Judicial Interference and the IBC: The case of Embassy Property Developments

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-Vrishank Singhania*

Those who fail to learn from history are condemned to repeat it.

The Insolvency and Bankruptcy Code, 2016 (IBC), heralded the beginning of a new insolvency regime in India. Its predecessor, the erstwhile Sick Industrial Companies Act, 1985 (SICA), had riddled the insolvency process with inefficiencies and delays. While the Act itself was to blame for this, part of the fault also lay with the adjudicatory framework. Incessant interference from High Courts (HCs) and the Supreme Court (SC) crippled the specialised authorities set up under SICA and lead to interpretations of the Act that were never intended for.[1] Thus, for a successful insolvency regime, an overhaul of the law is necessary, but not sufficient – it also requires judicial discipline.

It is this second aspect, that of judicial interference, that this article is concerned with. While the law has been overhauled through the passage of the IBC, the trajectory of court interference is one that has to been seen in the coming few years. However, if the early signs are indicative of anything, it is that the judiciary has not learnt from the failure of the SICA regime – judicial interference continues unabated. This is concerning, because it could mean that the same fate that befell SICA could also befall the IBC. In this context, the SC ruling in Embassy Property Developments v. State of Karnataka, assumes significance. In this case, the SC approved of a party bypassing the NCLAT, holding that the NCLT cannot exercise jurisdiction in the “public law domain.” This article makes two arguments – first, that this case is an example of unwarranted judicial interference and second, that it creates hindrances for an effective insolvency regime.

Summary of Facts

The corporate debtor in this case held a mining lease granted by the Karnataka Government, which was set to expire on 25 May, 2018. The Resolution Professional (RP) filed a writ petition before the Karnataka HC, seeking an extension of the lease under the Mines & Minerals (Development and Regulation) Act, 1957 (MMDR Act). The Government passed an order rejecting the extension and decided to prematurely terminate the lease. The RP then withdrew the writ petition and approached the NCLT, which held that the corporate debtor would be granted an extension. Aggrieved by this order, the Karnataka Government moved a writ petition before the Karnataka HC. The Court set aside the NCLT order and remanded the issue back to the NCLT for its re-consideration.

The NCLT passed a similar order again and granted the corporate debtor the benefit of the extension. Thereafter, the Karnataka Government filed another writ petition before the HC, and an interim stay on the NCLT order was granted. This interim order of the HC was appealed against in the SC. It was contended that the HC could not have exercised writ jurisdiction in the present case because the NCLAT could not have been bypassed.  

Unwarranted Judicial Interference

The SC held that in the present case, it was legitimate for the Government to have bypassed the NCLAT, and moved to the HC instead. This was based on two prongs – first, that it is permitted within the scope of review under Art. 226 of the Constitution of India; and second, that the NCLT acted in excess of its jurisdiction.

Scope of review under Art. 226

It is well-recognized that when an alternative statutory remedy exists, HCs should not ordinarily exercise judicial review under Art. 226. This rule can be traced back to Wolverhampton New Waterworks Co. v. Hawkesford,[2] in which J. Wiles held that when a liability is created by a statute, the remedy provided by the statute must be followed, and no other method should be used to enforce it. There have however, been exceptions recognized to this rule, for instance when the vires of the law is challenged, when a fundamental right has been violated, when principles of natural justice have not been followed, or when the tribunal’s order was wholly without jurisdiction.[3]

In the present case, the SC relied on the last exception. It held that where there was merely an “error of jurisdiction”, a statutory appeal could not be bypassed. However, when the order was “in excess of jurisdiction”, the HC could exercise judicial review, bypassing the statutory appeal. Thus, if it is shown that the NCLT order in the present case, was “in excess of jurisdiction”, the HC’s interference would have been permissible.

NCLT’s jurisdiction

The NCLT’s jurisdiction has been codified in sec. 60(5) of the IBC. According to sub-clause (c), it includes “any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”

The SC held that since the decision by the Government of Karnataka to terminate the mining lease is in the “public law domain”, it would not come within the scope of sub-clause (c). It provided no authority or reasoning for this conclusion.

While the SC deals with the interpretation of the moratorium under sec. 14 of the IBC as an ancillary question, it is in fact at the heart of the dispute. Unlike the SC’s idea that the NCLT exercised some sort of judicial review over the Karnataka Government, all the NLCT had done was hold that the Government’s order contravened sec. 14 of the IBC.

