Scope of NCLT/NCLAT’s Inherent Powers: Meeting the Ends of Justice

[By Rozat Akolawala ]

The author is a student at the Maharashtra National Law University, Aurangabad.

Like any other tribunal, the National Company Law Tribunals (hereinafter ‘NCLT’) across the country, and the National Company Law Appellate Tribunal (hereinafter ‘NCLAT’) have inherent powers that are exercised to meet the ends of justice and prevent the abuse of process of the Tribunal. It is well settled that the Tribunals cannot go beyond the purpose and objectives of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘IBC’), this implies that the Tribunals cannot interfere with the commercial decision of the Committee of Creditors (hereinafter ‘CoC’), unless it is unjust or violates the provisions of the IBC. This principle implies that the NCLTs’ and the NCLAT’s inherent powers cannot go beyond the commercial decision of the Committee of Creditors (hereinafter ‘CoC’) unless it is patently unjust or against the provisions of the IBC.

The article focuses on the journey of these “inherent powers” from the year 2016, and the judicial pronouncements that set up the circumstances under which the Tribunal exercises these powers.

Background

The Central Government has a rulemaking power under Section 469 of the Companies Act, 2013 and it formulated the NCLT Rules, 2016, and the NCLAT Rules, 2016 under the provision. Both the Rules have similar provisions on the inherent powers of the Tribunal. However, according to Rule 10(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, only selective Rules apply to the IBC, and Rule 11 falls in the left-out category.

One can understand that the legislature intended to restrict the implementation of the rules in the IBC, and it is pertinent to note that Rule 11 which invokes the exercise of inherent powers was kept at bay. The reason behind this was the suggestion in the BLRC Report[i]. While dealing with the resolution process of the Corporate Debtor, the commercial decision of the creditors is placed at a high pedestal. The BLRC Report suggested that inherent powers of the Tribunals should be out of the statutory process to limit their interference in commercially viable decisions, to give effect to the commercial wisdom of the CoC.

It was clarified in the case of Lokhandwala Kataria[ii] that as per Rule 10(1) only Rules 20 to 26 has been adopted for the functioning of the IBC and Rule 11 was excluded from the same. This was later affirmed by the Supreme Court and further in the case of Uttara Foods and Feeds[iii] it directed the authorities to carry out amendments which shall allow the Tribunals to exercise their inherent powers while dealing with insolvency proceedings filed under the IBC.

The NCLAT in the case of Lokhandwala Kataria[iv] held that Rule 11 has not been adopted for the IBC’s purpose and Rule 10(1) adopts only Rules 20 to 26 so far. The Supreme Court later affirmed the same. In the case of Uttara Foods and Feeds[v], the Supreme Court reiterated the decision in Lokhandwala Kataria[vi] and directed authorities to amend the laws and to include inherent powers in the statutory working of the insolvency proceedings.

Section 12A was incorporated in the IBC after considering the recommendations in the Insolvency Law Commission Report of March 2018. As per Section 12A if a withdrawal application for initiating insolvency proceedings has been approved by the CoC with a 90% voting share, same can be allowed by the Adjudicating Authority. In further discussion, in March 2018 in the Insolvency Law Commission Report, and after that Section 12A found its place in the IBC. Under Section 12A, the Adjudicating Authority can allow withdrawal of application for initiating CRIRP if approved by the CoC with a 90% voting share. In the case of Swiss Ribbons[vii], the Supreme Court held that the Adjudicating Authority can deal with a withdrawal application till the CoC’s constitution, this fell under the ambit of its inherent powers.

Judicial Pronouncements  

Judgments revolving around the inherent powers of the NCLTs/NCLAT touch on the following areas-

  1. Review Application

In the case of Shri Lalit Aggarwal[viii], the NCLAT while adjudicating a Review Application referred to the case of Dr. M.A.S. Subramanian[ix] and observed that power to review is not an inherent power of the court. The NCLAT exercised its inherent powers only to correct typographical errors of the Review Application. Discussing evidence and arguments of the Review Application was beyond the NCLAT’s power.

Correspondingly, in the matter of Deepakk Kumar[x], the NCLAT believed that “review” is not an inherent power until and unless it is expressly mentioned in a statute or arises by any necessary implication. A Tribunal’s power to “review” must be a statute’s creation.

  1. Commercial Wisdom of the CoC

In Sushil Ansal’s[xi] case, two Financial Creditors prayed for invoking Rule 11 of the NCLT Rules, 2016 to terminate the CIRP against the Corporate Debtor as they had agreed to settle the dispute. Relying on the award of Swiss Ribbons[xii]the NCLAT observed that to allow the settlement via their inherent powers, it is necessary to first hear both the parties and check if the CoC’s is formed.

The Tribunals often construe the creditors’ decision strictly; however NCLT, Mumbai recently passed a judgment as to the obligations of the creditors. In the Dy. Commissioner of Customs DEEC[xiii] case, the question that arose was whether the Resolution Professional must send notice to the creditors requiring them to file their claim or is it the creditors’ duty to file their claim on the issue of the public notice. It was held that it is the creditors’ responsibility to file the claim, the NCLT, Mumbai refused to invoke its inherent powers to prevent violation of the provisions of the Code.

