The Missing Power of NCLT: Prospect of Contempt Proceedings under IBC
[Preksha and Anchit are students at Gujarat National Law University.]
Under Part II of the Insolvency and Bankruptcy Code 2016 (IBC), the adjudicating authority, which is the National Company Law Tribunal (NCLT), has been given wide and extensive powers with respect to the resolution and liquidation proceedings of the corporate debtor. While the provisions of the IBC confer multiple powers upon the NCLT, there are many provisions applicable to the proceedings before the NCLT, which are found outside the IBC, such as in the Companies Act 2013. These provisions apply in proceedings under the IBC through Section 5(1) of the IBC, which defines the adjudicating authority as the NCLT as constituted under Section 408 of the Companies Act 2013. Since Section 408 allows the NCLT to exercise the powers conferred on it by the Companies Act 2013 or any other law, thus the powers conferred on the NCLT are exercisable by it in proceedings under the IBC.
Most of the provisions in the Companies Act 2013 were amended by the eleventh schedule to the IBC to explicitly apply those provisions in proceedings under the IBC. However, certain provisions were left unamended, most notably Section 433, which applied the Limitation Act 1963 in proceedings before the NCLT and Section 425, which gives the NCLT the power to hold a person accountable for its contempt. While the Supreme Court clarified the applicability of Section 433 in proceedings under the IBC, there have been contradictory NCLT judgments on the applicability of Section 425 in proceedings under the IBC.
Contradictory decisions of the NCLTs
Since the enactment of the IBC, the NCLTs have instituted or issued threats of contempt proceedings in cases such as Shreeshyam Metaliks Private Limited v. Concast Steel Power Limited and Asset Construction Company (India) Private Limited v. Shivam Water Treaters Private Limited. These contempt proceedings have been issued or threatened against everyone from officers of the corporate debtor to the resolution professional. The issue of applicability of Section 425 in proceedings under the IBC first came before the National Company Law Appellate Tribunal in Liberty House Group v. Mr. Dinkar T Venkatasubramaniam and Another, where the issue was framed by the tribunal but saw no mention in the final judgment.
Thereafter, the NCLTs have continued instituting or issuing threats of contempt proceedings, with the notable exception of the judgment in K.K.Agarwal v. Soni Infratech Private Limited, where the principal bench of the NCLT held that Section 425 is not applicable in proceedings under the IBC. The NCLT noted that the power under Section 425 was an extraordinary one vested with the NCLT under the Companies Act 2013, whereas, in proceedings under the IBC, the NCLT as the adjudicatory authority enjoys jurisdiction to the extent specified under the code only. The tribunal found that since the eleventh schedule to the IBC had made comprehensive amendments to the Companies Act 2013 to extend the applicability of some provisions to proceedings under the IBC, other provisions that were left unamended could not be applied in proceedings under the IBC.
Lessons from the applicability of Section 433
Section 433 of the Companies Act 2013 provides for the applicability of the Limitation Act 1963 in proceedings before the NCLT. Just like Section 425, Section 433 had not been amended by the eleventh schedule to be applied in the IBC, and thus there was no provision that explicitly extended Section 433 to proceedings under the IBC. Deciding on the applicability of Section 433 to proceedings under the IBC, the Supreme Court in B.K. Education Services Private Limited v. Parag Gupta and Associates, held that the definition of ‘Adjudicating Authority’ under Section 5(1) of the IBC would be enough to apply Section 433 to proceedings under the IBC. The court further commented that since Section 5(1) of the IBC itself extended Section 433 to proceedings under the IBC, Section 433 was not amended to apply to proceedings under the IBC.
This view of the Supreme Court suggests that Section 5(1) of the IBC would extend provisions applicable to the NCLT to apply to the adjudicating authority. Thus, this view of the Supreme Court indicates that the power to punish for contempt under Section 425 would apply to proceedings under the IBC. However, it has to be noted that the Supreme Court’s decision, in this case, relied heavily on observations specific to limitation, and thus it cannot be said that the reasoning adopted by the Supreme Court can be universally applied to extend provisions other than Section 433 to proceedings under the IBC.
For a tribunal to exercise a power, that power must be expressly conferred by law. Therefore, in the absence of any provision which extends the Section 425 to proceedings under the IBC, the power has to be conferred within the scope of Section 5(1) of the IBC for the power to be available with the NCLT.
The eleventh schedule of the IBC made comprehensive amendments to the Companies Act 2013 to make it compatible with the IBC. In this context, many provisions applicable to the NCLT under the Companies Act 2013 were made applicable to it under the IBC. One such amendment was made in Section 429, which provides for the power of the NCLT to seek the assistance of Chief Metropolitan Magistrate, Chief Judicial Magistrate or District Collector to take custody or control of all property, books of account or other documents. The amendment to Section 429 hints that the legislature did not think that Section 5(1) itself was enough for Section 429 to be applied in proceedings under the IBC. Thus, the omission of a similar amendment to Section 425 suggests that the legislature intended to exclude the application of Section 425 in proceedings under the IBC.
Further, the offenses and penalties under Chapter VII of Part II of the IBC subsume various acts such as misconduct of an officer of the corporate debtor during the resolution process, the contravention of the moratorium or the resolution plan and punishment of false information in the application to initiate the resolution process. These provisions provide for prosecution of most of the acts against which contempt proceedings have been threatened or instituted in the NCLTs. However, under Section 236 of the IBC, the offenses under Chapter VII of Part II of the IBC have to be tried by the Special Court constituted under the Companies Act 2013. This shows that the legislature has provided an alternative forum to deal with instances generally dealt with by contempt proceedings. Since IBC is a complete code and provides exhaustively for the offenses that are dealt by contempt proceedings to be managed by an alternative forum other than the NCLTs, it seems unlikely that the legislature has vested the NCLTs with the power under Section 425 to be applied in proceedings under the IBC.
The high number of cases where contempt proceedings have been instituted or threatened certainly shows that the power to punish for contempt in proceedings under the IBC would improve compliance of the orders and ensure better supervision of the resolution and liquidation processes by the NCLTs. However, until an express provision that extends the power under Section 425 to proceedings under the IBC is not added, the decision of the principal bench in K.K.Agarwal v. Soni Infratech Private Limited, which held Section 425 to not be applicable in proceedings under the IBC, would remain correct.