application filed under Section 7 of IBC afresh on merits and in accordance with law. The Bombay High Court, relying on its earlier judgment in Anthony Raphael Kallarakkal, reiterated that when exceptional facts and circumstances have been made out, the High Court can exercise jurisdiction under Article 226 despite availability of alternate remedy. The Court further observed that if the orders of a court or tribunal subordinate to the High Court had resulted in a failure of justice, then writ of certiorari can be issued irrespective of the availability of alternate and equally efficacious remedies to the petitioner.

The ruling of the Bombay High Court in Kamal K Singh read with its earlier judgment in Anthony Raphael Kallarakkal is pertinent to understand the approach of Bombay High Court in intervening in IBC proceedings where an alternative efficacious remedy is available before NCLAT. Prima facie, the Bombay High Court is likely to intervene only where exceptional facts and circumstances have been made out by the Petitioner, as was the case in Kamal K Singh.

Conclusion

From the judgments discussed herein above, it is evident that in addition to the challenges to constitutional validity of the provisions of IBC (which was subsequently put to rest by the Supreme Court in Swiss Ribbons), the High Courts have intervened by exercising its power of judicial review over administrative action, especially in matters pertaining to public law, and also in exceptional facts and circumstances, such as procedural irregularities by NCLT, leading to failure of justice. It appears that the latter might open a floodgate of litigation before High Courts around the country and thus, render the legal remedy of appeal before the NCLAT/DRAT redundant, which would ultimately impact the time-bound insolvency resolution under IBC.

Contributors– Jyoti B Singh and Mayank Samuel

[i] Preamble, Insolvency and Bankruptcy
Code, 2016 (Act No. 31 of 2016)

[ii] Section 245 – Amendments of Act 9 of
1932, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[iii] Section 246 – Amendments of Act 1 of
1944, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[iv] Section 247 – Amendments of Act 43 of
1961, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[v] Section 249 – Amendments of Act 51 of
1993, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[vi] Section 251 – Amendments of Act 54 of
2002, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[vii] Section 254 – Amendments of Act 6 of
2009, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[viii] Section 255 – Amendments of Act 18 of
2013, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[ix] M/s. Innoventive Industries Ltd. v.
ICICI Bank & Anr.
, (2018) 1 SCC 407

[x] Joseph Peter v. State of Goa, Daman
and Diu
, (1977) 3 SCC 280

[xi] Section 60 – Adjudicating Authority for
corporate persons, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[xii] Section 63 – Civil Court not to have
jurisdiction, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[xiii] Section 180 – Civil Court not to have jurisdiction, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[xiv] Section 231 – Bar of jurisdiction,
Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016)

[xv] Section 238 – Provisions of this Code
to override other laws, Insolvency and Bankruptcy Code, 2016 (Act No. 31 of
2016)

[xvi] Sree Metaliks Limited and Anr. v.
Union of India and Anr.
, 2017 SCC OnLine Cal 2749

[xvii] Shivam Water Treaters v. Union of
India
, C/SCA/19808/2017

[xviii] Akshay Jhunjhunwala & Anr. v.
Union of India through the Ministry of Corporate Affairs & Ors.
, 2018
SCC OnLine Cal 142

[xix] Swiss Ribbons Private Ltd. and Anr.
v. Union of India and Ors.
, (2019) 4 SCC 17

[xx] Anthony Raphael Kallarakkal v.
National Company Law Tribunal, Mumbai Bench & Ors.
, 2018 SCC OnLine Bom
13865

[xxi] M/s Embassy Property Developments
Pvt. Ltd. v. State of Karnataka & Ors.
, 2019 SCC OnLine SC 1542

[xxii] Kamal K Singh v. Union of India and
Ors.
, 2019 SCC OnLine Bom 5609

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