M/s Embassy Property Developments Pvt. Ltd. vs State of Karnataka & Ors.

Insolvency and Bankruptcy Code, 2016: Scope of the jurisdiction and the nature of the powers exercised by NCLT and NCLAT under the provisions of IBC, 2016 – Discussed. Insolvency and Bankruptcy Code, 2016: Whether the questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the IBC Code – Held: NCLT has jurisdiction to enquire into allegations of fraud – As a corollary, NCLAT will also have jurisdiction – Fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in s.61.

Constitution of India: Arts.226/227 – Exercise of jurisdiction, exception – In cases where a statutory alternative remedy of appeal is available, one of the exceptions to the self imposed restraint of the High Court is the lack of jurisdiction on the part of the statutory/quasi-judicial authority, against whose order a judicial review is sought – Traditionally, English courts maintained a distinction between cases where a statutory/quasijudicial authority exercised a jurisdiction not vested in it in law and cases where there was a wrongful exercise of the available jurisdiction – The distinction between lack of jurisdiction and wrongful exercise of available jurisdiction, should certainly be taken into account by High Courts, when Art.226 is sought to be invoked bypassing a statutory alternative remedy provided by a special statute.

Constitution of India: Arts.226/227 – Scope of jurisdiction and nature of the powers exercised by High Court under Art.226 of the Constitution – Discussed.

Constitution of India: Arts.226/227 – Scope of jurisdiction of High Court over private individuals – Held: In view of the use of the expression “any person” in Art.226 (1), the jurisdiction of the High Court extends even over private individuals, provided the nature of the duties performed by such private individuals, are public in nature – Therefore, the remedies provided under Art.226 are public law remedies, which stand in contrast to the remedies available in private law.

Mines and Minerals (Development and Regulation) Act, 1957: Object of enactment – Discussed – Constitution of India – Seventh Schedule – Union List – Entry 54.

Companies Act, 2013: ss.408, 410 – Jurisdiction and powers of NCLT – NCLT and NCLAT are constituted, not under the IBC, 2016 but under ss.408 and 410 of the Companies Act, 2013 – ss.420 and 424 of the Companies Act, 2013 indicate in broad terms, merely the procedure to be followed by the NCLT and NCLAT before passing orders – However, there are no separate provisions in the Companies Act, exclusively dealing with the jurisdiction and powers of NCLT – In contrast, Sub-sections (4) and (5) of s.60 of IBC, 2016 give an indication respectively about the powers and jurisdiction of the NCLT – Sub-section (4) of s.60 of IBC, 2016 states that the NCLT will have all the powers of the DRT as contemplated under Part III of the Code for the purposes of Subsection (2) – Insolvency and Bankruptcy Code, 2016 – s.60. Insolvency and Bankruptcy Code, 2016: ss.60, 179 – Under s.179 (1), it is the DRT which is the Adjudicating Authority in relation to insolvency matters of individuals and firms – This is in contrast to s.60(1) which names the NCLT as the Adjudicating Authority in relation to insolvency resolution and liquidation of corporate persons including corporate debtors and personal guarantors – The object of Sub-section (2) of s.60 is to avoid any confusion that may arise on account of s.179(1) and to ensure that whenever a CIRP is initiated against a corporate debtor, NCLT will be the Adjudicating Authority not only in respect of such corporate debtor but also in respect of the individual who stood as surety to such corporate debtor, notwithstanding the naming of the DRT under s.179(1) as the Adjudicating Authority for the insolvency resolution of individuals.

