Embassy Property Developments Pvt. Ltd. v. State of Karnataka and Ors. MANU/SC/1661/2019

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[M/s.Udhyaman Investments Pvt. Ltd. (The twelfth Respondent), claiming to be a Financial
Creditor, moved an application before the NCLT Chennai, under Section 7 of the Insolvency
and Bankruptcy Code, 2016 against the Corporate Debtor (M/s.Tiffins Barytes Asbestos &
Paints Ltd.). By and Order dated 12.03.20 the NCLT Chennai admitted the application,
ordered the commencement of the Corporate Insolvency Resolution Process and appointed an
Interim Resolution Professional. The Corporate Debtor held a mining lease granted by the
Government of Karnataka, which was to expire by 25.05.2018. Though a notice for premature
termination of the lease had already been issued on 09.08.2017, on the allegation of violation
of statutory Rules and the terms and conditions of the lease deed, no order of termination had
been passed till the date of initiation of the Corporate Insolvency Resolution Process (CIRP).
The Interim Resolution Professional appointed by NCLT wrote a letter dated 21.04.2018to
the Director of Mines and Geology, seeking the benefit of deemed extension of the lease. The
Government passed an order dated 26.09.2018 rejecting the proposal for deemed extension,
on the ground that the Corporate Debtor had contravened not only the terms and conditions
of the Lease Deed but also the provisions of Rule 37 of the Mineral Concession Rules, 1960
and Rule 24 of the Minerals Rules, 2016. The Resolution Professional moved a Miscellaneous
Application No. 632 of 2018, before the NCLT Chennai, praying for setting aside the Order of
the Government of Karnataka. The NCLT an Order dated 11.12.2018 allowed the
Miscellaneous Application, setting aside the order of rejection and directed the Government
of Karnataka to execute Supplemental Lease Deeds. Challenging the Order of the NCLT
Chennai, the Government of Karnataka moved a writ petition before the High Court. The
High Court, by Order dated 12.09.2019 granted an interim stay of operation of the direction
contained in the impugned Order of the Tribunal.
It is against the said ad Interim Order granted by the High Court that the Resolution
Applicant, the Resolution Professional and the Committee of Creditors have filed the present
Appeal before the Supreme Court – held- 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.]
Hon’ble Judges/Coram: Rohinton Fali Nariman, Aniruddha Bose and V. Ramasubramanian,
JJ.
V. Ramasubramanian, J. – 2. Two seminal questions of importance namely:
i) Whether the High Court ought to interfere, Under Article 226/227 of the Constitution, with
an Order passed by the National Company Law Tribunal in a proceeding under the Insolvency

and Bankruptcy Code, 2016, ignoring the availability of a statutory remedy of appeal to the
National Company Law Appellate Tribunal and if so, under what circumstances; and
ii) Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings
initiated under the Insolvency and Bankruptcy Code, 2016, arise for our consideration in these
appeals.

9. In response, Sh. K.K. Venugopal, learned Attorney General submitted that if a case falls
   under the category of inherent lack of jurisdiction on the part of a Tribunal, the exercise of
   jurisdiction by the Tribunal would certainly be amenable to the jurisdiction of the High Court
   Under Article 226. Since the contours of jurisdiction of NCLT are defined in Clauses (a), (b)
   and (c) of Sub-section (5) of Section 60 and also since the powers of the NCLT are defined in
   Sub-section (4) of Section 60, to be akin to those of the Debts Recovery Tribunal under the
   Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (hereinafter referred
   to as DRT Act, 1993), it was contended by the learned Attorney General that the jurisdiction
   of the NCLT is confined only to contractual matters inter-parties. An order passed by a
   statutory/quasi-judicial authority under certain special enactments such as the MMDR Act,
   1957 falls in the realm of public law and hence it was contended by the learned Attorney
   General that the NCLT would have no power of judicial review of such orders. The learned
   Attorney General also drew our attention to the minutes of the 10th meeting of the Committee
   of Creditors held on 27.02.2019, in which a Company other than the present Resolution
   Applicant was recorded to have made a better offer. But the present Resolution Applicant was
   able to have his plan approved, despite the offer being lesser, only because they were willing
   to take the risk of the mining lease not being renewed. Therefore, it was his contention that a
   person who was willing to take a chance, cannot now take shelter under the approval of the
   Resolution Plan. On the contention that the Government of Karnataka had an efficacious
   alternative remedy before the NCLAT, the learned Attorney General submitted, on the basis
   of the decision in Barnard and Ors. v. National Dock Labour Board and Ors. (1953) 2 WLR
   995 that when an inferior Tribunal passes an Order which is a nullity, the superior Court need
   not drive the party to the appellate forum stipulated by the Act. The learned Attorney General
   also relied upon the decision of this Court in The State of Uttar Pradesh v. Mohammad
   Nooh (1958) SCR 595.
10. In the backdrop of the facts narrated and in the light of the rival contentions extracted
    above, the first question that arises for consideration is as to whether the High Court ought to
    interfere, Under Article 226/227 of the Constitution, with an order passed by NCLT in a
    proceeding under the IBC, 2016, despite the availability of a statutory alternative remedy of
    appeal to NCLAT.
11. Though in Thressiamma Jacob v. Deptt. of Mining & Geology, (2013) 9 SCC 725 this
    Court held that the mineral wealth in the subsoil would go along with the ownership of the
    land, the question of entitlement of the government to charge royalty was left open, as it was
    pending reference to the constitution bench. But 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. As we have indicated
elsewhere, 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. Section 2 of
MMDR Act, 1957 reads as follows:
It is hereby declared that it is expedient in the public interest that Union should take
under its control the Regulation of mines and the development of minerals to the
extent hereinafter provided.

