Student Law Journal

Trimex Industries Pvt Ltd v. Sathavahana Ispat Ltd: Conundrum of Exercising Judicial-Review at Pre-approval Stage

abstract

The pre-approval stage of the resolution plan, which occurs before the NCLT accepts the plan, is a crucial stage and can make or break the entire resolution process. However, there is a lack of clarity regarding the tribunal’s power to intervene and adjudicate upon the issues arising at this stage, which has created uncertainty and ambiguity for the stakeholders involved.

The case of Trimex Industries Pvt. Ltd. v. M/s. Sathavahana Ispat Ltd highlighted this issue, however, failed to satisfactorily address it even after the reference, and thus was yet another lost opportunity to settle the issue once and for all. Therefore, the piece will critically analyse the ongoing conundrum, determine the position which is compliant with the code, and suggest ways to resolve disputes arising at this stage effectively.

Introduction

The Insolvency & Bankruptcy Code, 2016 (IBC or the Code) provides for a time-bound and efficient framework for the resolution of insolvency, with an objective to maximize the value for all the stakeholders. The pre-approval stage of the resolution plan refers to the stage of the resolution process which is prior to the acceptance of the resolution plan by the Adjudicating Authority (AA) i.e., the National Company Law Tribunal (NCLT). It is a crucial phase that can make or break the entire insolvency process. However, this stage is also where disputes relating to the resolution process can arise, which can potentially derail the entire process. Unfortunately, it is unclear if the tribunal can interfere at this stage to resolve the disputes, primarily due to the absence of a specific provision in the code, empowering the tribunal to entrench and adjudicate upon the issues arising at this stage.

As a consequence of this lack of clarity, various tribunals across the country have repeatedly arrived at conflicting opinions on the admissibility of the issues that arise during this phase. On the one hand, some tribunals are of the opinion that it is incumbent upon them to intervene in order to safeguard the interest of the stakeholders involved, and therefore, such petitions are entertained by invoking the tribunals’ inherent powers (such as inTorrent Investments Ltd vs. Y. Nageswara Rao , Committee of Creditors of Meenakshi Energy v. Consortium of Prudent ARC Limited ). However, on the other hand, certain coordinating benches of these tribunals have also taken the position that the tribunals’ interference in these matters is ultra vires to the scope of the code, and consequently, such claims are dismissed (such as in Committee of Creditors of Essar Steel v. Satish Kumar., Arcelor Mittal India Ltd v. Satish Kumar Gupta). This lack of uniformity in the interpretation of the law has created uncertainty and ambiguity among the stakeholders involved.

Recently, this issue was brought to light by the split dictum of NCLT Hyderabad in the case of Trimex Industries Pvt. Ltd. v. M/s. Sathavahana Ispat Ltdwherein, a reference was made to the President of the Principal Bench. In this case, there was an allegation that the resolution professional (RP) had allowed an ineligible resolution applicant to submit the prospective resolution plan which was in contravention of section 29A of the code. But before the Committee of Creditors (CoC) could consider the impugned resolution plan, the matter was brought before the tribunal, wherein the issue framed was:

Whether the Committee of Creditors can be restrained from considering the resolution plan of the prospective resolution applicant, which has been submitted by the Resolution Professional to the Committee of Creditors?” 

While the issue framed here appeared to pertain only to a particular instance where the interference of the tribunal at the pre-approval stage is questioned, however, the members of the NCLT while adjudicating this issue, first attempted to establish a general law regarding the powers of the tribunal to adjudicate at the pre-approval stage of the resolution plan and then, based on that, moved to answer the specific question framed above, thereby impacting the whole jurisprudence surrounding the powers of the tribunal to exercise judicial review at the pre-approval stage. But since the tribunal members were divided on this issue, the matter was referred to the president of the principal bench.

The president of the principal bench, on receipt of the issue, referred the matter (vide section 419(5) of the Companies Act, 2013) to the single-member bench of NCLT Cuttack, presided by the judicial member. The judicial member, NCLT Cuttack reiterated the stand taken by the judicial member in the split dictum and thereby disposed of the matter.

