Supreme Court: Scope of intervention by High Courts in cases of orders passed by the National Company Law Tribunal

In the case of Embassy Property Developments (Private) Limited v. State of Karnataka and Others (decided on December 3, 2019), the Supreme Court of India (“SC”) outlined the scope of intervention by High Courts in cases of orders passed by the National Company Law Tribunal (“NCLT”).

A set of three appeals had been filed before the SC by a resolution applicant, a corporate debtor through the resolution professional and committee of creditors in respect of the said corporate debtor (collectively, “Appellants”), in order to challenge an interim order passed by the division bench of the High Court of Karnataka (“KHC”). The said interim order stayed the operation of a direction contained in the order of the NCLT.

FACTS
A company by the name of M/s. Udhyaman Investments Private Limited (“Financial Creditor”), which was the twelfth respondent in the first appeal, moved an application before the NCLT, Chennai Bench in the capacity of a Financial Creditor against M/s. Tiffins Barytes Asbestos and Paints Limited (“Corporate Debtor”). The Corporate Debtor was also the fourth respondent in the first of these three appeals before the SC.

By an order dated March 12, 2018, the NCLT, Chennai Bench admitted the application of the Financial Creditor and ordered the commencement of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. Thereafter, an Interim Resolution Professional (“IRP”) was appointed and a moratorium came to be imposed in terms of section 14 of the IBC (moratorium). At the time, the Corporate Debtor held a mining lease granted by the Government of Karnataka which was set to expire on May 25, 2018 under a particular Lease Deed (“Lease Deed”). Due to violation by the Corporate Debtor of the statutory rules, and terms and conditions of the Lease Deed, a notice of premature termination of the lease was also issued to the Corporate Debtor on August 09, 2017. However, no order towards termination as aforesaid had been passed until the date of initiation of CIRP.

Thereafter, the IRP addressed a letter dated March 14, 2018 to the Chairman of the Monitoring Committee and the Director of Mines and Geology, informing these authorities of the commencement of the CIRP and seeking the benefit of deemed extension beyond March 25, 2018 (date of expiry of Lease Deed) and until March 31, 2020 in terms of the Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”). Receiving no response, the IRP was constrained to file a Writ Petition no. 23075 of 2019 (“Writ Petition No. 1”) before the KHC, wherein it was sought that the Lease Deed should be deemed to be valid until March 31, 2020. During the pendency of the Writ Petition No. 1, the Government of Karnataka passed an order dated September 26, 2018 (“Government Order”) rejecting the proposal for deemed extension, on the grounds of contravention of, the terms and conditions of the Lease Deed. In the aftermath of the Government Order as aforesaid, the IRP withdrew the Writ Petition No. 1 and filed Miscellaneous Application no. 632 of 2018 (“Miscellaneous Application”) before the NCLT, Chennai Bench, wherein it was prayed that the Government Order should be set aside and that the lease should be deemed valid until March 31, 2020. Further, it was also prayed that supplement lease deeds should be executed in relation thereto.

Thereafter, the NCLT, Chennai Bench set aside the Government Order by an order dated December 11, 2018 (“Order 1”) on the ground that the same was in violation of the moratorium declared in terms of section 14 of the IBC. The NCLT, Chennai Bench also directed the Government of Karnataka to execute supplement lease deeds. Aggrieved by Order 1, the Government of Karnataka moved Writ Petition no. 5002 of 2019 before the KHC (“Writ Petition No. 2”), whereby the KHC by an order dated March 22, 2019, set aside Order 1. The matter was thereafter remanded back to NCLT, Chennai Bench for a fresh consideration.

Before the NCLT, Chennai Bench, the Government of Karnataka filed statement of objections contending, interalia, that NCLT had no jurisdiction to adjudicate disputes arising out of the grant of mining leases under the MMDR Act. However, the NCLT, Chennai Bench overruled the objection of the Government of Karnataka and ordered the execution of supplemental lease deeds by order dated May 03, 2019 (“Order 2”). The Government of Karnataka, thereafter, filed Writ Petition no. 41029 of 2019 (“Writ Petition No. 3”) against Order 2, before the KHC, wherein, an Interim Order dated September, 2019 (“Interim Order”) was passed. The Interim Order ultimately granted a stay of operation of the direction of the NCLT, Chennai Bench. It was against this Interim Order that the resolution applicant, the IRP and the committee of creditors had filed these appeals before the SC.

ISSUES
1. Whether the KHC ought to interfere under Article 226/227 of the Constitution of India against an order passed by NCLT in a proceeding under the IBC, merely because an alternative remedy was available by way of an appeal to the National Company Law Appellate Tribunal (“NCLAT”).

2. Whether the NCLT is competent to enquire into allegations of fraud especially in the nature of the very initiation of CIRP.

ARGUMENTS
Contentions raised by the Appellants:

1. Contentions of the resolution applicant:

An efficacious alternative remedy was available by way of filing of an appeal before the NCLAT under section 61 (appeals and appellate authority) of the IBC, and therefore the KHC should not have entertained the Writ Petition No. 3, against an order passed by the NCLT (Order 2). As such, the IRP was concerned with the enabling survival of a corporate debtor as a going concern, and therefore, the IRP had a right to move the NCLT for appropriate reliefs. The only way steps taken by the IRP could be set aside was by taking recourse to the provisions of IBC, that is, by approaching the NCLAT. It was also contended that the remedies provided under the IBC were all pervasive and exclusive.

It was further contended that the KHC was obliged to switch over the hands-off mode in matters of such nature. In any case, the NCLT, Chennai Bench had already approved the resolution plan and anything done by the KHC would tinker with or destroy the resolution plan approved by the NCLT.

