Debtor status, final reached, cannot be changed based on subsequent judgment: NCLAT Delhi


The National Company Law Appeals Tribunal (“NCLAT”), main bench, consisting of Judge Ashok Bhushan (President), Judge M. Satyanarayana Murthy (Judicial Member) and Mr. Barun Mitra (technical member), while ruling on an appeal filed in Raghavendra G. Kundangar & Ors. against Shashi Agarwal & Anr., applied the doctrine of prospective cancellation while observing that when the quality of a debtor becomes final, it cannot be modified on the basis of a subsequent judgment in different proceedings. NCLT had declared the debtor company insolvent under section 7 of the IBC for failure to pay for the supply of materials. Subsequently, the Supreme Court of Anuj Jain v Axis Bank Limited considered that the debt resulting from the supply of materials is an operational and not a financial debt. The NCLAT bench declined to intervene in the NCLT order applying the doctrine of prospective rescission. The NCLAT bench further held that NCLT is exclusively vested with inherent jurisdiction to decide the petition filed under Section 7, 9 or any of the provisions of the IBC.

Background Facts

Jindal Steel & Power Limited (“Respondent 2”) provided certain documents to Bharat NRE Coke Ltd. (“the debtor company”) under an agreement and the payments have not been released by the debtor company. Respondent No. 2 brought an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), requesting the commencement of proceedings for the resolution of the insolvency of the company against the debtor company, claiming that there was an ongoing financial debt relating to the supply of equipment to the company. Debtor. The NCLT Kolkata Bench had admitted the request and initiated the CIRP see an order of 11.03.2019. The Appellants appealed to the NCLAT against the order of 11.03.2019, which ended in a dismissal. The Appellants appealed to the Supreme Court under Article 62 of the CIB, which was dismissed on line. In all of these proceedings, the respondents’ debt was declared as a financial debt.

At the same time, another series of calls 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’s void order of 16.08.2019 and became final.

However, in a subsequent call in Anuj Jain v Axis Bank Limited, (2020) 7 SCC 401, the Supreme Court ruled that the person who provided material under contract to the Debtor Company is not a Financial Creditor but an Operational Creditor. Based on the judgment rendered in the Anuj Jain case, the plaintiffs filed a request with NCLT to set aside the order of 11.03.2019 by which the CIRP was initiated under Article 7 of the IBC, because a material supplier was no longer a financial creditor but an operational creditor.

Appellants’ Arguments

The plaintiffs argued that once the NCLAT decision, upheld by the Supreme Court, is reversed in the subsequent judgment, the order issued by the NCLT on 2019.03.11 becomes bad in law. Consequently, respondent no. 2 becomes incompetent to initiate proceedings under Article 7 of the IBC, claiming to be a financial creditor, since he is no longer anything more than an operational creditor. It was argued that when the judgment is set aside it will have retroactive effect and that NCLT also has no inherent jurisdiction.


Whether the order of 11.03.2019 adopted by NCLT can be set aside on the grounds of excessive recall of the judgment of the Supreme Court in Anuj Jain Vs. Axis Bank Limited?

NCLAT Decision

The panel observed that the order of the NCLT establishing the CIRP under Section 7 of the IBC has become final. We relied on the judgment of the Supreme Court in Sri Budhia Swain & Ors. vs. Gopinath Deb & Ors., (1999) 4 SCC 396, where it was held that an order can only be revoked on 4 points: (i) the proceedings resulting in an order suffer from an inherent lack of jurisdiction and this lack of jurisdiction is manifest ; ii) There is fraud or collusion in obtaining the judgment; (iii) There has been an error by 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 was deceased and the estate was not represented.

The Chamber found that none of the four criteria set out in Sri Budhia Swain & Ors. vs. Gopinath Deb & Ors. was fulfilled because the appellants did not that the NCLT manifestly lacked inherent jurisdiction or that the order was obtained by playing fraud or collusion.

The seat observed that a jurisdictional defect impairs the very authority of the court to issue an order, and such a defect cannot be corrected even by the consent of the parties. But the same does not apply to the facts of the case because NCLT is vested with such jurisdiction and the order does not suffer from an inherent lack of jurisdiction. Therefore, this appellant’s assertion that the contracting authority has no inherent jurisdiction is hereby rejected.

Doctrine of prospective nullification

When an order/judgment achieves finality and is implemented, it cannot be reopened due to the quashing of the judgment in different proceedings, as achieving finality is the basic principle of the Indian legal system. If the matters are reopened on the basis of a subsequent cancellation, there will be no end to the legal proceedings. The prospective declaration of the law is a device innovated by the Supreme Court to avoid the reopening of settled questions and to prevent the multiplicity of proceedings. It is also a device adopted to avoid uncertainty and avoidable disputes.

“By the very purpose of the forward-looking statement of law, all actions taken contrary to the statement of law prior to the date of the statement are deemed to be valid. This is done in the broader public interest. Therefore, subordinate courts which are legally bound to apply the declaration of law made by the Honorable Supreme Court are also bound to apply such dictum only to cases which may arise in the future. have been taken previously declaration of right, may not be hindered on the basis of such declaration of right.”

The bench held that in the case of Anuj Jain, the Supreme Court failed to indicate the prospective applicability of the principle. Therefore, it directly nullified the previous law and the retroactive nullification of the law is not a ground for exercising the recall of an ordinance.

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

The appeal was dismissed.

Case title: Raghavendra G. Kundangar & Ors. against Shashi Agarwal & Anr.

Case no: Society Appeal (AT) (Ins.) No. 886 of 2022

Appellants advice: Mr. Bharat Sood, lawyer.

Click here to read/download the order


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