Strengthening Our Insolvency Regime: The Answer Lies Within

Introduction

In a recent judgment delivered by the Supreme Court of India,¹ it has been reaffirmed that the Insolvency and Bankruptcy Code, 2016² (IBC/Code) is a complete Code in itself, having sufficient checks and balances, and thus, the exercise of supervisory jurisdiction and judicial review by the High Courts should only be exercised in exceptional and compelling circumstances. The judgment expounded on the scope of judicial intervention, outside the remit of the adjudicating authority³ during the corporate insolvency resolution process (CIRP). The decision, passed in an appeal which arose from the Karnataka High Court came down heavily on the High Court’s exercise of its plenary jurisdiction under Article 226⁴ of the Constitution of India⁵ in setting aside the CIRP, albeit on the ground of violation of principles of natural justice. While doing so, the Supreme Court, not specifically drawing reference, revisited the principles set out in earlier landmark decisions, namely, Swiss Ribbons (P) Ltd. v. Union of India⁶ (Swiss Ribbons) and Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.⁷ (Ghanshyam Mishra).

Factual matrix

On 26-10-2018, Oriental Bank of Commerce (now Punjab National Bank) initiated CIRP against Associate Decor Ltd. (“Corporate Debtor”), leading to the approval of a resolution plan proposed by Mohammed Enterprises (Tanzania) Ltd. (MeTL) on 11-2-2020. The Committee of Creditors (CoC) unanimously accepted MeTL’s plan, marking a step forward in resolving the debtor’s financial distress. However, Mr Farooq Ali Khan, a suspended director of the Associate Decor Ltd, raised concerns about procedural irregularities, particularly the alleged lack of notice for the CoC meeting, which was scheduled on 11-2-2020, the date on which the appellant’s resolution plan was approved by the CoC.

After a gap of three years, Mr Khan moved the Karnataka High Court inter alia seeking quashing of the minutes of the meeting dated 11-2-2020, including the resolution plan approved at the said meeting. Meanwhile, in the intervening period, he had also filed an interlocutory application before the National Company Law Appellate Tribunal (Nclat) seeking rejection of the resolution plan. The Karnataka High Court accepted his claims, invalidated the CoC’s decision, and set aside the resolution process, citing violation of natural justice. The said order was under challenge before the Supreme Court.

Remedial avenues within the IBC

While setting aside the impugned order, the Supreme Court observed that the IBC contains, within its remit, sufficient checks and balances, remedial avenues, and provision for appeals. In fact, the Court confers extensive jurisdiction to the adjudicating authority to entertain any question of law or fact, arising out of or in relation to the insolvency resolution or liquidation proceedings of a corporate debtor.⁸ The Supreme Court reaffirmed this jurisdictional principle by relying on two landmark judgments passed by the Supreme Court in Essar Steel India Ltd. (CoC) v. Satish Kumar Gupta⁹ and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta¹⁰.

As regards the violation of principles of natural justice is concerned, the adjudicating authority NCLT or the appellate authority Nclat are not precluded from considering such a violation. Section 60(5) read with Rules 11 and 34 of the National Company Law Tribunal (NCLT) Rules, 2016¹¹ make it abundantly clear that the adjudicating authority is vested with inherent powers to make such orders as may be necessary for meeting the ends of the justice or to prevent the abuse of due process. Therefore, given the extant statutory framework, any aggrieved person, including, in this case, Mr Khan had sufficient remedies available within the four corners of the IBC. Consequently, the Court held that was not correct on part of the High Court to interdict the CIRP proceedings. Moreover, in the present case, Mr Khan was not oblivious to the statutory remedies available, as he had himself filed an interlocutory application before the Nclat seeking similar reliefs.

Delay and laches against the spirit of the Code

Apart from the issue of judicial overreach, the Supreme Court also highlighted the issue of inordinate delay in invoking the jurisdiction of the High Court. Mr Khan had challenged the minutes of the CoC meeting held on 11-2-2020, almost three years after the said meeting had taken place i.e. 4-1-2023. The Court was loathed while observing that despite the CIRP proceedings having commenced in 2018 and the resolution plan having been approved in 2020, the CIRP proceedings had still not concluded. It is not without reason that the very intent and object of the Code¹² emphasises the importance of resolution of corporate entities in a time-bound manner so as to ensure maximisation of value of assets in the interest of all stakeholders. In fact, the Supreme Court, in the present case, while setting aside the order of the Karnataka High Court, directed the adjudicating authority to conclude the CIRP process as expeditiously as possible stating that the same was in “spirit of the Code”.

Plenary jurisdiction versus Jurisdiction conferred by statute

It has been consistently held and settled that when an alternative and equally efficacious statutory remedy is open to a litigant, he/she should first invoke the specific remedy provided by the statute before invoking the plenary jurisdiction of the High Courts under Article 226 of the Constitution of India.¹³ It has further been held that if the right or obligation is created by a statute and it prescribes a remedy or procedure for enforcement of the said right or obligation, then the High Courts may refuse to entertain writ petitions and direct the party to seek remedy under the statute only.¹⁴

Even in the IBC jurisprudence, the courts have repeatedly emphasised that unjustified interference by High Courts, in exercise of their discretionary jurisdiction, breaches the judicial discipline as envisaged and required to be maintained under the IBC.¹⁵

The Supreme Court emphasised that plenary powers under Article 226 of the Constitution of India are not intended to supplant statutory remedies but serve as a last resort for addressing exceptional cases involving grave injustices or jurisdictional errors.

Conclusion

The IBC was always contemplated to be self-sustaining Code and the adjudicating authority constituted therein, a one-stop tribunal for addressing all questions of law and fact arising out or in relation to the CIRP. As per the recently released data by the Insolvency and Bankruptcy Board of India (IBBI)¹⁶, the average time taken for CIRP is around 680 days, far beyond the statutory period¹⁷ prescribed under the Code. These delays have had a cascading impact on the asset value and recoveries as only 31.1%¹⁸ of the total admitted claims have been realised by financial creditors leading to a massive haircut more than 68% on admitted dues, thereby defeating the very purpose of the Code. It is not unfathomable to construe that exploring and invoking remedies outside the remit of the IBC have contributed to the delays in our insolvency regime which have led to this situation. This has resulted in erosion of investor confidence which is never a good sign for an aspirational economy like India. In that light, this judgment comes a major step in reaffirming the legislative intent behind the IBC and is sure to act as a deterrent for stakeholders who aim to derail the insolvency process by resorting to remedies and tactics extraneous to what was envisaged under the IBC.