(Srishti Multani and Aryan Birewar, Final Year Students at Symbiosis Law School, Pune)
The Corporate Insolvency Resolution Process (CIRP) is a procedure provided in the Insolvency & Bankruptcy Code, 2016 (IBC/ Code) for insolvency resolution of the Corporate Debtor (CD). Unlike the extant regime under the Companies Act 2013, the IBC provides for CIRP before direct liquidation of the CD. In substance, it is a recovery procedure initiated by the creditors of the CD to rehabilitate, revive, and save the latter from liquidation. In the matter of Swiss Ribbons Private Limited & Anr. v. Union of India, the Supreme Court (SC) echoed the legislative object of IBC as the reorganization of the CD in a time-bound manner.
On 12 February 2024, a three-judge bench of the SC in Greater Noida Industrial Development Authority (GNIDA) v. Prabhjit Singh Soni held that in the absence of a legislative provision to the contrary, the National Company Law Tribunal (NCLT) has inherent power to recall an order that approves an insolvency resolution plan of a CD under section 31(1) of IBC. The backdrop of this case lies in addressing a major legal question – whether the NCLT/National Company Law Appellate Tribunal (NCLAT) can recall an order approving a resolution plan on the ground that any creditor sufficiently establishes unfair treatment or blatant ignorance of rights during the insolvency resolution.
Through this article, the authors deconstruct the tribunal’s inherent power to recall, decode the effects of this ruling, and observe the implications from CIRP’s lens.Â
Factual Context
The Appellant leased a piece of land to JNC Construction Pvt. Ltd., the CD, in exchange for a premium to be paid in instalments. Any default in timely payments would lead to the termination of the lease agreement. Upon one such default, the Appellant initiated CIRP against the CD, however, the Resolution Professional (RP) classified the Appellant as an Operational Creditor (OC) and directed them to re-submit their claim. Without the Appellant filing claim as an OC, the Committee of Creditors (CoC) approved the resolution plan and furthered it to the NCLT. Aggrieved by such approval, the Appellant preferred an appeal before the NCLT under section 60(5) of the Code. The NCLT followed by the NCLAT dismissed the appeal preferred by the Appellant. At last, the doors of the SC were knocked.
Judicial Background
The prevailing judicial position is derived from a history of constant overhaul by the courts. The early view espousing the negative stance came into light in the matter of Agarwal Coal Corporation Pvt. Ltd. v. Sun Paper Mill Ltd., wherein the NCLAT while rejecting the appeal on the grounds of paucity of legislative support to recall an order/judgment passed by the Adjudicating Authority (AA), observed that any order passed by the NCLT/NCLAT between the parties inter-se stands final, conclusive, and binding. The implications of this ruling primarily included the Court’s repulsive outlook towards cushioning their rather strict stand and an inadvertent mix-up between the power to recall and review. This stance was further buttressed in the matter of Rajendra Mulchand Varma (Director of Omkar Realtors) & Ors. v. KLJ Resources Ltd., wherein the NCLAT while re-affirming its findings in the Agarwal case, observed that the inherent power to recall an order cannot be read into rule 11 of the NCLT Rules, 2016. The absence of explicit legislative support all the more warranted a sacrosanct nature to the order/judgment, thereby erroneously shielding it against any necessary judicial scrutiny and any subsequent amendment.
A major departure in the then line of judicial interpretation occurred in the matter of Union Bank of India. v. Dinkar T. Venkatasubramanian, wherein a 5-member bench of the NCLAT delineated a sharp line of distinction between the inherent power to recall and review an order. While it concurred with its earlier stance on the power to review, the other question met a stark opposite answer in the tribunal possessing the inherent power to recall an order. This stands as a means to protect the ends of justice or preclude the abuse of process enshrined under rule 11.
Findings & Analysis
The three-judge bench enlisted certain circumstances under which a recall application stands maintainable:
order is sans jurisdiction; or
counterparty is not served with notice of proceedings; or
order is solicited through misrepresentation of facts in court.