2. Contentions of the IRP:

The whole object of IBC would be defeated if orders of NCLT were to be declared to become amenable to review under Article 226/227 of the Constitution of India. Moreover, the provisions of IBC were given overriding effect over all other statutes by virtue of section 238 (provisions of the IBC to override other laws) of the IBC. It was also notable that the Government of Karnataka in Writ Petition No. 2 had taken a stand that dispute relating to refusal to grant deemed extension of the mining lease fell squarely within the jurisdiction of the mining tribunal. After raising a plea that the rejection of the benefit of deemed extension ought to have been challenged by way of revision before the Central Government under the MMDR Act, the Government of Karnataka had agreed to go back to NCLT for raising all contentions. Therefore, it was not open to the Government of Karnataka to question the jurisdiction of the NCLT in the next round of litigation.

Further, it was notable that the right to deemed extension of lease would come within the purview of the expression ‘property’ as defined in section 3(27) of the IBC, and as such, it was the duty of the IRP to preserve property of a corporate debtor. Further, the sweep of jurisdiction conferred upon NCLT under section 60(5)(c) (NCLT shall have jurisdiction to entertain any question of priorities, law or facts under the IBC) of the IBC, entitled the tribunal to investigate into allegations of fraud, as a result of which, the jurisdiction of the KHC does not arise. Consequently, any recognition by the SC of the jurisdiction of the KHC to interfere with the orders of the NCLT would completely derail the resolution process that was essentially bound to happen within a time frame.

3. Contentions of the committee of creditors:

There was no room for challenging the orders of the NCLT other than in the manner prescribed by the IBC. The IRP was only seeking recognition of the statutory right of deemed extension of lease conferred by the MMDR Act and therefore, the NCLT could not be said to have exercised a jurisdiction not vested in it by law, so as to enable the KHC to invoke jurisdiction under Article 226 of the Constitution of India.

Contentions raised by the Respondents:

If NCLT lacked the inherent jurisdiction in respect of a case, the exercise of jurisdiction by NCLT would certainly be amenable to the jurisdiction of the KHC under Article 226 of the Constitution of India. As such, the jurisdiction of NCLT is confined only to contractual matters inter parties. By contrast, an order passed by a quasi-judicial authority under enactments such as the MMDR Act would directly fall under the realm of public law. Therefore, the NCLT would not have power of judicial review over such orders. On the basis of the decision in Barnard and Others v. National Dock Labour Board and Others [1 (1953) 2 WLR 995], when an inferior tribunal passes an order which is a nullity, the superior court need not drive a party to the appellate forum stipulated by an act. Therefore, the Government of Karnataka did not have to resort to approaching the NCLAT

DECISION OF THE SUPREME COURT

The conflict between the lack of jurisdiction and the wrongful exercise of jurisdiction should be certainly taken into account by High Courts when Article 226 of the Constitution of India is sought to be invoked. This is important as such invocation may ultimately result in bypassing the remedy of appeal to NCLAT.

The mining lease granted to the Corporate Debtor by the Government of Karnataka was issued in accordance with the Mineral Concession Rules, 1960. Therefore, the relationship between the Corporate Debtor and the Government of Karnataka was not only contractual but also statutorily governed. Moreover, the land which formed the subject matter of the Lease Deed, belonged to the Government of Karnataka. In view of the above, it was rightly contended by the Respondent that the decision of Government of Karnataka to refuse the benefit of deemed extension of lease, was in the public law domain. In lieu of the same, the correctness of the decision of the Government of Karnataka could be called into question only in a superior court which was vested with the power of judicial review over administrative action. Clearly, NCLT being a creature of a special statute to discharge specific functions, could not be elevated to the status of a superior court having the power of judicial review over administrative action.

The SC held that the only provision that could help outline the scope of jurisdiction of the NCLT in respect of decisions taken under the MMDR Act was section 60(5) of the IBC. Section 60(5) of the IBC, was recognized to be very broad in its sweep, conferring jurisdiction upon the NCLT in respect of any question of law or fact, arising out of or in relation to insolvency resolution. However, the SC held that any decision taken by a government or statutory authority in relation to a matter which was in the realm of public law, cannot by any stretch of imagination be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution”.

If NCLT has been conferred with the jurisdiction to decide all types of claims to property, of the corporate debtor, section 18(f)(vi) of the IBC would not have made the task of an interim resolution professional in taking control and custody of an asset over which the corporate debtor has ownership rights, subject to the determination of ownership by a court or other authority. Even though section 20(1) of the IBC conferred a duty upon an interim resolution professional to preserve the value of the property of a corporate debtor, the duties of an interim resolution professional are entirely different from what comprises the exact jurisdiction and powers of the NCLT.

The SC also considered section 25(2)(b) of the IBC, wherein, a resolution professional was duty bound to represent and act on behalf of a corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings. The SC held that this would mean that whenever a corporate debtor had to exercise rights in judicial, quasi-judicial proceedings, a resolution professional cannot short circuit that procedure and bring a claim before NCLT by taking advantage of the broad sweep of powers conferred upon the NCLT within section 60(5) of the IBC.

