Persons With High Ideals & Impeccable Integrity Must Be Appointed As Members In NCLT & NCLAT; There Shouldn’t Be Any Political Appointment: SC

The Supreme has brought into light certain deficiencies in the Insolvency and Bankruptcy Code, 2016 (IBC) and also gave suggestions regarding the functioning of the NCLTs (National Company Law Tribunal) and NCLATs (National Company Law Appellate Tribunal).

The Court emphasised that the persons with high ideals and impeccable integrity must be appointed as Members in NCLT and NCLATs and there should not be any political appointment.

The Court was deciding civil appeals filed against the judgment of NCLAT by which it dismissed an appeal and upheld the order of NCLT.

The three-Judge Bench comprising CJI D.Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra remarked, “A shortfall of members and the lack of requisite strength has led to Tribunals only sitting for a few days of the week or a few hours in a day. Even in Tribunals where there is no vacancy, the absence of requisite infrastructure has forced the benches to share courtrooms or halls on a rotation basis. As a consequence, the strict timelines provided in Section 12 of the IBC, 2016 are not complied with. Filling such vacancies with experts having adequate domain knowledge in the field must be prioritized along with addressing the infrastructure needs of the Tribunals to prevent any adverse effect on the resolution process. There must be strict mandates regarding the functioning of the Tribunals within its normal working hours. The appointment of new members must be done in a manner such that it coincides with the date of retirement of the sitting members in a seamless manner to avoid such operational inefficiencies. Persons with high ideals & impeccable integrity should be appointed as Members in the NCLT as well as NCLAT. There should not be any political appointment.”

The Bench added that it is now for the Parliament to look into its suggestions in consultation with the Insolvency Bankruptcy Board of India (IBBI) and the Ministry of Finance.

ASG N. Venkataraman appeared for the appellants while Senior Advocate Mukul Rohatgi appeared for the respondents.

In this case, the NCLT vide its order, admitted the application for initiation of Corporate Insolvency Resolution Process (CIRP) filed by State Bank of India (SBI) in respect of Jet Airways (India) Limited i.e., the Corporate Debtor in accordance with Section 7 of IBC. The total admitted claim of the Financial Creditors was around Rs. 7,800 crores and pursuantly, an Interim Resolution Professional (IRP) was appointed as the RP as well.

Thereafter, the Committee of Creditors (CoC) approved the Resolution Plan proposed by the respondent company. The RP preferred an application before the NCLT seeking approval of Resolution Plan and the NCLT approved the same. The workmen and employees of the Corporate Debtor and several Operational Creditors challenged the NCLT’s order and the NCLAT upheld the same. The appellants, therefore, challenged three interim orders passed by the NCLAT before the Apex Court.

The Supreme Court in the above context of the case, said, “We are of the considered view that where there exists extraordinary circumstances warranting the exercise of such powers in order to ensure that the very salutary purpose of the Code, 2016 is not frustrated, then the Court would be well-within its prerogative to exercise them to secure the object of the IBC, 2016. If the proposition that there ought to be no exercise of the inherent powers where a procedure is laid down were to be blanketly accepted then it may have a very chilling effect whereby the very purpose of vesting this Court with inherent powers under Article 142 and tribunals Rule 11 of the NCLT Rules would be rendered otiose and meaningless.”

The Court, therefore, directed the Corporate Debtor into liquidation in the manner as laid down in IBC. It added that, ensuring that liquidation commences as soon as possible would also be in the best interests of the Corporate Debtor and the creditors including the workmen/employees who are yet to receive their rightful dues and it would not be necessary for the parties to again approach the Adjudicating Authority for a determination under Section 33(3) of the IBC, 2016 on the ground that the provisions of the approved Resolution Plan have been contravened.

“This litigation is an eye opener for one and all and therefore, before we close this matter, we deem it absolutely necessary to bring to light certain deficiencies in the IBC, 2016 which require immediate attention. We would also like to definitely say something as regards the functioning of the NCLTs and NCLAT”, it said before closing the case.

While explaining the shortcomings in IBC, the Court gave some suggestions as below –

• The insolvency ecosystem be continuously strengthened through a regular identification of its shortcomings and a quick redressal of its practical deficiencies and this would significantly improve its implementation and yield better results for all the stakeholders involved.

