Wednesday, May 17, 2017

Bankruptcy Code: Exclusion of Civil Courts in Monetary Matters?


[The following post is contributed by Bhavin Gada, Partner at Economic Laws Practice, Advocates and Solicitors, and Manendra Singh, Associate Manager at Economic Laws Practice, Advocates and Solicitors. The views of authors are personal.]

Preface

It is well known that in India a civil court of relevant jurisdiction is the usual forum for resolving not just disputes related to debt recovery, but also for resolving any contractual disputes between parties. The civil courts draw their powers from the Code of Civil Procedure, 1908 (“CPC”) to enforce contracts under the law and to resolve such disputes.

In such a milieu, the National Company Law Tribunal (“NCLT”) has been introduced under the Companies Act, 2013 (“Companies Act”), and is now designated as the adjudicatory authority under the Insolvency and Bankruptcy Code, 2016 (“Code”) to sit in judgment over the reorganisation and insolvency resolution of corporate persons for maximisation of value of assets of such persons. It cannot be denied that most such disputes will arise out of contractual arrangements and business relations. Further, the report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, November 2015 (“BLRC Report”) explicitly envisages the NCLT as an exclusive forum for insolvency and liquidation adjudication.   

In the above backdrop, although the Code has been introduced as a piece of legislation, among other things, to provide a sound legal framework to ensure flexibility for parties to arrive at the most efficient solution to maximise value during negotiations, and the intent seems bona fide, a crucial question arises as to whether the Code allows the NCLT to exercise the exclusive jurisdiction only in matters of insolvency disputes or whether it has an over-arching jurisdiction vis-à-vis matters that can be dealt by the civil courts. It is indeed this precise question that this post intends to discuss.

The Code supersedes other laws

The Code is given enough teeth to stamp its supremacy over other laws with the language embodied in section 238 of the Code. Section 238 says that the provisions of the 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.

The legal position with respect to such a non-obstante provision is clear in the words of the Supreme Court in KSL and Industries Ltd. v. Arihant Threads Ltd., MANU/SC/7980/2008, that:

…the law is fairly well settled. A provision beginning with non-obstante clause (“notwithstanding anything inconsistent contained therein in any other law for the time being in force”) must be enforced and implemented by giving effect to the provisions of the Act and by limiting the provisions of other laws…  

NCLT and its locus under the Code

Section 60 of the Code empowers the NCLT to exercise jurisdiction with respect to the matters arising in the context of the Code. Section 60(5), again being a non-obstante provision like the one in Section 238, confers the NCLT with jurisdiction to entertain or dispose of the following:

(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 the Code.

Sections 60(5)(b) and 60(5)(c) seem to have given extensive powers to the NCLT in deciding matters that may come before it under the Code. As evident from the language in items (b) and (c) above, the NCLT is inter alia empowered to deal with (i) claims made by or against the corporate debtor or corporate person, and (ii) 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 the Code. Two key takeaways from the aforementioned provision are the NCLT’s power to (i) exercise jurisdiction in relation to “claims” and (ii) decide “questions of law” arising out of insolvency resolution under the Code.

What is a “claim” that NCLT can decide

It is interesting to note that the Code has defined the terms like “claim”, “debt” and “default” to offer clarity to various provisions in relation to insolvency resolution and liquidation under the Code. In accordance with section 3(6) of the Code, the term “claim” means:

(a)        a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b)       right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

A combined reading of section 60(5)(b) with Section 3(6) seems to empower the NCLT to decide such claims which give rise to a right of payment, whether due to breach of a contract or not, or whether such claim is disputed or not.

Now, there are usual protection clauses in contracts which require payment in cases like breach of contract by way of damages (which could be liquidated at times) or in cases of indemnity (which at times includes payment for any loss suffered due to breach of contract). In such situations, an immediate question would arise whether the NCLT is able to exercise jurisdiction in cases of disputes for breach of contract or occurrence of an event related to an indemnity.  

What is a “question of law” that NCLT can decide

Another important juncture where the NCLT can exercise jurisdiction is where there arises any question of law arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the Code. Now, this seems to have given the NCLT an important tool to decide on its jurisdiction in cases where its jurisdiction is challenged. It may also decide upon questions such as whether there existed any contract or not or whether any claim made therein is legally tenable or not.

Take example of Tata-Docomo dispute wherein NTT Docomo was claiming that the contract between Tata Group and NTT Docomo was breached and that it had succeeded in obtaining an arbitral award for payment of damages to it. The Delhi High Court has recently ruled on the question whether such payment is permissible under the applicable Indian laws where the Reserve Bank of India has filed an intervention application to dispute payment of such amounts to NTT Docomo. The Court has given its go ahead for settlement entered into between the parties for making the payment of damages. An interesting question that arises is whether the NCLT would be able to exercise jurisdiction in such cases wherein breach of contract is claimed giving right to payment under the Code.

Conclusion

BLRC Report has specifically stated that to ensure the sanctity of the liquidation or bankruptcy process, it is essential that the jurisdiction of any civil court or authority should be specifically barred where NCLT has jurisdiction. It has gone on to say that by bringing all litigation that may have a monetary impact on the economic value of debtor firm’s assets within the jurisdiction of the NCLT, the liquidation or bankruptcy process will be streamlined and efficient. In light of what BLRC Report has to say (which is an important source to interpret the Code and thus cannot be ignored), does it mean that any dispute arising out of a breach of contract will now rest with the NCLT and civil courts will not have any say in such matters?

Also, another important interpretation that will be questioned here is where section 9 of the Code of Civil Procedure, 1908 stands in light of the above deliberation. Section 9 states that the civil courts shall have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is either expressly or impliedly barred. Does it mean that the NCLT’s jurisdiction to entertain cases under the Code relating to breach of contract acts as a bar to civil court’s jurisdiction?

It will be interesting to see how these matters will be dealt with by the NCLT. Given that the Code is still in its nascent stage of implementation, greater clarity is required in delineating the scope of the NCLT’s jurisdiction. Thus far, there is a considerable lack of clarity.

-           Bhavin Gada & Manendra Singh

4 comments:

Ashutosh Kumar said...

Great write up. It will be really be interesting to see the jurisdictional power to be exercised by the NCLT. It will further be good to go through if any writ petition is being filed before any High Court or Supreme Court on any ultra vires activity of NCLT.

vswami said...

In recent times, there has been at least yet another instance of legislation,- albeit not entirely a money matter of the subject kind- in which jurisdiction of civil court has been similarly excluded; to know more, look up the central enactment , popularly called the RERA Act (of 2016)- see sec 79 of the Act. And, the power to adjudicate and settle disputes has been vested in the Appellate Tribunal to be set up, state wise, there under.

Salonee Kulkarni said...

Proceedings before the NCLT are not in the nature of recovery proceedings. In case of recovery of monies a person will necessarily have to go before the civil court. So I don't see how NCLT's jurisdiction will overlap that of a Civil Court when it comes to enforcing a contractual claim.

Ashutosh Kumar said...

@Saloni Whats the difference between Recovery Proceedings and Contractual obligations in case of corporates?