The Viewpoint: Authors’ Note On Interim Order – MCA To Be A Mandatory Party in Insolvency Suits

Insolvency and Bankruptcy Code (IBC) was implemented in the year 2016, the administrative powers are distributed among the board which includes 10 members panel including members appointed by the Central Government and the Reserve Bank of India, respectively.

In the November 22, 2019 order, the Principal bench (Coram: President M.M Kumar; Technical Member S.K Mohapatra) of the NCLT in the case of Oriental Bank of Commerce v. Sikka Papers Ltd. & Ors directed that the Union of India (UOI) and Ministry of Corporate Affairs (MCA) to be now impleaded as a respondent party for all applications filed under Insolvency and Bankruptcy Code, 2016 (IBC) as well as under the Companies Act. While the same does not form part of the final order as the matter is lis-pendens, the said direction only forms part of the interim order referred above.

The reason being if MCA will be a party, it would ensure availability of authentic records for proper appreciation of the matter, which in authors’ opinion (as elaborated in the research article) is for checks and balances. This article dwells into analysing the powers of the NCLT, NCLAT, directions issued by Principal Bench. Furthermore, the article provides a critical note on the latest order, concluding on the note regarding the same.

Interim Order (22.11.2019) Case No. (IB)-939(PB)/2018

It has been directed by the Principal Bench of National Company Law Tribunal (NCLT) in New Delhi by way of an interim order (dated 22.11.2019) in the case of Oriental Bank of Commerce v. M/S Sikka Papers Ltd. and Ors. (Case no. (IB)-939(PB)/2018) that “……In all the cases of Insolvency and Bankruptcy Code and Company Petition, the Union of India, Ministry of Corporate Affairs through secretary be impleaded as a party respondent so that authentic record is made available by the officers of the Ministry of Corporate Affairs for proper appreciation of matter.”

Power of Direction

The Principal Bench comprises of the president (NCLT) as part of the coram. The power of direction flows from Rule 16 Part II of the National Company Law Tribunal Rules, 2016 which states the functions of the president of the tribunal. Further, the Rule 19 Part II of National Company Law Tribunal Rules, 2016 states the Delegation of Powers of the President. The power to direct the MCA is, therefore, well within the ambit of the Principal Bench.

Effect

The NCLT, similar to it’s adjudicating powers under the Companies Act of 2013, has powers under the IBC to decide on matters concerning the Insolvency Process of a Company (CIRP, as discussed above by the authors). However, the judicial binding of the NCLT is limited to their territorial jurisdiction. Further, an order by one bench holds only persuasive value in front of another bench in NCLT. There is no exception for this rule, even for the Principal Bench, which only differentiates in power for the purpose of monetary jurisdiction.

Therefore, in the instant case, the order holds partial substantive value as it is subject to order by a higher tribunal i.e. NCLAT, wherein an appeal has been preferred by the UOI through MCA challenging the NCLT order. In the order (dated 10.12.2019), NCLAT had issued notice to the respondents and inter alia stayed the operation of Para 4 of the impugned order.

Therefore, in the instant case, the order holds partial substantive value as it is subject to order by a higher tribunal (NCLAT, in the instant case) or the Apex Court

Authors’ Note

It is submitted by the authors that the Tribunal’s introduction of such direction is for the purpose of ‘checks and balances’ as is clear in paragraph 4 of the interim order which highlights the objective being availability of authentic records for the proper appreciation of the matter in hand. That is, if MCA is a direct party in all of the insolvency cases, then it proves beneficiary in light of justice as first-hand information available to the MCA would result in rational execution of the function of the government department (i.e MCA) in furtherance of development of facts and circumstances accordingly in each matter. It would become easier for MCA to maintain the records of the debts owed by the company.

The decision would also be beneficial for the original private or public respondents in the dispute, as the burden of proof would be divided and somewhat shifted in the hands of the party which is directly under the Union of India. In simple terms, ‘the state’ would be responsible for proving cases, infamously known as ‘financial growth supressors’. However, on the contrary, it is humbly submitted by the authors’ that the new development might raise a setback for the applicant.

Firstly, a company suit might be wrongly regarded as a ‘financial crime’ however is dealt more than often under the civil jurisdiction of the courts therefore establishing the legal remedy available as a right in personam. Recognizing Union of India, Ministry of Corporate Affairs as a mandatory party in the suit would contradict the basic principle that in personam right cases, the applicant has the primary discretion of choice for filing a suit against a party that is personally liable to the aggrieved party. It would thus become an obligation on part of the applicant.

Secondly, the IBC and the Companies Act require the applicants to adhere to certain compulsory reporting procedures which include a notice to the ministry either by way of intimation or by service of copy of such application. If the discussed direction is put into effect, it might lead to what can be called as ‘duplicity of records’; as the applicant party would in addition to the adherence of the reporting procedure would also have to make MCA as one of the parties in the application.

For instance, in an application for merger under section 232 of the Companies Act, 2013, the applicant company is required to serve a copy of the application to all regulatory authorities including the MCA, seeking the latter’s observation, if any. In such a set-up, if MCA is also impleaded as a party to the application, it may lead to duplicity of records with MCA, which in turn may not be fruitful. Again, in case of an application made under IBC, the Insolvency Resolution Professional/ Resolution Professional/ Liquidator is required to intimate the Registrar of Companies about initiation of corporate insolvency resolution/ liquidation process, as the case may be.

Lastly, impleadment of MCA as a party to all the applications under the IBC and the Companies Act might lead to delay of justice as the number of hearings and procedures to be complied with will increase over-time and the pressure on MCA to be a party in each and every case would result in escalated time gaps. Furthermore, NCLT benches will have to ‘ensure’ that MCA is in fact impleaded as a party to the application, further complexing the entire process of Insolvency.

Conclusion

With the limited scope of discussion based on an interim order, the authors conclude on the note that the final order regarding the same should direct for a detailed requirement of rules for the purpose of the meaning and scope of ‘mandatory impleadment of MCA’, putting a statutory bar over the same. Even in that case, the order would not be binding since an appeal is filed in the NCLAT. The order passed by NCLT is presently stayed and NCLAT has reserved the matter for orders.

Author - Meghna Mishra, Partner Karanjawala & Co. and Ankit Rajgarhia, Senior Associate Karanjawala & Co.

Research Assistants - Rhythm Katyal & Shikher Goyal (Symbiosis Law School, Noida)