Further, whenever a corporate debtor has to exercise a right that fell outside the purview of IBC, especially in the realm of public law, no bypass can be undertaken by going to the NCLT. The SC held that in the present case, the IRP, clearly understood this legal position. This was mainly because when the Government of Karnataka refused to grant the benefit of deemed extension, the IRP moved Writ Petition No. 1 before the KHC instead of the NCLT, as he understood that such manner of right could not be enforced before the NCLT. Whence after filing of the Writ Petition No. 1, the Government of Karnataka rejected the claim of the IRP, the latter withdrew the Writ Petition No. 1. If the NCLT was not considered by the IRP in the very first instance, to be empowered to issue a declaration of deemed extension of lease, NCLT could not be considered to have power of judicial review over the Government Order

Further, the SC held that moratorium provided for as per section 14 of the IBC would not have any impact on the right of the Government of Karnataka to refuse extension of lease. Basically, the right to not to be dispossessed under section 14 of the IBC had nothing to do with the rights conferred by a mining lease on a government land. As such, what was prohibited under section 14 of the IBC was only the right not to be dispossessed. It however, did not imply the right to have renewal of a lease. Therefore, section 14 of the IBC may not have an application in cases of rights conferred by way of a mining lease especially on a government land. Thus, NCLT did not have jurisdiction to entertain an application against the Government of Karnataka for a direction to execute supplemental lease deeds for the extension of the mining lease. Consequently, owing to the fact that the NCLT had chosen to exercise a jurisdiction not vested in it in law, the KHC was justified in entertaining the Writ Petition No. 2 on the basis that the NCLT was coram non judice.

The SC also analyzed the submission of the Government of Karnataka regarding the fraudulent and collusive manner in which the CIRP was initiated. The Government of Karnataka had submitted that it had chosen to challenge Order 2 before the KHC instead of the NCLAT, as the CIRP was initiated by one of the related parties to the Corporate Debtor. The SC held that it was clear from the provisions of IBC that the NCLT has jurisdiction to enquire into allegation of fraud, and as a corollary, NCLAT would also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in the IBC.

CONCLUSION

It was held that although NCLT would have jurisdiction to enquire into questions of fraud, the tribunal did not have jurisdiction to adjudicate upon disputes such as those arising under the MMDR Act. This distinction was especially important when the disputes revolved around decisions of statutory or quasi-judicial authorities. Such decisions could be corrected only by way of judicial review of administrative action. Hence, the KHC was justified in entertaining the Writ Petition No. 3, and therefore, it was that the decision of the KHC could not be interfered with.

Vaish Associates Advocates View:

This judgment has undertaken a significant step by defining the precise scope of NCLT’s jurisdiction in respect of issues pertaining to public law wherein, corporate debtors are undergoing CIRP. While holding that NCLT and NCLAT have jurisdictional powers to enquire into allegations of fraud in respect of a CIRP and that such remedy cannot be surpassed, the SC has carefully considered the implications of incorporating every issue within the fold of the expression, “arising out of or in relation to the insolvency resolution”.

Even though the IBC, as such, confers a sweep of jurisdiction on NCLT, it does not automatically imply that every issue would fall under the purview of the NCLT. Clearly, in light of this judgment, disputes revolving around decisions of statutory or quasi-judicial authorities, can be resolved only by judicial review.

The concerned parties hereon shall have to undertake sufficient responsibility towards delineating the nature of the issue at hand, that is, if such issue fell under the realm of public law or not. This will be the first required exercise to be undertaken in order to determine the necessary route of dispute resolution.

For more information please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2019 upheld

The Supreme Court of India (“SC”), on November 15, 2019 upheld the order approving the resolution plan submitted by ArcelorMittal India Private Limited (“ArcelorMittal”) for Essar Steel India Limited (“Essar”) and upheld the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.

FACTS
On August 02, 2017, the National Company Law Tribunal, Ahmedabad (“NCLT”) admitted Company Petition filed by Standard Chartered Bank together with a petition filed by the State Bank of India under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Satish Kumar Gupta was appointed as the interim resolution professional, who was later confirmed as Resolution Professional (“RP”).

Pursuant to the above, resolution plans were filed by ArcelorMittal and Numetal Limited (“Numetal”). Both the resolution plans were found to be ineligible under Section 29A of the IBC. On March 02, 2018, resolution plans were then submitted by ArcelorMittal, Numetal and Vedanta Limited. The resolution plan of ArcelorMittal specifically provided for an upfront payment of INR 35,000 crores in order to resolve debts amounting to INR 49,213 crores. It was stated that unsecured financial creditors shall be paid an aggregate amount of 5% of their admitted claims. Apart from the above, INR 8,000 crores of fresh capital infusion by way of capex and working capital was also to be infused. INR 3,339 crores – being the aggregate admitted claims of operational creditors, other than workmen and employees, were to be paid to the extent of INR 196 crores, but only to trade creditors and government creditors. Small trade creditors, defined as “having claims of less than one crore” were to be honoured in full, as was the claim of workmen and employees of the corporate debtor, amounting to INR 18 crores.

Importantly, ArcelorMittal empowered the Committee of Creditors (“COC”) to decide the manner in which the financial package being offered would be distributed among the secured financial creditors, vide a ‘core committee’. Standard Chartered Bank, which was stated to be an unsecured creditor, was to be paid an aggregate amount of 5% of its admitted claims. On April 19, 2018, the Adjudicating Authority directed the COC of the corporate debtor, to consider the eligibility of the aforesaid resolution applicants.

Since both ArcelorMittal and Numetal were ineligible by virtue of their resolution plans being hit by Section 29-A of the IBC, an order was passed by the SC under Article 142 of the Constitution, stating that one more opportunity be granted to both ArcelorMittal and Numetal to pay off the non-performing assets of their related corporate debtors within two weeks, failing which the corporate debtor would go into liquidation. On October 18, 2018, ArcelorMittal informed the RP and the COC that it had made payments as per the Supreme Court’s judgment. However, Numetal did not make any such payment. As a result, on October 19, 2019, ArcelorMittal resubmitted its resolution plan, which was then evaluated by the COC, which resulted in ArcelorMittal being declared as the highest evaluated resolution applicant. On October 25, 2019, the final negotiated resolution plan of ArcelorMittal was approved by the COC by a 92.24% majority, after which it was approved by the NCLT.

