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Case Summary: M/S Embassy Property vs Karnataka - Insolvency And Bankruptcy Code

A company named M/s Uddhyaman investments Pvt Ltd claimed itself to be the financial creditor (FC) and moved an application before the National Company Law Tribunal (NCLT) Chennai, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against M/s. Tiffin’s Barytes Asbestos & Paints Ltd., the corporate debtor (CD).

By an order dated 12.03.2018, NCLT Chennai admitted the application and ordered the commencement of Corporate Insolvency Resolution Process (CIRP). An Interim Resolution Professional (IRP) was appointed and consequently, a Moratorium was declared in terms of Section 14, IBC, 2016.

During this time, the CD held a mining lease granted by the Government of Karnataka (GoK), which was to expire by 25.05.2018. A notice was issued for premature termination of the lease on 09.08.2017, on the allegation of violation of statutory rules and the terms and conditions of the lease deeds. However, no order for termination was passed till the date of initiation of CIRP.

Therefore, the IRP appointed by NCLT, addressed a letter dated 14.03.2018, to the chairman of the monitoring committee and the Director of Mines & Geology informing them of the commencement of CIRP.

A letter dated 21.04.2018 was written by IRP to the Director of Mines & Geology, seeking the benefit of deemed extension of the lease beyond 25.05.2018 upto 31.3.2020 in terms ofSection 8A (6) of the Mines & Minerals (Development and Regulation) Act, 1957 (hereinafter referred to as MMDR Act, 1957).

IRP got no response and hence, filed a writ petition in WP No. 23075 of 2018 on the file of the High Court of Karnataka, seeking a declaration that the lease should be deemed to be valid up to 31.03.2020 (in terms of Section 8A (6) of the MMDR Act, 1957.

During the pendency of the petition, GoK passed an order dated 26.09.2018, rejecting the proposal for deemed extension, on the ground that he has contravened the terms and conditions of the Lease deed but also the provisions of Rule 37 of the Mineral Concession Rules, 1960 and Rule 24 of the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Rules, 2016.

In view of this order of rejection, the IRP withdrew the writ petition on 28.09.2018, on the liberty to file a fresh writ petition.

Instead of filing the fresh writ petition, the Resolution Professional (RP) moved a Misc. application No. 632 of 2018, before the NCLT, Chennai, praying for setting aside the Order of GoK. Also, seek the declaration that the lease should be deemed to be valid up to 31.03.2020 and also, a consequential direction to the GoK to execute supplement lease deeds for the period up to 31.03.2020.

By the Order dated 11.12.2018, NCLT Chennai, allowed the Misc. application on the ground that it was in violation to the moratorium declared on 12.03.2018 in terms of Section 14(1) of IBC, 2016.

As a result of this order, GoK moved a writ petition in WP No. 5002 of 2019, before the HC of Karnataka. It was conceded by the RP that the order of the NCLT can be set aside. Also, the order passed by the NCLT was “ex-parte”, on the ground that the State did not choose to appear despite service of notice.

As a result, by an Order dated 22.03.2019, the HC of Karnataka set aside the Order of the NCLT and remanded the matter back to NCLT for a fresh consideration of the Misc. application No. 632 of 2018.

Thereafter, statement of objections was filed by the State of Karnataka before the NCLT, primarily raising two objections:
  • one relating to the jurisdiction of the NCLT to adjudicate upon disputes arising out of the grant of mining leases under the MMDR Act, 1957, between the State Lessor and the Lessee
  • and another relating to the fraudulent and collusive manner in which the entire resolution process was initiated by the related parties of the Corporate Debtor themselves, solely with a view to corner the benefits of the mining lease.

Overruling the objections of the State, NCLT Chennai passed an order dated 03.05.2019, allowing the Misc. application, setting aside the order of rejection and directing the GoK to execute the supplemental lease deeds.

Challenging the Order of the NCLT, Chennai, the GoK moved a writ petition in WP No. 41029 of 2019, before the HC of Karnataka. When the writ petition came up, the CD represented by the RP appeared through the counsel and took notice and sought time to get the instructions.

Therefore, the HC, by an Order dated 12.09.2019, adjourned the matter to 23.09.2019 and granted a stay of operation of the direction contained in the impugned order of the tribunal. Interim stay was necessitated in view of a contempt application moved by the RP before the NCLT against the GoK for their failure to execute the supplement deeds.

It is against the said ad Interim Order granted by the High Court that the Resolution Applicant, the Resolution Professional and the Committee of Creditors have come up with the present appeals.

