The National Company Law Tribunal ('NCLT'), established under the Companies Act, 2013, has emerged as the forum of choice for the purpose of 'recovery' of debt from corporate debtors under the Insolvency and Bankruptcy Code, 2016 ('IBC'), even though it was not established with the intent to enforce and effect recovery of debts. As much as everyone, including the learned members of the NCLT, often insist to the contrary, the stark reality is that the NCLT has become indeed, a forum to arm-twist corporate debtors to effect recovery of monies by confronting them with the fear of facing corporate death in the form of insolvency resolution or liquidation.
Statistics don't lie. Therefore, to decipher whether the NCLT really emerged as a forum of choice to effect such recoveries, we must see the recovery rate which has emerged? To confine our analysis for the present, we may take the case of only financial debt (i.e. bad loans), recoverable by banks. As per the data for Financial Year 2018-2019 released by the Reserve Bank of India, scheduled Commercial banks in India recovered a staggering amount of Rs. 70,819 Crores out of claims of Rs. 1,66,600 Crores under the IBC mechanism (which translated to an impressive recovery percentage of 42.5%). To put this figure in perspective, a measly recovery of Rs. 41,876 Crores out of claims of Rs. 2,89,073 Crores (translating to a paltry recovery percentage of only 14.5%) was effected under the SARFAESI Act. These numbers infact justify the newly discovered proclivity of banks to advert to the IBC mechanism to make good their bad loans.
Under the IBC regime, a financial creditor need to satisfy only the bare requirement, which is best captured in the words of Rohinton F. Nariman, J., in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, it reads :
"28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1)….. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. …... The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be."
The only lifejacket, that a corporate debtor in this situation gets, is that he "… is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due…".
The corporate debtor may do this inter alia by challenging the validity of certain clauses of the Loan Facility Agreement, or the interpretation of the Financial Creditor as to whether the loan has become due and payable. As per 'Innoventive Industries' "A debt may not be due if it is not payable in law or in fact.".
As a matter of fact, most loan facility agreements executed by banks are contracts of adhesion, more commonly known as standard form contracts. These contracts generally have onerous and one-sided repayment clauses including unconscionable penalties and hidden fees & charges etc. It is also not possible for corporate debtors to switch bankers because credit in India is normally extended on long-standing relationships between the party and the banker.
It is in these circumstances, that a seminal question arises : "Does the NCLT have the power to rule generally on the validity of clauses of contracts and more specifically on contracts of adhesion?"
The Black's Law Dictionary, (Fifth Edition), defined an 'Adhesion Contract' as follows:
"'Adhesion contract' : Standardized contract form offered to consumers of goods and services on essentially 'take it or leave it' basis without affording consumer realistic opportunity to bargain and under such conditions that consumer cannot obtain desired product or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice as to its terms. Not every such contract is unconscionable."
There is a tendency amongst financial institutions to bury unconscionable terms of contract in the fine-print and word it in complex legal language so that the contracting party has no meaningful understanding but to sign on the dotted lines.
As back as in the year 1986, our Supreme Court had expounded the principle that the courts will not enforce unfair and unconscionable clauses in a contract which are entered between parties having unequal bargaining power. This pronouncement of in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156 is locus classicus on the issue, relevant portion whereof reads as follows:
"89….This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal."
Few decades back, in Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd.,  1 Q.B. 400, Lord Denning, sitting in the English Court of Appeal, held as follows:
"The time may come when this process of 'construing' the contract can be pursued no further. The words are too clear to permit of it. Are the courts then powerless? Are they to permit the party to enforce his unreasonable clause, even when it is so unreasonable, or applied so unreasonably, as to be unconscionable? When it gets to this point, I would say, as I said many years ago :
'there is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused' : John Lee & Son (Grantham) Ltd. v. Railway Executive  2 All. E.R. 581,
584. It will not allow a party to exempt himself from his liability at common law when it would be quite unconscionable for him to do so."
