NCLAT applies the Doctrine of Prospective Overruling

NCLAT applies the Doctrine of Prospective Overruling

The bench comprised of Justice Ashok Bhushan (Chairperson), Justice M. Satyanarayana Murthy (Judicial Member) and Mr. Barun Mitra (Technical Member).

The National Company Law Appellate Tribunal ("NCLAT"), Principal Bench, applied the Doctrine of Prospective Overruling while observing that when status of a debtor attains finality, the same cannot be altered on the basis of a subsequent judgment in different proceedings.

The National Company Law Tribunal (NCLT) had admitted the Corporate Debtor into insolvency under Section 7 of IBC for defaulting in payments in respect of supply of materials. Subsequently, the Supreme Court in Anuj Jain v Axis Bank Limited had held that debt arising out of supply of materials is operational debt and not financial. The NCLAT Bench declined to intervene in NCLT's order by applying Doctrine of Prospective Overruling. The NCLAT Bench further held that NCLT is exclusively invested with inherent jurisdiction to decide the petition filed either under Section 7, 9 or any of the provisions of IBC.

Facts of the case

Jindal Steel & Power Limited ("Respondent No. 2") entered into an agreement with Bharat NRE Coke Ltd. ("Corporate Debtor") for supply of certain material. However, payments were not released by the Corporate Debtor. Resultantly, the Respondent No. 2 filed a petition under Section 7 of Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, claiming that there was subsisting financial debt regarding supply of material to the Corporate Debtor.

The NCLT Kolkata Bench had admitted the petition and had initiated CIRP vide an order dated 11.03.2019. The Appellants preferred an appeal before NCLAT against the order dated 11.03.2019, which ended in dismissal. The Appellants filed an appeal before the Supreme Court under Section 62 of IBC which was dismissed in-limine. In all these proceedings, the debt of the Respondents was declared as Financial Debt.

Alongside, another batch of appeals in Arun Kumar Jagatramka v Jindal Steel & Power Limited & Anr., Civil Appeal No. 6015 of 2019 and Suraksha Asset Reconstruction Limited v Jindal Steel & Power Limited & Anr., Civil Appeal No. 7027 of 2019 were dismissed by the Supreme Court vide order dated 16.08.2019 and had attained finality.

However, in a subsequent appeal in Anuj Jain v Axis Bank Limited, (2020) 7 SCC 401, the Supreme Court held that the person who supplied material under contract to the Corporate Debtor is not Financial Creditor but an Operational Creditor. Based on the judgment in Anuj Jain case, the Appellants filed an application before NCLT to recall the order dated 11.03.2019 whereby CIRP was initiated under Section 7 of IBC, as a supplier of material was no more a financial creditor rather an operational creditor.

The issue before the bench was whether the order dated 11.03.2019 passed by NCLT can be recalled on the ground of over-recalling the Judgment of Supreme Court in Anuj Jain Vs. Axis Bank Limited?

The Bench observed that the order of the NCLT initiating CIRP under Section 7 of IBC has attained finality. Reliance was placed on the Supreme Court judgment in Sri Budhia Swain & Ors. v. Gopinath Deb & Ors., (1999) 4 SCC 396, wherein it was held that an Order can be recalled only on 4 points: (i) The proceedings culminating into an order suffer from inherent lack of jurisdiction and such lack of jurisdiction is patent; ii) There exists fraud or collusion in obtaining the judgment; iii) There has been a mistake of the Court prejudicing a party; or iv) A judgment was rendered in ignorance of the fact that a necessary party had not been served at all or had died and the estate was not represented.

The Bench opined that none of the four criteria laid down in Sri Budhia Swain & Ors. v. Gopinath Deb & Ors. was met as it is not the case of the Appellants that the NCLT lacks inherent jurisdiction patently or order was obtained by playing fraud or collusion.

The Bench observed that a defect of jurisdiction strikes at the very authority of the court to pass any decree, and such a defect cannot be cured even by consent of parties. But the same has no application to the facts of the case as NCLT is vested with such jurisdiction and the order does not suffer from inherent lack of jurisdiction. Hence, the contention of this Appellant that the Adjudicating Authority lacks inherent jurisdiction is hereby rejected.

Doctrine of Prospective Overruling

When an order/judgment attains finality and is acted upon, the same cannot be reopened on account of overruling of the judgment in different proceedings as the attainment of finality is the basic principle of Indian legal system. If issues are reopened on the basis of subsequent overruling, there will not be any end for legal proceedings. The prospective declaration of law is a device innovated by the Supreme Court to avoid reopening of settled issues and to prevent multiplicity of proceedings. It is also a device adopted to avoid uncertainty and avoidable litigation.

"By the very object of prospective declaration of law, it is deemed that all actions taken contrary to the declaration of law prior to the date of declaration are validated. This is done in the larger public interest. Therefore, the subordinate forums which are legally bound to apply the declaration of law made by the Hon'ble Supreme Court are also duty-bound to apply such dictum to the cases which would arise in future only. In the matters where decisions opposed to the said principle have been taken prior to such declaration of law, cannot be interfered with on the basis of such declaration of law."

The Bench held that in Anuj Jain's case, the Supreme Court did not indicate as to the applicability of the principle prospectively. Hence, it directly overruled the earlier law and overruling the law retrospectively is not a ground to exercise the recall an order.

The Bench further held that NCLT is exclusively invested with inherent jurisdiction to decide the petition filed either under Section 7, 9 or any of the provisions of IBC.

The Appeal was dismissed.