The recent decision of the NCLAT, Principal Bench in ARC Research and Development Centre Limited v. Liquidator of Adya Oils and Chemicals Ltd. (“Adya Oils”) through a majority decision of two technical Members had expanded the contours of Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (“Code”) to include a decision on easement rights affecting rights of a third party. Although the Supreme Court has stayed the operation of the NCLAT decision and referred the dispute to mediation, Adya Oils has raised interesting issues regarding the limits of Section 60(5)(c) of the Code.
The dispute in Adya Oils
The brief facts as narrated in the decision involves the right of easement claimed by the Liquidator over a neighbouring land. The majority decision, while allowing the appeal with costs, had importantly relied on a permission granted by the local authority in 1999 for the establishment of the factory. The permission granted also involved no objections from other governmental authorities as well. Curiously, while granting the said permission there is also a mention of an undertaking from the neighbouring landowners, an aspect on which there is no factual clarity.
The dissenting view by the Judicial Member categorically held that disputed easement rights falls within the exclusive realm of civil courts and disallowed the appeal.
A tribunal circumscribed by its statute
Jurisdictional limits are conventionally sorted into three categories – territorial, pecuniary, and subject-matter (Harshad Chiman Lal Modi v. DLF Universal and Anr.). In Kiran Singh v. Chaman Paswan, [(1954) 1 SCC 710] (“Kiran Singh”), the Supreme Court observed that a defect of jurisdiction “whether it is pecuniary or territorial, or whether it is in respect of the subject-matter of the action, strikes at the very authority of the Court to pass any decree, and such a defect cannot be cured even by consent of parties.” A decision rendered on a matter outside the forum's subject-matter competence is, therefore, not merely erroneous but coram non judice – a nullity that may be disregarded wherever it is set up. The pertinent question in Adya Oils is whether the determination of a contested easementary right was ever within the tribunal's subject-matter to decide.
The NCLT is not a court of general civil jurisdiction. It is a specialised tribunal and a creature of statute, brought into being to determine matters under the Code and the Companies Act, 2013. This was the very foundation of the decision rendered in Embassy Property Development Pvt. Ltd. v. State of Karnataka (“Embassy Property”), where the Supreme Court held that a resolution professional or liquidator cannot invoke Section 60(5) to short-circuit a proceeding that must be pursued before a competent forum. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (“Gujarat Urja”), the Supreme Court confined the jurisdiction of the Adjudicating Authority to disputes arising solely from, or relating to, the insolvency of the corporate debtor, and forbade it from venturing on matters lying dehors the insolvency.
Width of a residuary clause
Section 60(5)(c) is not unique. Its lineage runs through Section 446(2) of the Companies Act, 1956 (now Section 280 of the Companies Act, 2013) which vests the court winding up the company over “any question of priorities or any other question whatsoever, whether of law or facts … arising out of, or in relation to winding up of the company”. The object of Section 446(2) has been to enable the court winding up the company to decide claims and questions concerning the company's estate so that the winding-up process is not delayed by multiple proceedings in different forums (Sudarsan Chits (I) Ltd. v. O.Sukumaran Pillai). However, this jurisdiction was not limitless. In S.V. Kondaskar, Official Liquidator v. V.M. Deshpande, Income-tax officer the Supreme Court held that the expressions “other legal proceeding” in Section 446(1) and “legal proceeding” in Section 446(2) refer only to those proceedings that can appropriately be dealt with by the winding-up court. The Court remarked that the liquidation court cannot assume the statutory functions of another adjudicatory authority merely because the company is in liquidation. Similarly, Section 7 of the Presidency-Towns Insolvency Act, 1909 and Section 4 of the Provincial Insolvency Act, 1920 also contain residuary clauses resembling the Code. Curiously, Section 4 of the Provincial Insolvency Act, 1920 extended the powers expressly to “all questions whether of title or priority” – language plainly wider than the Code.