The NCLT, is not a court, however , it being the adjudicating authority in terms of the IBC, has the contours of its jurisdiction delineated in Section 60 of the Act. A specific reference may be made to clause (c) of Section 60(5) as follows:
"60. Adjudicating authority for corporate persons.—
(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—
(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency"
Therefore, the jurisdiction of the widest amplitude has been conferred on the NCLT, to decide 'any question of law or facts arising out of or in relation to the insolvency…'. This would necessarily mean ruling upon the terms of the contract which would have deemed to trigger the insolvency. Any claims of unconscionability of the terms of contract, or it being a contract of adhesion, would also necessarily have to be ruled upon by the NCLT.
It cannot be emphasised enough that the jurisdiction of civil courts is completely and unequivocally ousted by the clear language employed by both legislations on the topic. The jurisdiction of any civil court, to consider the claims of unconscionability, stands ousted by the umbrella legislation i.e. the Companies Act, 2013 in the following terms:
"430. Civil court not to have jurisdiction.— No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal."
A similar and equally unequivocal ouster of jurisdiction of civil courts, is also provided in the Insolvency and Bankruptcy Code, 2016 as well. It reads as follows:
"63. Civil court not to have jurisdiction.—No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code."
However, an established principle of natural justice, as accepted and affirmed by the Supreme Court, is that no one can be left remediless in law (Re: Ashish Ranjan v. Anupma Tandon, (2010) 14 SCC 274). Therefore, unconscionable terms of the contracts must be open to challenge once the same are enforced as against its signatories.
One may argue that since the jurisdictional bar under the IBC and Companies Act would kick in only upon filing of the application under the IBC, the civil courts may hear challenges by corporate debtors on the validity of these clauses prior to the financial creditors approaching the NCLT. While legally this may be correct, but from a practical standpoint it will amount to commercial suicide by the corporate debtor as it will irreversibly strain relations with the banks. At a stage prior to the alleged default, a challenge in the civil court may also be prone to rejection as being premature and may not be maintainable in vacuum in absentia of surrounding factum of default.
Drawing a contradistinction, such challenges to validity of clauses of contracts perhaps cannot be made before the DRT in proceedings under Section 17 of the SARFAESI Act, 2002. While there is a bar under the SARFAESI Act as well excluding the jurisdiction of the Civil courts, yet the contours of the bar of exclusion are narrower than the total bar prescribed under the IBC, being a 'Code' by itself.
Section 34 of the SARFAESI Act states that "No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine…". An appeal under Section 17, to the DRT, is available only to impugn the measures taken by the secured creditor under Section 13(4), which include taking over possession of the asset [13(4)(a)]; taking over the management of the business [13(4)(b)]; appoint a manager to the secured asset in possession of the credit [13(4)(c)] and requiring third parties to pay the consideration of the secured asset to the secured creditor instead of the borrower. [13(4)(d)].
The Supreme Court in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311, was perhaps clear that a civil action against the SARFEASI process would be maintainable where the claims of the secured creditors were inter alia either fraudulent or manifestly absurd and thus untenable. The court held as follows:
"51. However, to a very limited extent jurisdiction of the civil court can also be invoked, where for example, the action of the secured creditor is alleged to be fraudulent or their claim may be so absurd and untenable which may not require any probe, whatsoever or to say precisely to the extent the scope is permissible to bring an action in the civil court in the cases of English mortgages. …"
The DRT, therefore cannot, in our opinion, exercising jurisdiction under the SARFAESI Act, hear challenges to validity of clauses of contract on the ground of they being unconscionable. Such challenges, in that case, will belong in the domain of the civil courts for decision.
Therefore, to sum it all up, it seems apparent that while the National Company Law Tribunal has caught the fancy of the Banking Institution to recover bad loans, yet the same cannot be a one-sided and oppressive process against the corporate debtors. The NCLT is vested with plenary powers to adjudicate and set aside unconscionable terms of banking contracts when such pleas are raised before recording its 'satisfaction' of default and ordering initiation of the CIRP process. Whether this legalese is only in theory or it translates to the happenings in the courtroom is something which remains to be seen.
Views Are Personal Only
(Rushab Aggarwal & Tejasvi Chaudhry are lawyers at the Supreme Court of India and Delhi High Court. Authors may be contacted on email@example.com. Views are personal.)