This approval was appealed to the National Company Appellate Law Tribunal (“NCLAT”), which held in an order dated March 20, 2019 that the funds from the winning bid must be distributed equally between operational and financial creditors, as the NCLAT opined that there can be no difference between a financial creditor and an operational creditor in the matter of payment of dues. Pursuant to the passage of this order, the government passed the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (“Amendment Act”) which, inter alia, clarified the fundamental principle that a secured creditor has priority over unsecured creditors.

Pursuant to this, on March 27, 2019 the COC decided to appeal against the NCLAT’s order, and, by a majority, making an ex gratia payment of INR 1,000 crores to operational creditors above INR 1 crore. Appeals filed against the interlocutory orders of the NCLAT were then heard by the SC, which by its order dated April 12, 2019, inter alia, directed non-implementation of the judgment dated March 8, 2019 of the NCLT and expeditious disposal of the appeal before the NCLAT.

ISSUE
If the NCLAT was correct in disallowing the resolution plan and stating that the resolution amount is to be distributed equally between the financial creditors and the operational creditors and if Sections 4 and 6 of the Amendment Act are constitutionally valid.

ARGUMENTS
The counsel for Essar submitted that the IBC provides for a broad classification of creditors as financial creditors and operational creditors on the basis of the nature of the transaction between creditors and a corporate debtor, but does not mandate identical treatment of differently situated inter se creditors either within financial creditors, who may be secured or unsecured, and/or financial creditors vis-a-vis operational creditors and that financial creditors as a class have a superior status as against operational creditors, same as with secured creditors vis-a-vis unsecured creditors. It was further argued that if secured financial creditors are to be treated at par with unsecured creditors, such secured creditors would rather vote for liquidation rather than corporate resolution, contrary to the main objective sought to be achieved by the IBC.

It was also argued that since a resolution plan is a consent-based plan proposed by the resolution applicant for a corporate debtor, any modification, as has been done by the NCLAT, of such plan is illegal. It was further argued that the NCLAT judgment deserves to be set aside because it has curtailed the authority of the COC; expanded the jurisdiction of the Adjudicating Authority as well as the NCLAT beyond the bounds contained in the IBC; and has transgressed the most basic tenet of the COC’s commercial wisdom being reflected by an over 66% majority vote, which has been nullified by the NCLAT by completely modifying and substituting the resolution plan approved by the COC.

Further, the counsel for the State Bank of India argued that the NCLAT had upped the figure to approximately INR 2160 crores completely beyond its limited jurisdiction under the IBC. Further, Standard Chartered Bank is precluded from raising any challenge to the constitution of a sub-committee as it had participated in several meetings in which it raised no objection to the sub-committee, and had in fact requested to be a part of the sub-committee.

The counsel for Standard Chartered Bank, who was opposing the appeal, argued that the very formation of a core committee/sub-committee, was against the provisions of the IBC, and was manifestly illegal. Further, the role of the COC is limited to considering the feasibility and viability of the resolution plan, which does not include the manner of distribution of the amount payable by the resolution applicant to the erstwhile creditors of the corporate debtor. It was also argued that the Parliament has consciously chosen not to create different classes of financial or operational creditors when it comes to the process of resolution of debts. Section 53 of the IBC would apply only during liquidation and not at the stage of resolving insolvency as is clear from the fact that “secured creditor” as defined by Section 3(30) of the IBC is used only in Section 53 (distribution of assets) of the IBC which is contained in Chapter III, titled ‘Liquidation Process’ and not at all in Chapter II of the IBC which is titled ‘Corporate Insolvency Resolution Process’. Further, it was argued that neither the COC, nor any sub-committee could possibly decide the manner of distribution as it would give rise to a serious conflict of interest, as the majority may get together to ride roughshod over the minority.

Further, arguments were made by Ideal Movers Limited, which was an operational creditor of the Corporate Debtor to oppose the appeal. It stated that from a reading of the preamble of the IBC and some of its provisions that a key objective of the IBC is to ensure that the corporate debtor goes on doing its business as a going concern during the Corporate Insolvency Resolution Process (“CIRP”) as a result of which a large number of operational creditors have to be paid their dues – such as workmen, electricity dues, etc. It was further contended that the process of revival and the process of liquidation are distinct and separate and have been so treated by the IBC. It was argued that, priorities of payment which apply in liquidation cannot apply when the corporate debtor is being run as a going concern as otherwise secured creditors alone will be paid and not operational creditors who are necessary for the running of the business.

With regards to the constitutional validity of Sections 4 and 6 of the Amendment Act, Ms. Madhvi Diwan, the Additional Solicitor General of India stated that the amendments further the objects sought to be achieved by the IBC, which is maximization of value of the assets of the corporate debtor in a time bound manner, and this loophole that was sought to be plugged in accordance with the original conception for the framework of the IBC. With respect to Section 6 of the Amendment Act, it was argued that there is a symbiotic relationship between a resolution applicant and the COC, who alone are to take a commercial decision by the requisite majority whether or not to put the corporate debtor back on its feet. Mr. Tushar Mehta, Solicitor General of India further added that it is well settled that the legislature can always take away the basis of a judicial decision without directly interfering with the judgment of a court.

OBSERVATIONS OF THE SUPREME COURT
The SC confirmed that the role of the RP under the IBC and the regulations thereunder, is not adjudicatory but administrative, and that the COC decides the “feasibility and viability” of a resolution plan, after taking into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. It was clarified that it was open to the COC to suggest a modification to the prospective resolution applicant’s plan, affecting the payment of priority of dues. Thus, the SC essentially upheld the sanctity of the commercial wisdom of the COC to determine as to how, and in what manner, the CIRP is to take place.

