Debunking the applicability of NCLT Rules on pronouncement of orders

[By Utkarsh Pandit and Samridhi Shrimali]

The authors are students at the Institute of Law Nirma University, Ahmedabad.

Introduction

The key intent of the existence of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘IBC’) is the resolution of companies in distress. The Code prescribes specific timelines for an efficient and swift resolution. However, these timelines are not always met due to delays from both, the bar and the bench. One such cause of delay on the part of the bench is the reservation of order and delayed pronouncement.  Rule 150 of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the NCLT Rules, 2016) provides for the pronouncement of orders. This rule provides for a limited time frame of 30 days to pronounce the order which has been reserved. There still exist procedural inconsistencies when it comes to the implementation of such rules. Resultantly, these issues acknowledged as mere irregularities have given them a flavor tantamount to being insignificant. This article analyzes the dichotomous stance of the courts/Tribunals on the delay in pronouncement of orders and if such delays can be a ground to challenge an order.

By definition, pronouncement means to utter formally, officially, or solemnly, to declare or affirm, as pronounce a judgment or order.[i] In other words, pronouncement means to officially communicate the order to the parties after the hearing is concluded. It becomes pertinent to comprehend the trends of the tribunals/courts as the harbinger of rampant delay in pronouncements poses a threat to the ‘speedy trial’ essence of insolvency forums. These trends encounter impediments in the smooth procedural conduction of such NCLT rules, as well as the jurisdiction of the courts/tribunals while hearing petitions/appeals challenging orders on the ground of delayed pronouncement.

Kamal K. Singh v. Union of India

In this case, the Bombay High Court quashed the order of NCLT Mumbai, as it violated Rule 150 to 152 of the NCLT Rules, 2016. While analyzing the ambit of the pronouncement of the order, the Court observed that mere making known or communicating the order as per section 7(7) of IBC, is not tantamount to pronouncement. It also observed that NCLT being a statutory tribunal is bound by the procedural rules or else the non-adherence would defeat the principles of natural justice and fairness. Thus, it was held that the pronouncement of order is imperative under Rule 150 of the NCLT Rules, 2016. Notably, it was further held that after the conclusion of the arguments, when the pronouncement of the order has to be done, both the parties are to be notified in advance.

Though the Bombay High Court did not delve into the issue of adherence to the timeline under Rule 150(1) of the NCLT Rules, it has definitely laid down a way for the aggrieved parties to exercise the jurisdiction of the High Courts in case an order is passed in violation of the procedural rules, specifically the NCLT Rules, 2016.

Rajratan Babulal Agarwal v. Solartex Pvt. Ltd. & Ors.

The NCLAT PB dismissed an appeal that prayed for setting aside of an impugned order of NCLT Ahmedabad, where inter alia the pronouncement of the impugned order was done six months post the conclusion of the final arguments. The appellants argued that the delayed pronouncement of the order was a direct violation of Rules 150 and 152 of the NCLT Rules, 2016. The appellants further relied on Anil Rai V. State of Bihar, where the Supreme Court laid down the guidelines for pronouncement of judgments and emphasized that for civil matters, the judgment ought to be pronounced within two months post the conclusion of the arguments.

The appellants also brought non-adherence to Rule 89 of the NCLT Rules, 2016 to the NCLAT’s notice, wherein the publication of the cause list is to be published one day in advance. In the present case, the publication was done on the same day when the judgment was pronounced. Intriguingly, NCLAT while dismissing the appeal held that

It is true that in the present case, the parties have submitted written submissions on 06.01.2020, however, the impugned order was pronounced on 28.05.2020 i.e. after about five months from the conclusion of arguments which is against the aforesaid rule as well as guidelines laid down by the Hon’ble Supreme Court.  We are of the view that only on this count the impugned order cannot be set aside which is otherwise flawless.”

For the violation of Rule 89 of the NCLT Rule, 2016, the NCLAT held that “even if the cause list was published on the same day, the same would be considered as an irregularity but not an illegality.”

