Contempt Conundrum: Conflicting Opinions Of Nclt On Applicability Of Contempt Provisions In Ibc
Jan 30, 2021.By:Mr. Sai Sumed Yasaswi Kondapalli, Graduate in Law and a first-year student at the Graduate Insolvency Program, IICA and Mr. Roustam Sanyal, Chartered Accountant and a first-year student at the Graduate Insolvency Program, IICA.
Section 5(1) of the Insolvency & Bankruptcy Code, 2016 (‘IBC’) designates the National Company Law Tribunal (‘NCLT’) to act as the adjudicating authority in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors[1].
Section 425 of the Companies Act, 2013 confers to the NCLT and the National Company Law Appellate Tribunal (‘NCLAT’), the power to punish for contempt.
In light of this, there have been conflicting rulings by various benches of NCLT regarding the applicability of contempt provisions of Companies Act, 2013 to the proceedings under IBC.
Those against the applicability of the power of contempt to the Adjudicating Authority while adjudicating matters relating to IBC, argue that there exists no particular provision in IBC that extends the power of contempt under section 425 of the Companies Act, 2013 to proceedings under IBC.
Those for the applicability of the power, argue that by virtue of IBC appointing the NCLT as the Adjudicating Authority for matters under IBC, the NCLT naturally draws the powers conferred upon it by the Companies Act, 2013.
This article goes on to examine the power of the NCLT to punish for contempt, through the lens of judicial pronouncements, and concludes that the NCLT does in fact have such a power and no new amendment or provision is required to extend the power given to the NCLT by the Companies Act, 2013.
In the case of Prithvi Raj Kasana vs. Kapil Arora and Ors [2019] ibclaw.in 78 NCLAT, The NCLAT while dealing with a matter concerning the withdrawal of an application filed under section 7 of IBC, also mentioned that if the terms of settlement are not complied with by the Directors of the Corporate Debtor, it would be open for the applicant to file a petition for contempt proceedings and for action in accordance with law against the directors of the Corporate Debtor.[3]
In Vicky Enterprises vs. Om Printing & Flexible Packaging Private Limited[4], The NCLT Mumbai bench came down upon one Mr. Shekhar Sonawane for using physical force against the Resolution Professional and for hurting him and threatening him. The Bench very sternly put, “In view of the above precarious situation, this Bench felt that this is a punishable offence under IPC, apart from this, threatening the RP and not handing over their possession deliberately also amounts to offence punishable under section 70 (1)(b) of IBC. This Bench having vested with power with contempt also take cognizance of the same.” The Bench also went on to provide police protection to the Resolution Professional and directed the Superintendent of Police, Malegaon Branch, Maharashtra to instruct the SHO Vadner Khakurdi Police Station to register a FIR against Mr. Shekhar and threatened to take appropriate action against the police if they failed to discharge their duties in accordance with the law.
In Asset Reconstruction Company India Pvt Limited vs. Shivam Water Treaters Private Limited [2019] ibclaw.in 10 NCLT, the NCLT Mumbai Bench directed that the Ex-Directors of the Corporate Debtor appear in person before the bench, failing to which orders shall be passed under the Contempt of Court Act.
In a contradictory ruling, in the case of K.K. Agarwal & Anr vs. M/s. Soni Infratech Private Limited & Ors[5], the NCLT Principal Bench had examined the applicability of section 425 of the Companies Act, 2013 to the proceedings under IBC. The Bench ruled as follows:
“The power of contempt is an extraordinary power and this power is conferred upon the NCLT u/s 425 of the Companies Act, 2013. Upon the advent of IBC, NCLT is authorized to act as Adjudicating Authority to deal with IBC jurisdiction to the extent that it is specified under the said enactment. Even in IBC also, it is not that Adjudicating Authority has power to deal with all the sections of IBC.
As to the applicability of companies Act, 2013 to IBC, whichever Companies Act 2013 section is required to applied to IBC, Parliament has amended each of the respective sections of Companies Act specifying which section is applicable to IBC as well. It has not been legislated anywhere in the Companies Act, 2013 that Companies Act jurisdiction in toto is extended to IBC as well.
As to Section 425 of the Companies Act jurisdiction, since it has not been extended to be exercisable to the cases falling under IBC, this jurisdiction cannot be construed as applicable to the cases falling under IBC.
It is trite law that jurisdiction comes to tribunals upon conferment, as to courts under section 9 of CPC, jurisdiction vests with courts unless courts are barred from exercising jurisdiction. Moreover, courts also, as to contempt jurisdiction, it cannot be exercised unless it is specifically conferred.
Adjudicating Authority under IBC, it has its own powers and limitations, merely by NCLT being asked to act as Adjudicating Authority, it cannot be seen as the Adjudicating Authority under IBC can exercise what all powers given to NCLT under Companies Act, 2013.
