Thanos’ Infinite Gauntlet Given an Endgame Treatment – Jurisdiction of the NCLT under Section 60(5) as interpreted by the Apex Court

“This topic is covered in detail in the comments on Section 60 in the commentary titled Insolvency and Bankruptcy Code: Law and Practice by the author of this column post. The same is available HERE

Overview

The Insolvency and Bankruptcy Code (hereinafter “the IB Code”) enshrines under Section 60(5), the provision which vests jurisdiction in the NCLT to decide applications before it filed by or against the corporate debtor or issues arising out of or in relation to the corporate insolvency resolution process (CIRP) or liquidation processes, amongst others. This broadly worded provision seems to equip the NCLT with Thanos – like infinity gauntlet in adjudicating any dispute that may be related to the CIRP or the liquidation processes.

The IB Code under Section 60(5) provides:

“60. Adjudicating authority for corporate persons. — …

(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of —

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

….” (emphasis added)

This column post will deal with how the seemingly infinite power to adjudicate vested in the NCLT may have been circumscribed by the Supreme Court in its ambit and scope. Akin to how the Avengers: Endgame (poorly) undermines the almighty strength of infinity stones; the interaction of the Supreme Court with Section 60(5)(c) of the IB Code stands to do the same to the rest of sub-clauses of Section 60(5).

A. Section 60(5)

Section 60(5) is a broad provision where any action of the resolution professional, Committee of Creditors or likewise any action against a non-complying party is to be challenged. The same is challenged through the procedural provision laid down under Section 60(5) before the adjudicating authority.

It is important to understand the width and ambit of Section 60(5), including Section 60(5)(c) which is a residuary and widely framed provision. The same delineates the power of an adjudicating authority in entertaining claims and challenges of stakeholders that arise during a resolution process. For instance, if the resolution professional classifies the claim of a creditor as an operational debt (as opposed to be a financial debt), the same has been challenged before the adjudicating authority under Section 60(5).¹ The NCLAT herein upheld the exercise of power by the adjudicating authority under Section 60(5) and had held that “the resolution professional is not vested with any adjudicatory powers and being a part of the mechanism all actions taken by him are subject to control of the adjudicating authority”.

There have been instances where the admission of claims of a creditor by a resolution professional and the consequent inclusion of those creditors into the CoC; has been challenged by the other creditors before the adjudicating authority on the ground that the former were wrongly inducted into the CoC or their claims are not in the nature of a financial debt.² In these instances, the NCLAT has decided the matters on the merits of the dispute.

In another ruling,³ the NCLAT upheld the order of the adjudicating authority, where one of the creditors (who was also a part of the CoC) challenged the inclusion of another creditor into the CoC on the ground that the claim of the latter creditor was an extortionate transaction and therefore not a valid claim. The creditor who was opposing the inclusion subsequently filed an application under Section 60(5) of the IB Code before the adjudicating seeking exclusion of the other creditor. When the matter went into appeal, the appellant argued that the adjudicating authority had wrongly intervened by finding its claim to be hit by extortionate transactions in absence of any application under Section 51 of the IB Code, which specifically dealt with extortionate transactions. The NCLAT repelling the argument, held in the following terms:

“22. … we are of the view that as per Section 60(5) of IBC, the adjudicating authority has jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate persons.

23. In the present case, Respondent 1 herein made an application to the adjudicating authority by invoking Section 60 sub-section (5) read with Section 22 of the IBC (Annexure R-8, p. 90 of reply) which in our opinion is in accordance with law and Respondent 1 rightly invoked the jurisdiction.

24. Therefore, the adjudicating authority passed the order in exercise of jurisdiction as enshrined under Section 60 sub-section (5) of the IBC.”⁴

The three important rulings rendered by the Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta,⁵ Alok Kaushik v. Bhuvaneshwari Ramanathan,⁶ and Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain⁷ give us a clearer picture and a better understanding of the provision of Section 60(5) and more importantly 60(5)(c).

