The Corporate & Commercial Law Society Blog, HNLU

Category: NCLT

  • Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    RITURAJ KUMAR , FIFTH – YEAR STUDENT AT RMLNLU, LUCKNOW

    INTRODUCTION

    The interplay of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) has been an issue of deliberation since the introduction of the IBC. The conflict is quite natural as both statutes have a non-obstante clause suggesting each has an overriding effect. This leads to a situation where both statutes claim primacy in case of conflict. Further, they both have divergent objects. The IBC aims to maximise the asset during the Corporate Insolvency Resolution Process (‘Resolution Process’), whereas the PMLA provides for confiscating assets arising from or engaged in money laundering. This becomes a significant barrier during the resolution process.

    The discussion around the primacy of the statute and whether a moratorium imposed under Section 14 of the IBC would extend to the attachment made by the Enforcement Directorate (‘ED’) under Section 5 of the PMLA has been a concern for almost a decade.  This blog does not delve into the above issue and restricts its scope to why the National Company Law Tribunal(‘NCLT’) cannot release attachments of a corporate debtor confirmed by the Adjudicating Authority under the PMLA. The National Company Law Appellate Tribunal (‘NCLAT’) in Anil Goel for Dunar Foods v. ED recently affirmed this position that the NCLT cannot release such attachments. However, the legal position on this issue remains unsettled as the Bombay High Court in Shivcharan v. Adjudicating Authority and Anr (‘Shivcharan’) had previously authorised the NCLT to release such attachments while exercising its residuary jurisdiction. Currently, the Shivcharan judgement is pending before the Supreme Court of India for final determination of this issue. In this light, this blog examines the residuary jurisdiction provided under the IBC and argues how Shivcharan judgement disregards the established legal principle and procedure in an attempt to achieve the objects of the IBC.

    RESIDUARY JURISDICTION OF THE NCLT

    Residuary jurisdiction has been vested in the NCLT under Section 60(5)(c) of the IBC. However, it is limited to deciding matters related to the resolution or liquidation of the Corporate Debtor, and it does not provide an inherent jurisdiction. This aligns with the Embassy Property Developments Pvt. Ltd. V. State of Karnataka and Ors case, where the Supreme Court of India asserted that the NCLT cannot replace the legitimate jurisdiction of other courts or tribunals when the issue does not arise solely from or relate to the insolvency of the corporate debtor. By extension, this would equally apply to a special statute like the PMLA where the attachment was confirmed by the Adjudicating Authority under Section 8(3) of the PMLA.

    The attachment under the PMLA relates to the ‘proceeds of crime’ derived from the criminal activities associated with the scheduled offences. These crimes threaten the integrity of the financial system and affects the public at large. These offences are prosecuted by the state and are in the realm of public law. The PMLA was introduced to fulfil India’s international commitment to combat money laundering, aligning with the Vienna Convention (1988) and the United Nations Convention against Transnational Organised Crime (2000).  Such matter, being in the realm of public law, cannot be brought within the phrase “arising out of or in relation to the insolvency resolution” as enshrined under the aforementioned section.

    This position has been recently reaffirmed in Kalyani Transco v. M/s Bhushan Power and Steel Ltd. , where the division bench of the Supreme Court held that the NCLT or NCLAT does not have any authority to adjudicate upon a public law like PMLA. The NCLT, deriving its jurisdiction from the provisions of the IBC and constituted under the Companies Act 2013, is a coram non judice to direct the ED to release the attachment. 

    NCLT AUTHORITY DURING THE RESOLUTION PROCESS 

    During the resolution process, the primary duty of a Resolution Professional is to run the Corporate Debtor as a going concern.Recently, in the case of Mr Shailendra Singh, Resolution Professional of Foxdom Technologies Pvt Ltd V. Directorate of Enforcement & Anr, the Resolution Professional invoked the residuary jurisdiction to defreeze the account of the Corporate Debtor, which was frozen by the Adjudicating Authority under PMLA. The NCLT held that they do not have the power to issue directions to the ED in this regard. It reiterated the stance adopted by the NCLAT in Kiran Shah v. Enforcement Directorate Kolkata that the jurisdiction to deal with matters related to attachment and freezing of accounts under PMLA vests exclusively with the authorities designated under the PMLA. If aggrieved by any action, the Resolution Professional can seek appropriate remedies under the PMLA itself. The statute provides adequate mechanisms for resolving concerns and claims. This clear demarcation of jurisdiction ensures that the PMLA remains independent of IBC and serves its legislative object.