The SC further clarified that protecting creditors in general is an important objective, and what is meant by protecting creditors from each other is only that a bankruptcy code should not be read so as to imbue creditors with greater rights in a bankruptcy proceeding than they would enjoy under the general law. An “equality for all” approach recognizing the rights of different classes of creditors as part of an insolvency resolution process, if adopted, secured financial creditors will, in many cases, be incentivized to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved. This would defeat the entire objective of the IBC which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

It is the COC, under Section 30(4) of the IBC read with Regulation 39(3) of the CIRP Regulations that is vested with the power to approve resolution plans and make modifications therein as the COC deems fit. It is this vital difference between the jurisdiction of the High Court under Section 392 of the Companies Act, 1956 and the jurisdiction of the Adjudicating Authority under the IBC that must be kept in mind when the Adjudicating Authority is to decide on whether a resolution plan passes muster under the IBC. When this distinction is kept in mind, it is clear that there is no residual jurisdiction not to approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been looked into and taken care of.

The SC observed that Section 53 of the IBC would be applicable only during liquidation and not at the stage of resolving insolvency. Section 30(2)(b) of the IBC refers to Section 53 not in the context of priority of payment of Creditors, but only to provide for a minimum payment to operational creditors. However, SC held that this does not in any manner limit the COC from classifying creditors as financial or operational and as secured or unsecured. Full freedom and discretion have been given to the COC to classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realize outside the process of IBC, thereby stymying the corporate resolution process itself. SC further went on to hold that the NCLAT judgment which substitutes its wisdom for the commercial wisdom of the COC, and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must be set aside.

The SC analyzed the Amendment Act and observed that it consists of several sections which have been enacted/amended as difficulties have arisen in the working of the IBC. Further, it observed that though the law laid down by the NCLAT in this case formed the basis for some of the amendments, it could not be said that the legislature has directly set aside the judgment of the NCLAT. Since an appeal against the judgment of the NCLAT lies to the SC, the legislature is well within its bounds to lay down laws of general application to all persons affected, bearing in mind what it considers to be curing of a defective reading of the law by NCLAT. For all these reasons, therefore, the SC observed that it was difficult to hold Sections 4 and 6 of the Amendment Act as constitutionally invalid. In Section 4 of the Amendment Act the SC struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution of India. The effect of this is that in exceptional cases, the time can be extended beyond 330 days for completion of the CIRP, however the general rule of 330 days as the outer limit has been retained by the SC.

DECISION OF THE SC
The SC held that the CIRP will take place in accordance with the resolution plan of ArcelorMittal, as amended and accepted by the COC. It also upheld the constitutional validity of Sections 4 (regarding the time limit for the resolution process) and 6 (regarding the inter se treatment amongst creditors) of the Amendment Act.

Vaish Associates Advocates View
While the bench has made several noteworthy observations regarding the IBC and the role and responsibilities of each stakeholder in it, the key takeaway from this decision is the importance of the COC’s commercial wisdom, as the intention of the legislature was made clear pursuant to the Amendment Act.

This decision clears all hurdles to the takeover of Essar Steel by ArcelorMittal. Another knock down effect should be the clarification that operational and financial creditors cannot be given the same treatment and that the IBC mandates that they receive equitable, and not equal treatment, a move that has been welcomed by the banking industry as a flexible approach rather than one-size-fits-all approach. Further, this should significantly reduce the scope for long winding litigation under the IBC.

For more information please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: No automatic stay on challenges to arbitral awards

The Supreme Court of India (“SC”) in the case of Hindustan Construction Company Limited and Another v. Union of India and Others (decided on November 27, 2019) struck down the insertion of Section 87 to the Arbitration and Conciliation Act, 1996 (“1996 Act”), calling it “manifestly arbitrary” and in violation of Article 14 of the Constitution of India. The newly inserted Section 87 of the 1996 Act contemplated that there would be an automatic stay on arbitral awards the moment they are challenged under Section 34 of the 1996 Act, if they pertained to arbitral proceedings commenced before October 23, 2015, that is, the date of enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”). This was irrespective of the fact that the said court proceedings under Section 34 (application for setting aside arbitral award) of the 1996 Act has commenced prior to or after October 23, 2015, Section 34 application only had to relate to an arbitral proceeding commenced prior to October 23, 2015.

The catena of issues in this case derive their genesis from an amendment to Section 36 (enforcement of arbitral awards) of the 1996 Act by Section 19 of the 2015 Amendment Act, which removed the automatic stay on operation of arbitral awards merely upon being challenged.

The SC also struck down the repeal of Section 26 (Act not to apply to pending arbitral proceedings) of the 2015 Amendment Act by the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). In BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], the SC had deliberated upon the scope of Section 26, holding that automatic stay would not apply to Section 34 applications filed on or after October 23, 2015, even if the arbitral proceedings had commenced prior to the said date.

The SC held that insertion of Section 87 to the 1996 Act removed the premise of its judgement in BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], by imposing an automatic stay on arbitral awards if they pertained to arbitral proceedings before October 23, 2015.

FACTS
A set of writ petitions had been filed before the SC challenging the constitutionality of inserting Section 87 to the 1996 Act and repealing Section 26 of the 2015 Amendment Act. The petitioner in one of the writ petitions, Hindustan Construction Company Limited (“HCC/ Petitioner”) had submitted that as a contractor, it had undertaken projects for several government companies such as NTPC Limited, IRCON International Limited, NHPC Limited, in addition to National Highways Authority of India (“NHAI”) (collectively “Respondents”). All of the aforesaid parties were made respondents to the writ petition. In respect of these projects, cost overrun was always a matter of dispute between HCC and the Respondents. The only way for HCC to receive its dues was by instituting either a civil proceeding or an arbitration proceeding. Even in the scenario that an arbitral award was passed in the favour of HCC, it was invariably challenged by the Respondents by filing an application under Section 34 of the 1996 Act. A Section 34 application resulted in imposition of an automatic stay on the operation of arbitral awards. Consequently, on one hand, HCC’s pending dues would be stuck until the application could be adjudicated upon and on the other hand, HCC’s pending dues would become ‘disputed debt’ as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Therefore, any proceeding that could have been initiated by HCC under the IBC against the respondent government companies, would come to be dismissed. In any case, HCC could not initiate any proceeding against a statutory body like NHAI under the IBC.

