The early years of the 21st century witnessed a devastating need for a special tribunal to adjudicate the perpetual customer-debt crisis faced by banks and other financial institutions including the massive default of business loans taken by private sector companies. The functioning of Debt Recovery Tribunals achieved a perpendicular success; the efficient quasi-judicial settlement did not stray too much from litigation but the burden on benches across India rose in an unprecedented manner. Post-2015, the move to include the resolution of financial debts, as well as those of corporate and operational nature, in the jurisdiction of National Company Law Tribunals as construed under the Insolvency and Bankruptcy Code was welcomed by most stakeholders.
The new legislation envisaged a far easier and straightforward way to admit an application for the transparent method of liquidation, insolvency and winding up procedures. Armed with a powerful clause to declare moratorium to prohibit and stay matters that would be instituted or were pending at any court of law or Debt Recovery Tribunal, it has made the National Company Law Tribunals the go-to forum for recovery of dues, of any nature and substance. While it accomplished reducing the pendency of cases before the former tribunal, it has also duplicated its subject-area jurisdiction, raising the question of whether Debt Recovery Tribunals in this era are on their way to a progressive redundancy and an in-depth examination provides the answer in the affirmative.
The Insolvency and Bankruptcy Code, 2016 (hereinafter, ‘the Code’) came as a boon to the commercial sector of India. It not only consolidated and repealed British era insolvency legislations but it also amended 11 other laws, the most relevant being the Companies Act, 2013, Recovery of Debts and Bankruptcy Act, 1993 (hereinafter, ‘DRT Act’) and Securitization and Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002 (hereinafter, ‘SARFAESI Act’). While several experts believe that the presence of more than one forum for insolvency and bankruptcy related grievance redressal is necessary, the increasingly overwhelming opinion is that the Code has made Debt Recovery Tribunals (hereinafter, ‘DRTs’) and the SARFAESI Act redundant.
A closer look at the quasi-judicial authorities created under the Companies Act, 2013- NCLT (National Company Law Tribunal) & the NCLAT (Appellate Tribunal) reveals their powers to decide corporate disputes. It can pass orders to restitute parties, direct insolvency or liquidation proceedings and even hold parties liable for punishments or costs. It may do so by adhering to the principles of natural justice. The NCLAT holds the same powers of any other appellate tribunal in reviewing the NCLT’s decisions. The final court of appeal under the Court is the Supreme Court.
On the other hand, DRTs can be approached only by banks, financial institutions and their customers. They were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Appeals can be heard by the DRAT (Appellate Tribunal). While the government has increased the number of tribunals for speedy settlement of loan default cases, juristic entities are beginning to eliminate it as an efficient forum for dispute resolution.
DRT v. NCLT: A Stark Contrast
The first basic point of difference between the two tribunals is that the NCLT is regulated by the Companies Act and the Code while the DRT is regulated by its parent act and the SARFAESI Act. Secondly, the very nature of the relief provided by these bodies is distinct- the NCLT is a forum for resolution proceedings concerning liquidation, insolvency or winding up due to bankruptcy. The DRT provides a recovery mechanism for debts of and strictly confined to banks and other financial institutions.
Thirdly, the NCLT provides remedy sought to companies in case of default in payment of debts that are both operational and financial. Therefore, banks and financial institutions are also allowed to approach the NCLT for recovery of loan amount. Since operational debts cover all commercial transactions entered into by businesses, companies choose the convenient forum, the NCLT for initiation of insolvency resolution process instead of filing a suit for breach of contract in the civil court. On the other hand, the DRT can only facilitate recovery of amounts of a financial nature, that is, it resolves disputes between customers and banks or financial institutions only. It does not have the subject-matter jurisdiction to entertain any other cases.
Attributing Factors to the Popularity of the NCLT
There are several factors that can be attributed to the NCLT being viewed as the first and most attractive forum to recover any form of debt by companies. It is significant to note that Section 63 of the Code lays down that no civil court shall have any jurisdiction to entertain any suit or proceedings in respect of any matter on which the NCLT has jurisdiction. Therefore, this is pleaded to be an effective bar on institution of suit when in fact, the civil court may still be approached for recovery of amounts under a contract.