    NCLT AUTHORITY AFTER APPROVAL OF THE RESOLUTION PLAN 

    While the forum for releasing attachments during the resolution process is relatively clear, the situation becomes complicated after approval of the resolution plan under Section 32A of the IBC  It states that the Corporate Debtor cannot be held liable for the prior offence committed by the erstwhile promoter, and protects the property from being attached.

    In Shivcharan judgement, the Bombay High Court reinforced this interpretation that after approval of the resolution plan, the Adjudicating Authority under the PMLA must release the attachments. It also stated that this is the only means of ensuring that the right, as stipulated in Section 32A of the IBC, will start to flow. This position is supported by the Supreme Court’s decision in Manish Kumar v. Union of India which upheld the constitutionality of Section 32A. Article 141 of the Constitution of India ensures consistency in the interpretation of law and set a judicial precedent where all lower courts follow the ruling made by the Supreme Court of India. Consequently, the PMLA Court is bound to comply and give effect to the Section 32A by releasing the attachment.

    However, the Shivcharan judgement erred in empowering the NCLT to release the attached property made under the PMLA under the residuary jurisdiction. The Bombay HC read something not expressly provided in the law and authorised NCLT to adjudicate upon the issue falling into the purview of another court. Though this judgment seeks to achieve the object of the IBC, it overlooks the relevant precedents and established principles. Notably, it stands in aberration with the Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, where the Supreme Court issued a note of caution to NCLT while exercising the residuary jurisdiction. The Apex Court noted that the NCLT has jurisdiction to adjudicate disputes that arise solely from or relate to the insolvency of the corporate debtor. It has to ensure that they do not usurp the legitimate jurisdiction of other courts or tribunals when the issue extends beyond the insolvency of the corporate debtor.

    Additionally, this approach is also in conflict with the principle of harmonious construction, which is applied to reconcile conflicting provisions within a statute or two different statutes. A harmonious construction cannot extend to the limit which renders one provision completely redundant. The Shivcharan judgement makes the provisions of the PMLA nugatory by bypassing the PMLA courts, and authorises the NCLT to release the attachment.

    Moreover, allowing the NCLT to discharge the attachment practically implies that the NCLT is sitting in an appeal against the Adjudicating Authority of the PMLA, where the latter confirmed the attachment made by the ED.  This goes against the settled principle that the forum to hear the appeal is to be tested in reference to the forum which passed the original order. Since the attachments are confirmed under Section 8(3) of the PMLA by its Adjudicating Authority, it must be discharged either by the same forum or by the appellate forum under Section 26 of the PMLA constituted thereunder. In short, the Adjudicating Authority under the IBC i.e. NCLT cannot assume the role of Adjudicating Authority under the PMLA.

    A WAY AHEAD

    As the appeal of the Shivcharan judgement and related cases are pending before the Supreme Court, a clear jurisdictional boundary must be established by a conclusive ruling. The authority to discharge attached property must rest with the PMLA Court unless a legislative amendment says otherwise. The PMLA Court is a competent forum authorised by the law to deal with attachment and permitting the NCLT to adjudicate on such matters only causes jurisdictional conflict and confusion among the litigators, forcing them to move from one court to another.

