Sat. Mar 23rd, 2019

Scope of Article 227 to interfere with IBC proceedings up for debate as TAPHC stays insolvency admission

Last Updated on

After Telangana and Andhra Pradesh High Court stayed an NCLT order initiating insolvency resolution process against a corporate debtor, the scope of supervisory jurisdiction of High Courts in dealing matter related to Insolvency and Bankruptcy Code, 2016 (IBC) is again up for debate. Hearing a petition under Article 227 of the Constitution of India, on July 17, 2017, Telangana and Andhra Pradesh High Court, granted an interim suspension of an order of the Hyderabad Bench of NCLT admitting a petition for initiation of corporate insolvency resolution process (CIRP) against Ramky Infrastructure Limited. Before the NCLT, Todi Minerals Private Limited, as an operational creditor, had sought to initiate CIRP under Section 9 of IBC, for non-payment of around Rs 1.27 crore from Ramky.

On July 13, 2017, dismissing Ramky’s claim of a dispute as a pre-existing dispute, NCLT admitted the Section 9 petition and appointed an insolvency resolution professional. It also issued a moratorium under Section 14 of IBC. Subsequent to this order, a petition under Article 227 of the Constitution was filed with the High Court “praying that in the circumstances stated in the grounds [in the petition], the High Court may be pleased to exercise its supervisory and corrective jurisdiction under Article 227 and set aside the [NCLT Order].

It appears, however, that before the matter could reach the bench, an office objection was raised “as to the maintainability of [the] revision under Article 227”. The single judge bench of the High Court comprising Justice Sanjay Kumar, on hearing the arguments of senior counsel S Niranjan Reddy, observed:

“[NCLT] is a Tribunal functioning in a territory over which this Court exercises jurisdiction. In terms of the law laid down by the Constitution Bench in L CHANDRA KUMAR V/s. UNION OF INDIA [(1997) 3 SCC 261], Article 227 of the Constitution forms part of the inviolable structure of the Constitution and provisions of the Insolvency and Bankruptcy Code, 2016 cannot have the effect of prevailing over the Constitutional power of this Code under Article 227.”

Hearing an interlocutory application filed along with the petition under Section 151 of Code of Civil Procedure Code, 1908, seeking suspension of the NCLT’s admission order, High Court recorded that the Petitioner’s counsel had produced before the Court, original demand drafts of the total amount of Rs. 1,27,52,887, which would cover the claim amount in the Section 9 petition before the NCLT. Court observed:

As the petitioner is able to prove its bonafides apart from its financial liquidity as on date, there shall be interim suspension as prayed for.

Subsequent to this, Ramky issued a disclosure with the BSE Limited:

“The Company had received an Order on July 16, 2018 from National Company Law Tribunal, Hyderabad, in the matter of M/s. Todi Minerals Private Limited in the CP (IB) No. 56/9/HDB/2018 under Rule 6 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
Further the company vide its appeal against the Order of NCLT had received the Order dated July 17, 2018 from High Court of State of Telangana suspending the order issued by NCLT.”


Why the debate

Scope

Article 227 of the Constitution confers High Courts with superintendence over all courts and tribunals throughout the territories within which they exercise jurisdiction. High Courts and the Supreme Court have, however, at several occasions, reviewed the scope of interference under Article 227. In Mohd. Yusuf v. Faij Mohammad, (2009) 3 SCC 513, the Supreme Court has held:

 “The jurisdiction of the High Court under Articles 226 and 227 of the Constitution of India is limited. It could have set aside the orders passed by the [courts below] only on limited grounds, namely, illegality, irrationality and procedural impropriety. The High Court did not arrive at a finding that there had been a substantial failure of justice or the orders passed by the [courts below] contained error apparent on the face of the record warranting interference by a superior court in exercise of its supervisory jurisdiction under Article 227 of the Constitution of India.”

