Inherent Powers for the Benefit of Creditors: Insights from NUI Pulp vs Roxcel

Introduction

The Insolvency & Bankruptcy Code, 2016 (the ���Code�۝) provides for a strict deadline of 14 days within which an insolvency application filed under Section 7, 9 or 10, as applicable, of the Code has to be admitted or rejected by the National Company Law Tribunal (���NCLT�۝). In the event, the insolvency application is admitted, then only a moratorium can be imposed against the corporate debtor.

However, the aforesaid period of 14 days has not been strictly adhered to and there have been instances where the insolvency application has been pending for more than a year[i]. Moreover, the Supreme Court in Surendra Trading Company vs. Juggilal Kamlapat Jute Mills[ii] has held that the 14 days' timeline provided under Section 7, 9 or 10, as applicable, of the Code is discretionary and not mandatory. Therefore, until the application is admitted, the corporate debtor may sell/transfer or encumber its assets. This goes against the fundamental aim of the Code to provide an effective recovery mechanism.

In light of the aforesaid discussion, it is pertinent to observe the manner in which, both the NCLT and the National Company Appellate Law Tribunal (���NCLAT�۝) have taken a pragmatic approach while passing the relevant orders in the recent matter of��NUI Pulp and Paper Industries Pvt. Ltd. vs. Ms. Roxcel Trading GMBH[iii].

NUI Pulp and Paper Industries Pvt. Ltd. vs. Ms. Roxcel Trading GMBHFactual Matrix

• Roxcel Trading GMBH (���Roxcel�۝), an operational creditor, had filed an insolvency application against NUI Pulp and Paper Industries Pvt. Ltd. (���NUI�۝) , the corporate debtor, before the NCLT Chennai Bench. Additionally, Roxcel filed an application under Section 60(5)(c) of the Code, 2016 seeking an interim relief of restraining NUI from selling its assets (��� Application�۝).
• NUI raised an objection against the Misc. Application on the ground that Section 60(5)(c) of the Code comes into effect only after the admission of the insolvency application and not when the insolvency application is pending with NCLT.
• In its order dated June 25, 2019 (���NCLT Order�۝)[iv], the NCLT agreed with NUI and stated that Section 60(5)(c), and the relief sought thereunder, would be applicable only after the insolvency application is admitted and not during the pre-admission stage. However, the NCLT invoked its interim powers under Rule 11 of National Company Law Tribunal Rules, 2016[v] (���NCLT Rules�۝) and passed an order restraining NUI and its directors from alienating, encumbering or creating any third-party interest on its assets on the ground that the purpose of the Code will be defeated if the assets of the corporate debtor are allowed to be alienated.
• Thereafter, NUI had challenged the NCLT Order before the NCLAT. However, the NCLAT through its judgment dated July 17, 2019 (���NCLAT Judgment�۝) upheld the NCLT Order and observed that NCLT is well within the legal sphere to invoke its interim powers to meet the ends of justice.

Brief Analysis and Key Takeaways

• The NCLT Order and NCLAT Judgment give new wings and an additional comfort to the creditors while preventing the corporate debtor from alienating the assets. However, on a careful perusal of the NCLT Order and NCLAT Judgment, it is very clear that the tribunals did not want to give effect to Section 14 of the Code, which provides for moratorium against the corporate debtor, at the pre-admission stage. In this regard, the NCLAT observed in unambiguous terms: �����_once the application is admitted, then the order of ���Moratorium�۪ under Section 14 will follow, taking away the right of the Board of Directors of the ���Corporate Debtor�۪ to take any decision on behalf of the ���Corporate Debtor�۪ prohibiting others from taking any action against the ���Corporate Debtor�۪ which is different from interim order. On the other hand, if application under Sections 7 or 9 or 10 is rejected, the interim order will automatically stand vacated.�۝[vi]��
• This could be because the moratorium under Section 14 of the Code has a much wider impact which is not only limited to the corporate debtor, but affects other creditors, initiation/continuance of any proceedings or execution of judgments, etc. Hence, the NCLT Order and NCLAT Judgment gave a purposive interpretation to the provisions of the Code and struck a balance between (a) the interests of the corporate debtor and the operational creditor by not allowing a complete moratorium and going against the statute, and (b) safeguarding objects of the Code by invoking interim powers to only restrain the corporate debtor from alienating or creating third party rights on the assets during pendency of the insolvency application.
• The NCLAT Judgment also took into consideration that NUI did not give any undertaking or made any specific reply refuting the allegations that it intends to alienate its assets and observed that �����_we are of the view that it is always open to the Adjudicating Authority to pass ad-interim order before admitting any application under Sections 7 or 9 or 10 of the ���I&B Code.�۝ Therefore, it remains to be seen whether an undertaking from directors or corporate debtors would be sufficient to prevent any restraining order.
• Another debatable point in the NCLAT Judgment was the applicability of NCLT Rules and invoking of interim powers thereunder. Inherent powers are to be invoked sparingly, however, the decisions of judiciary and tribunals invoking the inherent powers shall stand its ground unless it is observed to be arbitrarily used or patently illegal, as per the Supreme Court�۪s recent judgment in Swiss Ribbons (P.) Ltd. v. Union of India [vii].
• Further, an argument that may be raised against the NCLT Order and the NCLAT Judgment is, that Sections 43, 45 and 50 of the Code provide that the liquidator or the resolution professional may file an application for avoidance of certain transactions which were either of preferential nature, undervalued transaction or extortionate credit transaction, and which took place during the period of: (a) 2 years preceding the insolvency commencement date in case of a related party transaction; and (b) 1 year preceding the insolvency commencement date in case of a non-related party transaction. However, such actions at a later stage may not be of practical significance and restoring the assets of the corporate debtor may be difficult/impossible due to various reasons.

Appeal in the Apex Court

NUI had preferred an appeal against the NCLAT Judgment before the Supreme Court, however, the same was dismissed as the Supreme Court held that the order passed by NCLAT requires no interference[viii]. Therefore, until the Supreme Court gives a contrary judgment, the NCLAT Judgment would be the golden window and serve as the perfect legal precedent for the creditors trying to get an interim relief at the pre-admission stage.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.

[i] Asset Reconstruction Company Limited vs. GPT Steel Industries Limited, Company Appeal (AT) (Insolvency) No. 151 of 2019

[ii] Surendra Trading Company vs. Juggilal Kamlapat Jute Mills, (2017) 16 SCC 143

[iii] NUI Pulp and Paper Industries Pvt. Ltd. vs. Ms. Roxcel Trading GMBH, Company Appeal (AT) (Insolvency) No. 664 of 2019

[iv] NUI Pulp and Paper Industries Pvt. Ltd. vs. Ms. Roxcel Trading GMBH, IBA/598/2019 (NCLT Chennai), order dated 25/06/2019

[v]��Rule 11 of NCLT Rules: ���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.�۝

[vi] Supra Note 2, paragraph 12

[vii] Swiss Ribbons (P.) Ltd. v. Union of India, (2019) 4 SCC 17

[viii] NUI Pulp and Paper Industries Pvt. Ltd. v. M/S Roxcel Trading Gmbh, Civil Appeal No. 6697/2019 decided on September 11, 2019