    However, while adopting this approach, Section 32A of IBC must be given effect. This provision represents the last expression of the intent of the legislature, as it was introduced through an amendment in 2020. After approval of the resolution plan, the PMLA court must be mandated to release the attachment. This ensures that the protection under the said provision can take effect, and the Successful Resolution Applicant is not made liable for the prior offence. For Section 32A to operate effectively, the perquisite prescribed therein must be satisfied, namely that the new management is not related to the prior management and is not involved in the alleged offence. In practice, the PMLA Court often encounters difficulties in determining compliance with these requirements while considering the release of attachments. To address this issue, the NCLT may issue a No Objection Certificate (‘NOC’) while approving a resolution plan, specifying that the statutory conditions of Section 32A are met. Such an NOC will affirm that a promoter is not regainingcontrol or laundering assets through the resolution process. It will prevent jurisdictional conflict and will not cause unnecessary hardships to litigating parties. In effect, this will ensure that resolution applicants are not discouraged, and revival of a corporate debtor is not obstructed.     

    This conflict between the IBC and the PMLA reflect the difficulty of reconciling two statutes having divergent objects and non-obstante clause. To maintain the independence of both statutes, a consistent position has to be adopted defining a clear jurisdictional boundary ensuring the revival of a corporate debtor is not discouraged. A conclusive ruling by the Supreme Court in this regard or an appropriate legislative amendment is essential to resolve this conflict and bring much-needed clarity to relevant stakeholders.

  • NCLT’s Departure: Reviving Time-Barred Claims in Insolvency Proceedings

    NCLT’s Departure: Reviving Time-Barred Claims in Insolvency Proceedings

    By Navya Bassi and Rhythm Goel, fourth-year students at NLU, Odisha

    Introduction

    Recently, the Mumbai bench of National Company Law Tribunal (‘NCLT’) in Gokul Anilkumar v. Shailesh Bhalchandra held that claims that are time-barred can get revived by Corporate Insolvency Resolution Process (‘CIRP’). It laid down that even though remedy is restricted, right cannot be negated. The facts of this case were that CIRP was initiated against Maharashtra Theatres Private Limited, who was the  debtor. A claim was filed by Creditor alleging a financial debt arising out of a term loan facility of Rs. 55 crores.  An application was submitted by the suspended director of the debtor to dismiss the creditor’s claim contending that the debtor’s account was declared as a Non- Performing Asset (‘NPA’) prior to the date of default, rendering the claim to be barred by limitation. The bench addressed two pertinent questions- admissibility of claims that are barred by limitation and ‘one time settlement’ as an acknowledgement of liability to resume the limitation period . The author seeks to analyse whether the bench has gone a bit too far and deviated from well settled position of law.

    Position Prior To This Judgement

    The Report of the Insolvency Law Committee in March 2018 stated that the enforcement of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was not to suit the interests of the creditors who failed to exercise the available remedies under the pre- existing laws within the prescribed period.

    In 2018, the Supreme Court (‘SC’) in the judgement of B.K. Educational Services Private Limited v. Parag Gupta relied on this report to derive the legislature’s intention of not giving an opportunity to present time- barred claims. It has been made explicitly clear by sections 7 and 9 of the IBC that the creditor can seek CIRP only for debts that have not crossed the limitation period.

    As held by the SC in Andhra Pradesh Power Coordination Committee & Ors v. Lanco Kondapalli Power Limited & Ors., it was not the intention of the legislature to enable a creditor to revive dead claims through the route of the IBC. Section 3 defines debt as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”. This was interpreted by the court as debts that are “due and payable” in law.

    Section 238A of the IBC was inserted through an amendment to explicitly state that for any proceeding before the Adjudicating Authority, the provisions of the Limitation Act, 1963 (‘Limitation Act’) shall be applicable to the proceedings. On the question of retrospective applicability, the SC in Thirmalai Chemicals Limited v. Union of India held that in essence, limitation is procedural and would be applied retrospectively.

    The interpretation of section 18 of the Limitation Act has been a contentious issue. This provision stipulates that if there is a written acknowledgment of liability before the specified period lapses, a new limitation period starts from that acknowledgment. However, the Supreme Court’s ruling in Babulal Vardharji Gurjar v. Veer Gujjar Aluminium held that section 18 would not apply to applications for initiating insolvency proceedings under the IBC. National Company Law Appellate Tribunal (‘NCLAT’) relied upon this contradictory decision for some time until clarity was provided in the case of Laxmi Pat Surana v. Union of India., wherein, the court affirmed that section 18 of the IBC should not be disregarded if circumstances necessitate its application. The court elucidated that if the debt or the responsibility to pay has been acknowledged by the principal borrower or the corporate debtor, new statute of limitations begins from the date of such acknowledgment, as long as it transpires before the expiration of the existing limitation periodTop of Form

    Chaos Ensued

    The order of the NCLT has gone beyond its jurisdiction  to create ambiguity with respect to the limitation period of claim under CIRP.

