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Section 60 (5) of the IBC: An unresolved conundrum

posted 2 years ago

Introduction

  • The National Company Law Tribunal’s (“NCLT“) jurisdiction under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC“) has often been invoked as a comprehensive recourse to all issues concerning a corporate debtor undergoing corporate insolvency resolution process (“CIRP“) or liquidation. In recent times, the Supreme Court has had the occasion to opine on the scope and extent of NCLT’s jurisdiction under Section 60(5) in the judgments of M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka and Ors. (“Embassy”) and Gujarat Urja Vikas Nigam Limited v. Amit Kumar Gupta and Ors. (“Gujarat Urja”) wherein it would appear that the Supreme Court has recognized the limitations inherent to the NCLT’s powers thereunder.
  • In this article however, we argue that the Supreme Court’s decisions have left a number of questions unanswered and the desired finality to the conundrum of Section 60(5) may perhaps still be elusive.

The Problem Statement

  • Section 60(5) is widely worded. Clause (a) covers any applications or proceedings by or against the corporate debtor, clause (b) covers any claims by or against the corporate debtor and its Indian subsidiaries and clause (c) covers all questions of law or facts arising out of or relating to the insolvency resolution or liquidation of the corporate debtor. One could therefore argue that Section 60(5) makes the NCLT a one stop solution for everything concerning a corporate debtor.
  • However, a reading of certain other provisions of the IBC militates against the aforesaid argument. Notably:
    • Section 25(2)(b) mandates that the corporate debtor be represented by its resolution professional before any court, tribunal or other authority against third parties for preservation and protection of its assets. If the intention of the legislature was that all disputes by or against the corporate debtor were to be entertained by the NCLT, the words “any court, tribunal or other authority” contained in Section 25(2)(b) would be rendered otiose.
    • Section 14(1)(a) prohibits institution of suits and continuation of pending suits or proceedings against the corporate debtor. While there is a bar on institution / continuation of suits or proceedings against the corporate debtor, that bar does not extend to the institution or continuation of proceedings by the corporate debtor. In fact, for the purpose of the protection and preservation of assets of the corporate debtor under the provisions of Section 25(2)(b), the resolution professional may well be required to continue or initiate suits or legal proceedings before the appropriate fora (suits being instituted before a civil court).
    • Section 63 provides that no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of “any matter over which” the NCLT or the National Company Law Appellate Tribunal (“NCLAT“) have jurisdiction under the IBC, meaning thereby that that the legislature perhaps envisaged proceedings which would not fall within the jurisdiction of the NCLT or NCLAT.