Dismissing the appeals, the Court

HELD: 1.1 It is beyond any pale of doubt that IBC, 2016 is a complete Code in itself. It is an exhaustive code on the subject matter of insolvency in relation to corporate entities and others. It is also true that IBC, 2016 is a single Unified Umbrella Code, covering the entire gamut of the law relating to insolvency resolution of corporate persons and others in a time bound manner. The code provides a three-tier mechanism namely (i) the NCLT, which is the Adjudicating Authority (ii) the NCLAT which is the appellate authority and (iii) this court as the final authority, for dealing with all issues that may arise in relation to the reorganisation and insolvency resolution of corporate persons. In so far as insolvency resolution of corporate debtors and personal guarantors are concerned, any order passed by the NCLT is appealable to NCLAT under Section 61 of the IBC, 2016 and the orders of the NCLAT are amenable to the appellate jurisdiction of this court under Section 62. [Para 11] [578-D-G]

1.2 Article 226 (1) recognizes the power of every High Court to issue (i) directions, (ii) orders or (iii) writs. They can be issued to (i) any person or (ii) authority including the Government. They may be issued (i) for the enforcement of any of the rights conferred by Part III and (ii) for any other purpose. But the exercise of the power recognized by Clause (1) of Article 226, is restricted by the territorial jurisdiction of the High Court, determined either by its geographical location or by the place where the cause of action, in whole or in part, arose. While the nature of the power exercised by the High Court is delineated in Clause (1) of Article 226, the jurisdiction of the High Court for the exercise of such power, is spelt out in both Clauses (1) and (2) of Article 226. [Para 13] [579-B-D]

M/s Innoventive Industries Limited v. ICICI Bank, AIR 2017 SC 4084 : [2017] 8 SCR 33 – relied on.

1.3 Traditionally, the jurisdiction under Article 226 was considered as limited to ensuring that the judicial or quasi-judicial tribunals or administrative bodies do not exercise their powers in excess of their statutory limits. But in view of the use of the expression “any person” in Article 226 (1), courts recognized that the jurisdiction of the High Court extended even over private individuals, provided the nature of the duties performed by such private individuals, are public in nature. Therefore, the remedies provided under Article 226 are public law remedies, which stand in contrast to the remedies available in private law. One of the well recognized exceptions to the self-imposed restraint of the High Courts, in cases where a statutory alternative remedy of appeal is available, is the lack of jurisdiction on the part of the statutory/quasi-judicial authority, against whose order a judicial review is sought. [Paras 14, 15] [579-E-G]

Nilabati Behera @ Babita Behera v. State of Orissa (1993) 2 SCC 746 : [1993] 2 SCR 581 – relied on.

2. Whether the case of the State of Karnataka fell under the category of (1) lack of jurisdiction on the part of the NCLT to issue a direction in relation to a matter covered by MMDR Act, 1957 and the Statutory Rules issued thereunder or (2) mere wrongful exercise of a recognised jurisdiction. In the case on hand, the land which formed the subject matter of mining lease, belongs to the State of Karnataka. The liberties and privileges granted to the Corporate Debtor by the Government of Karnataka under the mining lease, are delineated in Part IV of the mining lease. The mining lease was issued in accordance with the statutory rules namely Mineral Concession Rules, 1960. Therefore, the relationship between the Corporate Debtor and the Government of Karnataka under the mining lease is not just contractual but also statutorily governed. The MMDR Act, 1957 is a Parliamentary enactment traceable to Entry 54 in List I of the Seventh Schedule. This Entry 54 speaks about regulation of mines and development of minerals to the extent to which such regulation and development under the control of the Union, is declared by Parliament by law to be expedient in public interest. In fact the expression “public interest” is used only in 3 out of 97 Entries in List I, one of which is Entry 54, the other two being Entries 52 and 56. Interestingly, Entry 23 in List II does not use the expression “public interest”, though it also deals with regulation of mines and mineral development, subject to the provisions of List I. It is this element of “public interest” that finds a place in Section 2 of the MMDR Act, 1957, in the form of a declaration. Therefore, the decision of the Government of Karnataka to refuse the benefit of deemed extension of lease, is in the public law domain and hence the correctness of the said decision can be called into question only in a superior court which is vested with the 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 the power of judicial review over administrative action. Judicial review, flows from the concept of a higher law, namely the Constitution. The NCLT is not even a Civil Court, which has jurisdiction by virtue of Section

