Inquisitorial Interventions by High Courts with Insolvency and Bankruptcy Code
[Akshay Sharma and Kunwar Surya Pratap are students at National University of Study and Research in Law, Ranchi.]
The insolvency and bankruptcy laws of India have witnessed multiple regimes down the timeline but none of them could satiate the urgent requirement of providing an efficacious remedy to the creditors and thus, the entire system was popularly termed as ‘defaulters paradise’. Therefore, the government introduced the Insolvency and Bankruptcy Code 2016 (IBC), which formed part of the crucial reforms in the bankruptcy laws of India. It primarily seeks to incorporate the element of uniformity in the laws relating to insolvency and bankruptcy in India by consolidating and amending them into one single statute. Further, the IBC, as a special statute, is complete in itself and exhaustive of the matters dealt with therein. Nevertheless, the scheme of the legislation also lays down several time limits, making it manifestly clear that time is the essence under the IBC. These characteristics are innate to the IBC as they form part of the very objective behind its enactment.
However, in a recent case between Flipkart India and Cloud Walker Streaming Technologies, a decision of the High Court (HC) of Karnataka granting a stay on an admission order passed by the National Company Law Tribunal (NCLT), Bengaluru, has become an issue worth consideration. It has ignited a debate on whether the HC has the power to interfere with the proceedings before NCLTs or have any kind of jurisdiction whatsoever to adjudicate the issues arising out of the IBC. The HC of Karnataka passed an interim order by not giving requisite regard/reasoning to the determination of its jurisdiction to interfere with the order of the NCLT, Bengaluru. Such stay orders or interferences have huge ramification over proceedings under the IBC, by derailing the whole resolution process and bringing the proceedings under the IBC to a standstill. This article dwells into analysing the power and jurisdiction of the HCs to intervene with the proceedings under the IBC inter alia providing a critical opinion of the author in that regard.
Adjudicating Mechanism under IBC
At the outset, Part II of the IBC states that the adjudicating authority for corporate insolvency and resolution is NCLT. Further, an appeal may be preferred to the National Company Law Appellate Tribunal (NCLAT) under Section 61 of the IBC. However, the tri-levelled adjudicating mechanism of IBC mandates that any appeal against the orders of the NCLAT shall lie before the Supreme Court of India (SC). Thus, subject to certain exceptional cases to be discussed hereinafter, the IBC eludes the role of HC in the adjudicatory mechanism.
Power of High Court qua Appellate Authority under IBC
The exclusion of HC from the adjudicatory framework of the IBC is manifestly clear from the bare provisions therein. The provisions of the IBC, enumerating powers of the NCLT and ouster of the powers of other forums from exercising jurisdiction over such powers, additionally substantiate the point which is enumerated hereinbelow:
First, Section 60(2) of the IBC states that during pendency of the case before the NCLT, any application concerning the insolvency resolution shall be field before such NCLT only.
Second, Section 231 of the IBC stipulates that no civil court shall have the jurisdiction in respect of any matter in which the adjudicating authority (i.e., the NCLT) is empowered and no injunction can be granted by any court with regard to proceedings before the NCLT.
Judicial Interpretation of Section 231 of the IBC
Section 231 was interpreted by the Delhi HC in the case of Liberty House Group Pte Ltd v. State Bank of India and Others whereby the Delhi HC categorically refrained from exercising jurisdiction with respect to the action taken by the NCLT in pursuance of the powers conferred upon it by the IBC itself. The relevant paragraph from the decision has been reproduced hereinbelow:
“Section 231 of the Code, also provides that “….No injunction shall be granted by any court…..in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority…..under this Code”. The injunction sought by the plaintiff in these suits is clearly in respect of action to be taken by NCLT under the jurisdiction vested in it under Section 60(5)(C) supra and barred by this part of Section 231 of the Code.”
Also, the NCLT, Kolkata, in the case of Aryan Mining and Trading Corporation Private Limited v. Ganesh Sponge Private Limited, stated that any injunction granted by any court, shall be nullity in law and cannot be given effect to, by virtue of Section 231 of the IBC. Therefore, the legislature was of the firm view that the any issue arising out of the IBC can only be looked into by NCLT, NCLAT and SC and ousts the jurisdiction of HCs in toto.
Jurisdictional Authority of HCs under IBC
In a recent case of M/s Embassy Properties Developments Private Limited v. State of Karnataka and Others, the SC dealt with the issue concerning interference of the HC with the proceedings undertaken by the NCLTs. The SC observed that if the concerned NCLT has erred by coram non judice i.e., by exercising a jurisdiction not vested in it in law, then only the HC can interfere with the proceedings under Article 226 of the Constitution of India (Constitution), ignoring the availability of a statutory remedy of appeal to the NCLAT. The rationale behind the same was also adequately set out by the SC, that a decision taken on the subject matter falling in the realm of public law cannot, by any stretch of imagination, be brought within the ambit of the powers of NCLT as defined in Section 60 of the IBC. Hence, the HC, being a court vested with the powers of judicial review, may intervene only in these specific cases.
Caution on Interventions by High Courts
Now, it is no longer res integra that a petition under Article 226 of the Constitution, in the presence of an alternative and equally efficacious remedy, has to be entertained with utmost diligence and caution. Thus, before intervening, the HC must take into account the distinction between cases related to absence of jurisdiction and wrongful exercise of jurisdiction. This is to prevent multiplicity of adjudications, a definitive example of which was seen in Flipkart’s dispute wherein the HC intervened with the order of the NCLT but the matter was eventually adjudicated upon by the NCLAT.
The aforesaid cautionary qualification has also been a part of the discussion by Bombay HC in the case of Kamal K Singh v. Union of India while adjudicating a writ petition filed under Article 226 of the Constitution assailing the order of NCLT, Mumbai for violation of principles of natural justice. The Bombay HC observed that it can interfere with the orders of subordinate court or tribunal, irrespective of alternate and equally efficacious remedies, if the order has led to failure of justice.
However, it is noteworthy that there are precedents wherein the NCLAT has dealt with and subsequently set aside the orders passed by the NCLTs in violation of the principles of natural justice. Moreover, the observation of the Calcutta HC while considering the vires of Section 7 of the IBC, also adopted by NCLAT, is worthy of reference in this regard. The HC observed that by the virtue of Section 424 of the Companies Act 2013, NCLT and NCLAT are required to follow the principles of natural justice. Therefore, the parties can challenge the order before the NCLAT if the principles of natural justice have not been followed by the NCLT.
The HCs have no specific power to interfere with the orders of the NCLT/ NCLAT and further, the provisions of the IBC specifically oust the jurisdiction of the HCs. Adjudication of matters pertaining to the IBC by the HC will impinge upon the time bound nature of the proceedings under it. Nevertheless, the increasing intervention by the HCs, on abstract grounds affording scope for wide interpretations, would also lead to redundancy of the appellate authorities so as to damage the efficacious statutory remedies provided by the IBC.
More so, what follows such interventions, is the risk of degeneration and fragmentation of the jurisprudence of the IBC which is still setting its course through the municipal framework of our country. It is because the moment different forums start adjudicating on the same subject matter, contrary to the objective of a special statute such as the IBC, the judicial literature and precedents face dilution and ambiguity, which in turn complicates the existing adjudicatory mechanism.