Post this dictum, the discussion on the issue of exercising judicial review at the pre-approval stage, which was initially at the forefront, faded away. The saga did saw subsequent developments such as the approval of the impugned resolution plan (of the alleged ineligible party) by the CoC and its challenge, the appeal to NCLAT Chennai which referred the matter back to NCLT Hyderabad, the final disposal of the issues and ultimately the approval of the resolution plan by the NCLT. However, none of these orders shed any light on the issue which led to the initial reference.

Therefore, this piece aims to redirect attention to the initial issue and reinvigorate the discussion by doing a critical analysis of the decisions of the members of NCLT Hyderabad (herein referred as the split dictum) and the decision of the judicial member of NCLT Cuttack (herein referred to as the referred dictum).  For this, the piece will expand the scope of the referred question to; whether there can be a judicial review at the pre-approval stage of the resolution plan, as was done by tribunal members in their discussion on the issue, and try to determine the position which is in compliance with the code. Further, we will suggest ways in which the disputes arising at this stage can be expeditiously resolved.

The Split Dictum: Observations of the Members of NCLT Hyderabad

1. Observations of the Judicial Member

The judicial member, after analysing the contentions of the parties, adjudged the applicant’s prayer as ‘premature’ on the ground that the judicial review under the code is confined within the four corners of Section 30(2) of the code. Section 30(2) of the code talks about the duties of the RP, and as per the tribunal member in this case, it is only when the RP has failed to comply with his duty mentioned under this section, that the tribunal can review its action. Thus, the tribunal can only exercise its powers where the matter comes before it under section 30(6) of the code for its approval. To substantiate his dictum, the learned member relied upon the authority of the Apex Court in India Resurgence Arc vs M/S. Amit Metaliks Ltd. He further observed that the consideration and approval of the resolution plan are completely within the domain of the commercial wisdom of the CoC and judicial review of it is limited (Para 14.3-14.5 & 15.4-15.6). 

Afterwards, the learned member went on to deliberate upon the exercise of residuary powers of the tribunal enumerated under section 60(5)(c) of the code, to adjudicate at the pre-approval stage of the resolution plan.  For this, he relied upon the decision of the Apex Court in Ebix Singapore Pte Ltd. vs Committee Of Creditors Of Educomp and held that the scope of residuary powers prescribed under the code are very limited and cannot be used to create a procedural or substantive remedy which is not envisaged by the statute, as doing so will usurp the delicate balance of the code. Thus, he refused to grant relief by using these powers. He further added that the use of residuary powers to prevent the Committee to consider and deliberate upon the resolution plan will be tantamount to preventing the Committee from exercising its statutory duties, which runs contrary to the code (Para 15.1-15.3).

The view of the learned member can therefore be summarised as follows:

  • Judicial review under the code is confined within the four corners of Section 30(2), thus the Tribunal cannot exercise its powers beyond it.
  • The CoC is the sole authority to approve or reject a resolution plan and the tribunal cannot exercise judicial review over its commercial wisdom.
  • The residuary powers prescribed under the code cannot be used to create a procedural or substantive remedy which is not envisaged by the statute.

It is pertinent to note that the learned judicial member in his dictum has only discussed the general proposition regarding the judicial review at the pre-approval stage and at no other point, except at the very end, has made reference to the particular circumstance of pre-approval review, i.e., when the resolution plan has been submitted to the CoC. Thus, the ratio laid by the learned member is not limited to the particular instance where the prospective resolution plan has been submitted to the Committee, but extends to any other circumstance where a person wishes to approach the tribunal before the approval of the resolution plan by the committee.

2.  Observations of Technical Member

The technical member of the tribunal, unlike the judicial member, did not jump into the intricacies of statutory interpretation, but simply pursued the material on record and observed that the case at hand requires exigent judicial intervention, thereby justifying the invocation of residuary powers. He accused the RP for not performing his duties diligently as a result of which the alleged related party was able to submit his resolution plan to the committee. Thus, he found merits in the claim of the applicant and accordingly ordered judicial intervention. (Para 43.4-43.6)

The Reference’s Outcome

Observations of Judicial Member, NCLT Cuttack

The learned judicial member, unlike the members of split-dictum, proceeded with a narrow approach by restricting himself to the referred question only. After analysing the parties’ pleadings, he began his ratio by establishing the proposition that “the CoC cannot be restrained from considering the Resolution Plan of the PRA, unless the PRA is disqualified to be termed as a Resolution Applicant”. Therefore, as per him, if the party to the case fell within this proposition, it can be restricted by judicial intervention. (Para 39) Based on this, he went on to apply the proposition to the facts of the case. (Para 40-43)