9 of the Code of Civil Procedure to try all suits of a civil nature excepting suits, of which their cognizance is either expressly or impliedly barred. Therefore NCLT can exercise only such powers within the contours of jurisdiction as prescribed by the statute, the law in respect of which, it is called upon to administer. [Paras 25, 27, 29] [585-B-G; 586-A-B-F] Sub-Committee on Judicial Accountability v. Union of India (1991) 4 SCC 699 – relied on.

Thressiamma Jacob v. Deptt. of Mining & Geology (2013) 9 SCC 725 : [2013] 7 SCR 863 – referred to.

3. Jurisdiction and powers of NCLT

3.1 NCLT and NCLAT are constituted, not under the IBC, 2016 but under Sections 408 and 410 of the Companies Act, 2013. Without specifically defining the powers and functions of the NCLT, Section 408 of the Companies Act, 2013 simply states that the Central Government shall constitute a National Company Law Tribunal, to exercise and discharge such powers and functions as are or may be, conferred on it by or under the Companies Act or any other law for the time being in force. Insofar as NCLAT is concerned, Section 410 of the Companies Act merely states that the Central Government shall constitute an Appellate Tribunal for hearing appeals against the Orders of the Tribunal. The matters that fall within the jurisdiction of the NCLT, under the Companies Act, 2013, lie scattered all over the Companies Act. Therefore, Sections 420 and 424 of the Companies Act, 2013 indicate in broad terms, merely the procedure to be followed by the NCLT and NCLAT before passing orders. However, there are no separate provisions in the Companies Act, exclusively dealing with the jurisdiction and powers of NCLT. In contrast, Sub-sections (4) and (5) of Section

60 of IBC, 2016 give an indication respectively about powers and jurisdiction of the NCLT. [Paras 30, 31] [586-G; 587-A-D]

3.2 Sub-section (4) of Section 60 of IBC, 2016 states that the NCLT will have all the powers of the DRT as contemplated under Part III of the Code for the purposes of Sub-section (2). Sub-section (2) deals with a situation where the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor of a corporate debtor is taken up, when CIRP or liquidation proceeding of such a corporate debtor is already pending before NCLT. The object of Sub-section (2) is to group together the CIRP or liquidation proceeding of a corporate debtor and the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor of the very same corporate debtor, so that a single Forum may deal with both. This is to ensure that the CIRP of a corporate debtor and the insolvency resolution of the individual guarantors of the very same corporate debtor do not proceed on different tracks, before different Fora, leading to conflict of interests, situations or decisions. [Para 32] [588-F-H; 589-A]

3.3 If the object of Sub-section (2) of Section 60 is to ensure that the insolvency resolutions of the corporate debtor and its guarantors are dealt with together, then the question that arises is as to why there should be a reference to the powers of the DRT in Sub-section (4). The answer to this question is to be found in Section 179 of IBC, 2016. Under Section 179 (1), it is the DRT which is the Adjudicating Authority in relation to insolvency matters of individuals and firms. This is in contrast to Section 60(1) which names the NCLT as the Adjudicating Authority in relation to insolvency resolution and liquidation of corporate persons including corporate debtors and personal guarantors. The expression “personal guarantor” is defined in Section 5(22) to mean an individual who is the surety in a contract of guarantee to a corporate debtor. Therefore the object of Sub-section (2) of Section 60 is to avoid any confusion that may arise on account of Section 179(1) and to ensure that whenever a CIRP is initiated against a corporate debtor, NCLT will be the Adjudicating Authority not only in respect of such corporate debtor but also in respect of the individual who stood as surety to such corporate debtor, notwithstanding the naming of the DRT under Section 179(1) as the Adjudicating Authority for the insolvency resolution of individuals. This is also why Subsection (2) of Section 60 uses the phrase “notwithstanding anything to the contrary contained in this Code”. [Para 33] [589B-E]