It was also pertinent that HCC already owed large sums of money to its own operational creditors. In fact, demand notices had already been issued to HCC by these operational creditors for sums amounting to over a hundred crores. Therefore, even if HCC was financially sound, it would be unable to repay its operational creditors because of money being stuck under the automatic stay rule.

ISSUES

I. Whether Section 87 introduced to the 1996 Act by the 2019 Amendment Act was constitutionally valid.
II. Whether Section 26 of the 2015 Amendment Act should have been repealed with effect from October 23, 2015 by the 2019 Amendment Act.
III. Whether Sections 3(7) and 3(23) of the IBC are arbitrary and discriminatory to the Petitioners.

ARGUMENTS

Arguments raised by the Petitioner:
The Petitioner argued that from the plain language of Section 36 of the 1996 Act, automatic stay did not follow, and therefore, judgments of the SC which had held so, would require re-visitation.

Further, the Petitioner also brought to the SC’s notice that in its judgement in BCCI, it had considered the report chaired by Retired Justice B. N. Srikrishna (“Srikrishna Committee Report”), wherein, it was proposed that Section 87 should be introduced to the 1996 Act. The Petitioner contended that in BCCI, the SC had discouraged the introduction of Section 87 to the 1996 Act as it would have defeated the very object of introducing the automatic stay rule. Even though the judgement in BCCI was sent to Ministry of Law and Justice and to the Attorney General of India, Section 87 was finally inserted in the 1996 Act by the 2019 Amendment Act, without even a mere reference to the SC’s judgement in BCCI. Therefore, the 2019 Amendment Act sought to overturn the judgement in BCCI without disturbing its basis .The Petitioner, inter alia, raised the following contentions:

(i) It was contended that while in a full-blooded appeal, there was no automatic stay, in a summary proceeding as under Section 34 of the 1996 Act, there was an automatic stay merely upon filing of an application.

(ii) It was also contended that payment of a money decree under an arbitral award, even when under challenge, should be the rule whereas the stay should be the exception.

(iii) Further, it was contended that though introduction of Section 87 to the 1996 Act was a direct attack on the judgement in BCCI, the said section did not remove the basis of the said judgement. The said section had also arbitrarily imposed a ‘cut-off date’ qua the application of amended Section 36 of the 1996 Act.

(iv) With reference to NHAI, a statutory body constituted by the NHAI Act, 1988, the Petitioner contended that within Section 3(7) (corporate person)of the IBC, the words ‘limited liability’ should be deleted. Alternatively, Section 3(23) (g) (any other entity established under a statute) of the IBC should be read into Section 3(7) of the IBC. It was strongly contended that there was no level playing field under the IBC as far as HCC was concerned. This was because a statutory authority like NHAI could initiate resolution process against HCC but that could not happen vice-versa, which made the provisions of IBC discriminatory as IBC only provides for reorganization and insolvency resolution of corporate persons, etc. thereby excluding statutory bodies from its ambit.

(v) It was submitted that there was no bar to applying an Order VIII-A of the Civil Procedure Code, 1908 (“CPC”) type procedure to proceedings under the IBC. Such a manner of application would have manifested a situation wherein, if the Petitioner’s sub-contractor triggered the IBC, the Petitioner would be able to make its principal employer a party to such proceedings. Resultantly, the sub-contractor would be able to recover pending amounts directly from the principal employer.

Arguments raised by the Respondents

(i) It was contended that interpretation of Section 26 of the 2015 Amendment Act was only ‘declaratory’ in nature. Moreover, it was open to the Parliament to clarify its original intent by an amendment, if it found that a view expressed by the SC did not reflect its original intent. Such clarification was manifested by deleting Section 26 of the 2015 Amendment Act and introducing Section 87 to the 1996 Act.

(ii) Section 87 of the 1996 Act had also retrospectively removed the basis of the judgment of the SC in BCCI.

(iii) It was also submitted that in a plethora of cases the SC had held that fixing of a ‘cut-off date’ was within the exclusive domain of the Parliament.

(iv) The writ petition filed under Article 32 of the Constitution of India could not be converted into a recovery proceeding by the Petitioners.

(v) The definitions under Sections 3(7) and 3(23) of the IBC were separate and independent of each other. Therefore, nothing from Section 3(23) of the IBC which defined a ‘person’ could be imported into the definition of ‘corporate person’ under Section 3(7) of the IBC.

(vi) NHAI was a statutory body of the Central Government that carried out sovereign functions. Inevitably, the IBC could not be applied against a statutory body, because no resolution professional or private individual could take over the management of a body that performed sovereign functions.

OBSERVATIONS OF THE SUPREME COURT

A. Interpretation of Section 36 of the 1996 Act:
It was incorrect to read Section 36 of the 1996 Act as inferring something negative, that where the time period of ninety days for making an application under Section 34 of the 1996 Act had not expired and when such an application was made within the time frame, an automatic stay automatically ensued. The SC, pointed out that automatic stay of an arbitral award as provided in its previous judgments which are, National Aluminum Company Limited(NALCO) v. Pressteel and Fabrications Private Limited and Another [(2004) 1 SCC 540], National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited [(2005) 2 SCC 367], Fiza Developers and Inter-State Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] were incorrect. The amended Section 36 of the 1996 Act only restated the position that provisions did not stand in the way of law towards granting a stay of a money decree under the provisions of CPC.