Sec. 14(1)(d) of the IBC prohibits “the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor”, after the initiation of the corporate insolvency resolution process. The IBC’s definition of “property” in sec. 3(27) includes any vested interest arising out of land. Thus, the mining lease would come within the ambit of “property”. This means that, on a simple application of the provision, after the moratorium period came into force, the Government (the lessor) could not have terminated the mining lease (property), since the said lease was in the possession of the corporate debtor.

However, as per the SC, the Government order did not come within the scope of sec. 14 of the IBC for two reasons – first, the lease did not grant “exclusive possession” to the corporate debtor; and second, the moratorium only preserves status quo and cannot create new rights (extension of the lease in the present case). In my opinion, both of these findings are erroneous.

The first one is erroneous because sec. 14(1)(d) of the IBC merely uses the phrase “possession”. There is no provision of the IBC which construes possession to mean “exclusive possession”. Further, the SC provides no authority for such a construction of sec. 14. In any case, the mining lease over the specific mines was granted exclusively to the corporate debtor.

The second one is erroneous because the NCLT’s order did not create a new right. As per sec. 8A(6) of the MMDR Act, the mining lease “shall be extended and be deemed to have been extended up to a period ending on the 31 March, 2020.” The SC has itself in Common Cause v. Union of Indiarecognized that s. 8A grants such a deemed extension.[4]

The SC’s confusion with the scheme of the IBC is further apparent, when it says that the RP’s act of first approaching the HC before the NCLT is a concession that the NCLT did not have jurisdiction. The first writ petition was filed by the RP because the Government had not passed an order either accepting or rejecting the corporate debtor’s application. The RP wanted the HC to issue a mandamus to the Government to pass an order. At this stage, the NCLT did not have jurisdiction. The NCLT could exercise its jurisdiction only after the Government passed an order because it could now determine whether the order was hit by the moratorium or not. This is why, after the order was passed, the RP withdrew his writ petition, and filed an application with the NCLT.

Even if we were to agree with the SC’s analysis on sec. 14 of the IBC, there is no justification that the SC provides as to why the NCLT’s order was “in excess of jurisdiction”. The present matter was squarely one that involved an interpretation of sec. 14 of the IBC – the NCLT had to decide whether a particular order came within the scope of the moratorium or not. This clearly comes within the scope of the NCLT’s jurisdiction under sec. 60(5) of the IBC.

The SC went to great lengths in this case to show that the conflation of “error of jurisdiction” with “in excess of jurisdiction” in Anisimic Ltd. v. Foreign Compensation Commission,[5]would not apply in the present case. Despite this, the SC itself conflates the two. Even if it disagreed with the NCLT’s interpretation of sec. 14 of the IBC, this was an “error of jurisdiction” and not an error “in excess of jurisdiction.” As held in Official Trustee, West Bengal v. Sachindra Nath (which the SC relies on in the present judgement),[6] “it is equally plain that if he had jurisdiction to pronounce on the plea put forward before him the fact that he made an incorrect order or even an illegal order cannot affect its validity.” Thus, even if the NCLT erred in its interpretation of sec.14 of the IBC, this would not be a sufficient ground for the HC to exercise its power of judicial review and bypass the NCLAT.                                                                                                          

Hindrances for an Effective Insolvency Regime

The SC’s decision in this case is a problematic precedent that creates hindrances for an effective insolvency regime going forward. This is for three reasons – first, it dilutes the moratorium provision in the IBC; second, it dilutes the IBC’s overriding effect; and third, it conflates “error of jurisdiction” and “excess of jurisdiction”.

First, the SC dilutes the moratorium provision in the IBC. Zweiten argues that one of the reasons for the failure of the SICA regime was the judicial innovations that led to a dilution of the moratorium provisions.[7] A similar problem can be seen in the present case. The SC reads the requirement of “exclusive possession” into sec. 14(1)(d) of the IBC. This effectively means that if the corporate debtor has an interest in a property that it shares with another company, the owner or lessor would not be barred from moving for recovery of the property, even after the moratorium has kicked-in. Such a qualification is not envisaged within the scheme of the IBC.

Further, the SC also effectively holds that matters that come in the “public law domain” would not come within the scope of the moratorium. The SC explains this by giving the hypothetical of an order passed by the Income Tax Appellate Tribunal (ITAT). According to the SC, the NCLT cannot rule against such an order by the ITAT.[8] This again dilutes the scope of sec. 14 of the IBC. The consequence of this holding is that any order passed by a public authority (which would include statutory tribunals) would not come within the scope of sec. 14, thereby making the moratorium provision largely redundant. This implies that the insolvency process could be riddled with proceedings from multiple authorities, which would lead to numerous delays. It further means that other tribunals and authorities can attach the corporate debtor’s properties and demand payment of fines, thereby reducing the asset value of the corporate debtor. This would defeat the twin goals of expeditious disposal and of “maximisation of value of assets” that the IBC strives for.[9]