  1. Whether the High Court ought to interfere, under Article 226/227 when an Order passed by the NCLT, ignoring the availability of a statutory remedy of appeal to the NCLAT and if so, under which circumstances?
  2. Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the IBC, 2016?

Appellant’s arguments
  1. Sh. K.V. Viswanathan, the learned Senior Counsel appearing on behalf of the Resolution applicant assailed the impugned order on the ground that when an alternative remedy is provided under Section 61, IBC, 2016, the HC of Karnataka has no right to address such a petition, that too against the Order passed by the NCLT, Chennai. He referred to certain cases in order to say that, when a statutory forum is created for the redressal of grievances, a writ petition should not be entertained. He also contended that IBC is a unified umbrella and the remedies provided under it are all pervasive and exclusive.
  2. Sh. Mukul Rohatgi, learned Senior Counsel appearing for the Resolution applicant contended that the NCLT has already approved the Resolution Plan, by an order dated 12.06.2019 and that therefore the High Court cannot do anything that will tinker with or destroy the very Resolution Plan approved by the NCLT.
  3. Sh. Kapil Sibal, the Learned Senior Counsel appearing for the RP contended that the whole object of IBC will get defeated if High Court will get the power under Article 226/227 to review the orders of the NCLT. He also contended that the provisions of IBC, 2016, are given overriding effect under Section 238, over all other statutes.

    According to him, the only ground on which GoK opposed the Misc. application of the RP was fraud and collusion on the part of CD and the creditor who initiated the CIRP. To which, he further contended that in view of the sweep of the jurisdiction conferred upon the NCLT under Section 60)5) of IBC, 2016, the Tribunal was entitled to investigate even into allegations of fraud. He appealed that the Order of High Court should be set aside on the lack of jurisdiction.
  4. Sh. Arvind P. Datar and Sh. E. Om Prakash, learned Senior Counsel appearing for Committee of creditors (CoC) contended that IBC is a complete code in itself and hence, it does not provide any room for challenging the Orders of NCLT, other than the manner prescribed by the law itself. According to the Learned Senior Counsel, the RP sought for a mere recognition of statutory right and therefore, the NCLT, cannot be taken to have exercised a jurisdiction not vested in it by law.

Respondent’s arguments
  1. The respondent was represented by, Sh. K.K. Venugopal, the Learned Attorney General, who contended that the jurisdiction of NCLT is defined under Section 60 of IBC, 2016, which is similar to the Debts recovery tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) and hence, the jurisdiction of the NCLT is confined only to contractual matters inter-parties.
  2. An order passed under special enactments such as MMDR Act, 1957, falls in the realm of public law and hence, the NCLT would have no power of judicial review of such orders.
  3. on the basis of the decision inBarnard and Others vs. National Dock Labour Board and Otherthe Learned Senior Counsel submitted that, when an inferior Tribunal passes an Order which is a nullity, the superior Court need not drive the party to the appellate forum stipulated by the Act. The Counsel also relied upon the decision of this Court inThe State of Uttar Pradesh vs. Mohammad Nooh.

To Answer The First Issue
  1. apex court examined the scope of jurisdiction of the High Court under Article 226/227 and NCLT and NCLAT, under IBC, 2016, and observed that the contractual agreement between the State Govt. and the CD is a matter of public interest, which is governed statutorily. The MMDR Act, 1957, is a parliamentary enactment and the mining lease was also issued in accordance with the statutory rules namely Mineral Concessions Rules, 1960 and therefore, the relationship between CD and GoK is statutorily governed and not just contractual.
  2. The Apex Court was of the view that the decision taken by the State govt. is a matter which is of public interest, governed by the statute. Hence, the decision can only be reviewed by a superior court which shall have the power of judicial review.
  3. NCLT is a quasi-judicial body that has been created by a statute and hence, it cannot be elevated to the status of a superior court which will have the power of judicial review. (Para- 29)

To Answer The Second Issue
  1. Appellant contended that NCLT and NCLAT has the power to inquire fraudulent and collusive allegations. The apex court believed that the appellant are right in this regard as Section 65, IBC, 2016, specifically deals with the fraudulent or malicious intention of proceedings.
  2. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in Section 61, IBC, 2016.

Final Decision
NCLT and NCLAT has jurisdiction and power to try fraudulent questions but they would not have the jurisdiction to adjudicate upon the disputed such as those arising under the MMDR Act, 1957, especially when the disputes run around the decisions of statutory and quasi-judicial authorities.

Hence, HC was justified in entertaining the writ petition.

Appeals were dismissed and there was no order as to costs.

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