In Haji Anwar Khan v. Mohammad Khan and Ors., [(1929) SCC OnLine All 192], Dalal, J. and King, J., speaking for the majority, adopted an expansive construction of the powers conferred under Section 4. In the context of determining whether the insolvency court could inquire into the validity of a sale effected beyond the two-year look-back period, the majority held that its jurisdiction extended even to the adjudication of questions of title arising under the ordinary law. Equally instructive, however, is the dissenting opinion of Sen, J. He adopted a narrower view, holding that the insolvency court, as a “creature of statute”, could exercise only such powers as were expressly conferred by the statute and therefore lacked jurisdiction to undertake such an inquiry.
Jurisdiction to determine easementary rights
In Adya Oils, the question as to whether the corporate debtor acquired a prescriptive easementary right over the Appellants' land was a question wholly indifferent to the debtor's solvency. Such a right either crystallised through twenty years of qualifying use before 2019, or it did not. What arose “on account of” the insolvency was, at most, the Appellants' obstruction, i.e., the timing of the wall. The majority opinion, having correctly noticed that the obstruction was suspiciously timed, allowed that observation to clothe itself with the jurisdiction that it otherwise did not possess. While invoking the principle objective of the Code, i.e., value maximisation the majority opinion overlooked the fact that the said principle owes its duty to the creditors and cannot operate as a blanket warrant against the world at large. If the principle of value maximisation is to be invoked, then every civil dispute that touches an asset “relates to” the liquidation; and its resolution would help realise value. Consequently, the residuary jurisdiction would have no outer edge at all. This is the very expansion that Gujarat Urja sought to foreclose.
The majority opinion's remaining justification was that relegating the liquidator to a civil suit would “significantly delay and prejudice the auction sale”. Delays in conducting a proceeding cannot enlarge the powers of the tribunal beyond what the statute grants. As the dissent observed, one does not consult an ophthalmologic surgeon for a cardiac ailment merely because he offers a speedier treatment. The Code has itself anticipated the situation under the proviso to Section 33(5) of the Code which empowers the liquidator, with the leave of the Adjudicating Authority, to institute a suit to adjudicate the claims before proper forum.
The limits of Section 60(5): asking the right question
The residuary jurisdiction under Section 60(5)(c) is a valuable provision, but its value depends on its limits being observed. Interestingly, Embassy Property extensively discussed the House of Lords decision in Anisminic Ltd. v. Foreign Compensation Commission (“Anisminic”) which would be of relevance to the present issue. Although the Hon'ble Supreme Court found Anisminic to be inapplicable on account of the availability of the statutory alternative remedy, the present case warrants reliance on the findings rendered in Anisminic. As per Lord Reid in Anisminic, the real question that needs to be inquired is not whether the concerned authority arrived at a wrong decision but whether the authority enquired into and decided a matter which they had no right to consider.
In Adya Oils, the correct question regarding threshold was whether the existence of a disputed prescriptive easement is a matter arising out of or in relation to the insolvency of the corporate debtor. Had the majority opinion asked it plainly, the answer would have been difficult to escape. Instead, the majority opinion inverted the process and posed itself with a different question: whether the obstruction, being suspiciously timed and inimical to value maximisation, was connected with the liquidation.
In ousting the jurisdiction of the civil courts, the majority opinion decision has also failed to examine if the ouster satisfied the tests laid down by the Hon'ble Supreme Court in Dhulabhai and Others v. The State of Madhya Pradesh and Anr. (1968 INSC 92), (“Dhulabhai”). Of particular relevance here would be the second test laid down in Dhulabhai: where there is an express bar of civil court's jurisdiction, an examination of the scheme of the particular Act in terms of its adequacy or sufficiency of the remedies provided would be relevant, although not decisive to sustain jurisdiction of courts. While Section 63 of the Code bars the jurisdiction of courts, the scheme of the Code does not contain the adequate remedies that could otherwise be granted by civil courts. Although this may not be the decisive factor, the absence of jurisdiction for granting the adequate remedies in Adya Oils is certainly a crucial factor that the majority opinion decision ought to have borne in mind.
Authors are Advocates based in Chennai. Views are personal.