The Supreme Court decisions in Embassy and Gujarat Urja

The Decision in Embassy
  • The dispute in Embassy arose because a proposal by the resolution professional seeking extension of mining lease granted to the corporate debtor was rejected by the Government of Karnataka on the ground that the corporate debtor had violated certain provisions relating to the mining lease. An application was preferred by the resolution professional before the NCLT seeking setting aside of the Government’s decision to reject the proposal for extension and a direction to the Government to extend the lease. One of the grounds on which the Government opposed the grant of any reliefs by the NCLT was that the NCLT did not have the jurisdiction to adjudicate upon disputes arising out of the grant of mining leases under the Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act“). The NCLT passed an order against the Government (i) setting aside its order rejecting the proposal for extension of the mining lease, and (ii) directing it to enter into a supplemental lease with the corporate debtor for an extended period. This order passed by the NCLT was challenged in writ proceedings initiated by the Government before the High Court of Karnataka, wherein the High Court granted a stay on the NCLT’s order. This stay order was challenged before the Supreme Court of India.
  • One of the arguments raised by the Government of Karnataka before the Supreme Court (to emphasise that the order passed by the NCLT was a nullity) was that the jurisdiction of the NCLT is confined to judicial matters only, whereas an order passed by a statutory/ quasijudicial authority under a special enactment such as the MMDR Act falls within the realm of public law and that the NCLT has no power of judicial review over such orders.
  • The Supreme Court held that the land forming subject matter of the lease in question belongs to the State of Karnataka, and that the relationship between the corporate debtor and the Government under the lease was not just contractual but statutorily governed. The Supreme Court thus held that the decision of the Government to refuse deemed extension of the lease was in public law domain and that the “correctness of the said decision can be called into question only in a superior court which is vested with the power of review over administrative action. The NCLT, being a creature of special statute to discharge certain specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action”.
  • The Supreme Court further observed that clause (c) of Section 60(5) was very broad in its ambit “but a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot by any stretch of imagination be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Sub-section (5)” . Interestingly, the Supreme Court did not delve into the issue as to whether such a decision taken by the government or a statutory authority would fall within clause (a) of Section 60(5) which gives the NCLT the jurisdiction to entertain and dispose of ‘any application or proceeding by or against the corporate debtor or corporate person’, notwithstanding anything to the contrary contained in any other law for the time being in force.
  • The Supreme Court thus concluded that the NCLT did not have the jurisdiction to entertain an application against the Government and since the NCLT exercised jurisdiction that it did not have, the High Court of Karnataka was justified in entertaining the writ petition on the basis that the NCLT was ‘coram non judice’.
The Decision in Gujarat Urja
  • Gujarat Urja Vikas Nigam Limited (“GUVNL“), the appellant, had issued notice of termination of power purchase agreement entered into between itself and the corporate debtor (“PPA“) on the ground that the CIRP of the corporate debtor had begun, amounting to an ‘event of default’ under the PPA. This notice was challenged before the NCLT and an injunction was sought restraining GUVNL from terminating the PPA. The NCLT passed an order restraining GUVNL from terminating the PPA and setting aside the notice of termination. When the matter went into appeal, the NCLAT also decided against GUVNL holding that the PPA could not be terminated solely on the ground of initiation of CIRP of the corporate debtor. The matter finally reached the Supreme Court where two issues arose, i.e. (i) whether the NCLT and the NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA and (ii) whether GUVNL’s right to terminate the PPA according to the provisions of the PPA is regulated by the IBC.
  • To address these questions, the Supreme Court examined the contours of jurisdiction conferred upon the NCLT under Section 60(5). Interestingly though, in doing so, the Supreme Court limited itself to clause (c) of the provision. Considering the text of Section 60(5)(c) and other similar provisions in other insolvency related statutes, the Supreme Court noted that the NCLT has jurisdiction to adjudicate disputes which arise solely from or which relate to the insolvency of the corporate debtor. However, the Supreme Court issued a note of caution to the NCLT and NCLAT “to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor. The nexus with the insolvency of the Corporate Debtor must exist”.
  • The Supreme Court held that the dispute in the instant matter solely arose out of and related to the insolvency of the corporate debtor. The Supreme Court also elaborated upon the distinction between disputes arising out of or relating to insolvency resolution with other disputes and held:
    • “72. Therefore, we hold that the RP can approach the NCLT for adjudication of disputes that are related to the insolvency resolution process. However, for adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.” (emphasis supplied)
  • Distinguishing the facts of this matter with that in Embassy, the Supreme Court noted that in the present case the decision to terminate the PPA was not taken by “any governmental or statutory authority acting within the domain of its public law functions”, but the decision was “simply taken by a contracting party solely on account of the initiation of insolvency proceedings against the Corporate Debtor in terms of an agreement between the parties”. The Supreme Court also contrasted the facts of the present matter with those in Municipal Corporation of Greater Bombay v. Abhilash Lal wherein the lease with the corporate debtor was terminated by a municipal corporation on the grounds of other defaults unrelated to the insolvency of the corporate debtor. In relation to the non-obstante clause in Section 238 of the IBC, the Supreme Court observed that the word “instrument” used therein does include a contract. The Supreme Court concluded that since the PPA in the instant case was sought to be terminated only on the ground that the corporate debtor had become subject of insolvency proceedings under the Code, such termination was not valid.
  • The Supreme Court held that the NCLT, under Section 60(5)(c), had the power to restrain GUVNL from terminating the PPA, recognizing that the PPA was central to the success of the CIRP of the corporate debtor. Since the termination was solely on the ground of insolvency of the corporate debtor, the dispute was held to be within the provisions of Section 60(5)(c). The Supreme Court also observed that such jurisdiction of the NCLT cannot be invoked in matters where a termination takes place on grounds unrelated to the insolvency of the corporate debtor.

