EMBASSY PROPERTY DEVELOPMENTS  PVT. LTD. VS STATE OF KARNATAKA : CASE SUMMARY

The Supreme Court in  Embassy Property Development Pvt. Ltd. Vs. State of Karnataka (2019) SCC Online SC 1542  held that Wherever the Corporate Debtor has to exercise a right which falls outside the purview of the IBC ,especially in realm of public law, they cannot take a bypass and approach NCLT. The Supreme Court also held that NCLT and NCLAT has jurisdiction to enquire in allegation of fraud.

FACTS OF THE CASE

Udhyaman Investments Pvt. Ltd. (Financial Creditor ) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Tiffin Barytes Asbestos & Paints Ltd. (Corporate Debtor). NCLT Chennai admitted the application vide order dated 12.03.2018.

At the time the Corporate Debtor has a mining lease granted by Government of Karnataka which was to expire by 25.05.2018. Although a notice of premature termination of lease has been issued on 09.08.2017 on allegation of violation of statutory rules and terms and conditions of the lease deed, no order of termination has been passed till initiation of Corporate Insolvency Resolution Process (CIRP).

The Interim Resolution Professional (IRP)  wrote letters informing the Chairman of the Monitoring Committee as well as the Director of Mines & Geology informing them about commencement of CIRP and sought deemed extension of lease beyond 25.05.2018 to 31.03.2020 in terms of Section 8 -A (6) of the Mines and Minerals (Development and Regulation ) Act, 1957.

As there was no response, IRP filed Writ Petition before the High Court of Karnataka seeking a declaration that mining lease should be deemed to be valid upto 31.03.2020 in terms of Section 8A (6) of the MMDR Act, 1957. During the pendency of the Writ Petition, Government of Karnataka passed order dated 26.09.2018 rejecting the proposal for deemed extension on ground of violation of terms and conditions of lease.

In light of rejection by Government of Karnataka, the IRP withdrew the Writ Petiiton with a liberty to file fresh petition. After withdrawal from High Court the RP filed Miscellaneous Application before NCLT  for declaration that Lease should be deemed to be valid upto 31.03.2020 and to execute supplement Lease Deeds for a period upto 31. 03.2020. The NCLT Chenni allowed the Application ex parte.

Government of Karnataka filed Writ Petition before High Court of Karnataka wherein the High Court directed the NCLT to consider the Application on merits after giving opportunity to the State to respond.

After hearing the State , the NCLT again allowed the Application of the Corporate Debtor.

The State of Karnataka again moved Writ Petition before the High Court of Karnataka against order of the NCLT wherein the High Court granted stay.

Against the said order of stay of NCLT, the Resolution Applicant, the Resolution Professional and the Committee of Creditors approached the Supreme Court.

FINDINGS OF THE SUPREME COURT

The Supreme Court considered two issues  – (i)  Whether the High Court should have interfered with order of the NCLT when alternative remedy in form of appeal before NCLAT was available ? (ii) Whether question of fraud can be inquired by NCLT/NCLAT ?

The First Issue

The Supreme Court observed that IBC is a complete code. The code provides three tier adjudicatory mechanism- NCLT, NCLAT and the Supreme Court.

Article 226 empowers High Court to issue writs, orders and directions to any authority or person for enforcement of any rights under Part III or for any other purpose. Traditionally jurisdiction of High Court under 226 was considered to be limited to ensuring the judicial or quasi-judicial tribunals or administrative bodies do not exercise their powers in excess of statutory limits. But in view of use of words “any person” Courts recognized the jurisdiction of High Court even extended to private individuals if duties performed by such individuals are public in nature.

One of the exception of self-imposed restraint is review in case  lack of jurisdiction on the part of statutory/quasi-judicial authority even if alternative judicial remedy is available. The Supreme Court surveyed several judgments and held that in so far as the question of exercise of the power conferred by Article 226, despite availability of statutory alternative remedy is concerned Anisminic Ltd Vs. Foreign Compensation Commission (1969) 2 WLR 163 cannot be relied. The distinction between the lack of jurisdiction and wrongful exercise of jurisdiction can be certainly be taken into account by High Courts when Article 226 is invoked bypassing statutory alternative remedy.

The Supreme Court observed that it has to be decided whether it is case of lack of jurisdiction of the NCLT or mere wrongful exercise of jurisdiction.

The Supreme Court went through several provisions of MMDR Act, 1957 and observed that the relationship between the Corporate Debtor and Government of Karnataka is not merely contractual but statutory. The decision of the Government of Karnataka to refuse the benefit of deemed extension of lease is in public law domain and hence the correctness of the said decision can be called into question in superior court which is vested with power of judicial review over administrative action.  The NCLT being a creature of a special statute to discharge certain specific functions, cannot be elevated to the status of a superior court having power of judicial review over administrative action.  Judicial Review as observed in Sub-Committee on Judicial Accountability Vs Union of India (1991) 4 SCC 699 flows from the concept of higher law.

The Supreme Court observed that NCLT can exercise only such powers within contours of jurisdiction as prescribed by statute, the law in respect of which it is called upon to administer.

The Supreme Court observed that from a combined reading of sub-section (4) and sub-section (2) of Section 60 with Section 179, it is clear that none of them infer that NCLT would have jurisdiction over a decision taken by Government under MMDR Act, 1957. Although scope of Section 60 (5) (c) is very broad but it cannot include a decision taken by government or a statutory authority in relation to a matter which is in realm of public law.

Duties of the Resolution Professional is entirely different from the jurisdiction of the NCLT. When the Corporate Debtor has to exercise rights in judicial, quasi- judicial proceedings, the Resolution Professional cannot short-circuit the same and bring claim before NCLT taking advantage of Section 60 (5).  Wherever the Corporate Debtor has to exercise a right which falls outside the purview of the IBC, 2016 especially in realm of public law, they can not take a bypass and approach NCLT.

The Supreme concluded that NCLT did not have jurisdiction to entertain an application against Government of Karnataka in respect of lease deeds.

Issue No. 2

One of contentions of Government of Karnataka was that they have challenged the order of NCLT before High Court of Karnataka as CIRP has been initiated fraudulently and collusively. The Supreme Court observed the fraudulent trading can be inquired by Adjudicating Authority under Section 66. Corporate Debtor is liable for punishment for carrying out transactions with a view to defraud creditors.  Thus,  NCLT is vested with jurisdiction to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions.  As a corollary the NCLAT will also have jurisdiction to enquire into allegation of fraud.

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