3.4 Sub-section (2) of Section 179 confers jurisdiction upon DRT to entertain and dispose of (i) any suit or proceeding by or against the individual debtor (ii) any claim made by or against the individual debtor and (iii) any question of priorities or any other question whether of law or facts arising out of or in relation to insolvency and bankruptcy of the individual debtor. Clauses (a), (b) and (c) of Sub-section (2) of Section 179 are identical to Clauses (a), (b) and (c) of Sub-section (5) of Section 60. Therefore the only reason why Sub-section (4) is incorporated in Section 60 is to ensure that NCLT will exercise jurisdiction – (1) not only to entertain and dispose of matters referred to in Clauses (a), (b) and (c) of Sub-section (5) of Section 60 in relation to the corporate debtor, (2) but also to entertain and dispose of the matters specified in Clauses (a), (b) and (c) of Sub-section

(2) of Section 179, whenever the contingency stated in Section 60(2) arises. [Para 34] [589-F-H]

3.5 A combined reading of Sub-section (4) and Sub-section

(2) of Section 60 with Section 179 shows that none of them hold the key to the question as to whether NCLT would have jurisdiction over a decision taken by the government under the provisions of MMDR Act, 1957 and the Rules issued thereunder. The only provision which can probably throw light on this question would be Sub-section (5) of Section 60, as it speaks about the jurisdiction of the NCLT. Clause (c) of Sub-section (5) of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. But a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Subsection (5). [Para 36] [590-G-H; 591-A-B]

3.6 If NCLT has been conferred with jurisdiction to decide all types of claims to property, of the corporate debtor, Section 18(f)(vi) would not have made the task of the interim resolution professional in taking control and custody of an asset over which the corporate debtor has ownership rights, subject to the determination of ownership by a court or other authority. In fact an asset owned by a third party, but which is in the possession of the corporate debtor under contractual arrangements, is specifically kept out of the definition of the term “assets” under the Explanation to Section 18. This assumes significance in view of the language used in Sections 18 and 25 in contrast to the language employed in Section 20. Section 18 speaks about the duties of the interim resolution professional and Section 25 speaks about the duties of resolution professional. These two provisions use the word “assets”, while Section 20(1) uses the word “property” together with the word “value”. Sections 18 and 25 do not use the expression “property”. Another important aspect is that under Section 25 (2) (b) of IBC, 2016, the resolution professional is obliged to represent and act on behalf of the corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings. Wherever the corporate debtor has to exercise rights in judicial, quasi-judicial proceedings, the resolution professional cannot short-circuit the same and bring a claim before NCLT taking advantage of Section 60(5). Therefore in the light of the statutory scheme as culled out from various provisions of the IBC, 2016 it is clear that wherever the corporate debtor has to exercise a right that falls outside the purview of the IBC, 2016 especially in the realm of the public law, they cannot, through the resolution professional, take a bypass and go before NCLT for the enforcement of such a right. [Paras 39-40] [593-B-E-H; 594-A-B]