B. Removal of the basis of the BCCI judgement by the 2019 Amendment Act:
The retrospective omission of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act had indeed resulted in removal of the basis of the judgement in BCCI. The SC observed that at the time of passing of the judgment in BCCI, it was well aware of the recommendation of the Srikrishna Committee Report towards introducing Section 87 to the 1996 Act. It had noted that an immediate effect of enactment of Section 87 in the 1996 Act would put all important amendments on a back-burner.

Further, it was noted that such enactment would become contrary to the statement of objects and reasons of the 2015 Amendment Act. The statement of objects and reasons of the 2015 Amendment Act had made it very clear that the law prior to the 2015 Amendment Act had resulted in delay of arbitral proceedings and increased interference by courts in arbitration matters.

C. Constitutional challenge to the 2019 Amendment Act:
The SC agreed with the contentions of the Petitioner that mischief of the old Section 36 of the 1996 Act as regards automatic stay had been remedied after a period of more than 19 years by way of the 2015 Amendment Act, and now enactment of Section 87 to the 1996 Act would mean working in a reverse direction. Moreover, payments already made under the amended Section 36 of the 1996 Act to award-holders in a situation of ‘no stay’ or ‘conditional stay’ would be sought to be refunded. It was observed that the Srikrishna Committee Report did not refer to the provisions of the IBC. As a result of an automatic stay, the award holder may become insolvent by defaulting on payments to its creditors, when such payments would have been ordinarily forthcoming from the arbitral awards. Therefore, deletion of Section 26 of the 2015 Amendment Act and insertion of Section 87 to the 1996 Act were struck down as being manifestly arbitrary under Article 14 of the Constitution of India.

As far as the fixing of ‘cut-off date’ was concerned, it was the non-bifurcation of court proceedings and arbitration proceedings with reference to October 23, 2015 that was found to be manifestly arbitrary. The challenge was not in respect of fixing of a cut-off date. The SC also held that the ratio decidendi in BCCI would have continued application, so as to enable application of salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after October 23, 2015.

D. Constitutional challenge to the IBC:
The SC held that as far as the statutory body, that is, NHAI was concerned, the Petitioner’s argument as to deletion of words in Section 3(7) of the IBC or addition of words from Section 3(23) (g) of the IBC into Section 3(7) of the IBC was not acceptable. NHAI was a statutory body that functioned as an extended limb of the Central Government, and these governmental functions could not be taken over by a resolution professional under the IBC, or any other corporate body. It was also impossible that such a statutory body could be ultimately wound-up under the provisions of IBC. Relying upon its judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [(2019) 8 SCC 416], the SC held that the IBC is not meant to be a recovery mechanism, what it did in fact intend, was the resolution of stressed assets. Further, the argument that an Order VIII-A type mechanism as under the CPC was not barred under IBC, was totally rejected by the SC. It was observed that a dispute must be between the parties as provided under the IBC. The IBC was not a debt recovery legislation, wherein by some theory of indemnity or contribution debt owed to the Petitioners could be fastened on to public sector units.

Vaish Associates Advocates View
The myriad of legal conflicts started right from the enactment of 2015 Amendment Act. A body of conflicting decisions across High Courts as to the applicability of the automatic stay rule, had resulted in constant uncertainty until the SC finally rendered its judgement in BCCI. The primary principle of this judgement is to prevent an automatic stay on an arbitral award when challenged, merely because it pertained to an arbitral proceeding commenced before October 23, 2015, that is, the date of enactment of the 2015 Amendment Act. The SC, in a welcome decision, clearly has recognized the need for India to become an arbitration friendly destination, which had been suddenly nullified by introduction of Section 87 to the 1996 Act. Excessive interference of courts and undue delay would have been the ultimate result of the retrospective resurrection of the automatic stay rule.

More particularly, an award holder would have been rendered insolvent because of obstruction of dues pending under an arbitral award on the one hand, and the escalating debt, now being owed to the award holder’s creditors on the other hand. The perpetuation of this vicious cycle would have taken a toll on the financial health of the award holder, and simply defeat the purpose and object of deleting the automatic stay rule. The judgement has done well in green signaling India as a business and arbitration friendly regime.

For more information please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Court can permit the filing of a counter claim even after the written statement has been filed but not after the issues have been framed unless there are exceptional circumstances

The Supreme Court (“SC”) in the matter of Ashok Kumar Kalra v. Wing Commander Surendra Agnihotri and Others (decided on November 19, 2019) held that a counter claim against the original claim may at the court’s discretion be filed after the written statement has been filed but not after the issues have been framed. However, exceptional circumstances exception has been carved out to permit the filing of the counter claim after the issues have been framed in order to prevent the multiplicity of proceedings and avoid the situation of an effective retrial but any counter claim filed after the recording of evidence has begun would be improper.

FACTS
Dispute arose between Ashok Kumar Kalra (“Petitioner”) (Original Defendant No. 2) and Wing Commander Surendra Agnihotri (“Respondent No. 1”) (Original Plaintiff) concerning a contract for sale pursuant to which Respondent No. 1 filed a suit on May 02, 2008 seeking the relief of specific performance.

Thereafter, the Petitioner in this case filed his written statement on December 02, 2008 and subsequently a counter-claim in the same suit on March 15, 2009. This was objected to by the Respondent No. 1 and the trial court rejected objections against the filing of the counter-claim after filing of the written statement and framing of issues. This order was quashed by the High Court. Hence, reference was made to the SC on this question of law.