Afterwards, the learned member went on to consider the validity of invocation of residuary powers of the tribunal to interfere at the pre-approval stage. Here, the learned member concurred and reiterated the general proposition laid by the judicial member in the split dictum that judicial review under the code is confined within the four corners of Section 30(2) of the code, and thus inherent powers cannot be exercised. (Para 44)

One interesting argument which the learned member added to the ongoing discussion was that the interference by the tribunal at the pre-approval stage would amount to “injuncting the RP and CoC from functioning and discharging their duties and responsibilities as mandated under the Code”. (Para 47) With this, the learned member dismissed the matter in favour of the respondents.

Critical Analysis

Having understood the stance taken by both the members of the tribunal, it is time to critically analyze the reasoning given by them in support of their decision.

1.  Critical analysis of the decision of the judicial-member, NCLT Hyderabad

Judicial review under the code is confined within the four corners of Section 30(2).

Starting with the first limb of the decision of the judicial member, it is submitted that strictly limiting the scope of judicial review within the four corners of Section 30(2) will not only create unnecessary hardships for the litigants but will also defeat the main object of the code i.e., to provide a for expeditious and time-bound insolvency resolution. It is because if such an interpretation is given and any dispute arises at the initial stages of the resolution process, then the same cannot be addressed by the tribunal till the approval of the plan by the CoC. Many a time, the outcome of such disputes even results in vitiating the whole resolution process and the tribunals have to order a fresh process. A classic example of one such dispute, that is also frequently filed, is the dispute concerning the constitution of the CoC by the IRP under section 21 of the Code. The admissions and rejections of creditors’ claim for the constitution of the CoC are not always candid and often involve complex legal questions requiring a prima facie evaluation of the merits. As a result, various creditors (especially operational creditors) approach the tribunal with their claims. Thus, if the observation of the tribunal is strictly implemented, then it would make many of such claims inadmissible, thereby causing hardship to the litigants. In addendum to this, if these claims are brought at the later stage and the tribunal subsequently decides to dissolve the committee on the ground that it was improperly constituted, then the main aim of the IBC to expedite the process will be defeated.

The CoC is the sole authority to approve or reject a resolution plan.

Moving on to the next limb of the decision, it is submitted that the commercial wisdom of the CoC must be distinguished from the legal wisdom. While the members of the CoC can be the best persons to take the commercial decisions for the enterprise, however, they are not trained experts of laws who can take accurate legal decisions as well. Many times the committees are faced with complex legal issues, and they cannot be reasonably expected to take the correct decision in such situations as they lack the requisite legal wisdom. An example of such a complex legal situation arising at the pre-approval stage is that of the present case only, where even the tribunal is divided in its opinion on whether the parties are ‘related parties’ or not. Thus in such situations, the tribunal must not be made to sit as a silent spectator under the pretext of commercial wisdom. Moreover, the doctrine of commercial wisdom is not absolute and it finds its limits where the commercial discretions of the committees go against the basic contours of the Code. In such situations, Tribunals/Courts have replaced commercial wisdom with judicial wisdom (such as in the following cases; Committee of Creditors of Essar Steel Ltd v. Satish Kumar,  K. Sashidhar v. Indian Overseas BankState Bank of India v. Ushdev International Ltd).

The residuary powers cannot be used to create a remedy that is not envisaged by the statute.

Moving on to the last limb of the decision, it is submitted that the scope of inherent powers prescribed under section 60(5)(c) of the code is indeed limited. The Hon’ble Apex Court has on various occasions reminded that the residuary powers of the code must be sparingly used, otherwise, they can disturb the balance of the code (such as in the following cases; Doypack System (P) Ltd. vs. Union of India, Committee of Creditors of Essar Steel Ltd v. Satish Kumar). However, this takes us back to the situation discussed in the first limb, where in the absence of any remedy, the litigants have no other option but to invoke the residuary powers of the tribunal. Thus, the unpalatable exercise of invoking residuary powers at the pre-approval stage seems to be a necessary evil.