    To justify its decision, the bench has cited two cases, both being irrelevant in the present context. One of these references was the judgement of the SC in Punjab National Bank and Ors. v Surendra Prasad Sinha.. The court in this case had held that due to limitation, only suit as a remedy is barred. The creditors’ right subsists till the debt is repaid, and thus, he can still exercise his right through an alternative remedy, i.e. balancing the payment through fixed deposit in this case.

    The bench has relied upon this case to hold that claim under CIRP cannot be dismissed on the grounds that it is time constrained. Placing the two cases in juxtaposition, the claims in both are completely dissimilar to each other,  as the Punjab National Bank case pertains to a claim of  criminal breach of trust under the Indian Penal Code, 1860 (‘IPC’) where the issue was of creditor deducting money from the debtor’s bank account outside the limitation period. Even the remedy obtained in this case was not sought through IBC as money was simply deducted from the account after which the validity of the same was challenged before the court. The extract used from this case is “only exception in which the remedy also becomes barred by limitation is that right itself is destroyed.” However, the same judgement also goes on to say that the remedy to enforce the liability stands destroyed after period of limitation lapses. Which, however, is conveniently ignored by the court in the Gokul case.

    Another case that has been referred by the bench is Sunil Kumar Aggarwal v. New Okhla Industrial Development Authority & Ors. by reproducing the part of the order which reads as “The claim cannot be rejected because it is time- barred or claimed by an entity other than the financial creditor.” The bench has read the order in isolation, not being cognizant of the order in entirety which held the claim to be admissible only as it was within the ambit of limitation period. Moreover, the limitation period in question was of twelve years as it pertained to immovable property. This cannot be used as a justification for the present order as the limitation period had not lapsed in the cited case, but it is time-barred in the instant case.

    These cited judgements hold no water as they are not in the context of initiating IBC proceedings outside the limitation period and only add to confusion of the legal fraternity.

    Questions Left Unanswered

    This judgement has encroached upon the already settled questions of law. section 60(6) of the IBC excludes the period of moratorium from the computation of limitation period under the Limitation Act. If the IBC’s intent were to operate in complete alienation of this Act, there would have been no need of incorporating this section in the first place.

    This case particularly had a One Time Settlement (‘OTS’) wherein the debt was acknowledged by the member of the board of directors of the corporate debtor. As per Tejas Khandahar v. Bank of Baroda, OTS proposals come within the ambit of ‘acknowledgement of debt’ in consonance with section 18 of the Limitation Act.

    However, there are certain loopholes in this judgement. Firstly, to what extent is it permissible to assess veracity of the claim when it already fails to meet the criteria provided under the Limitation Act? If this case is to be followed as a precedent by the courts, there will be no point in having an express provision in the first place that bars admissibility of such claims. Secondly, is this judgement phrased this way because of OTS as a recourse, or because the bench necessarily implies evaluating the merits of time-barred claims? An OTS has been repeatedly held as an acknowledgement of liability by the debtor and for the same, a fresh limitation period is permissible under law starting from the date of such an acknowledgement. However, the same is not true for the claims that do not have such a proposal in their agreements. This order fails to distinguish two such scenarios.

    This position was settled by the SC until now. And a departure from the same requires coherent reasoning, which this particular judgement fails to deliver.  

    Conclusion

    Even with the laid down position of law in place, we see that NCLT diverges from the same to lay down its own interpretation of law in the case of Gokul Anilkumar v Shailesh Bhalchadra. NCLT’s decision to revive time-barred debts has led to confusion, citing case law irrelevant to the issues raised in this case. One of the cases cited by the Bench clearly bars the remedy of suit for falling outside of the limitation period, while the other has accepted the claim solely because it falls within the purview of the limitation. So, it is irrational to cite these cases to justify the decision of the bench

    Prior to this order, both the legislative and judiciary seemed clear on the law that claims barred by limitation will not be admissible under the IBC, except in the cases wherein OTS proposals were incorporated. This judgement has the potential to open a pandora’s box of unanswered questions, particularly on assessing the veracity of time-barred claims.

