India: The NCLAT Rules That The Adjudicating Authority Has No Jurisdiction To Decide The Legality And Propriety Of A Foreign Decree

The National Company Law Appellate Tribunal (NCLAT), vide its judgment in Usha Holdings LL.C. & Anr v Francorp Advisors Pvt Ltd (Company Appeal (AT) (Insolvency) No. 44 of 2018) dated 30 November 2018, held that the National Company Law Tribunal (NCLT) cannot determine whether a foreign decree is legal or enforceable in India while admitting or rejecting a claim as a debt under the Insolvency and Bankruptcy Code, 2016 (IBC).

In doing so, the NCLAT has set aside the order of the NCLT (Principal Bench) dated 11 December 2017 ((IB) - 196(PB) / 2017). The NCLT had declined to recognize a foreign decree from a court in the United States as evidence of a debt payable by Francorp Advisors Pvt Ltd (Corporate Debtor) to Usha Holdings LL.C. (Operational Creditor) in an application under Section 9 of the IBC for Corporate Insolvency Resolution Process (CIRP).

Factual Background

A petition under Section 9 of the IBC was placed before the NCLT (Principal Bench) by the Operational Creditor. The alleged debt due to the Operational Creditor from the Corporate Debtor, which forms the basis of the present CIRP, stems from a judgment of the United States District Court, Eastern District, New York dated 5 October 2015, and amounts to USD 1,661,743.04. The NCLT declined to admit this Section 9 petition for two reasons. Firstly, the NCLT refused to admit the petition because the foreign decree in question was not enforceable in India as it failed to meet the requirements of various provisions of the Code of Civil Procedure, 1908 (CPC), inter alia Sections 13, 14 and 44A of the CPC. The reasons provided by the NCLT were as follows:

  • The foreign decree was passed in the United States of America, and no notification of the reciprocation between the United States of America and India under 44A of the CPC was produced, because there is no reciprocal arrangement with the United States of America.
  • No certified copy of the foreign decree was provided as evidence of its validity, which is a requirement of Section 44A of the CPC. Furthermore, no proceedings in furtherance of this foreign decree were instituted in India.
  • The foreign decree did not meet the requirements of Section 13 of the CPC, because it was pronounced by a court which did not possess requisite jurisdiction. The underlying agreement in the dispute contained an arbitration clause, which was not invoked by the Operational Creditor, despite which the court still passed judgment. Accordingly, the foreign decree did not comply with the laws of India, i.e., the Arbitration and Conciliation Act, 1996, which stipulates that an arbitration agreement is binding upon parties and must be invoked before court proceedings are initiated.
  • The foreign decree was not passed on merits, it violated the principles of natural justice (right to a fair hearing and lack of bias) and it was not given on the merits of the case.

The NCLT analysed in detail how each of the above requirements espoused by the CPC were not met, and accordingly, the foreign decree was not valid under Indian law and could not be the basis of a debt, as defined in Section 3(11) of the IBC.

Secondly, the NCLT held that the underlying agreement between the parties, from which the foreign decree arose was a License Agreement that did not envision any payment in lieu of the provision of goods and services by the Operational Creditor. Therefore, there is no operational debt as per Section 5(21) of the IBC. In this article, we analyse the NCLT's reasoning on the first ground in detail.

Question of Law

The NCLAT determined whether the Adjudicating Authority under the IBC, i.e., the NCLT, has the power to adjudicate on the legality or validity of a foreign decree, while examining it as proof of a debt under the IBC.

Finding of the NCLAT

The NCLAT did not delve into the substance of the contentions raised before the NCLT by either the Operational Creditor or the Corporate Debtor. Instead, it fulcrumed its findings on the question of law posed above, and whether the claims made by the Operational Creditor basis the foreign decree amounted to an operational debt under Section 5(21) of the IBC. While its decision regarding the latter question was negative, which led to the CIRP petition being dismissed, the NCLAT categorically decided that the NCLT did not possess the authority to examine the legality of the foreign decree, even if the provisions of the CPC were not complied with.

The NCLAT's rationale for such a holding was largely predicated on the prior decision of the NLCAT in Binani Industries Limited v Bank of Baroda & Anr (Company Appeal (AT) (Insolvency) No. 82 of 2018), which  analysed inter alia the Report of the Bankruptcy Law Reforms Committee, 2015 (BLRC Report). Both this case and the BLRC Report elaborately discuss the object, purpose and principles of the IBC. They lead to the clear inference that the IBC and the CIRP have the singular aim of aiding a corporation in operating as a going concern, despite the burden of non-performing assets. The CIRP caters to the needs of both financial and operational creditors, as well as the interests of the employees of the corporate debtors. The BLRC Report recognizes that the contents of a Resolution Plan are not determined by any party except the stakeholders and the Committee of Creditors. Accordingly, the Resolution Plan does not fall within the ambit of a sale, auction, liquidation or a recovery proceeding.

On the basis of the above, the NCLAT concluded that the CIRP does not cast the Adjudicating Authority, i.e., the NCLT, in the role of a "Court". Consequently, a body that does not have the powers of a "Court" cannot analyse the validity or legality of a foreign decree, even if there is non-compliance with Indian laws. Therefore, even if a foreign decree has not been executed by a Court in India as per Section 13 and 44A of the CPC, the NCLT does not have the power to adjudicate upon its legality and enforceability. It is not for the NCLT to decide whether a foreign court had jurisdiction, or whether its finding was illegal or against the public policy of India or the principles of natural justice.

Khaitan Comment

The decision of the NCLAT in the present appeal does not come as a surprise, because vesting the NCLT with the authority to analyse the jurisdictional and procedural merit of foreign decrees will create another hurdle in resolution of insolvency for creditors and corporate debtors. These hurdles and the long – drawn, time consuming process of winding up were the mischiefs that were supposed to be remedied by the enactment of the IBC. The NCLAT's decision reaffirms that the NCLT is a facilitator of the CIRP and not a court of law at this stage.

Furthermore, the definitions of the terms "claim" and "debt", under Section 3(6) and 3(11) of the IBC only pertain to the right to a payment. Nowhere in these definitions is there any stipulation regarding compliance with procedural laws such as those in the CPC, or the presence of any sort of enforcement proceedings or equivalent judgements of domestic courts. Therefore, the NCLAT has effectually interpreted the letter and spirit of the IBC, which revolves around the facilitation of the CIRP by the stakeholders, as opposed to judicial authorities.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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