[By Anwesha Nanda & Ankit Raj]
The authors are students of National Law University Odisha.
Introduction
The essence of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as per its Preamble is to guarantee timely resolution and revival of the Corporate Debtor (“CD”). By adhering to its core principle, it helps build confidence in creditors and minimise undue delay in the process of resolution. However, a recent ruling of the Supreme Court (“SC”) by a three-judge bench led by the Chief Justice of India in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Others (“GNIDA”) seemingly deviates from this objective.
The IBC has a well-defined structure for corporate insolvency resolution, which is led by resolution professionals (“RP”), a committee of creditors (“CoC”), and finally an adjudicating authority for approval of the insolvency resolution plan. Given this context, a critical point to ponder is whether any creditor or person whose interest has not been considered, with due care by the CoC, can approach the adjudicating authority to revisit the approved resolution plan?
The answer to this question was dealt with in the case of GNIDA. The SC framed the issue of whether the adjudicating authority, notably the National Company Law Tribunal (“NCLT”) has the power to revisit their judgement by recalling it. The SC ruled that the NCLT has inherent power to recall the judgement under certain circumstances. While acknowledging the potential advantage of the judgement in certain circumstances where the interests of creditors are hampered, at the same time some loopholes can be misused by unscrupulous parties to re-hear matters or cause deliberate delays. In this article, the authors undertake a critical analysis of the SC’s decision, contending that the verdict diverges from the overarching objectives and preamble of the parent statute, i.e., the IBC.
Factual Matrix
In this case, GNIDA filed an appeal against an order issued by the NCLT, which was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”), approving the resolution plan for M/s. JNC Construction Pvt. Ltd. (Corporate Debtor). GNIDA had given land on lease for 90 years for the residential project to the CD in consideration of some premium payable by it. The lease agreement was subject to payment of premium at due time which was breached by the CD. In the meantime, through a company petition, the CD was taken into insolvency under the IBC. Following the initiation of the Corporate Insolvency Resolution Process (“CIRP”), GNIDA submitted its claim as a secured financial creditor. However, the RP classified the claim as that of an operational creditor and admitted only a portion of it. To further clarify its position, the RP sought a claim in Form B to designate it as an Operational creditor of CD. Subsequently, there was no further communication from the side of GNIDA because of which a part of the claim was acknowledged and incorporated into the resolution plan. GNIDA’s primary argument arose from the incorrect handling of its claim within the resolution plan and concerns regarding the principles of natural justice.
Understanding Recall of an Order or Judgement.
The recall of an order or judgement necessitates “reversal” or “revocation” of the order or judgement owing to the defects during the procedure. In the cases of Agarwal Coal Corporation Private Limited v. Sun Paper Mill Limited and Rajendra Mulchand Varma v. K.L.J. Resources Ltd. The NCLAT held that the NCLT or NCLAT lacks the authority to review or recall its judgments due to the absence of specific provisions in IBC. However, this issue was referred to a five-member bench of the NCLAT in Union Bank of India v. Dinakar T. Vekatasubramanian. (Dinakar T. Vekatasubramanian). The bench concluded that while the NCLAT cannot review its own judgments due to the lack of statutory backing, it does possess the power to recall judgments under Rule 11 of the NCLAT Rules, 2016, which grants inherent powers to the tribunal to ensure justice. Additionally, it stated that the power to recall a judgement can be exercised only when any procedural error is committed in delivering the earlier judgement. This interpretation was later upheld by a two-judge bench of the Supreme Court in Union Bank of India v. Financial Creditors of M/s Amtek Auto Ltd. & Ors.
Furthermore, it is well established in Budhia Swain & Ors. v. Gopinath Deb & Ors. (Budhia Swain) that the criteria for recalling an order are: firstly, the proceedings leading to the order are fundamentally flawed due to a clear lack of jurisdiction; secondly, the judgement was obtained through fraud or collusion; thirdly, there was also a mistake by the court that caused prejudice to a party, and the judgement was delivered without including a necessary party; Additionally, the court clarified that the power to recall a judgement couldn’t be exercised when the pleader had an option available to reopen the proceeding in the original action or where proper remedy by way of appeal or revision was available as an alternative and was not taken into consideration.