Thus, the Appellate Authority held that even if the orders are not in coherence with these rules, the same could take a back seat if the order otherwise does not have any other inconsistencies. It is reasonable to infer from the abovementioned case that the defect on account of pronouncement of orders would not impute sufficient ground to set aside such orders.

Shaji Purushothman v. Union of India

The Madras High Court, in a writ petition filed against the order passed by the NCLT Chennai Bench, observed the nature of NCLT Rules. Placing reliance on Balwant Singh and Others v. Anand Kumar Sharma and Others, Sharif-ud-Din v. Abdul Gani Lone, Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Others, and Pesara Pushpamala Reddy v. G.Veeraswamy and Others, the Madras High Court laid down a test and stipulated that if the law does not provide the consequences of non-compliance of the rule, then it should be deemed to be directory in nature. On the other hand, if the law provides for the consequences of non-compliance, then it should be deemed to be mandatory. While analyzing the nature of the NCLT Rules, 2016, and Rules 150 and 153 particularly, the High Court held that as the rules do not indicate any consequences on the account of non-adherence to the timelines, therefore, they can be considered as directory rather than mandatory.

Analysis

After the perusal of the above-mentioned cases, it is evident that there still exists ambiguity, when it comes to the delay in pronouncement of orders and the repercussion along with the aftermath of such delays. The NCLAT in the Rajratan Balul case acknowledges the contravention of such rules, and the guidelines given by the SC but still dismisses the appeal. Further, constituting the violation of Rule 89 as mere irregularity creates a conflicting stance with the Bombay High Court decision in the Kamal K Singh case, where it was held that the date of such pronouncement has to be notified to the parties in advance of such pronouncement.

These inconsistencies cause the parties to lose their substantive rights for fresh trials and an opportunity to claim for rehearing of the matter. The non-adherence to the rules has opened gates for haywire situations as a consequence of delayed pronouncements. For instance, in Vikas Prakash Gupta, RP, Man Tubinox ltd. Vs. Vinod Kuwadia & Anr. Dena Bank, the order for admission was reserved for more than two months. Meanwhile, the corporate debtor maliciously entered into a sub-lease deed, which was then later held to be a fraudulent transaction by the NCLT.

Conclusion

The failure to pronounce the judgment on timelines propelled under the aegis of the NCLT Rules, 2016 has taken a massive toll on corporate debtors as the value of the corporate debtor erodes with time and the primary aim of the code is to maximize the value of the assets of the corporate debtor goes into vain. The Code is still evolving and is in the juvenile stage, therefore apposite measures in terms of accountability of the AA along with consequences of non-compliance are required.

The authors are of the view that the delay in IBC matters can lead to adverse impact on the commercial assessment of the parties. Although, the rulings of the Bombay and Madras High Court have laid the way for the litigants to exercise the remedy under article 226 of the Constitution of India, in case the AA does not abide by the NCLT Rules, 2016. Further, section 61(1) of the IBC, 2016, provides a remedy for the aggrieved party to prefer an appeal before the NCLAT challenging the procedural irregularities as was held in the Vistra Case.

However, the order of the AA causing a delay in pronouncement may not be totally overturned on this sole ground as the nature of such rules is just directory. Therefore, efforts must be made to abide by the NCLT Rules, 2016 and the guidelines laid down by the Supreme Court in the Anil Rai Case as there is still a need for proper implementation of these rules so that the litigants do not suffer due to such delay. The harmonious adherence to the timelines could be honored with the increment in the number of appointed members to the NCLTs and NCLAT for the expeditious disposal of cases and to abate the workload. Conversely, the government could consider notifying separate branches or forums dedicated to deciding solely upon insolvency matters. These measures could be taken into consideration to preserve the effectiveness of the NCLT rules from turning otiose.

[i] 3 Ramanatha Aiyar, P. Advanced Law Lexicon: The Encyclopaedic Law Dictionary with Words & Phrases, Legal Maxims and Latin Terms (4th ed. 2013).

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