• Scrupulous following of the provisions of the Code along with behavioural and ethical discipline is especially required from the key participants of the IBC who are central to its design i.e., the Adjudicating Authorities, Corporate Debtor, Resolution Professionals, Committee of Creditors, potential and Successful Resolution Applicants, Approved valuers and Liquidators.

• The CoC must exercise their commercial wisdom and approve/reject the Resolution Plans placed before them exhibiting fairness and with good reasons and such a reasoned decision making on their part will only serve to further enable the other key players like the Adjudicating Authorities to understand the rationale behind their decision and to uphold the correctness of the same.

• The role of Successful Resolution Applicant is far more than a transactional duty towards the creditors or stakeholders; it embodies a pivotal responsibility to the distressed entity itself, which must be approached with utmost dedication and an earnest sense of duty.

• Regardless of the challenges that may arise, the Successful Resolution Applicant cannot treat its obligations as optional or conditional, nor can it abdicate its responsibility in the face of unforeseen obstacles. Its efforts must reflect a determination to implement the plan fully and to rejuvenate the debtor company, as this is integral to the success of the IBC framework and the spirit of economic revival it seeks to foster.

• The Successful Resolution Applicant cannot step back or dismiss its obligations by attributing delays or setbacks to the conduct of other stakeholders, as this would undermine the very purpose of insolvency resolution.

• The lenders must balance their financial interests with the broader objective of rehabilitation and should not take an obstructive approach or seek to leverage the resolution process solely for individual benefit, as such actions would risk destabilizing the corporate debtor’s recovery trajectory.

• Through a spirit of cooperation and shared purpose, the Successful Resolution Applicant and lenders together can ensure that the corporate debtor is given the best chance for revival and sustained growth, reflecting the Code’s intent to rescue viable companies and protect broader economic interests.

• The IBC, 2016 is silent as regards the phase of implementation of the Resolution Plan by the Successful Resolution Applicant. This is mostly due to the fact that each Resolution Plan might be unique and customized to the specific needs of the Corporate Debtor and an excessive amount of statutory control over the implementation of the Plan may prove to be counterproductive to the cause of the Corporate Debtor. However, this has unfortunately led to the consequence of giving excessive leeway to the Successful Resolution Applicants to act in flagrant violation of the terms of the Resolution Plan in a lackadaisical manner.

• The exercise of discretion as regards altering the binding terms of the Resolution Plan, including the timelines imposed, must be kept at a minimum, at best. The NCLTs/ NCLATs need to be sensitised of not exercising their judicial discretion in extending the timelines fixed under IBC, 2016 or the Resolution Plan, in such a way that it may make the Code lose its effectiveness thereby rendering it obsolete.

• The authorities including the NCLT and NCLAT must not aid the successful resolution applicants in circumventing the strict mandates of the law by acceding to their requests to relax the terms of the plan itself.

• The Adjudicating Authority while approving a Resolution Plan under Section 31 of the IBC, 2016, should record the next steps which are to be taken by the respective parties for commencement of implementation of the approved Resolution Plan.

• The CoC must be empowered to constitute the Monitoring Committee which may, by default, include the Resolution Professional and also include other nominees from the CoC and the resolution applicant respectively.

• The integrity of the original timelines laid down by the Code and the resolution plan must not be allowed to be violated since it would dilute the objective of the Code in its entirety, erode investor confidence and hinder all corporate restructuring efforts.

• It has been noticed that the benches of NCLT(s) and NCLAT don’t have the practice of sitting for the full working hours. They are particularly lacking in the capacity to manage the growing number of cases and giving undivided attention required in such matters.

• The NCLT(s) and the NCLAT must seriously rethink their approach towards admission and disposal of insolvency matters, they should not act as a mere rubberstamping authority and must take their roles seriously in ensuring time-bound hearings and resolutions.

Accordingly, the Apex Court allowed the appeals and set aside the NCLAT’s order.

Cause Title- State Bank of India & Ors. v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr. (Neutral Citation: 2024 INSC 852)

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