Union of India v. Oriental Bank of Commerce - Case Law Analysis

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”) is a revolutionary legislation in terms of insolvency regime in India. The Code has streamlined the insolvency, bankruptcy and liquidation proceedings in the country. These domains were previously governed by different codes and laws until the Code was implemented in 2016. Since its implementation, the Code was questioned and amended on several aspects. The governing authorities, that make changes to the practicality of the implementation of the Code, are the legislature, NCLT, NCLAT and Supreme Court. Over the last four years, several amendments were brought into effect by the legislature and orders were passed by the courts. As per the law, parties that are dissatisfied with the outcome of an order of a tribunal have approached the higher court for a suitable remedy. One such order that was challenged in the higher court in Union of India v. Oriental Bank of Commerce. This article will analyse the judgment of the appellate tribunal of the abovementioned case.

Oriental Bank of Commerce v. M/s. Sikka Papers Ltd. & Ors – Order passed by NCLT

The NCLT in the abovementioned case passed an order directing the Registrar of Companies (ROC) to file an affidavit within a week from the order. The court issued the following directions, pertaining to the present article;

The court directed that the Union of India and the Ministry of Corporate Affairs to be parties to all cases of Insolvency & Bankruptcy. Moreover, the said bodies would also be parties in cases of a Company Petition.
The abovementioned bodies would be a party to the respondents in all the cases of Insolvency & Bankruptcy and Company Petitions.
This rule was enforced so that the officers of the Ministry of Corporate Affairs could retain authentic records and proper appreciation of all matters.
The court implemented the rule across the country for all National Company Law Tribunals.
The ROC was directed to issue the present order to all the NCLT’s and ensure proper implementation.

Union of India filed an appeal before the National Company Law Appellate Tribunal (NCLAT) against the abovementioned order (22.11.2019). The NCLAT heard the case and passed an order on 22.05.2020.

Union of India v. Oriental Bank of Commerce

The direction issued by the NCLT attracted an appeal before the NCLAT. The appeal was regarding making Ministry of Corporate Affairs a necessary party in all insolvency, bankruptcy and company petitions;

Contentions of the Appellant

The appellant, in the present matter, made several compelling arguments before the tribunal. The arguments were as follows;

The appellant contended that the NCLT does not possess the power to pass an order in the form of a rule. The appellant argued that the direction was weak and it did not hold cognizance before the law.
The power of making a rule lies with the Central Government who would then present a notification before the Parliament. The Parliament holds the authority to pass a rule to implement cross-nation.
The appellant argued that the NCLT should have notified the Central Government before issuing such an order. The reason for this is the subject matter of rulemaking does not lie with the NCLT. Thus, NCLT issuing an order that passed a rule was ultra-virus to their powers.

Antonio S.C. Preria v. Ricardina Noronha (D) By Lrs – Persuasive precedent

The appellant presented the case of Antonio S.C. Preria v. Ricardina Noronha (D) By Lrs. before the NCLAT. This precedent set by the apex court resolved the issue of a third party. The court analysed the position of a third party in a matter based on what consequence it would face by the decision of the court. More so, said position is regarding hearing the third party's contentions.
The appellant contended that they foll all due diligence as required by the law while submitting all the documents. They even adhered to the provisions of Section 399(2) of the Companies Act, 2013.
The Director of the Ministry of Corporate Affairs stated that a separate application was in the pipeline before the tribunal. This application would present documents from the ROC as per Section 399(2) of the Companies Act, 2013.
Furthermore, the Director argued that the directions issued in Corporate Insolvency Resolution Process required them to produce all relevant records. Moreover, the Director assured the court that they would follow the direction issued in CIRP.
The appellant contended that the Central Government has, in the past, already issued rules to ensure inspection of documents and certified copies. This fundamentally means that the rule directed by the NCLT was unnecessary.

Contentions of the Respondent

The respondent presented its arguments before the NCLAT. They stated that they hold no bearing to the case. Their contentions were as follows;

The respondent contended that the NCLT did not issue them any direction by way of an order. They stated that the order was passed with reference to an application filed by the Resolution Professional.
Respondent stated that, the Resolution Professional applied to the tribunal because he faced issues in complying with some provisions of the Companies Act, 2013 among others.
They argued that the directions issued by the NCLT did not hold any relevance to the respondent and the respondent was not the right party to the case.

Findings of the NCLAT

The tribunal made an analysis of the matter at hand after hearing the appellant and respondent and came to a conclusion. The court drew an analogy between the general rule for a third party and the impugned order. The findings of the court were as follows;

The court stated that a third party is a necessary party to a case and can present its arguments before the court.
Court observed that the tribunal must follow the principles of natural justice. Thus the tribunals have to follow the principles of natural justice as a mandate and it has to ensure that it does not cause harm to any person.
The tribunal analysed the definition of a necessary party. Therefore, it stated that without the necessary party, the court cannot conclude a matter.
The court defined and made analysis of a proper party. It observed that a proper party, which may not be a necessary party, can assist the court with conclusion of a matter.
The court stated that adding or removing a party is a process which takes place at the discretion of the court which can be executed;
- On an application by the parties involved; or
- Suo moto by the court; or
- On an application by a third party.
The court observed that the discretion of the court cannot be dismissive or indifferent. So the actions of NCLT were not justified.
The tribunal stated that the correct manner of including a third party at discretion as a necessary or proper party involves a process. Thus, this process involves the court to issue a notice to such party and hear their contentions regarding accepting or rejecting such notice.

Conclusion

The court concluded in the instant case that, the NCLT did not provide the third party with an opportunity to a present its plea. It simply issued a direction for filing affidavits. and issued an order to make MCA a party to all insolvency, bankruptcy and company petitions. It did not consider to involve the government body to matters on a case to case basis. The court observed that the NCLT did not provide the MCA with an opportunity to present its arguments of accepting or rejecting the direction. Thus, this was a violation of the principle of natural justice which was a miscarriage of justice and cause of hardship. Moreover, the court stated that the NCLT has to abide by the principles of natural justice. Conclusively, the NCLAT set aside the order passed by the NCLT that made MCA a third party upheld the petition.