Residuary Jurisdiction of the National Company Law Tribunal: A Study of Recent Developments – By N. Bharat Sudarshan and Reema Jain

Residuary Jurisdiction of the National Company Law Tribunal: A Study of Recent Developments

– By Reema Jain and N. Bharat Sudarshan

The National Company Law Tribunal (hereinafter referred to as “NCLT”) was established owing to the fact that there was pendency of litigation proceedings in High Courts and multiple other fora like Company Law Board and Board for Industrial and Financial Reconstruction inter alia. As noted in Union of India v. R. Gandhi[1], the intent behind establishment of NCLT was to reduce the period taken for the culmination of insolvency or winding-up process. The establishment of NCLT streamlined the entire Winding-up process, as the Appeals against the decision of the NCLT, could be heard by NCLAT. Further Appeals would lie before the Hon’ble Supreme Court only in matters that pose a question of law.

The Eradi Committee therefore recommended the need to establish a National Tribunal to take over the role of Company Law Board and consolidate the role that was being played by High Courts and multiple other fora.[2] In furtherance of this recommendation, the National Company Law Tribunal was established under Section 408 of the Companies Act, 2013. The jurisdiction of NCLT is underlined in Section 60 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code). The role of NCLT would not be entirely appreciated if parties to the Insolvency Proceedings would have to approach the High Court or any other judicial body barring NCLT for matters that pertain to insolvency.

It was noted in Duncan Industries v. A.J Agrochem[3] that the objective behind enactment of The Code was to resolve the insolvency of the Corporate Debtor in a time bound manner while maximizing the value of the assets. This would ensure availability of credit so that the interests of all stakeholders can be balanced. The recent judgment of the Hon’ble Apex Court in Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain[4] must be read with the legislative intent behind the enactment of The Code. In this instant matter the NCLT and NCLAT ordered for the stay of termination notice that was issued by the Appellant to the Corporate Debtor. It was observed by NCLAT that the moratorium under Section 14 of The Code is imposed to ensure smooth functioning of the Corporate Debtor and it is imperative to treat the Corporate Debtor as a going concern. But, the moot question raised in the Hon’ble Apex Court was whether the NCLT had the residuary jurisdiction under Section 60(5) of The Code to adjudicate on the contractual obligations between the parties. In response to the moot question, the Corporate Debtor relied on the judgment of Gujarat Urja Vikas Nigam v. Amit Gupta[5] where it was held that NCLT had the jurisdiction to adjudicate and declare stay on the termination notice. However, in this case the residuary jurisdiction of NCLT was invoked as the Appellant terminated the contract as a result of initiation of Corporate Insolvency Resolution Process (CIRP). This termination directly arose from the fact that CIRP was initiated. However in the instant matter, the termination notice was served as a result of breach of contract between the parties on multiple occasions.

The contract (Facilities Agreement) between the Corporate Debtor and the Appellant was the only source of income for the Corporate Debtor and extensive capital expenditure was also incurred by the Corporate Debtor for the same. It was observed in ArcelorMittal v. Satish Kumar Gupta[6] that The Code is a beneficial legislation and the resolution process must not be adversial to the interests of the Corporate Debtor. Therefore, if the only source of income of the Corporate Debtor is terminated, that would have an adverse effect on the revival of the Corporate Debtor. Furthermore, the parties in the instant matter included a clause in their contract with respect to dispute resolution. As per this clause, any dispute arising between the parties would be subject to arbitration. However, it must be understood that Section 238 of the Code gives overriding powers to The Code and the Contract between the parties can be considered as “an instrument” that can be overridden by The Code, nullifying the powers of Section 8 of the Arbitration and Conciliation Act, 1996. Therefore, simply because the parties agreed for arbitration, it does not oust the residuary jurisdiction of NCLT.

Another aspect that must be considered is the view that comes in while comprehending Section 25 of The Code. As per Section 25(1), it is the duty of the Resolution Professional to protect the assets of the Corporate Debtor and maintain the business as a going concern. Therefore, if the dispute between the parties with respect to “any claim” or “any question of facts or law” arises and shares a nexus with the insolvency proceedings, then the residuary jurisdiction of the NCLT and NCLAT can be invoked. However, it must be noted that such jurisdiction must be exercised with caution as the adjudicating authorities cannot rewrite the contract between the parties. The adjudicating authorities can intervene only when the state of affairs cut the legs of the CIRP.

The instrumental case of Essar Steel (India) Ltd. (CoC) v. Satish Kumar Gupta[7] studies the relationship between Section 14 and Section 60(5)(c) of The Code. The Section 14 of The Code imposes moratorium on the Corporate Debtor which implies that no new suits or proceedings can be instituted against the Corporate Debtor and no recovery of property can be made by the owner or lessor if it is being utilized by the Corporate Debtor. Therefore, if it is contended by a party that since no new suits, proceedings or recovery has been made, the residuary jurisdiction of NCLT cannot be invoked, it would still not hold substance. The Section 14 of the Code cannot be held exhaustive for determining the judicial grounds that The Code envisages.