B. Supreme Court and discontents of its obiter in Gujarat Urja

In Gujarat Urja,⁸ there was a power purchase agreement between the parties that had provided that Gujarat Electricity Regulatory Commission would entertain the disputes between the parties relating to the agreement. The corporate debtor was a power producing company which was undergoing resolution process and the appellant – Gujarat Urja Nigam was the purchaser. When the resolution process had initiated, the appellant terminated the agreement. When the matter went to the adjudicating authority and the NCLAT, both the tribunals had stayed the termination of the agreement. The Appellate Tribunal prevented the appellant from terminating the same on the grounds that it is essential to keep the corporate debtor as a going concern. The Appellate Tribunal expressly held:

“48. … the ‘Gujarat Urja Vikas Nigam Limited’, being purchaser of the electricity cannot terminate the ‘power purchase agreement’ solely on the ground that the ‘corporate insolvency resolution process’ has been initiated against ‘Astonfield Solar (Gujarat) Pvt. Ltd.’ (corporate debtor) which is generating electricity and supplying it and there is no default in supplying electricity and during the ‘corporate insolvency resolution process.”

Issue firstly arose as to whether such a dispute could even be entertained before an adjudicating authority by way of Section 60(5)(c) of the IB Code. The Supreme Court firstly placed reliance on Section 238 of the IB Code, which stipulated:

“[t]he provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” (emphasis supplied)

Then it perused the provision of Section 60(5)(c) of the IB Code, which states that the adjudicating authority has jurisdiction to decide on “any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code”.⁹

On the basis of the above, it was firstly concluded that Section 238¹⁰ of the IB Code gives an overriding effect to the provisions of the IB Code over condition mentioned in any instrument. Resultantly, the same would include even a bilateral commercial contract between the corporate debtor and any other party. Then, the scope of Section 60(5) was explained where the court opined that the same clothes an adjudicating authority with jurisdiction to entertain a dispute which may arise in the context of insolvency proceedings. The operative part of the ruling states:

“69. … considering the text of Section 60(5)(c) and the interpretation of similar provisions in other insolvency related statutes, NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor. However, in doing do we issue a note of caution to the NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the corporate debtor. The nexus with the insolvency of the corporate debtor must exist.”¹¹

(emphasis supplied)

Therefore, the adjudicating authority could adjudicate disputes arising between parties in context of insolvency [Section 60(5)(c)] and nothing inconsistent contained in any agreement between the parties could override that (Section 238).

The Supreme Court on the facts then noted that the power purchase agreement was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the corporate debtor. The court also noted that in the absence of the insolvency of the corporate debtor, there would be no ground to terminate the agreement. Therefore, it concluded that the termination has not been on a ground independent of the insolvency and the present dispute solely arose out of and relates to the insolvency of the corporate debtor.¹²

Resultantly, the exercise of jurisdiction, under Section 60(5)(c) by the adjudicating authority and the Appellate Tribunal, was upheld.

It must be here noted that in para 74 of its ruling the Supreme Court cited an instance where Section 60(5)(c) would not be relevant. The Court stated:

“74. … for adjudication of disputes that arise dehors the insolvency of the corporate debtor, the resolution professional (RP) must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the corporate debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.”¹³

It must be clarified that while the observations are made in respect to Section 60(5)(c) and the interpretation given to it by the court; the provision of Section 60(5)(a) is very expansive in itself which stipulates that “the National Company Law Tribunal shall have jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate person”. Therefore, the instance cited by the Supreme Court may fall into the ambit of Section 60(5)(a), hence allowing the jurisdiction of the adjudicating authority. The same is stated for two following reasons:

(a) In its ruling in Arcelormittal India (P) Ltd. v. Satish Kumar Gupta,¹⁴ the Supreme Court discussed the scope of entire Section 60(5) [as opposed to only Section 60(5)(c)] to hold that “the non obstante clause in Section 60(5) is designed … to ensure that the NCLT alone has jurisdiction when it comes to applications and proceedings by or against a corporate debtor covered by the Code, making it clear that no other forum has jurisdiction to entertain or dispose of such applications or proceedings”.

(b) The ruling in Gujarat Urja¹⁵ deals with Section 60(5)(c) only and the court itself had adverted to numerous precedents and reports to conclude that the framework of the IB Code is to establish the adjudicating authority as a single forum and avoid multiplicity of forums.

It is submitted that caution must be taken while interpreting the ruling in Gujarat Urja¹⁶ so as to not restrict the other sub-clauses of Section 60(5), namely, Sections 60(5)(a) and 60(5)(b).