In view thereof, we are of the considered opinion that section 425 of the Companies Act is not applicable to IBC, therefore this application is hereby dismissed as misconceived.”
The primary argument of those stating that the NCLT does not enjoy the power of contempt under the I&B Code is that any change which has not been explicitly made to the provisions of the Companies Act cannot be inherently implied to IBC. For instance section 429(1) was amended to extend the power of Tribunals to seek assistance of chief metropolitan magistrate, to IBC. However, it is interesting to note that prior to this amendment, section 429(1) encapsulated “sick companies” within its ambit. Sick Companies were defined under section 253 of the Companies Act. Chapter XIX (sections 253 to 269) of the Companies Act, 2013, which dealt with the revival and rehabilitation of sick companies, was repealed post the enactment of IBC, and hence the lawmakers had to make an amendment to section 429(1) to remove “sick companies” and extend its application to IBC. Amendments to the provisions of the Companies Act were made only in places where they were in conflict with IBC. Changes are not required to the provisions which are already in consonance with the theme of IBC. It would therefore be incorrect to conclude that omission of such amendment in section 425 indicates that the legislature intended to exclude the application of section 425 to IBC[6].
While dealing with the issue of contempt powers of Administrative Tribunals, the Apex Court in the case of T.Sudhakar Prasad Vs. Govt. of A.P. & Ors[7], held that:
“..Administrative Tribunals are subordinate to High Court, admits of no doubt, as such Tribunals exercise the judicial power of the State and are amenable to the Jurisdiction of judicial review and judicial superintendence of the High Courts under Articles 226 and 227 of the Constitution. The tribunal cannot be said to have the contempt power sui generis.”
The above judgment clarifies that Tribunals cannot inherently have the power of Contempt.
At this juncture, it is important to read the provision that brought the NCLT into existence:
Section 408 of the Companies Act, 2013: “The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.”
The provision giving the NCLT the power to punish for contempt is in Section 425, which reads:
“The Tribunal and the Appellate Tribunal shall have the same jurisdiction, powers and authority in respect of contempt of themselves as the High Court has and may exercise, for this purpose, the powers under the provisions of the Contempt of Courts Act, 1971, which shall have the effect subject to modifications that—
(a) the reference therein to a High Court shall be construed as including a reference to the Tribunal and the Appellate Tribunal; and
(b) the reference to Advocate-General in section 15 of the said Act shall be construed as a reference to such Law Officers as the Central Government may, specify in this behalf.”
The wordings used in section 425 are that, the powers under Contempt of Courts Act, 1971 are vested with the NCLT while adjudicating all proceedings before it. It is nowhere stated in section 425 that the provisions of the powers under the provisions of Contempt of Courts Act, 1971 are applicable for the proceedings before the Tribunal only in respect of the provisions of the Companies Act, 2013 alone.
The NCLT is the Adjudicating Authority under IBC in view of section 60. Therefore, any proceeding initiated under the provisions of IBC before the Adjudicating Authority shall be treated as the proceeding before the NCLT.[8] This means that the extension of the Contempt powers to IBC does not violate the principle laid down by the Hon’ble Supreme Court in the case of T. Sudhakar Prasad (supra).
When dealing with the powers of the NCLT, it is submitted that there must be a combined reading of provisions to truly understand the extent to which the NCLT may exercise its powers under IBC. In the present issue, there must be a combined reading of section 408 and 425 of the Companies Act, 2013. This would show that the power to punish for contempt shall be vested with the NCLT while adjudicating on matters not just limited to companies act but also in matters relating to IBC.
In the case of Manoj K. Daga vs. ISGEC Heavy Engineering Limited and Ors [2020] ibclaw.in 266 NCLAT, while addressing the conduct of the Directors in causing obstruction to the CIRP proceedings and for the willful non-compliance of undertakings, the Hon’ble NCLAT in para 22 stated,
“…The acts of the two Directors have obstructed the proceedings of CIRP, the proceedings before Adjudicating Authority and this Tribunal. The acts prima facie disclose serious Contempt, violating mandate of law of IBC applied by Orders of Adjudicating Authority and this Tribunal and breach of undertaking given on oath, actionable as NCLT established under the Companies Act, 2013 acts as Adjudicating Authority and this Tribunal is empowered under Section 425 of Companies Act, 2013 read with enabling provisions to take action. ”
Amendments in legislation are designed in a manner that eliminates ambiguity in interpretation and streamlines the harmonious existence of different pieces of legislation. However, it is equally important to ensure that such amendments do not lead to superfluity of language.