  1. Necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal

The arguments in the matter of Univalue Projects[xiv] before the Calcutta High Court was that invoking the inherent powers of the Tribunals is a judicial function and not administrative. The opinion of the Court was that the Tribunals derive their inherent powers from a delegated legislation and ergo, cannot supersede the statutory provisions of the Acts of the Parliament.

The NCLAT in NUI Pulp and Paper Industries Private Limited[xv] observed that under Rule 11 it was under the NCLT’s jurisdiction to pass any order if it is necessary for meeting the ends of justice or to curb abuse of the process of the Tribunal. As held in the NUI Pulp and Paper Industries Private Limited[xvi] passing an order to meet the ends of justice or prevent abuse of the process of the Tribunal is within the NCLT’s jurisdiction and Rule 11 guarantees the same.

The Corporate Debtor in the India Asset Growth Fund & Others[xvii] case had proposed a settlement payment. Exercising its inherent powers, the NCLT, Bangalore ignored the default and preferred the unilateral settlement offered by the Corporate Debtor. The Tribunal justified itself by highlighting the economic severities faced by the Corporate Debtor during the Covid-19 pandemic.

In Sushil Ansal’s [xviii] case the NCLAT observed that the Interim Resolution Professional had received several claims against the Corporate Debtor. The Tribunal invokes its inherent powers to prevent the miscarriage of justice and abuse of the Court’s process, the NCLAT refused to invoke the same. The settlement served the purpose of only two Financial Creditors; if their request was entertained, it would have been unjust towards the other claimants.

Concluding Remarks

At the onset of the pandemic, we saw some significant amendments to the IBC, since the scope of these inherent powers is not yet explored much in the field of insolvency, how the Tribunals will delve into the same is something to look forward to. Further, the Government of India is carrying out several economic reforms and that forms a base for the pre-packed insolvency resolution process, this questions the role of the Adjudicating Authority now.

After examining and analyzing all the cases discussed above, we see that the Tribunals and Supreme Court affirm the use of inherent powers only when it is to prevent injustice or abuse of the process of the court. In several cases, we see that the approach tilts towards the CoC and on a bare perusal of the IBC one can understand that its purpose is to remedy the mischief of loan default. The Tribunals aim to offer speedy relief to the parties hence the courts are very stringent when it comes to the application of inherent powers to curb the abuse of process. So far, the approach of the Tribunals has either been to prevent the parties from abusing the legal framework to delay the process or protect the aggrieved party from any unjust act or process which falls outside the scope of the IBC.

Endnotes:

[i] Banking Law Reforms Committee Report, November 2015.

[ii] Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance & Investment Manager LLP, Company Appeal (AT) (Insolvency) No. 95 of 2017.

[iii] Uttara Foods and Feeds Private Limited Vs. Mona Pharmachem, Civil Appeal No. 18520 Of 2017.

[iv] Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance & Investment Manager LLP, Company Appeal (AT) (Insolvency) No. 95 of 2017.

[v] Uttara Foods and Feeds Private Limited Vs. Mona Pharmachem, Civil Appeal No. 18520 Of 2017.

[vi] Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance & Investment Manager LLP, Company Appeal (AT) (Insolvency) No. 95 of 2017.

[vii] Swiss Ribbons Pvt. Lmt. V. Union of India, (2019) SCC OnLine SC 73.

[viii] Shri Lalit Aggarwal v. Shree Bihari Forgings Private Limited, Review Application No. 04 of 2020 in Comp. Appeal (AT) No.380 of 2018.

[ix] Dr. M.A.S. Subramanian v. Mr. T.S. Sivakumar, Review Application No.2 of 2018 in Company Appeal (AT) No. 12 of 2018.

[x] Deepakk Kumar v. M/s Phoenix ARC Private Limited and Another, Review Application No. 09 of 2020 in Company Appeal (AT)(Insolvency) No. 848 of 2019.

[xi] Sushil Ansal v. Ashok Tripathi and Others, Company Appeal (AT) (Insolvency) No. 452 of 2020.

[xii] Swiss Ribbons Pvt. Lmt. V. Union of India, (2019) SCC OnLine SC 73.

[xiii] Dy. Commissioner of Customs DEEC v. Jyoti Structures Limited and Others, IA 1218/MB/2020 in CP (IB) 1137/MB/2017.

[xiv] Univalue Projects v. Union of IndiaW. P. No. 5595 (W) of 2020 With C.A.N. 3347 of 2020.

[xv] NUI Pulp and Paper Industries Pvt. Ltd. v. Ms. Roxcel Trading GMBH, Company Appeal (AT) (Insolvency) No. 664 of 2019.

[xvi] NUI Pulp and Paper Industries Pvt. Ltd. v. Ms. Roxcel Trading GMBH, Company Appeal (AT) (Insolvency) No. 664 of 2019.

[xvii] India Asset Growth Fund & Others v. CMRS Projects Private Limited, C.P. (IB) No. 233/BB2019.

[xviii] Sushil Ansal v. Ashok Tripathi and Others, Company Appeal (AT) (Insolvency) No. 452 of 2020.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in