Business Laws

Does NCLT hold a magic wand to settle all insolvency-related issues?

Ameya Gokhale/ Radhika Indapurkar August 22 | Updated on August 22, 2021

Litigants tend to approach the NCLT for redressal of all grievances against firms undergoing insolvency resolution or liquidation   -  Getty Images

A cloud hangs over what matters the National Company Law Tribunal can and cannot entertain

The National Company Law Tribunal (NCLT), was formulated under the Insolvency and Bankruptcy Code, 2016 (IBC) to deal with insolvency and liquidation matters of corporate entities.

Experience has shown that litigants tend to approach the NCLT for redressal of all grievances against companies undergoing insolvency resolution or liquidation. However, does the NCLT really have such powers to deal with all and sundry matters concerning these companies?

The Supreme Court had the occasion to opine on the scope of NCLT’s power under Section 60 (5) of the IBC in Embassy Property Developments Vs State of Karnataka and Gujarat Urja Vikas Nigam Vs Amit Kumar Gupta.

‘Insolvency resolution’

In the Embassy case, the Supreme Court concluded that a matter which is in the realm of public law could not be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Section 60(5) and therefore such a matter was outside the authority of the NCLT.

In the Gujarat Urja (GUVNL) case, the Supreme Court asked the NCLT to ensure that it does not entertain matters falling within the jurisdiction of other forums and to entertain cases which arise solely from or relate to the insolvency of the company. The Supreme Court made it clear that nexus between the issue at hand and insolvency of the company must exist for NCLT to exercise jurisdiction.

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The decisions in the Embassy and GUVNL cases leave many questions and propositions unanswered. Importantly, these cases have been decided based on the interpretation of only clause (c) of Section 60(5).

Clause (a) of the Section, which gives the NCLT jurisdiction to entertain “all applications or proceedings by or against the corporate debtor notwithstanding any other law for the time being in force” was not called out for interpretation. One wonders whether the Supreme Court would have decided these cases differently, had it been called upon to consider this provision.

If indeed the NCLT cannot decide an issue which is unrelated to the insolvency resolution process of the company, what happens to the case of a third party, (one who is barred from suing the company in any court or tribunal on account of a moratorium imposed by the IBC), who has a dispute with the company that does not arise out of or relate to the insolvency resolution of the company?

Does it mean that such a third party would have no remedy since it can neither approach a civil court nor can it approach the NCLT? For example, in the event there is a breach or default on part of the company which is de hors the insolvency process, the counter-party has no recourse in the form of institution of a suit against the corporate debtor, going by the dicta in Embassy and GUVNL.

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It would indeed be a travesty, if legitimate claims were left remediless in such a manner. This could not have been the Supreme Court’s intention. Under the Companies Act, the Company Court overseeing winding up or liquidation proceedings of a company had the power to entertain any suits or proceedings against the company being wound up.

The logic behind this was to make the procedure simple and avoid multiplicity of proceedings across different for a when they related to that company being wound up. The IBC, which aims to be a comprehensive code in itself, effectively replacing the winding up provisions and installing the NCLT as the adjudicatory authority in place of the Company Court, does not seem to include such express powers for the NCLT.

Companies Act, 2013

Under Section 424 of the Companies Act, 2013, the NCLT, for the purpose of discharging its functions under the IBC, has powers as vested in a civil court under the Code of Civil Procedure, 1908, including examination of evidence and taking evidence on oath, etc.

Given the ambit of Section 424, perhaps an argument can be made that the powers of NCLT under Section 60(5) are much wider than envisaged under Embassy and GUVNL. It is, however, equally true that matters before the NCLT are required to be disposed of in a time bound manner given the limited time period for completion of the processes under the IBC. It would be impossible for the NCLT to decide complex questions of fact and law, like the Company Court could do, in a limited time frame.

Given that the attention of the Supreme Court has not yet been drawn to several critical and important provisions within the IBC and the Companies Act, 2013, it can be argued that Embassy and GUVNL are limited in their scope and application.

Till the Supreme Court finds another occasion to delve into the scope and extent of the NCLT’s jurisdiction, there remains a substantial cloud on what matters the NCLT can and cannot entertain.

(The authors are Partner and Senior Associate respectively at Shardul Amarchand Mangaldas, a law firm)

Published on August 22, 2021

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