In substance, the AA has inherent power to recall an order, however only under limited circumstances. Barricading the inherent power of the tribunal with limited circumstances shall preclude any attempts at baselessly reopening the CIRP.
In the present case, two grounds stand satisfied for the maintainability of the recall application. First, as per section 24(3)(c) of the Code and regulation 19 of the Insolvency & Bankruptcy Board of India (CIRP) Regulations, 2016 (CIRP Regulations) the RP failed to notify the OC despite its aggregate dues exceeding 10% of the total debt and it being a member of the CoC, respectively. Second, the RP misclassified the Appellant as an Operational Creditor and refused to acknowledge the latter’s claim with proof submitted as a Financial Creditor. The form wherein a claim is to be submitted is directory and not mandatory in nature. Thus, the attachment of proof while submission of the claim is necessary and not the form per se. By this misclassification, the RP not only denied a CoC seat to the Appellant but also erroneously made the incorrect submission of a form to be a ground to reject the latter’s claim. If we refer to regulations 7 and 8 of the CIRP Regulations, we find that the submission of a claim is rooted in the claimant’s understanding, which in turn is required to be verified by the RP at a later stage. Even in the matter of Ghanshyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., the SC observed that the RP must collect data obtained from the claims. Thus, even if a claim submitted is not in the form specified, it can at least be considered while examining compliance with the requirements under section 30(2) of the Code. Therefore, the failure to serve notice and misrepresentation by the RP together establish the maintainability of the recall application.
The three-judge bench observed that decisions taken by the CoC are not sacrosanct or unalterable. There can be shortcomings in the resolution plan approved by the CoC, in which case the AA must resend the plan for rectification and reconsideration. Such review jurisdiction is attributed to the inherent power of AA under section 60(5) of the Code. A bare reading of this provision suggests that mere approval of the resolution plan is not the end of the matter. Apart from the regular appellate framework, the AA can recall its order to protect the ends of justice or preclude an abuse of process.
One vital aspect remaining to be analysed is the impact on the CIRP timeline. A little reference must be made to the erstwhile regime, wherein assets of the CD stood unutilised owing to a plurality of legislations and courts resulting in excessively delayed litigation. It is in this regard the Preamble of the Code and later the Binani Industries Limited v. Bank of Baroda judgment referred to the maximization of the value of assets of the CD in a timebound manner as one of the legislative objects of the Code. Time is of the essence because undue delay in the closure of CIRP results in a loss of financial value to the CD and makes its revival all the more challenging. The quantum of time spent is a stand-in for the indirect costs incurred by the CD, which is why the longer the bankruptcy proceedings last, the more fatal it shall be for the CD. The Bankruptcy Law Reforms Committee in their report rightly observed that delays in the proceedings not only leave the CD with liquidation as the sole resort but also plummet the financial value of the assets owing to the rate of depreciation. In light of this understanding, it is vital to punctuate that the remedy offered by a recall application already exists in section 61(3)(ii) of the Code, i.e. material irregularity in RP’s conduct during CIRP. Thus, the present ruling will contribute to unnecessary and undue delay in the CIRP by adding another redundant layer of judicial proceedings.
Concluding Remarks
In conclusion, it is evident from knowing the legislative aims and the legal background that the tribunals, such as the NCLT and NCLAT, have the authority to recall rather than review their prior rulings. The interpretation that follows is based on the Supreme Court's ruling that differentiated between the said terms. At first, the tribunals believed they lacked the statutory authority to recall any rulings. However, the tribunal ultimately decided that it had the inherent power to recall orders under rule 11 of the NCLAT Rules and section 60(5) of the Code, in exceptional circumstances, following multiple legal challenges and consideration by a five-judge bench established under the NCLAT. The panel did stress that this was only feasible in certain circumstances, including when there was fraud against any creditor. Consequently, the tribunals have the authority to recall a resolution plan and send it back to the CoC for reconsideration.
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