- Anushree Poddar
SCOPE OF RESIDUARY JURISDICTION OF NCLT IN THE INDIAN INSOLVENCY REGIME
Updated: Dec 26, 2022
A. Residuary Jurisdiction of NCLT: Overview
The National Company Law Tribunal (“NCLT”) was established in 2016 under Section 408 of the Companies Act 2013. In the same year, the Indian insolvency regime also underwent a historic structural change with of enacting the Insolvency and Bankruptcy Code, 2016 (“IBC”). IBC provides for NCLT as the adjudicating authority, which does not intervene in the resolution process but simply adjudges the fairness of the process and compliance with the governing law. Under Section 60(5) IBC, NCLT is vested with residuary jurisdiction. It is empowered to entertain or dispose of anyapplication made by or against the corporate debtor and any question of priorities, law or facts arising out of or in relation to the insolvency resolution. Section 60(5) IBC consistently uses the word ‘any’, conferring wide jurisdictional powers. Due to the expansive wording of the provision, any residuary matter can arguably be included within the ambit of this provision and, consequently, within NCLT’s jurisdiction. Therefore, Courts have often delved into the scope of residuary jurisdiction to determine the extent of NCLT’s authority to adjudicate over various disputes.
B. Judicial Interpretation: Narrowing The Ambit of Residuary Jurisdiction
The Supreme Court explained the ‘residual jurisdiction’ of NCLT in Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta. It was ruled that even if the Adjudicating Authority cannot interfere with the merits of a commercial decision taken by a Committee of Creditors, it would have the power to ensure that the corporate debtor functions as a going concern throughout the insolvency process, maximises the value of its assets and secures the interests of all stakeholders. The Court also held that ers concerning the rights of a Corporate Debtor. In Embassy Property Developments Pvt Ltd v State of Karnataka and Ors, the Resolution Professional moved an application before NCLT for setting aside an order of the Government which rejected the grant of extension to the Corporate Debtor’s mining lease. The Court held that such matters fall in the public law domain, and NCLT, being a creature of a special statute to discharge specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action. The Court accepted that Section 60(5) IBC is very broad in its sweep since it covers “any question of law or fact arising out of or in relation to insolvency resolution”, but a decision taken by the Government or statutory authority regarding a matter which is in the realm of public law cannot be included within it. Emphasising the phrase ‘arising out of or in relation to the insolvency resolution’ in Section 60(5) IBC, it was ruled that a decision taken by the Government or a statutory authority cannot be included within its purview. Therefore, despite the broad wording of the statute, the Court’s interpretation limited NCLT’s residuary jurisdiction to matters that arise out of or relate to insolvency resolution.
C. Recent Holdings: Factors Affecting Applicability of Residuary Jurisdiction
Recently, the Supreme Court pronounced a detailed judgement regarding the residuary jurisdiction of NCLT in Gujarat Urja Vikas Nigam Ltd v Amit Gupta and Ors (“Gujarat Urja”). In this case, the Appellant and the Corporate Debtor had entered into a Power Purchase Agreement (“PPA”). Under the agreement, a Corporate Insolvency Resolution Process (“CIRP”) was an event of default. The Appellant issued a notice to the Corporate Debtor, which was undergoing a CIRP, to remedy the default failing, which would terminate the PPA. The Corporate Debtor contended that they relied heavily on it to reach a resolution under IBC. The NCLAT held that the Appellant could not terminate the PPA solely due to the initiation of the CIRP and further restrained the Appellant from terminating the PPA even in the event that the Corporate Debtor did undergo liquidation.
The consideration which was primarily weighed while coming to this determination was that the termination of the PPA would prejudice the status of the Corporate Debtor as a ‘going concern’ and lead to failure of the CIRP. The present dispute solely arose out of and related to the insolvency of the Corporate Debtor. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. Thus, it was held that NCLT would have jurisdiction under Section 60(5)(c).
This understanding was also upheld by the Court in Tata Consultancy Services Ltd v SK Wheels Pvt Ltd. Here, under a facilities agreement, the Corporate Debtor had provided its premises with certain specifications and facilities to the Appellant. The Appellant had repeatedly informed the Corporate Debtor that its services were deficient and falling foul of its contractual obligations. Thus, the agreement was eventually terminated. There was nothing to indicate that the termination of the facilities agreement was motivated by the insolvency of the corporate debtor. Ultimately, it was held that the NCLT did not have any residuary jurisdiction to entertain the contractual dispute which arose dehors the insolvency of the corporate debtor.
Therefore, the Court ruled that NCLT should have applied its mind to analyse the centrality of the facilities agreement vis a vis the success of the CIRP and the corporate debtor’s survival as a going concern. In a nutshell, for NCLT to have residuary jurisdiction in a contractual dispute, there must be a nexus between the nature of the dispute and the insolvency of the corporate debtor. The key determinants are that, firstly, the contract is central to the success of the CIRP ,and, secondly, the corporate debtor would not be able to maintain itself as a going concern upon its termination.
D. Exercise of Residuary Jurisdiction: Analysis
The Gujarat Urja decision was a classic case of prioritising: on one hand, the Court had the option of ensuring that the debtor remains a ‘going concern’ throughout the insolvency process; on the other hand, there was the question of respecting party autonomy to enter into contracts and enforce contractual remedies. The Court, through its judgement, indirectly controlled the ambit of ipso facto clauses which essentially allows parties to terminate a contract upon the occurrence of an event of default. Contracts usually define events of default, giving the counterparty an unconditional right of termination. Such events often include the commencement of insolvency proceedings. In certain instances, there may be a need to invalidate ipso facto clauses to prevent the value of a corporate debtor’s assets from diluting during the insolvency process. However, such invalidation should be balanced with the compelling need to preserve the contractual rights of the parties to a contract. While there is a need to ensure that the debtor remains a going concern throughout the insolvency proceeding, controlling the ambit of ipso facto clauses also presents an overarching concern of infringing the sanctity of contractual relationships. NCLT has to analyse whether a contract is so indispensable to a corporate debtor that its termination would dilute the assets of the corporate debtor and render the CIRP useless.
The residuary jurisdiction provision is very crucial to empower NCLT as an adjudicating authority. The wide wording of Section 60(5) IBC and the judicial interpretation in the cases highlighted indicate that the scope of NCLT’s jurisdiction is not as obvious as it may seem. The courts have held that residuary jurisdiction cannot be restricted or understood in a way that the very objective of the provision is rendered nugatory. However, NCLT cannot cloak itself with a jurisdiction which is beyond or contrary to the provisions of a statute. Thus, there is a need for judicious use of the residuary jurisdiction provision. Providing NCLT with a degree of exclusivity to deal with such matters contributes to making the process and the outcome speedier and more efficient. In conclusion, like the Court held in Gujarat Urja, a fine line has to be drawn between ensuring that a residuary jurisdiction is not rendered otiose due to an excessively restrictive interpretation and guarding against the illegitimate usurpation of power.