    Until there is further clarification or intervention with respect to this order and the law interpreted therein, the decision stands as a contentious point, leaving room for continued debate and potential future legal challenges.

  • Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    A 4-minute read by Arihant Jain, a fourth-year student of Nirma University

    The National Company Law Appellate Tribunal (‘NCLAT’) on 18.12.20 in the case of Rajnish Jain v. BVN Traders and ors (‘Rajnish Jain’)held that the Committee of Creditors (‘CoC’) constituted under Section 21 of the Insolvency and Bankruptcy IBC, 2016 (‘IBC’) cannot determine the status of a creditor as a financial or an operational creditor. It is a matter of applying insolvency law to the facts of each case. The judgment clarified that only the adjudicating authority has power to adjudicate the status of a creditor as a financial or an operational creditor. The author hereinafter highlights the judiciousness of the Rajnish Jain judgment in the light of the principle of equality of similarly situated creditors, commercial wisdom of the CoC & limited rights of the CoC under the IBC.

    Factual Background

    The National Company Law Tribunal, Allahabad (‘NCLT’) admitted an application under Section 9 of the IBC to initiate Corporate Insolvency Resolution Process (‘CIRP’) against the corporate debtor, Jain Mfg (India) Pvt. Ltd. BVN Traders,the Respondent in this case had extended a loan of Rs. 80,00,000 to the corporate debtor having a secured title deed of the property of corporate debtor against the consideration of 18% per annum. BVN Traders had filed FORM C as financial creditors and the insolvency resolution professional (‘IRP’) admitted the claim of BVN Traders as a financial creditor.

    Rajnish Jain, the promoter, stakeholder and managing director of the corporate debtor, filed an application for removal of BVN Traders from the status of financial creditor. The NCLT directed the resolution professional (‘RP’) of the corporate debtor to seek approval from the CoC to change the status of BVN traders from financial creditor. Pursuant to this, the CoC passed a resolution that BVN Traders is to be treated as financial creditors.  In light of this resolution, the NCLT rejected the claim of the promoter via order dated 23.01.20.

    Subsequently, in the 7th meeting of CoC, the RP again proposed the agenda to determine status of BVN Traders. The CoC passed a resolution with its majority that BVN Traders is not a financial creditor. The CoC also discussed the agenda regarding withdrawal of CIRP under Section 12A of the IBC and for the same, prior approval of 90% majority of voting shares of CoC is required. However, the withdrawal resolution did not attain the 90% majority and the same was not passed. In the 8th meeting of the CoC, withdrawal of CIRP process was again discussed and the same was passed by CoC without including BVN Traders in the CoC. An appeal was filed by Rajnish Jain against the order dated 23.01.20 of the NCLT.

    Decision of the NCLAT:

    The NCLAT observed that the CoC cannot determine the status of creditor. It is a matter of applying the applying the IBC laws to facts. It further held that CoC cannot use its commercial wisdom to determine the status of creditor. The NCLAT observed that despite the order being passed by the NCLT, the CoC proceeded to change its earlier stance and passed a resolution contrary to NCLT order, thereby undermining its authority. The NCLAT also held that the resolution passed in the 8th meeting was bad in law since it was passed after illegally reconstituting the CoC. 

    Current Position of Law 

    Financial creditor and Operational creditor are defined under Sections 5(7) and 5(20) of the IBC. Pertinently, the Supreme Court’s judgment in the case of Swiss Ribbons Pvt. Ltd v.UOI differentiated both the terms by relying on the recommendation of  BLRC Report, 2015:

    “Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations.”

