[By Srinjoy Debnath]
The author is a student of National Law School of India University (NLSIU).
INTRODUCTION
Corporate Democracy, similar to sovereign democracy works as per the will of the majority. A company is fairly independent as far as decisions are concerned unless they violate a law. However, the Central Government has the power to intervene in the management of a company if the operations of the company are being conducted in a manner prejudicial to the public interest. Such an intervention has to be approved by the National Company Law Tribunal (“NCLT”) which has the power to pass “such order as it thinks fit”. The words like “Public Interest” and similar terms in s241 and s242 provide wide discretion to the Central Government and the NCLT under the provisions. The wide discretion under sections 241 and 242 gives rise to concerns about whether the discretion has any restrictions. In the case of UOI v. IL&FS, the Central Government had approached the NCLT u/s241(2) and asked for the removal of directors.i and the imposition of a moratorium on IL&FS and its 348 group companies.ii The NCLT granted the prayer for the removal of directors but rejected the prayer for the imposition of a Moratorium. However, on appeal, the NCLAT imposed a moratorium on IL&FS and its 348 groups until further orders. At this juncture, the question arises as to whether the NCLAT has the power to impose a moratorium against a company and its group companies u/s242 of the Act. The impugned order is under challenge before the Supreme Court and is pending on the date of writing this paper.iii
The NCLAT while passing the order for a moratorium has noted that there is no explicit provision other than s14 of the IBC that provides NCLT/NCLAT the power to impose a moratorium. However, in the opinion of the NCLAT, the powers u/s242 of the Companies Act are wider than the powers under the IBC. The court did not provide any reasons in support of such a position. In this article, the author shall argue that the order of moratorium is bad in law as, first, an order u/s242 of the Companies Act cannot be contrary to any other legal provision; second, even if the provision of moratorium was borrowed from IBC, other safeguards and procedures under the code were not followed; and, third, a blanket moratorium against a group of companies goes against the principle of Separate Legal Personality.
ABSENCE OF NON-OBSTANTE CLAUSE: S242 HAS OVERRIDING POWERS?
A moratorium as was imposed in this case was essentially an injunction on any suit in any court or arbitration in the same terms as is mentioned in section 14(1) of the IBC. An order of this sort is in direct conflict with section 41(b) of the Specific Relief Act which bars anti-suit injunctions for a superior court. The Supreme Court in Cotton Corporation of India had held that a court is barred from granting an injunction that restrains a person from instituting any proceeding in a coordinate or superior court. The Supreme Court had observed that access to courts is an indefeasible right and the principle flows from the Constitution. The only way in which access to justice can be curbed is when a superior court injuncts suit in a subordinate court. This is an exception carved out by the legislature itself. Barring any suit in any court would also cover the Supreme Court which means an anti-suit injunction against a superior court. The rationale of the NCLAT that the powers u/s242 are wider than the powers under the IBC seems untenable as the IBC contains a non-obstante clause while neither the Companies Act nor s242 contains a non-obstante clause. Therefore, an anti-suit injunction can only be passed against a subordinate court or through the provisions of the IBC. This proposition is also supported by the observation of the Supreme Court in Cyrus Mistry where the court had held that a remedy u/s242 cannot be in contravention of any other law.
PROCEDURE UNDER THE IBC OR OF THE UNION OF INDIA?
The IBC contains streamlined provisions that take into consideration all creditors and ensure that their rights are adequately protected. However, in this case, even though the moratorium was imposed on the same terms as s14 of the IBC, other procedures under the IBC were not followed. For example, the watershed mechanism u/s53 of IBC was not followed and instead, they went with a pro-rata distribution, as proposed by the Central Government. In the opinion of the court, following the procedure u/s53 IBC, in this case, would be against the public policy as a lot of public money through the investment of LIC, SBI, and other public entities have gone into the shareholding of IL&FS group of companies. Following the watershed mechanism in this case would mean that the shareholders will come much later in priority and will lose out on money.
The appeals filed against this order have also not been taken up by the Supreme Court on time and that has also caused prejudice to multiple creditors of different subsidiaries of IL&FS. Under the IBC, resolution of the corporate debtor is a time-bound process and has to be completed within 180 days. The moratorium passed u/s14 also ceases to have effect with the end of the resolution process. However, in this case, no time limit was attached to the continuation of the moratorium period. The cutoff date for submission of claims was kept as 15th October 2018. However, the effect of the moratorium continued. This has prejudiced the creditors whose claims arose after 15th October 2018 who could not institute any suit or arbitration. The Courts in some cases have noted the difficulties of the creditors whose claims arose after 15th October but refused to interfere with the order of the NCLAT as it has not been stayed by the Supreme Court.iv In effect, what happened in this case was that neither the principles under the IBC nor the procedures that are legally permitted u/s242 were followed. In effect, the procedures followed in this case do not find strength in any source of law and are arbitrary.
MORATORIUM AGAINST A GROUP OF COMPANIES: VIOLATION OF SEPARATE LEGAL PERSONALITY
One of the striking parts of this order is how the moratorium is blanketly imposed on all 348 companies that are part of the group of companies of IL&FS. A group insolvency is something that even the IBC does not allow where insolvency proceedings have to be initiated individually and debt and default have to be proved in every separate proceeding. The reason for this is the fact that every subsidiary of a holding company is a separate legal entity. The default or liability of one company cannot be imposed on another company unless the corporate veil is lifted. Strikingly, there is no discussion on lifting the corporate veil even though a moratorium is being imposed on an entire group of companies. Further, the court did not consider any material to suggest if such an order was necessary. It may well have happened that some companies within the group were functioning properly and an imposition of a moratorium was not required. Apart from the issue of the moratorium, the powers of the tribunal u/s242 can only be exercised against that company and not against any other entity. Therefore, orders that adversely affect other entities even if they are a part of the same group of companies, violate the principle of separate legal entity and are illegal.
CONCLUSION
The NCLT and NCLAT have a tendency to expand the power under Section 242 beyond any limits.v The Supreme Court has on multiple occasions stepped in to curtail the scope of section 241 and the powers under section 242. However, due to the use of generalized terms like “public interest” which can be interpreted very widely, the tribunal has constantly sought to interpret them beyond its ambit. In this article, I have shown how the NCLAT has gone on to pass orders that go directly into the teeth of established legal principles. This confusion and arbitrariness in the interpretation of sections 241 and 242 can only be solved by effective legislative intervention. The scope of the sections related to Oppression and Mismanagement needs to be adequately defined and proper guidance regarding remedies needs to be put in place. Hopefully, the Supreme Court will overrule this order and re-state the scope of power of the tribunal under section 242 and proper legislative reforms will follow.