The National Company Law Appellate Tribunal (NCLAT) has, in its recent decision in NUI Pulp and Paper Industries Pvt Ltd v Roxcel Trading GmbH1, held that Rule 11 of the National Company Law Tribunal Rules 2016 (NCLT Rules) recognises that the National Company Law Tribunal (NCLT) has inherent powers to pass orders for ensuring substantial justice and preventing abuse of process.
Specifically, it has been ruled that since the NCLT has inherent powers, it is competent to pass interim orders of protection at any stage after an application under §7, §9 or §10 of the Insolvency and Bankruptcy Code 2016 (IBC), as the case may be, has been filed and before an order admitting the application has been handed down.
Roxcel Trading GmbH (Operational Creditor) had filed an application under §9 of the Code against the NUI Pulp and Paper Industries (Corporate Debtor) for unpaid invoices. On the first day of hearing, the Corporate Debtor, who had appeared on caveat, submitted that the debt was disputed and prayed for time to file its reply.
The Operational Creditor in reply had argued that it apprehends that the Corporate Debtor intends to sell its assets to defeat the provisions of the IBC, which act(s) would also amount to an abuse of process. Based on the Operational Creditor's position, the NCLT set a timeline for completing pleadings and adjourned the matter with the following ad-interim direction:
"However, the apprehension of the Applicant can be taken note of till the time either the Application is admitted or rejected, the assets and accounts of the Company need to be maintained on date except withdrawal of the legitimate expenses required for carrying on the day to day expenses. Therefore, this Authority in exercise of the powers conferred under Rule 11 of the NCLT rules, 2016, restrains the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the 1st Respondent Company till further orders"
This order was appealed by the Corporate Debtor before the NCLAT.
Proceedings before the NCLAT
Before the NCLAT, the Corporate Debtor made the following primary arguments:
- The NCLT has no jurisdiction to restrain the Corporate Debtor, and its directors, from alienating, encumbering or creating third party rights with respect to its assets before the application under §7 or §9 of the IBC, as the case may be, is actually admitted. Rule 11 of the NCLT Rules does not contemplate exercise of such powers.
- In the alternative, such orders in exercise of its inherent powers, can be exercised by the NCLT only when, after a reply to the application has been filed, it notices that the Corporate Debtor is trying to alienate assets or is taking adjournments to defeat the objective of the proceedings. Since no such grounds were shown by the Operational Creditor on the first day of hearing the NCLT did not have any jurisdiction to grant interim relief.
The NCLAT had, before going into the merits of the appeal, asked the Corporate Debtor if it would provide an undertaking that it will not sell, transfer, alienate or create any third party interest on its assets. However, the Corporate Debtor took the position that it could not provide such an undertaking because its actions would be guided by its requirements for fulfilling its day to day functioning.
The NCLAT thereafter held that there are no restrictions on the NCLT exercising its inherent powers under Rule 11 of the NCLT Rules. Rule 11 allows the NCLT to pass such orders as may be necessary for meeting the ends of justice and preventing abuse of process. The NCLAT further stated that if the NCLT is of the view that interim orders are required to be passed because there is an apprehension that the Corporate Debtor may abuse the process of the IBC to deny the creditors of their legitimate rights, then it can grant interim relief at any stage and does not need to wait for the application to be admitted
The NCLAT also observed that the Corporate Debtor not only refused to give an undertaking, but also failed to specifically deny that it has no intention of alienating its assets. In such circumstances, interim relief could be granted.
While the NCLAT's position on the scope of Rule 11 of the NCLT Rules is clear, the order does not examine the circumstances under which such inherent jurisdiction can be exercised by the NCLT. For instance, it needs to be examined whether the principles that are otherwise applicable for passing orders granting interim or ad-interim injunctions or attachment prior to judgment, as enunciated in Order XXXIX Rule 1 & 2 and Order XXXVIII Rule 5 of the Civil Procedure Code, 1908 (CPC) respectively, would also need to be satisfied when the NCLT passes similar orders under Rule 11 of the NCLT Rules.
1. Company Appeal (AT) (Insolvency) No 664 of 2019.
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