Further, the Supreme Court in Madras Bar Association v. Union of India [i] upheld the constitutional validity of NCLT & NCLAT, removing all doubts in the minds of legal officers of companies who may have been hesitant to file applications. Section 14(1)(c) of the Code explicitly states that when an insolvency resolution process is underway, the Code takes precedence over not only the SARFAESI Act but also the DRT. This position is further crystallized in the Supreme Court ruling in the infamous Innoventive case [ii] where it held that when simultaneous proceedings are initiated under the Code and the SARFAESI Act, the proceeding under the Code will prevail and its decision will be final.
The Allahabad High Court [iii] has also held that two proceedings cannot go on concurrently before both forums when the liability of the parties is co-extensive and the cause of action is the same. If the liability has not been adjudicated upon, the DRT proceeding cannot continue and must be stayed until the NCLT approves a resolution plan or orders for liquidation.
Legislative Intent
The Code itself contains provisions that seem to clarify the legislative intent behind making the NCLT appear more expedient to companies, and especially- banks and financial institutions. Section 14 stays all other pending proceedings (before the DRT) between the parties for a period of 180 days from the date of admission of application under Section 12 (corporate insolvency resolution process) before the NCLT. The NCLT may declare by order that no fresh action would be allowed to be taken. The debtor is also prevented from disposing of its asset during the moratorium period; this refers to the ‘cooling period’ wherein the debtor and the creditor can deliberate the rehabilitation of the company (companies incorporated under the Companies Act, 2013 and the Limited Liability Partnership Act, 2008). The same is applied to individuals and unincorporated entities under Section 85. Therefore, the Code has laid down absolutely that the proceedings before the DRT (initiated under the DRT Act and the SARFAESI Act) will be suspended without the limitation period being affected for a period of 180 days. An order stating this is required to be passed.
On the other hand, the Code also attempts to bring harmony with other laws- a bankruptcy proceeding may be maintained before the DRT. If an order is passed by the DRT, the creditor is still entitled to realize his security interest in the same manner as he would have been entitled to in the absence of such an order. In case a secured creditor is in conflict due to a liquidation order directed towards a corporate debtor, he has two options. Firstly, he may relinquish his security interest and become a party to the liquidation process and rank higher in preference of distribution. Alternatively, he can stay out of the liquidation process and enforce his security interest. Therefore, a favourable order passed by the DRT with respect to bankruptcy is not diluted by any provision of the Code or the NCLT.
Conclusion
The contemporary litigation involving the Code still faces confusion as the presence of more than one available forum is tested by the real implementation of the above law. The disposal rate of DRTs is alarming. They are unable to reduce pendency of cases. It is recommended that at the very first instance, if the proceeding can be held before the NCLT, the DRT choose to direct an application for the same.
The existence of several company-related legislations with respect to recovery of debt mandates interpretation. A delay in insolvency or liquidation proceedings due to overlapping proceedings is worrisome. The interplay of rules of the Code, the SARFAESI Act and the DRT Act remains unresolved. Simultaneous proceedings before the civil court, the DRT and the NCLT for recovery of the same debt is contributing to an inefficient insolvency regime. There is craving among experts for a settled position of law. Since almost any case before the DRT can be resolved by the NCLT, the legislature as well as the judiciary must decide on the chief question- has the Insolvency and Bankruptcy Code made Debt Recovery Tribunals redundant?
End Notes:
[i] Madras Bar Association v. Union of India & Ors., (2015) 8 SCC 583.
[ii] Innoventive Industries Ltd. v. ICICI Bank & Ors., AIR 2017 SC 4084.
[iii] Sanjeev Shriya & Ors. v. State Bank of India & Ors., 2018 (2) ALJ 769; Deepak Singhania v. Union of India & Ors., 2018 (2) RCR (Civil) 52.
This article is written by Ashwini Nag of Symbiosis Law School, Pune.
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