Second, it dilutes the IBC’s overriding effect. As per sec. 238 of the IBC, the IBC would override other provisions of law. As per the scheme of the Act, conflicts with other statutes (particularly decisions by other statutory tribunals) would be resolved in favour of the IBC on a joint reading of sec. 14 and sec. 238 of the IBC.[10]

However, the SC effectively carves out an exception to this, by holding that the NCLT has no power over “the public law domain”. The SC’s conception of “public law” in this case is based on “public interest”. Such a broad and vague formulation could be used to argue that certain “public law” statutes do not come within the scope of s. 238 of the IBC, thereby diluting IBC’s overriding effect.

Third, the SC conflates “error of jurisdiction” and “excess of jurisdiction”. As analysed above, it is clear that the Court conflated the two when it used an interpretation of s. 14 to hold that the NCLT acted in excess of jurisdiction. It further states that application of a “wrong test” would constitute an “excess of jurisdiction”. A “wrong test” could include the application of any principle or precedent on any question of law. The consequence of this is that it opens up the floodgates for parties to bypass statutory remedies by arguing that the tribunal acted “in excess of jurisdiction”. Such a trend could hamstring the entire insolvency process and riddle it with delays. Ultimately, this would mean that the same fate as the SICA regime would befall the insolvency regime too.

Conclusion

It is clear from the analysis above that the SC’s ruling in this case itself constitutes an example of unwarranted judicial interference and sets up a problematic precedent that could render the IBC regime ineffective. While outside the scope of the present article, this case also raises the question of the grounds on which judicial review should be granted.

Over the years, HCs have been expanding their exercise of discretionary jurisdiction under Art. 226/Art. 227 of the Constitution of India. Such an observation was also made in the Economic Survey of India (see figure 1 below).[11] This, according to the report, was one of the reasons for increasing delays and pendency in HCs.

Figure 1: Number of Decisions that relied on Article 226 of the Constitution and Section 482 of the Code of Criminal Procedure (All HCs, 1980-2016 in Thousands)[12]

There is a need for HCs to exercise greater constraints on their exercise of Art. 226 powers, particularly when it involves bypassing statutory remedies. The grounds of judicial review need to be constricted. One way in which this can be done is by removing jurisdictional errors as a ground for exercise of judicial review. For one, the distinction between jurisdictional and non-jurisdictional errors is superfluous and only leads to further confusion.[13] Second, when a statute empowers a tribunal, it also empowers it to rule on its own jurisdiction.[14] Since jurisdiction depends on a construction of the statute, which the tribunal has the power to carry out, jurisdictional claims should remain within the statutory dispute resolution framework. The concept of jurisdictional errors may have made sense in an era where appellate tribunals did not exist, but in the current era, such a nebulous concept only serves to allow judicial interference, at the whims and fancies of HCs. The legislature has played its part by overhauling the insolvency regime. The executive too has played its role by regularly passing regulations and rules. However, neither of these is sufficient for a successful insolvency regime. Judicial discipline and non-interference is of paramount importance, and we can only hope that the judiciary learns from its past mistakes.


* Vrishank is a student of law at the National Law School of India University, Bangalore.

[1] Kristin van Zweiten, ‘Corporate Rescue in India: The Influence of the Courts’ [2015] 15 Journal of Corporate Law Studies 1.

[2] [1859] 6 C.B. (NS) 336.

[3] Harbanslal Sahnia v. Indian Oil Corporation Ltd., AIR 2003 SC 2120.

[4] (2016) 11 SCC 455.

[5] [1969] 2 AC 147.

[6] 1969 AIR SC 823.

[7] Zweiten [n 1] 32.

[8] Interestingly, this seems to reverse the holding in Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., (2018) 18 SCC 786, in which the SC held that the ruling of the ITAT would come within the scope of sec.14 of the IBC.

[9] Preamble, Insolvency and Bankruptcy Code, 2016.

[10] Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., (2018) 18 SCC 786.

[11] Ministry of Finance, ‘Economic Survey of India 2017-18 (Vol. 1), 134.

[12] Ministry of Finance, Annexures (Vol. 1) in ‘Economic Survey of India 2017-18, A33.

[13] Rao Bhupendra Singh v. Smt. Gopal Kunwar Umath, AIR 1970 MP 91; Mark Leeming, ‘The Riddle of Jurisdictional Error’ (2014) 38(2) Australian Bar Review 139.

[14] The Queen v. The Commissioners for Special Purposes of the Income Tax, (1888) 21 Q.B.D 313.

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