Provision for appeal under IBC and the 2018 Ordinance

It is also pertinent to note that the IBC itself provides under Section 61, a right to challenge orders passed by the NCLT, including orders passed by NCLT under Section 9. What is more important to note is that the recent Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, has already provided a mechanism for withdrawal of application for initiation of insolvency resolution process even after its admission.

The need for this amendment had arisen due to such a requirement being felt and upon the repeated observations in this with regard by the Supreme Court. Observing so, the Supreme Court would exercise its inherent powers under Article 142 of the Constitution to settle the matter if the parties had reached to a mutual settlement after admission of the application. In Uttara Foods and Feeds Private Limited v. Mona Pharmachem, CA 18520/2017, the Supreme Court bench comprising Justices Rohinton Fali Nariman and Sanjay Kishan Kaul had suggested the relevant provisions to be amended by the competent authority. It had observed:

“We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached.”

With the latest ordinance, Section 12A has been introduced in the IBC which provides that NCLT may allow the withdrawal of an application admitted under section 7, 9 or 10, on the application made by the applicant with the approval of 90 percent voting share of the committee of creditors.

In this regard, it is relevant to note that in Surya Dev Rai v. Ram Chander Rai, (2003) 6 SCC 675, Supreme Court had observed:

26. In order to safeguard against a mere appellate or revisional jurisdiction being exercised in the garb of exercise of supervisory jurisdiction under Article 227 of the Constitution, the courts have devised self-imposed rules of discipline on their power. Supervisory jurisdiction may be refused to be exercised when an alternative efficacious remedy by way of appeal or revision is available to the person aggrieved. The High Court may have regard to legislative policy formulated on experience and expressed by enactments where the legislature in exercise of its wisdom has deliberately chosen certain orders and proceedings to be kept away from exercise of appellate and revisional jurisdiction in the hope of accelerating the conclusion of the proceedings and avoiding delay and procrastination which is occasioned by subjecting every order at every stage of proceedings to judicial review by way of appeal or revision. So long as an error is capable of being corrected by a superior court in exercise of appellate or revisional jurisdiction, though available to be exercised only at the conclusion of the proceedings, it would be sound exercise of discretion on the part of the High Court to refuse to exercise the power of superintendence during the pendency of the proceedings. However, there may be cases where but for invoking the supervisory jurisdiction, the jurisdictional error committed by the inferior court or tribunal would be incapable of being remedied once the proceedings have concluded.”


Not the first time

This, however, is not the first instance of High Court interfering with a CIRP admission order under the IBC. An order of Chennai Bench of NCLT dated July 19, 2017, while hearing a Section 9 petition, was challenged before the Madras High Court under Article 227. The petition claimed that the “[NCLT] order came to be passed in utter violation of principles of natural justice”. High Court granted an interim stay on July 24, 2017, after which the operational creditor appeared and opposed the Article 227 petition before the High Court. On October 24, 2017, High Court while setting aside the July 19, 2017 order of NCLT for “non-compliance of principles of natural justice”, observed that it was open for the NCLT to “to pass orders on merits after hearing the parties”. Subsequent to this order, on April 23, 2018, NCLT admitted the Section 9 petition.


What’s next

The Telangana and Andhra Pradesh High Court would be hearing the above petition next on August 03, 2018. Since the settlement demand drafts in favour of the operational creditor, covering its claim, have already been deposited with the High Court, it would be interesting to see if it would oppose the hearing of the petition by the High Court.

1 thought on “Scope of Article 227 to interfere with IBC proceedings up for debate as TAPHC stays insolvency admission

  1. Hello Garima,
    please advice me on a matter.
    An order has been passed by the NCLAT, by which resolution plan of a “A” company has been approved and the company “A” has been permitted to take over the company B. Also as per the order, company A is supposed to pay off the debts of the operational creditors of company B.
    In such circumstances, can a bank, who is a creditor of this “operational creditor” get an order from the High Court under article 226, to directly get the due amount from company A.

    Is there any case law on this point?

Leave a Reply

Your email address will not be published. Required fields are marked *