28. Therefore as rightly contended by the learned Attorney General, 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, as observed by this Court in Sub-Committee on
    Judicial Accountability v. Union of India, (1991) 4 SCC 699 flows from the concept of a
    higher law, namely the Constitution. Paragraph 61 of the said decision captures this position
    as follows:
    But where, as in this country and unlike in England, there is a written Constitution
    which constitutes the fundamental and in that sense a “higher law” and acts as a
    limitation upon the legislature and other organs of the State as grantees under the
    Constitution, the usual incidents of parliamentary sovereignty do not obtain and the
    concept is one of ‘limited government’. Judicial review is, indeed, an incident of and
    flows from this concept of the fundamental and the higher law being the touchstone of
    the limits of the powers of the various organs of the State which derive power and
    authority under the Constitution and that the judicial wing is the interpreter of the
    Constitution and, therefore, of the limits of authority of the different organs of the
    State. It is to be noted that the British Parliament with the Crown is supreme and its
    powers are unlimited and courts have no power of judicial review of legislation.
29. 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. Hence, let us now see the jurisdiction and powers
conferred upon NCLT.

30. 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.
31. 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 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 there-under. 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 Subsection (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 Sub-section (5). Let us take for instance a case where a
    corporate debtor had suffered an order at the hands of the Income Tax Appellate Tribunal, at
    the time of initiation of CIRP. If Section 60(5)(c) of IBC is interpreted to include all questions
    of law or facts under the sky, an Interim Resolution Professional/Resolution Professional will
    then claim a right to challenge the order of the Income Tax Appellate Tribunal before the
    NCLT, instead of moving a statutory appeal Under Section 260A of the Income Tax Act,
32. Therefore the jurisdiction of the NCLT delineated in Section 60(5) cannot be stretched
    so far as to bring absurd results. (It will be a different matter, if proceedings under statutes
    like Income Tax Act had attained finality, fastening a liability upon the corporate debtor,
    since, in such cases, the dues payable to the Government would come within the meaning of
    the expression “operational debt” Under Section 5(21), making the Government an
    “operational creditor” in terms of Section 5(20). The moment the dues to the Government are
    crystalised and what remains is only payment, the claim of the Government will have to be
    adjudicated and paid only in a manner prescribed in the resolution plan as approved by the
    Adjudicating Authority, namely the NCLT.)

39. 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, quasijudicial and arbitration proceedings. Section 25(1) and 25(2)(b) reads as follows:
40. Duties of resolution professional –
    (1) It shall be the duty of the resolution professional to preserve and protect
    the assets of the corporate debtor, including the continued business
    operations of the corporate debtor.
    (2) For the purposes of Sub-section (1), the resolution professional shall
    undertake the following actions:
    (a)………….
    (b) represent and act on behalf of the corporate debtor with third parties,
    exercise rights for the benefit of the corporate debtor in judicial, quasi
    judicial and arbitration proceedings.
    This shows that 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).
41. 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.
42. Therefore, in fine, our answer to the first question would be that 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.

46. The second question that arises for our consideration is as to whether NCLT is competent
    to enquire into allegations of fraud, especially in the matter of the very initiation of CIRP.
47. In the light of the above averments, the Government of Karnataka thought fit to invoke the
    jurisdiction of the High Court Under Article 226 without taking recourse to the statutory
    alternative remedy of appeal before the NCLAT. But the contention of the Appellants herein
    is that allegations of fraud and collusion can also be inquired into by NCLT and NCLAT and
    that therefore the Government could not have bypassed the statutory remedy.
48. The objection of the Appellants in this regard is well founded. Section 65 specifically
    deals with fraudulent or malicious initiation of proceedings. It reads as follows:
49. Fraudulent or malicious initiation of proceedings. – (1) If, any person initiates
    the insolvency resolution process or liquidation proceedings fraudulently or with
    malicious intent for any purpose other than for the resolution of insolvency or
    liquidation, as the case may be, the adjudicating authority may impose upon such
    person a penalty which shall not be less than one lakh rupees, but may extend to one
    crore rupees.
    (2) If, any person initiates voluntary liquidation proceedings with the intent to
    defraud any person the adjudicating authority may impose upon such person a
    penalty which shall not be less than one lakh rupees but may extend to one crore
    rupees.
50. 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, for
    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. It is significant to note that Section 65(1) deals with a situation where CIRP is
    initiated fraudulently “for any purpose other than for the resolution of insolvency or
    liquidation”.
51. Therefore, if, as contended by the Government of Karnataka, the CIRP had been initiated
    by one and the same person taking different avatars, not for the genuine purpose of resolution
    of insolvency or liquidation, but for the collateral purpose of cornering the mine and the
    mining lease, the same would fall squarely within the mischief addressed by Section 65(1).
    Therefore, 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.
52. The upshot of the above discussion is that though NCLT and NCLAT would have
    jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate
    upon disputes such as those arising under MMDR Act, 1957 and the Rules issued thereunder,
    especially when the disputes revolve around decisions of statutory or quasi-judicial
    authorities, which can be corrected only by way of judicial review of administrative action.

Hence, the High Court was justified in entertaining the writ petition and we see no reason to
interfere with the decision of the High Court. Therefore, the appeals are dismissed. There will
be no order as to costs