Analysis of the Supreme Court Decisions, Some Observations and Open Issues

  • A joint reading of the decisions in Embassy and Gujarat Urja would show that the Supreme Court has recognized that the jurisdiction of the NCLT under Section 60(5) is not unlimited. While these decisions, on the one hand, have cleared the air on some critical issues, many questions still remain open.
  • One of the most striking aspects of Embassy and Gujarat Urja is that the analysis of NCLT’s jurisdiction is limited to provisions of clause (c) of Section 60(5). The Supreme Court does not seem to have considered the meaning and interpretation of clause (a) of the Section, which appears to be much wider in its scope than clause (c) and which, by its very language, gives the NCLT jurisdiction to entertain and dispose of all applications or proceedings by or against the corporate debtor notwithstanding any other law for the time being in force. Interestingly, even the arguments advanced by parties before the Supreme Court in both matters seem to be limited to clause (c) of the provision and it may be for this reason that the Supreme Court has arrived at its decisions exclusively based on clause (c). Perhaps, the Supreme Court may have decided these cases differently, had it been called upon to consider clause (a) of Section 60(5) as well. Evidently, both cases involve applications/ proceedings by the corporate debtor. Therefore, had Section 60(5)(a) been invoked, a case could have been made out in favour of NCLT having jurisdiction to entertain both these cases.
  • According to the decisions in Embassy and Gujarat Urja, only those issues that arise out of or relate to the insolvency resolution process of the corporate debtor can be determined by the NCLT, and the NCLT while doing so is expected to be careful to not oust jurisdiction of any other court or tribunal. The natural corollary to that principle is that any issue that does not arise out of, or relate to insolvency resolution process of the corporate debtor, is to be decided upon by other courts, tribunals and authorities that have legitimate jurisdiction over the subject matter. This creates an anomalous situation because under Section 14(1)(a) of IBC, institution of suits and continuation of pending suits and proceedings is prohibited during the insolvency resolution process period. So, if there is a dispute between the corporate debtor and a third party which does not arise out of or relate to the insolvency resolution of the corporate debtor, such third party would have no remedy since it can neither approach a civil court or authority nor can it approach the NCLT. For example, in the event there is a breach or default on part of the corporate debtor which is de hors the insolvency process, the counter party has no recourse in the form of institution of a suit against the corporate debtor, going by the dicta in Embassy and Gujarat Urja. Even after the conclusion of the CIRP or liquidation, such third party will find it extremely difficult to pursue its claims against the corporate debtor. The third party is thus effectively rendered remediless against the corporate debtor.
  • Some other open issues which the Supreme Court did not have the occasion to consider in Embassy and Gujarat Urja can be summarised as follows:
    • Under Section 424 of the Companies Act, 2013, the NCLT and NCLAT, for the purpose of discharging their functions under the IBC, have powers as vested in a civil court under the Code of Civil Procedure, 1908, including examination of evidence and taking evidence on oath, etc. Given the ambit of Section 424, perhaps an argument can be made that the powers of NCLT under Section 60(5) are much wider than envisaged under Embassy and Gujarat Urja.
    • However, it would be an equal consideration that the applications before the NCLT are required to be disposed of in a time bound manner given the limited time period for completion of the processes under the IBC. This becomes relevant especially in the context of the desirability of NCLT being called upon to decide complex questions of fact in a short period of time. Therefore, any interpretation which accords comprehensive powers to the NCLT under Section 60(5) would militate against the object of the IBC, namely, time bound resolution.

Conclusion

While the bare text of Section 60(5) would point towards very wide powers, the Supreme Court in Embassy and Gujarat Urja has emphasized upon the limitations which are inherent to the NCLT’s jurisdiction. However, it would appear that the attention of the Supreme Court has not been drawn to several critical and important provisions within the IBC and the Companies Act, 2013. It would therefore be a strong argument that both these decisions are limited in their scope and application. The Supreme Court would probably require another occasion to deal with the other relevant provisions of law to determine the extent of NCLT’s powers under Section 60(5). Perhaps the legislature may in the meanwhile deem it fit to clarify the legal position by way of an amendment. However, till then, there still remains a substantial cloud on the extent to which the NCLT can interfere by way of the provisions of Section 60(5) and this continues to remain an unresolved conundrum.

 

Footnote

[1] Civil Appeal No. 9170 of 2019 with Civil Appeal Nos. 9171 and 9172 of 2019.

[2] Civil Appeal No. 9241 of 2019.

[3] Paragraph 28 of Embassy.

[4] Paragraph 36 of Embassy.

[5] Paragraph 67 of Gujarat Urja.

[6] Paragraph 75 of Gujarat Urja.

[7] (2020) 13 SCC 234.

[8] Under Section 33(5) of the IBC, after passing of order of liquidation, no suit or other legal proceeding can be instituted against the corporate debtor.

[9] According to the decision of the Supreme Court in Ghanshyam Mishra and Sons v. Edelweiss Asset Reconstruction Company Limited Through the Director & Ors. Civil Appeal No. 1554 of 2021 and Civil Appeal No. 1550-1553 of 2021, all prior claims against the Corporate Debtor are extinguished upon the approval of the resolution professional.

 

This article was originally published in Mondaq on 18 August 2021 Co-written by: Ameya Gokhale, Partner; Radhika Indapurkar, Senior Associate. 

Contributed by: Ameya Gokhale, Partner; Radhika Indapurkar, Senior Associate

Click here for original article

Disclaimer

This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.

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