Critical analysis
The IBC was enacted to assist debt-ridden companies promptly, emphasizing the importance of time in the resolution process. In the GNIDA, it was allowed to recall the order approving the resolution plan even after more than 3 years of the commencement of the resolution process. This effectively gives a second life to the insolvent company. By recalling an order that approved the resolution plan, the SC essentially examined the plan itself and explicitly delegated similar power to the NCLT. This is evident from the SC’s scrutiny of compliance standards and deficiencies outlined in Section 30(2) of the IBC.
The SC allowed the recall application because the resolution plan did not comply with Section 30(2) of the IBC. The grounds laid down in the case of Budhia Swain, do not apply in this situation. By making this decision, the SC has effectively added non-compliance as a valid reason to file a recall application. This could enable dishonest promoters or creditors with ulterior motives to delay the resolution process even further.
Additionally, parties might begin using the argument of non-compliance to justify a recall application without first pursuing the alternative remedies available. However, this just adds more rounds of litigation and delays, which do not serve the purpose of the time-bound nature of the resolution process. The deadlines mentioned in Section 12(3) of the IBC are consistently breached, as evidenced by the June 2023 quarter data, wherein the average resolution duration soared to an unprecedented 643 days, surpassing records of the preceding years. Furthermore, recent data indicates that 67% of active CIRPs failed to meet the 270-day deadline.
Alternatively, remedies are available for reviewing such a decision under Section 61 of the IBC. It allows an appeal to the NCLAT to the aggrieved party, and if unsatisfied, an appeal to the SC is very well available under Section 62 of the IBC. The NCLAT can overturn NCLT orders, including those approving resolution plans.
The power given to NCLT can be misused by unscrupulous parties to have their matters re-heard or cause deliberate delays, as seen in ICICI Bank Limited v. GVK Power and Infrastructure Limited. Here, the applicant sought to recall an order due to a typographical error, which the bench declined and ruled that it could be rectified under Rule 154 of the National Company Rules, 2016. Similarly, in Ms. Monika Gupta v. M/s. You Seung Sang Sa India Construction Private Limited, the applicant (RP) sought to extend insolvency resolution time and requested to recall the previous resolution plan due to non-cooperation from directors. The tribunal dismissed the petition.
The SC in GNIDA has sanctioned the power of recall, inter alia, premised on a substantial error committed by the NCLT in approving a resolution plan that failed to satisfy the conditions enumerated under Section 30(2) read with IBC regulations. By adopting this stance, SC has broadened the purview of recall applications. This ruling elucidates the SC’s stance that, notwithstanding the approval of a resolution plan by the adjudicating authority, it remains amenable to reconsideration based on grounds deemed sufficient by tribunals.
Lastly, it’s also not clear whether, upon recall, the CoC will have the discretion to introduce or consider those aspects of the resolution plan that were not considered by the NCLT while ordering the recall.
Conclusion
While allowing this appeal, the SC asserted that NCLT has the inherent power to recall its own order under certain circumstances to avoid any abuse of power. Section 31 of the IBC mandates that the NCLT, while endorsing a plan, must ensure compliance with the requisites defined under Section 30(2). Consequently, any application for recall premised on non-compliance of IBC effectively entails a review of the aforementioned order. However, the SC has not provided definitive guidelines for the extent to which NCLT may re-examine the order or plan in Greater Noida Industrial Development Authority. Moreover, the power to review is ordinarily not inherent to a tribunal unless explicitly conferred by its parent legislation. This ruling effectively confers upon the NCLT the authority to review under the guise of power to recall its own order, at least with regard to the approval of a resolution plan. Notably, analogous grounds for challenge are available under Section 61(3) of the IBC for appealing against an NCLT order endorsing a resolution plan, including the ground of “material irregularity.” Consequently, aggrieved parties may appeal to the NCLAT to challenge the approved resolution plan. Permitting the re-adjudication on similar grounds after NCLT approval will likely engender delays, augment judicial proceedings, and escalate litigation costs. This has the potential that a losing party would start approaching authorities to stall and obstruct the CIRP, thereby impending stakeholder interests. This will certainly complicate proceedings with superfluous applications.
Considering the aforementioned concerns, it is imperative that either parliament clear this conundrum of recall power of the NCLT by amending the laws or the larger bench of SC look into the loopholes to make it in consonance with the legislation.