The Supreme Court in the case of Embassy Properties Developments Pvt. Ltd. v. State of Karnataka & Ors. on December 3, 2019 held that the NCLT can only review orders arising out of contractual transactions between the parties and cannot review quasi judicial orders or orders passed by statutory bodies that fall within the ambit of public law.
A bench of the Supreme Court comprising of Justices R.F. Nariman, Aniruddha Bose and V. Ramasubramanian was hearing an appeal filed by the Corporate Debtor through its Resolution Profession, resolution Applicant and Committee of creditors challenging the interim order passed by the High Court of Karnataka staying the order of the NCLT.
Dismissing the appeals, the court held that, “though NCLT and NCLAT have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes arising under the MMDR Act, 1957, especially when the disputes revolve around decisions of quasi judicial bodies, which can only be corrected by judicial review of administrative action. Hence the High Court was justified in entertaining the Writ Petition.”
The main questions before the Court were whether the High Court can entertain petitions under Article 226 of the Constitution against order passed by NCLT when a statutory remedy is available under the Insolvency and Bankruptcy Code, 2016 and if so, then under what circumstances and whether fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated under the IBC.
Answering the above question, the Court held that, “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”. 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.”