C. Sacrificing Section 60(5)(a) at the altar of the shadow cast by Section 60(5)(c)

In Alok Kaushik,¹⁷ the issue pertained to the costs, charges, expenses and professional fees payable to a registered valuer appointed after the initiation of the resolution process under the IB Code. In this case, the resolution process was set aside by the NCLAT and the matter was remanded back to the adjudicating authority to decide on the issue of CIRP costs. Pursuant to the setting aside of the resolution process, the appointment of the appellant – registered valuer was cancelled by the resolution professional. The fees of the appellant which were ratified were not paid; resultantly dispute arose. The appellant approached the adjudicating authority by way of Section 60(5), which dismissed its application holding that it had been rendered functus officio. The appeal before NCLAT was also rejected.

The question of law before the Supreme Court came to be that in a situation such as the present where the resolution process was set aside, there has to be a framework within the IB Code to determine the claim of a professional valuer who provided services for the resolution process.

The Supreme Court placed reliance on the residuary power under Section 60(5)(c) to hold that the impugned order of the adjudicating authority in declining to exercise jurisdiction for being functus officio was incorrect.

The court then opined that though the resolution process was set aside later, the claim of the appellant as a registered valuer related to the period when he was discharging his functions as a registered valuer. The court then termed the appointment of the valuer as an “incident of the CIRP”, thereby opening the doors of Section 60(5)(c) where an adjudicating authority has jurisdiction to decide on “any question of law or facts, arising out of or in relation to the insolvency resolution under this Code”.

Resultantly, the Supreme Court remitted back the proceedings to the adjudicating authority for the purposes of determining the claim of the appellant for the payment of the professional charges as a registered valuer appointed by the RP in pursuance of the initiation of the resolution process.

While the above two rulings provide us with the instances where disputes have been found to be arising out of the insolvency process. The condition set by the Court in Gujarat Urja¹⁸ as a prerequisite for exercising jurisdiction under Section 60(5)(c) i.e. the condition that the dispute must arise solely from or relate to the insolvency of the corporate debtor stood satisfied in Gujarat Urja¹⁹ as well as Alok Kaushik²⁰.

The condition however was not fulfilled in Tata Consultancy²¹. In this case, the agreement between parties provided that the disputes between the parties shall be a subject-matter of arbitration. The Supreme Court referring to the provision of Section 238 held that the existence of a clause for referring the dispute between parties to arbitration does not oust the jurisdiction of the adjudicating authority to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the corporate debtor.

The matter however turned with respect to whether the dispute related to the insolvency of the debtor. In this case, the alleged breaches on part of the debtor were communicated on multiple occasions in 2018, while the resolution process had started on 29-3-2019. The termination notice was however dated 10-6-2019. The court noted that in the facts and circumstances of the case, the appellant had time and again informed the corporate debtor that its services were deficient, and it was falling foul of its contractual obligations. The court materially opined that there was nothing to indicate that the termination of the facilities agreement was motivated by the insolvency of the corporate debtor, rather the termination was on account of the alleged breaches noted in the termination notice.

Resultantly, it held that the adjudicating authority does not have any residuary jurisdiction to entertain the present contractual dispute, which had arisen dehors the insolvency of the corporate debtor and therefore no stay could have been issued on the termination notice.

The court, holding that the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the corporate debtor, set aside the orders of the adjudicating authority as well as the NCLAT.

It is submitted that the discussion made post the analysis of Gujarat Urja²² that the other sub-clauses of Section 60(5), namely, Sections 60(5)(a) and 60(5)(b) must not get diluted at the altar of the interpretation of Section 60(5)(c) made by the court in Gujarat Urja²³; becomes relevant here.

While the issue of terminating the contract here in Tata Consultancy²⁴ did not arise out of or in relation to the insolvency resolution proceedings as mandated under Section 60(5)(c); still the adjudicating authority should have not been deprived of from adjudicating on the merits of the case in terms of Section 60(5)(a). The Supreme Court by restricting its analysis over Section 60(5)(c) has rather ended up opening the Pandora’s box where a resolution professional in such cases will have to go to a civil court to challenge and contest contractual disputes, thereby encouraging multiple litigation before multiple forums.

Conclusion

The jurisprudence on Section 60(5) of the IB Code may seem to be ambiguous. However, it is submitted that the statutory provision of Section 60(5) read with the time-limit of completing a resolution process (under Section 12) and the clean slate of all the previous claims upon the approval of a resolution plan (Section 31) along with the letter and spirit of the IB Code demands that a wide power is vested in the adjudicating authority so that the best and most efficient outcome could be derived from a resolution process. Therefore, it must follow that any party aggrieved with the corporate debtor should be able to approach and settle their disputes before one single, forum i.e. the adjudicating authority.