Another vital observation with respect to breach of contractual obligations and subsequent termination of contract between the parties in Gujarat Urja Vikas Nigam is that if the breach or default is a result of the insolvency of the Corporate Debtor, it would still be considered as a subject-matter that can invoke the residuary jurisdiction of NCLT. The intent is straight-forward as The Code envisages the revival of the Corporate Debtor and the termination of contract which is a result of insolvency, can further aggravate the position of the Corporate Debtor. Furthermore, in Electrosteel Castings v. UV Asset Reconstruction Company[8], the idea of centrality was discussed. The termination of contract can only be considered related to insolvency if the said termination leads to the death of the Corporate Debtor.

After the pronouncements in Innoventive Industries Limited v. ICICI Bank[9] it is lucidly understood that The Code is a complete code in itself and is exhaustive of matters pertaining to insolvency. But, the question of whether NCLT could investigate the allegations of fraud arising from insolvency and whether a writ could be filed against the order of NCLT in the High Court was still open and unanswered. This question was sufficiently answered in M/s Embassy Property Developments v. State of Karnataka[10], where the Department of Mining refused to grant an extension to the mining lease of the Corporate Debtor. The Resolution Professional contended that such a refusal was against the moratorium imposed under Section 14 of The Code. It was contended by the Corporate Debtor that the statutory forum of NCLT was established for the redressal of grievances. Besides, if the jurisdiction of a judicial authority is sought, the said authority must not merely have the power to entertain that suit but must also have the authority to entertain and pass the orders that are sought.[11] Therefore, it was held by the Apex Court that the moratorium imposed can only preserve the status and not create any new right. This judgment made it clear that if the relief sought falls outside the framework of The Code and transcends into other areas, more specifically, public law, then NCLT and NCLAT will not have the jurisdiction.

However, it must be understood that Section 65 of The Code single-handedly deals with initiation of CIRP with a fraudulent or malicious intent. So, if a party claims that the CIRP was initiated in a “collusive manner” by the related parties of the Corporate Debtor, then the matter will fall within the jurisdiction of NCLT and not High Court or any other Civil Court.

Conclusion

The purpose behind enactment of The Code was the revival of Corporate Debtor and to consolidate the law pertaining to insolvency, so that NCLT has the sole jurisdiction to adjudicate the matters, thereby minimizing the time required for reconstruction. A catena of judgments by the Apex Court has clarified that unless the contractual obligations have a direct relationship with insolvency or unless the termination of contract is so central that the said termination can lead to the death of the Corporate Debtor, the residuary jurisdiction of NCLT cannot be invoked.

However, it must be considered that the legislative intent envisages that all state of affairs should be such that the Corporate Debtor can be revived. This idea percolates through Section 60(5)(a) of The Code as it unequivocally declares that NCLT shall have jurisdiction to entertain “Any application” against the Corporate Debtor without any specification regarding the dispute or application arising from the insolvency of the Corporate Debtor.  However, the Section 60(5)(c) of The Code limits the jurisdiction of NCLT to dealing with questions of fact or law only arsing from the insolvency of the Corporate Debtor. This calls for clarity from the Judiciary to reduce the multiplicity of litigation proceedings that are initiated regarding the jurisdiction thereby beating the intent of The Code. In light of the same essence, Section 14 places a moratorium on initiation of any proceedings or recovery. It is therefore recommended that during CIRP, no contract should be statutorily permitted to be terminated unless the continuation of such contract can trigger the insolvency of the other party as well. Lastly, NCLT must be given the jurisdiction to adjudicate all matters of the Corporate Debtor in order to truly appreciate the essence of The Code.

Reference

[1] Union of India v. R. Gandhi, 2009 SCC OnLine SC 18.

[2] Eradi Committee Report, Law Relating to Insolvency and Winding up of Companies, 78 Ministry of Corporate Affairs (2000).

[3] Duncan Industries v. A.J Agrochem, [2019] ibclaw.in 18 SC.

[4] Tata Consultancy Services Limited v. Vishal Ghisulal Jain, (2021) ibclaw.in 167 SC.

[5] Gujarat Urja Vikas Nigam v. Amit Gupta, (2021) ibclaw.in 44 SC.

[6] ArcelorMittal v. Satish Kumar Gupta, [2018] ibclaw.in 31 SC.

[7] Essar Steel (India) Ltd. (CoC) v. Satish Kumar Gupta, [2019] ibclaw.in 07 SC.

[8] Electrosteel Castings Limited v. UV Asset Reconstruction Company Limited, (2021) ibclaw.in 169 SC.

[9] Innoventive Industries Ltd v ICICI Bank [2017] ibclaw.in 02 SC.

[10] M/s Embassy Property Developments v. State of Karnataka, [2020] ibclaw.in 12 SC.

[11] Bengal & Others v. Sachindra Nath Chatterjee, (1969) 3 SCR 92.

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