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NCLT and NCLAT would have jurisdiction to enquire into questions of fraud: SC

M/S EMBASSY PROPERTY DEVELOPMENTS PVT. LTD. V STATE OF KARNATAKA & ORS., CIVIL APPEAL NO. 9170 OF 2019 (@ SPECIAL LEAVE PETITION (C) NO. 22596 OF 2019)

This appeal was brought before the Supreme Court of India before the bench consisting of Honourable Justice Aniruddha Bose, Honourable Justice V. Ramasubramanian and Honourable Justice Rohinton Fali Nariman.

APPELLANTS CONTENTION

Sh. Arvind P. Datar and Sh. E. Om Prakash, learned Senior Counsel appearing for the Committee of Creditors submitted that IBC, 2016 being a complete code did not provide any room for challenging the Orders of NCLT, otherwise than in a manner prescribed by the code itself. What was sought by the Resolution Professional, according to the learned Senior Counsel, was a mere recognition of the statutory right of deemed extension of lease conferred by

Section 8A of the MMDR Act, 1957 and that therefore NCLT cannot be taken to have exercised a jurisdiction not vested in it in law, to enable the High Court to invoke the jurisdiction under Article 226.

RESPONDENTS CONTENTION

In response, Sh. K.K. Venugopal, learned Attorney General submitted that if a case falls under the category of inherent lack of jurisdiction on the part of a Tribunal, the exercise of jurisdiction by the Tribunal would certainly be amenable to the jurisdiction of the High Court under Article 226. Since the contours of jurisdiction of NCLT were defined in Clauses (a), (b) and (c) of Subsection (5) of Section 60 and also since the powers of the NCLT are defined in Subsection (4) of Section 60, to be akin to those of the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (hereinafter referred to as DRT Act, 1993), it was contended by the learned Attorney General that the jurisdiction of the NCLT is confined only to contractual matters interparties. An order passed by a statutory/quasijudicial authority under certain special enactments such as the MMDR Act, 1957 falls in the realm of public law and hence it was contended by the learned Attorney General that the NCLT would have no power of judicial review of such orders. The learned Attorney General also drew the courts attention to the minutes of the 10th meeting of the Committee of Creditors held on 27.02.2019, in which a Company other than the present Resolution Applicant was recorded to have made a better offer. But the present Resolution Applicant was able to have his plan approved, despite the offer being lesser, only because they were willing to take the risk of the mining lease not being renewed. Therefore, it was his contention that a person who was willing to take a chance, cannot now take shelter under the approval of the Resolution Plan. On the contention that the Government of Karnataka had an efficacious alternative remedy before the NCLAT, the learned Attorney General submitted, based on the decision in

Barnard and Others vs. National Dock Labour Board and Others1 that when an inferior Tribunal passes an Order which is a nullity, the superior Court need not drive the party to the appellate forum stipulated by the Act.

ISSUES RAISED BY THE COURT


Whether the High Court ought to interfere, under Article 226/227 of the Constitution, with an Order passed by the National Company Law Tribunal in a proceeding under the Insolvency and Bankruptcy Code, 2016, ignoring the availability of a statutory remedy of appeal to the National Company Law Appellate Tribunal and if so, under what circumstances?

Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the Insolvency and Bankruptcy Code, 2016, arise for our consideration in these appeals?

ISSUE I:

For finding an answer to the question on hand, the scope of the jurisdiction and the nature of the powers exercised by –

  1. the High Court under Article 226 of the Constitution and

  2. the NCLT and NCLAT under the provisions of IBC, 2016 were to be seen.

The court while answering this question observed that as rightly contended by the learned Attorney General, the decision of the Government of Karnataka to refuse the benefit of deemed extension of lease, was in the public law domain and hence the correctness of the said decision can be called into question only in a superior court which is vested with the power of judicial review over administrative action. The NCLT, being a creature of a special statute to discharge certain specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action. Judicial review, as observed by this court in SubCommittee on Judicial Accountability vs. Union of India, flows from the concept of a higher law, namely the Constitution.

When considering the jurisdiction of NCLT, the court answered that that 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. Since NCLT chose to exercise a jurisdiction not vested in it in law, the High Court of Karnataka was justified in entertaining the writ petition, on the basis that NCLT was coram non judice.

ISSUE II:

While answering the second issue, the court observed the following.

Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the Adjudicating Authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors. Therefore, NCLT was vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. Section 65(1) dealt with a situation where CIRP is initiated fraudulently for any purpose other than for the resolution of insolvency or liquidation”. Therefore, if, as contended by the Government of

Karnataka, the CIRP had been initiated by one and the same person taking different avatars, not for the genuine purpose of resolution of insolvency or liquidation, but for the collateral purpose of cornering the mine and the mining lease, the same would fall squarely within the mischief addressed by Section 65(1). Therefore, it was clear that NCLT had jurisdiction to enquire into allegations of fraud. 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 Section 61.

JUDGMENT DELIVERED

Thereby, this Honourable Court delivered its judgment as under,

“The upshot of the above discussion is that though NCLT and NCLAT would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes such as those arising under MMDR Act, 1957 and the rules issued thereunder, especially when the disputes revolve around decisions of statutory or quasi judicial authorities, which can be corrected only by way of judicial review of administrative action. Hence, the High Court was justified in entertaining the writ petition and we see no reason to interfere with the decision of the High Court. Therefore, the appeals are dismissed. There will be no order as to costs.”

–  Tanvi Srivatsan

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