NCLT Has No Jurisdiction To Examine Legality Of Action Taken Under MPID Act: Bombay High Court

Division bench of Justice SC Gupte and Justice Madhav Jamdar quashed and set aside the order dated January 28, 2019 passed by the Member (Judicial), National Company Law Tribunal, Mumbai Bench directing de-freezing of bank account in the name of Dunar Foods Ltd, which was freezed in relation to the National Spot Exchange Limited (NSEL) payment default crisis.

Case Background

The NSEL provided an electronic platform for spot trading in commodities, and used to operate from 16 States across the country. It was promoted by FTIL, now known as "63 Moons Technologies Pvt. Ltd.", which holds 99.99% of the share capital of NSEL. The balance 0.01% of the share capital of the NSEL is held by the National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED).

An FIR was registered against 63 Moons Technologies Ltd, NSEL, the Directors and key management persons of FTIL and NSEL, borrowers/trading members of NSEL, some brokers of NSEL, and others, under sections 120B, 409, 465, 467, 468, 471, 474, 477(A) of IPC by the MRA Marg police station on September 30, 2013.

In the said FIR, it is alleged that NSEL had caused wrongful loss of approximately Rs.5600 crores to more than 13000 investors. On the same day, the investigation into the said case was transferred to Economic Offence Wing, Mumbai.

As per the FIR, members of the NSEL fraudulently obtained huge funds from the NSEL against non-existent stocks of commodities. There was a semblance of trading, which was actually being done in non-existent goods, by issuing forged warehouse receipts. Further, the warehouses, which were an integral part of the NSEL as the commodities were required to be deposited in the exchange designated and certified warehouses as part of the pay-in obligations, lacked capacity and some of them had no stocks.

Although, NSEL announced a settlement schedule in August 2013, spread over 30 weeks for pay-out on a pro-rata basis to 148 members. The NSEL subsequently defaulted in all the payouts since the announcement of the settlement plan.

When the said investigation by EOW was going on and when the authorities were taking action under MPID Act, simultaneously on June 27, 2017, the State Bank of India, a Financial Creditor of M/s. Dunar Foods Ltd., invoked the jurisdiction under Section 7 of the Insolvency and Bankruptcy Code for the defaulted financial debt of over Rs.758 crore outstanding against M/s.Dunar Foods Ltd.

The said petition was admitted by the NCLT and Anil Kohli was appointed as Insolvency Resolution Professional and directed to comply with provisions of Sections 13 and 15 onwards of IBC.

More significantly, on February 20, 2018, application was filed by Dunar Foods Ltd. through IRP under Section 9 of MPID Act before the Designated Court under MPID Act, seeking direction to defreeze their bank accounts.

By order dated December 28, 2018, passed by the Special Judge (MPID Act) City Civil and Sessions Court for Greater Bombay, the said application was rejected, however, it was clarified that IRP was at liberty to raise objections before the Court under section 7 of the MPID Act.

Meanwhile, on November 12, 2018, a miscellaneous application was filed by IRP for Dunar Foods Ltd. under section 60(5), 14(1a) and 74(2) of IBC before the NCLT, seeking direction to de-freeze the said account of the corporate debtor By the impugned order dated January 28, 2019, passed by the NCLT, Mumbai Bench, defreezing of the said account was allowed. The said order is challenged by the State of Maharashtra through Deputy Collector and Competent Authority, (NSEL) in the present writ petition.

Submissions

Additional Government Pleaders AP Vanarase and YD Patil appeared on behalf of the State. AGP Patil submitted that the NCLT has no jurisdiction and no authority under law to pass the impugned order. He submitted that MPID Act is a special statute, which has as its object the protection of interest of depositors of Financial Establishments and matters relating thereto. There is an elaborate procedure for attachment and for hearing and making the order of attachment absolute and for hearing objections to the same by the designated court, he added.

Provisions of the MPID Act are very clear and, therefore, it is obvious that NCLT has no jurisdiction to interfere with the attachment order issued by the Government of Maharashtra by exercising power under section 4 of the MPID Act, AGP Patil argued.

On the other hand, Advocate Abhishek Anand appeared on behalf of IRP Anil Kohli and pointed out various provisions of IBC including Sections 5(12), 7, 14(a), 14(c), 15, 17(i)(d), 20, 32A and 60(5)(a)(b) thereof.

He submitted that Section 60 of IBC specifically provides that the adjudicating authority in relation to insolvency resolution and liquidation for corporate persons, including the corporate debtor, and personal guarantors thereof, shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.

Moreover, he argued that it is the exclusive jurisdiction of the NCLT to entertain and dispose of proceedings which are contemplated under IBC. He submitted that by Section 63, jurisdiction of the Civil Court or any authority is specifically barred in respect of any matter on which NCLT or NCLAT have jurisdiction under this Code. Therefore, the impugned order passed by NCLT is within the jurisdiction of NCLT and only NCLT will have exclusive jurisdiction, Adv Anand said.

Judgment

The bench examined the Insolvency and Bankruptcy Code as well as the MPID Act. Court also examined various judgments cited by both parties. Most importantly, the Court cited the decision of the Supreme Court in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka and observed-

"It is clear that the appropriate forum to challenge the attachment of the account of the Respondent is the Designated Court under MPID Act where the Respondent can raise all contentions on merits and also can point out the provisions of IB Code and the effect of the same on the steps taken under the MPID Act. It will be for the MPID Court to consider the interplay of the provisions of the MPID Act and the IB Code and rule on the matter."

Finally, the Court said-

"Thus, in view of the above discussion, we hold that the NCLT has no jurisdiction to examine legality or validity of action taken under MPID Act and it is only the Designated Court constituted under Section 6 of the MPID Act that will have exclusive jurisdiction to deal with the same. Therefore, the impugned order passed by the NCLT is without jurisdiction and therefore, amenable to a challenge in our writ jurisdiction."

Noting that the only remedy for the IRP now is to approach the designated court under Section 7 of the MPID Act, the NCLT's order was set aside.