Under the Companies Act, 2013, the provisions regarding the National Company Law Tribunal and Company Law Appellate Tribunal are discussed in Chapter XXVII from section 407 to 434. Of these provisions, only section 419, 424, 429 and 434 alone were amended[9]. If one were to examine the status of these provisions before the amendment by IBC, these provisions either restricted the applicability of Chapter XXVII to the Companies Act, 2013 or had provisions dealing with sick companies and rehabilitation[10]. Therefore, it can be clearly seen that the Companies Act was amended wherever IBC had to be accommodated. From this it naturally follows that the reason why section 425 of the Companies Act, 2013 was not amended is because in the eyes of the lawmakers, the provision was good to be utilized as is without any further clarification or amendment. Thus, in doing so, superfluity of language of law was avoided. Finally, if there is an ambiguity, rules of statutory interpretation suggest that the courts should strongly lean against a construction which reduces a statute to a futility[11].
In the absence of any specific contempt provisions under IBC, it is but natural to look towards the parent legislation of NCLTs- the Companies Act, 2013. It is difficult to imagine that the lawmakers had no intension to extend contempt powers to the Adjudicating Authority under IBC. If IBC is read in a way where the NCLT is stripped off its powers of contempt, then, the NCLT will be reduced to a toothless tiger. It will become a mere rubber stamp executing administrative functions. In a dynamic law such as IBC, there may be innumerable complexities that might crop up during the execution of the process. It is very important to have an adjudicating authority that can take appropriate action in order to ensure compliance with IBC. While it is true that the adjudicating authority under IBC is theoretically different from the Tribunals established under the Companies Act, in essence the existence of Tribunals is derived through the Companies Act.
A cross-sectional analysis of the provisions of both IBC and Companies Act, make it clear that Contempt Proceedings can be exercised by the NCLT- which is the Adjudicating Authority under IBC.
The Authors would like to thank Ms. Jane Pauline, a final year student at the Graduate Insolvency Program, for her support and guidance on this topic.
Mr. Sai Sumed Yasaswi Kondapalli is a law graduate from Symbiosis Law School, Hyderabad and a first-year student at the Graduate Insolvency Program, IICA and can be reached at [email protected] and Mr. Roustam Sanyal is a qualified Chartered Accountant and a graduate from St. Xavier’s College, Kolkata. He is currently a first-year student at the Graduate Insolvency Program, IICA and can be reached at [email protected]
8[1] Section 60(1), Insolvency and Bankruptcy Code, 2016.
[2] Cases provided under this are not exhaustive. However, cases cited provide the overall picture about the position of NCLT on the matter.
[3] Para 9, Id.
[4] 67.M.A. 2571/MB/2019 in C.P.(IB)-4403(MB)/2018
[5] (IB)-448(PB)/2018
[6] Preksha and Anchit, “The Missing Power of NCLT: Prospect of Contempt Proceedings under IBC”, https://www.irccl.in/post/the-missing-power-of-nclt-prospect-of-contempt-proceedings-under-ibc#:~:text=The%20Missing%20Power%20of%20NCLT%3A%20Prospect%20of%20Contempt%20Proceedings%20under%20IBC,-%5BPreksha%20and%20Anchit&text=Since%20Section%20408%20allows%20the,in%20proceedings%20under%20the%20IBC.
[7] T. Sudhakar Prasad vs Govt. Of A.P. & Ors on 13 December, 2000, available at https://indiankanoon.org/doc/727569/?type=print
[8] A similar reasoning was adopted by the NCLT Ahmedabad Bench in the matter of State Bank of India, Colombo vs. Western Refrigeration Pvt Ltd (C.P. (I.B) No. 17/7/NCLT/AHM/2017) in paras 26.1 & 26.2 while determining the applicability of section 433 of Companies Act, 2013 to The Code. Although, it is pertinent to note that these were merely observations and were not conclusively determined since the Tribunal decided not the entertain the controversy in a summary manner at the admission stage.
[9] Sections 31, 32,33, and 34 of Schedule XI of the Insolvency and Bankruptcy Code, 2016.
[10] For instance, an amendment to section 424 specifically made sure that the procedure before the NCLT and NCLAT shall be guided by the principles of natural justice subject to other provisions of [The Companies Act] or of the Insolvency and Bankruptcy Code, 2016. Regarding sick companies and rehabilitation, The Code replaced them.
[11] M. Pentiah vs. Veeramallappa Muddala, AIR 1961 SC 1107, p.1111 : 1961 (2) SCR 295.
Published at ibclaw.in on 28 January 2021. https://ibclaw.in/contempt-conundrum-conflicting-opinions-of-nclt-on-applicability-of-contempt-provisions-in-ibc-by-mr-sai-sumed-yasaswi-kondapalli-and-ca-roustam-sanyal/
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