India: Inherent Powers Of Courts And Tribunals

Last Updated: 9 November 2017
Article by Prachi Dave and Sana Khan

A company petition filed by Nisus Finance & Investment Managers LLP ("Nisus") against Lokhandwala Kataria Construction Pvt. Ltd ("Lokhandwala") has caused much ado in the recent past.1The brief facts of the case were that a company named Vista Homes Pvt. Ltd. raised monies by way of debentures under a debenture trust deed whereby the redemption of the debentures was inter alia guaranteed by Lokhandwala. Nisus acting as the facility agent has filed this petition on behalf of all the debenture holders. The Tribunal ordered that the corporate debtor was under obligation to make repayment to the debenture holders and therefore, the Corporate Insolvency Resolution Process was initiated and the interim insolvency resolution professional was appointed. However, the company and the creditor subsequently re-negotiated the repayment and reached a suitable financial arrangement. Consequently, the company paid part of the outstanding amounts as per the revised arrangement between the parties and the petitioner sought to withdraw the suit against Lokhandwala.

In this relation, it is relevant to consider the provisions of Rule 8 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which allows withdrawal only up to admission. The National Company Law Tribunal ("NCLT") and the National Company Law Appellate Tribunal ("NCLAT") established under the Companies Act, 2013 are tribunals that are guided by the principles of natural justice subject to provisions of the Companies Act, 2013 and the Rules made there under2. Rule 11 of the NCLT Rules, 2016 and the NCLAT Rules, 2016 provide 'inherent powers' to the Tribunals to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of process of the Tribunal. These inherent powers pronounce equity as an integral part of these Tribunals. Therefore, could the NCLT and/or the NCLAT have allowed Nisus to withdraw the petition given that the creditor under the circumstances clearly thought it fit to allow the company to function and not a case which merits the winding up of the company. In fact, winding up of the company on an as-is-where-is-basis could potentially harm the interest of the creditor by jeopardizing the recovery of the debtal together. However, the said Rule 11 has hitherto not been brought into effect and therefore NCLAT refused the withdrawal of the said petition.

The financial debt or approached the National Company Law Appellate Tribunal against the order passed by NCLT admitting the petition and in voking its inherent powers under Rule 11 of the National Companies Law Appellate Tribunal Rules, 2016. It was submitted that the parties had settled the dispute and part amount was already paid3 therefore the Appellate tribunal can exercise its inherent powers and record consent terms between the parties. However, on 13thJuly 2017 the Appellate Tribunal dismissed the appeal by reliance on the aforementioned Rule 8 and ruled that such settlements cannot be ground to interfere with the impugned order in absence of any other infirmity.

Thus, it appears that it is open to the Financial Creditor to withdraw the application before admission of an application under Section 7,  but once it is admitted, it cannot be withdrawn even by the relevant Financial Creditor. A similar view was expressed by the Appellate Tribunal in the matter of Mother Pride Dairy India Pvt. Ltd. vs. Portrait Advertising & Marketing Pvt. Ltd4 wherein the corporate debtor cited out of court settlement with the Operational creditor. The NCLAT observed that pursuant to the public announcement under section 15 read with section 18 of the IBC other creditors are entitled to raise their claims against the corporate debtor and hence even an operational creditor cannot be withdrawn an insolvency resolution application once admitted. Although, a slight distinction between the two cases needs to be discussed at this point. That is, the issuance of the public advertisement. The legal intent in issuing the public advertisement is to make the other creditors and stakeholders of the company aware of the winding up petition being admitted and for them to submit their claims. In the case of Nisus, the public announcement had yet to be published and therefore no other claims were received and the only interested parties remained Vista and Lokhandwala, however, the Appellate Tribunal did not allow withdrawing the suit on account of plain reading of the Rule 8 as stated above. Therefore the debtor company approached the Supreme Court for consideration of the aforementioned issue.

Supreme Court's use of its Inherent powers:

The Supreme Court, in Lokhandwala Kataria Construction Pvt. Ltd. vs. Nisus Finance & Investment Managers LLP5, was posed with the question as to whether NCLAT could utilize its inherent powers recognized by Rule 11 of the NCLAT Rules, 2016 to allow a compromise in a matter where application for insolvency resolution has been accepted. The Apex Court(without extensively dealing with the said question on merits) ruled that the Appellate Tribunal stood correct in not exercising its inherent powers under the aforesaid Rule 11 to record consent terms of the parties after the Application for Insolvency resolution was admitted. However, the Hon'ble Court put a quietus to the matter by taking consent terms on record utilizing Article 142 of Constitution of India.

It is true that on admission of the insolvency petition, the proceedings acquire the character of representative suit. Although the Supreme Court has not reasoned its order, it seems rational to allow the proceedings to abate at a time when the sole creditor at whose instance the proceedings were filed is no longer interested in pursuing the matter and is benefitted by settling the debt outside of court. With respect to a creditor, the whole purpose of the initiating winding up is to recover the winding up petition debt (or whatever maybe recoverable given the circumstances). Therefore, it maybe more beneficial for the creditor to re-negotiate  the repayment agreement due to the fact that after the public announcement other creditors (including those whose payments may not be due for a while) will seek immediate repayment, the bank account will be frozen and the company fail as the business will be vested in the liquidator/ resolution professional. Therefore, if a winding up order is made then it is in fact likely that all debts of the debtor creditor will have to take a serious haircut to maintain even a possibility of repayment.

However, none of the above, would in fact affect the rights or remedies of the other creditors of the company. It would of course remain open to any other creditor of the corporate debtor to file independent proceedings for recovery of its debt or file for insolvency and liquidation of the corporate debtor and for the NCLT to admit such insolvency at such relevant time. Therefore, it does not appear that the ruling of the Supreme Court could have adversely affected the rights of the other creditors of the company (particularly since there was no advertisement and other creditors had yet to come forward to support the winding up petition). It is also pertinent to note in this relation that since the discretionary power under Article 142 has been exercised by the Supreme Court, the impugned order does not attain the status of a binding precedent under Article 141 of the Constitution of India.

There has been much ado about the ruling of the Supreme Court and as to whether the said ruling would in fact adversely affect the "collective action" of the creditors as envisaged under the IBC. It would perhaps be relevant in this relation to consider the position under the Companies Act, 1956 prior to the enforcement of the IBC. The Company (Court) Rules 1959 allowed the withdrawal of the winding up petition even after the advertisement thereof. In such cases, it was open to the court to grant leave to withdraw the petition so long as the withdrawal was not prior to the date of hearing mentioned in the advertisement. On a practical level, in case of such withdrawal, the courts issued notice to all interested parties (including creditors and workers) to submit their claims/ objections to the withdrawal prior to the date of hearing of the application for withdrawal. Therefore, if all parties interested were in favour of the withdrawal of the petition, it is not open to the courts to decide what is in the commercial interest of the parties.

It would be fair to summarize therefore that the Supreme Court has followed the same legal principle in deciding to take the consent terms on record as per the wishes of all interested parties since in the present case no advertisement/ public announcement had yet been issued.

Footnotes

1 CP No.61/I & BP/NCLT/MAH/2017

2 Section 424(1) The Companies Act, 2013

3 Company Appeal (AT) (Insolvency) No. 95 of 2017

4 Company Appeal (AT) (Insolvency) No. 94 of 2017

5 Civil Appeal No. 9279 of 2017

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