    Further, in Pioneer Urban Land and Infrastructure Ltd and ors v. UOI, the Apex Court observed that financial creditors owe financial debt to meet the working capital or requirement of corporate debtor. On the other hand, operational creditors provide goods and service to the corporate person. In the instant case, the loan extended to corporate debtor is a pure financial contract to meet the working requirement. Therefore, the NCLAT has rightly denied the arbitrary decision of CoC in determining the status of creditor.

    Analysis

    • Principle of Equality – Similarly situated creditors should be treated alike

    Article 14 of Constitution of India provides that equals should be treated equally and unequal should be treated unequally. Further, in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors., the Apex Court observed that similarly situated creditors should be treated equally. Empowering the CoC to determine the status of a creditor will create inequality amongst the same class of creditors as other creditors of the CoC would determine the status of a creditor of the CoC who is in pari passu with them. In the instant case, the NCLT failed to consider the principle of equality by authorizing the CoC to determine the status of BVN Traders.

    • Commercial wisdom of the CoC – Not an absolute power

    Commercial wisdom of the CoC is not an absolute power. The Apex Court in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors has observed that commercial wisdom must be in consonance with the basic aims and objectives of IBC.  Decision of the CoC is subject to checks and balances of the IBC. In Swiss Ribbons Pvt Ltd. v. UOI, the Supreme Court has observed that the primary objective of the IBC is to balance the interests of all stakeholders. Under the IBC, an aggrieved person has the authority to challenge the constitution of CoC or categorization of creditors before the adjudicating authority. In the instant case, reclassifying the status of creditor by CoC is beyond the scope of commercial wisdom since it is in the hands of adjudicating authority to adjudicate the claims of categorization of creditors. Under Section 61(1) of the IBC, aggrieved party may challenge the order passed by NCLT before the NCLAT. However, in the instant case, the CoC sat in the position of NCLAT and gave a resolution contrary to the order passed the NCLT, which is beyond the aims and objectives of the IBC.

    •  The IBC is a complete code in itself

    Section 28(1) of the IBC which enumerates the conditions where prior approval of the CoC is required does not provide for seeking it for the determination of the status of a creditor during CIRP. Moreover, no provision under the IBC empowers the CoC to determine the status of a creditor. It is also pertinent to mention that the IBC is complete in itself. It has unambiguously laid down the powers of the CoC. 

    Further, an aggrieved party dissatisfied with the status of a creditor can submit an application to the NCLT through RP with the approval of 90% voting share of the CoC for the withdrawal of CIRP. However, in the 7th meeting of CoC in the instant case, only 66% of the CoC approved the withdrawal of CIRP. Further, a financial creditor, being a part of the CoC, cannot be excluded from taking part in the voting process of withdrawal of CIRP process. It would be violation of legal right of creditor of CoC mentioned under Section 12A of IBC.  However, in the 8th meeting of the CoC in the instant case, BVN Traders was not allowed to vote for the withdrawal of CIRP. Hence, the legal right of BVN Traders to vote under Section 12A is being defeated. 

    Judgment of Adjudicating Authority: It is a matter of applying law to the facts of each case    

     It is pertinent to mention that it is the statutory duty of court to deliver any judgment based upon the law. For clarifications, the court has the authority to take the opinion of experts. However, the judgment cannot be based solely on the expert opinion. The judgment has to be delivered by applying the law to the facts. In the instant case, the NCLT had delivered its judgment based solely on the decision of the CoC, however, the status of a creditor needs to be determined by the NCLT by applying the IBC to the facts of each case. The NCLAT has rightly clarified that the status of creditor could be determined only by applying the IBC to the facts of each case. 

    Conclusion

    The NCLAT has rightly adjudicated the matter by removing the flaws of NCLT’s decision which   would have led toimbalance by going against the purpose of commercial wisdom of the CoC. CIRP being the collective resolution process seeks parity amongst similarly situated creditors. Preference cannot be given to any similarly situated creditors. The adjudicating authority, by not providing legal reasoning for empowering the CoC to determine the status of creditor failed to consider that legal reasoning is the core of any judgment. The NCLAT has rightly adjudicated that empowering the CoC with such rights would have completely disabled the intent and purpose of the CIRP under the IBC.