4. The moratorium provided for in Section 14 could not have any impact upon the right of the Government to refuse the extension of lease. The purpose of moratorium is only to preserve the status quo and not to create a new right. Therefore nothing turns on Section 14 of IBC, 2016. Even Section 14 (1) (d), of IBC, 2016, which prohibits, during the period of moratorium, the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor, will not go to the rescue of the corporate debtor, since what is prohibited therein, is only the right not to be dispossessed, but not the right to have renewal of the lease of such property. In fact the right not to be dispossessed, found in Section 14 (1) (d), will have nothing to do with the rights conferred by a mining lease especially on a government land. What is granted under the deed of mining lease dated 04.01.2001, by the Government of Karnataka, to the Corporate Debtor, was the right to mine, excavate and recover iron ore and red oxide for a specified period of time. The Deed of Lease contains a Schedule divided into several parts. Part-I of the Schedule describes the location and area of the lease. Part-II indicates the liberties and privileges of the lessee. The restrictions and conditions subject to which the grant can be enjoyed are found in Part-III of the Schedule. The liberties, powers and privileges reserved to the Government, despite the grant, are indicated in Part-IV. This Part-IV entitles the Government to work on other minerals (other than iron ore and red oxide) on the same land, even during the subsistence of the lease. Therefore, what was granted to the Corporate Debtor was not an exclusive possession of the area in question, so as to enable the Resolution Professional to invoke Section 14 (1) (d). Section 14 (1) (d) may have no application to situations of this nature. Therefore, NCLT did not have jurisdiction to entertain an application against the Government of Karnataka for a direction to execute Supplemental Lease Deeds for the extension of the mining lease. Since NCLT chose to exercise a jurisdiction not vested in it in law, the High Court of Karnataka was justified in entertaining the writ petition, on the basis that NCLT was coram non judice. [Paras 44, 45] [595-A-H]

5. Whether NCLT is competent to enquire into allegations of fraud, especially in the matter of the very initiation of CIRP. Section 65 specifically deals with fraudulent or malicious initiation of proceedings. Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the Adjudicating Authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, f or carrying on transactions with a view to defraud creditors. Therefore, NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. Section 65(1) deals with a situation where CIRP is initiated fraudulently “for any purpose other than for the resolution of insolvency or liquidation”. It is clear that NCLT has jurisdiction to enquire into allegations of fraud. As a corollary, NCLAT will also have jurisdiction. Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal provided in Section 61. [Paras 49-51] [597-C-G-H; 598-B]

The State of Uttar Pradesh v. Mohammad Nooh. [1958] SCR 595 ; Official Trustee, West Bengal & Others v. Sachindra Nath Chatterjee & Another [1969] 3 SCR

92 ; Hirday Nath Roy v. Ramachandra Barna Sarma. ILR LXVIII Calcutta 138 ; Indian Farmers Fertiliser Co-operative Ltd. v. Bhadra Products (2018) 2 SCC

534 : [2018] 1 SCR 848 ; Mafatlal Industries & Others v. Union of India (1997) 5 SCC 536 : [1996] 10 Suppl. SCR 585 ; M.L. Sethi v. R.P. Kapur (1972) 2 SCC

427 : [1973] 1 SCR 697 ; Hari Prasad Mulshanker Trivedi v. V.B Raju (1974) 3 SCC 415 : [1974] 1 SCR

548 ; Union Bank of India v. Satyawati Tandon (2010)

8 SCC 110 : [2010] 9 SCR 1 ; Sadhana Lodh v.

National Insurance Co. (2003) 3 SCC 524 : [2003] 1 SCR 567 ; Nivedita Sharma v. Cellular Operators Association of India (2011) 14 SCC 337 ; Cicily Kallarackal v. Vehicle Factory (2012) 8 SCC 524 : [2012] 8 SCR 95 – referred to.

Anisminic Ltd. v. Foreign Compensation Commission (1969) 2 WLR 163 ; Barnard and Others v. National Dock Labour Board and Others (1953) 2 WLR 995 ; Reg. v. Governor of Brixton Prison, Ex parte Armah (1968) AC 192 ; Re Racal Communications Ltd (1981) AC 374 ; O’Reilly v. Mackman (1983) 2 AC 237 ; R. v. Lord President [1993] A.C. 682 ; Regina (Privacy International) v. Investigatory Powers Tribunal, [2019] UKSC 22 ; Smith v. East Elloe Rural District Council (1956) AC 736 ; R v. Secretary of State for the Environment, Ex p. Ostler (1977) QB 122 ;

Wolverhampton New Waterworks Co. v. Hawkesford [1859] 6 CB (NS) 336 – referred to.