ISSUES

i) Whether Order VIII Rule 6A of the Civil Procedure Code (“Rule 6A”) mandates an embargo on filing the counterclaim after filing the written statement.
ii) If not, then what are the restrictions on filing the counterclaim after filing of the written statement?

ARGUMENTS
The Petitioner argued that the intent behind Rule 6A is to provide an enabling provision for the filing of counterclaim so as to avoid multiplicity of proceedings, thereby, saving the time of the courts and avoiding inconvenience to the parties. Therefore, no specific statutory bar or embargo has been imposed upon the court’s jurisdiction to entertain a counterclaim except the limitation under the said provision which provides that the cause of action in the counterclaim must arise either before or after the filing of the suit but before the defendant has delivered his defense. Additionally, the Petitioner submitted that the rules of procedure should not be interpreted in a manner that ultimately results in failure of justice.

Respondent No. 1 argued that the language of the statute, and the scheme of the order, indicates that the counterclaim has to be a part of the written statement also relying on the statutory requirement that the cause of action relating to a counterclaim must arise before the filing of the written statement, and submitted that the counterclaim must therefore form a part of the written statement. Reliance was also placed on the placement of the provision relating to counter claim in Rule 6A.

OBSERVATIONS OF THE SUPREME COURT
The SC began emphasizing on the importance of both procedural and substantive justice, and the need to recognize and harmoniously stitch the two types of justice together to have an effective, accurate and participatory judicial system. It then considered the provisions of Order VIII, Civil Procedure Code, 1908, especially the claim of set-off in a money suit and right to claim under Rule 6A in addition to a set off (which is to have the effect of a cross suit) in respect of a cause of action accruing to the defendant before the delivery of his defense. It then went on to add that the counter-claim shall be treated as a plaint and governed by the rules applicable to plaints. The whole scheme of Order VIII in the opinion of the SC unequivocally points out the legislative intent to advance the cause of justice by placing an embargo on the belated filing of written statement, set-off and counterclaim.

The SC then pointed out the fact that Rule 6A was inserted vide an amendment (Act No. 104 of 1976) to avoid multiplicity of proceedings and that following Salem Advocate Bar Association Tamil Nadu v. Union Of India, [(2005) 6 SCC 344], procedural law should not be construed in a way to leave the court helpless, giving in fact a wide discretion to the civil court regarding procedural elements of a suit. Then following the Mahendra Kumar and Another v. State of Madhya Pradesh and Others, [(1987) 3 SCC 265] case, the SC, while considering the scope of Rule 6A(1) held that it does not bar the filing of a counter-claim by the defendant after he has filed the written statement as the cause of action for the counter-claim has arisen before the filing of the written statement.

The SC briefly discussed cases pertaining to the limitation applicable to filing such counter-claims and other judgments dealing with Rule 6A before concluding that a time limitation is not explicitly provided by the legislature, rather only limitation as to the accrual of the cause of action is provided. However, this does not mean that the counter-claim can be filed at any time after filing of the written statement as it is to be treated as a plaint which needs to be compliant with limitation provided under the Limitation Act, 1963. Time-barred suits cannot be entertained under the guise of counter-claim just because the cause of action arose as per the parameters of Rule 6A. The SC preferred a discretionary approach as opposed to the rigid technical view where the courts taking into the consideration, the reasons stated in support of the counter-claim, adopt a balanced approach keeping in mind the object behind the amendment and to sub-serve the ends of justice while deciding whether the counter-claim can be filed.

Hence, the SC stated that Rule 6A does not put an embargo on filing counter-claim after filing written statement but the restriction is only with respect to accrual of the cause of action. This does not give the right to file the counter-claim after substantial delay even if the limitation period has not passed and pegged the outer time limit till the framing of issues. The factors to be taken into consideration while permitting the filing are, inter alia, period and reason of delay, prescribed limitation period of cause of action, similarity in cause of action between main suit and counter-claim, injustice and abuse of process, and other facts and circumstances.

The dicta of Justice Shantanagoudar further added that in exceptional circumstances, the subsequent filing of the counter-claim may be permitted after the framing of issues until the stage of recording of evidence as there is no significant development in the proceedings during the intervening period of framing of issues and recording of evidence. A new issue can be framed by the court after the counter-claim if needed, without prejudicing the rights of either party. He however, went on to add that the filing of counter-claims after the commencement of recording of evidence is not illegal per se, rather improper and that the discretion has to be exercised wisely and pragmatically.

Vaish Associates Advocates View
One of the foremost activities of the third pillar is to ensure balance is maintained. This task of striking a balance is often a mammoth one, as one wrong precedent may lead to a floodgate of proceedings in the lower judiciary all over the country. The SC in the present judgment has attempted this balance, while trying to carve out principles of allowing a counter-claim to be filed after the written statement, in consonance with Rule 6A of the Civil Procedure Code, 1908. While doing so, the court has enshrined the foundational principle of “procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice”.

The SC has gone on to expound that although a rigid formula cannot be laid down, a counterclaim can be filed after filing of written statement in certain exceptional cases. The SC has delegated the balancing act to the civil judge to decide upon whether or not to allow such belated filing, while at the same time capping the upper limit at the stage of framing of issues. This delegation comes with a checklist of parameters to allow such filings that may successfully limit the number of counter claims filed at a later stage.

The only concern that may arise from this ruling is that such a belated filing may become a matter of routine and customary procedure. In a number of civil courts, the upper limit for filing a written statement has been increased to ninety days as a matter of practice, even though the statutory time limit is thirty days, and the extended time of up to ninety days is to be allowed only in exceptional cases. This ruling if not applied correctly, may lead to delayed counterclaims becoming a matter of practice, and the SC’s upper limit till the stage of framing of issues may only be able to do so much to prevent this practice.

For more information please write to Mr. Bomi Daruwala at [email protected]