EXPLORING THE INHERENT POWER VESTED WITH NCLT/NCLAT VIS-À-VIS IBC

Source : Bar and Bench

This article has been authored by Manaswita Nakwaal a third-year student at Symbiosis Law School, NOIDA.

Introduction

‘Inherent Power of the courts/tribunals’ is a phrase that is often used in the judgments of Indian Courts. It is quoted to reflect the abundance of powers and jurisdiction vested in courts and tribunals. But there exists a lot of gray area when it comes to distinguishing the normal powers of a court from that of inherent powers.

In recent times National Company Law Tribunal (“NCLT”) has been observed using its inherent powers in several matters. This suo moto move reflects the intent of the NCLT of delivering justice to all. The Insolvency and Bankruptcy Code, 2016, itself works with an aim and objective to meet the ends of justice and follow the path of natural justice whilst deciding any case. The following article deals with the inherent powers of the NCLT, functions and cases in which it has used inherent powers.

National Company Law Tribunal in a Nutshell

It is Article 254 of Indian Constitution, on the basis of which National Company Law Tribunal (NCLT) is formed. It is established by the Apex Court (Supreme Court of India) to adjudicate the matters related to companies law. NCLT is a quasi-judicial authority which is solely responsible to adjudicate the structures, laws and settle disputes with respect to corporate matters.

Going back in the era of 1990s, Indian companies were governed by several laws. Even the East India Company functioned as per the guidelines laid down in the Royal Charter and the Indian Companies Act, 1913. Lately, in June 2016, tribunals such as National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) were established to adjudicate laws relating to companies.

The major functions of NCLT is registration of companies, transfer of shares, deposits, power to investigate, freezing assets of a company and converting a public limited company into a private limited company.

Additionally, Rule 11 of the NCLAT Rules, 2016, talks about ‘inherent powers’ of the NCLAT which reads as follows:

"11. Inherent Powers- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal."

The NCLT Rules and the NCLAT Rules which are made under the Companies Act, 2013 provide for inherent powers of the Tribunals in order to meet the ends of the justice.

Recently NCLAT in NUI Pulp and Industries Pvt. Ltd. Vs. Ms. Roxcel Trading GMBH, held that NCLT is empowered to pass an ad-interim order under Rule 11 of NCLAT Rules, 2016 before admitting application filed under Section 7, 9 or 10 of Insolvency and Bankruptcy Code, 2016.

In another matter, Lokhandwala Kataria Construction Vs Nisus Finance Investment Manager LLP, it was laid down by the NCLAT that cases where there is no merit for use of inherent power then in such cases the question of exercising inherent power does not arise at all. As a result of which it was laid down that in the absence of inherent powers of the NCLT/NCLAT under IBC, all such cases for settlement and withdrawal of the proceedings have to be approved by the Apex Court itself.

Supreme Court in the matter of Swiss Ribbons v. Union of India, explicitly stated that NCLT/NCLAT may use their inherent powers. It was held that such powers can be used in case of withdrawal application prior to the Constitution of creditor’s committee.

NCLAT Quashed Corporate Insolvency Resolution Process (CIRP), using its Inherent Powers

The Bombay Bench of NCLT, in Dena Bank v. Indian Treat Ltd used its inherent powers vested in it by the virtue of Rule 11 of the NCLT Rules, 2016. In this case, the Corporate Insolvency Resolution Process was initiated under Section 7 of the Code. Later, the applicant himself sought the withdrawal of insolvency application from NCLT. Consequently, NCLT exercised its inherent powers and permitted withdrawal of the said application.

Furthermore, in Girish Agarwal v. Lavis Signature Panel (P) Ltd an application was filed under Section 9 of the Code by an Operation Creditor and was also admitted by the Tribunal. After the acceptance of the application a Corporate Insolvency Resolution Process was initiated against the corporate debtor. Whilst the proceedings, the appellant advocate contended that the matter had been settled with the Operational Creditors and the Corporate Debtors had already paid the entire amount prior to the appointment of Committee of Creditors.

In light of the settlement reached between the parties, the NCLAT exercised its inherent powers under Rule 11 of the NCLAT Rules, 2016 and overruled the order wherein a Corporate Insolvency Resolution Process was initiated against the Corporate Debtor. Subsequently the application filed under Section 9 was dismissed and withdrawn.

Moreover, the Mumbai Bench of the NCLT, in A.K. Corporation v. Anupam Extraction Ltd used its inherent power, as the Corporate Insolvency Resolution Process proceedings began prior the appointment of Committee of Creditors, Hence this came to as liberty for party to reach the NCLT and seek to either allow or disallow such applications. In this case, the application was not maintainable on the grounds of non- appointment of Committee of Creditors and hence the application was rejected by NCLT.

NCLT’s Inherent Powers Amidst the Covid-19 Pandemic

Bangalore Bench of NCLT in, India Asset Growth Fund and Ors. Vs. CMRS Projects Pvt Ltd amid this economic slowdown due to Covid-19 passed the judgement bearing in mind the intent of IBC. The ruling of the Tribunal shows that initiation of Corporate Insolvency Resolution Process of the corporate debtor meanwhile this economic pandemic situation is not justified. It was suggested that the financial creditors should invoke provisions under IBC in case all other remedies have been exhausted. The financial creditors were also expected to reappraise the proposed settlement. On the other hand, the respondents were expected by the Tribunal to show full cooperation for settlement.

Conclusion

After analysing several case laws and reasoning of various tribunals, NCLT/NCLAT have their own inherent powers to be used when required as the end motive of both the tribunals is to deliver justice. Also, the powers vested with them should be used in a fair and non-biased way.

The chief principle of law, that is, natural justice must be adhered to by all courts and tribunals throughout India. These exists no space for miscarriage of justice. Thus, under Rule 11 of NCLT Rules, 2016 the NCLT has the power to adjudicate the case using its inherent powers.