2.  Critical analysis of the decision of the technical member, NCLT Hyderabad

The technical member justified the invocation of residuary powers on the ground that the RP was negligent in his approach in allowing the alleged prospective resolution applicant to submit the resolution plan. However, it is imperative to note here that the RP does not in fact have any discretion to prevent a resolution plan from being submitted to the CoC. He is duty-bound to submit all the resolution plans to the committee and can merely give his opinion if any law has been violated (as was held by the Apex Court in Arcelor Mittal Ltd v. Satish Kumar Gupta).

Thus, accusing the RP of misconduct and then invoking the residuary powers to rectify the default committed by him, doesn’t appear to be just. However, as far as the question of invocation of inherent power is concerned, the dilemma which we discussed in the third limb of the judicial member’s decision in the split dictum, again comes into the picture.

3.  Critical analysis of the decision of the judicial member, NCLT Cuttack

The observations of the learned member presents an apparent contrast. Initially, the learned member, based on the pleadings of the parties, derived the proposition that “the CoC cannot be restrained from considering the Resolution Plan of the PRA, unless the PRA is disqualified to be termed as a Resolution Applicant” (referred to as the first proposition). The said proposition, in the opinion of the author, is legally and logically sound and has also been employed by the tribunal in various cases (such as in Torrent Investments Pvt. Ltd. vs. Y. Nageswara Rao ). It is pertinent to note that the said relief can only be granted by exercise of inherent powers of the tribunal, as there is an absence of any specific provision.  In the subsequent paragraphs, however, we have noted that the learned member reiterated the proposition of the judicial member in the split decision that no judicial review is permissible outside the scope of section 30(2) of the code (referred to as the second proposition). This creates a conflict as to how the effect to the first proposition will be given in light of the second general proposition, as the second general proposition clearly bars the invocation of inherent powers at the pre-approval stage, which is a must for exercising the first proposition.

As far as the argument of the learned member that invoking inherent powers would create an interference in the functioning of the RP and CoC, the author again reiterates and submits that the task of RP and CoC is not always candid and may involve complex legal issues, which have the potential to vitiate the whole CIRP process, as has been already discussed in this piece in the part dealing with the critical analysis of the dictum of the judicial member, NCLT Hyderabad.

Thus, the dictum also does not seem to satisfactorily resolve the conundrum at hand.

Observations & Suggestions

It appears that there is no single legal interpretation that can resolve the issue at hand. It is because if the statute is strictly interpreted, then the interest of the litigants is being jeopardised. On the other hand, if the inherent powers are invoked in the interest of the litigants, then the statute is at risk of being compromised. Thus, what is needed in this situation is a legislative reform, wherein a specific remedy must be provided to the litigants to approach the tribunal at the pre-approval stage, with a broader scope of adjudication. It is suggested that such proceedings may run parallel to the CIRP, so that the process is not delayed. This will not only resolve the disputes at its very inception but will also be in line with the main object of the code.

Alternatively, the IBBI can be conferred the duty to carry out preliminary adjudication of claims arising at the pre-submission stage. The board already possesses adequate powers by virtue of section 196 of the code to direct the RPs and to pass necessary orders. Further, the board carries out certain quasi-judicial functions and so can be trusted with legal wisdom. Therefore, a proviso can be added to section 60(5)(a), allowing the board to exercise preliminary adjudication, which it can do by issuing directions to the RPs. This will reduce the ever-growing burden on the tribunal and will also provide an expeditious remedy to the litigants. One limitation of this scheme, however, will be that the board will not be empowered to issue directions to the CoC. Nonetheless, the majority of the claims will be resolved prior to the submission of the resolution plan.

Conclusion

To conclude the discussion, it is again accentuated that the issues arising at the pre-approval stage can greatly affect the whole insolvency resolution process. The saga of Trimex Industries cases did a great job in highlighting this issue again; however, they later failed to address it satisfactorily.

Furthermore, through the discussion and critical analysis of the viewpoints expressed by the members of the tribunals, it appears that there is no single legal interpretation that can resolve this issue. What is needed is a legislative reform that establishes a specific remedy for litigants to approach the tribunal at the pre-approval stage, providing a broader scope of adjudication. It is crucial to keep in mind that the essence of ubi jus ibi remedium is a must for the realization of any enactment and the Tribunals/Courts as well as the Legislature must endeavour to preserve it.