Resolving IL&FS: Desperate Times Call for Desperate Measures

[Manaswi Agarwal and Aayush Mitruka graduated from ILS Law College, Pune and are currently working with law firms in Mumbai and Delhi respectively. They can be reached at [email protected] and [email protected]]

In a previous post we had analysed the efficacy of the Insolvency and Bankruptcy Code, 2016 (IBC) as compared with the scheme of arrangements mechanism under the Companies Act, 2013 (Companies Act) as a tool for restructuring of a financial institution like Infrastructure Leasing and Financial Services Limited (IL&FS). The post was written after IL&FS along with several of its subsidiaries had filed a petition before the National Company Law Tribunal, Mumbai (NCLT) for “certain reliefs in connection with filing of a scheme of arrangement under section 230 of the Companies Act”. Thereafter, the Union of India swung into action and invoked section 241(2) of the Companies Act pursuant to which the NCLT directed suspension of the then existing board of directors of IL&FS and appointed a new board of directors. As briefly discussed in the previous post, while schemes route under the Companies Act seemed more attractive for IL&FS than the IBC, the lack of any moratorium (as envisaged in section 14 of the IBC) in the Companies Act would pose a major concern for IL&FS with several creditors seeking to recover their debts.

In these circumstances, the Union of India approached the NCLT seeking virtually a blanket ban on all the creditors of IL&FS from taking any action against IL&FS and its 348 group companies to recover their dues. Interestingly, the relief was sought under section 242 of the Companies Act. The NCLT found itself constrained by provisions of Companies Act and concluded that only if IL&FS could proceed under IBC could it have availed of the moratorium envisaged in section 14 of the IBC. Accordingly, by an order dated 12 October 2018 (NCLT Order), the NCLT rejected the request for immunity in respect of IL&FS and its group companies.

The NCLT Order was challenged before the National Company Law Appellate Tribunal (NCLAT) and the NCLAT, in an unprecedented move, by an order dated 15 October 2018 (NCLAT Order), granted interim relief effectively restraining the creditors of the IL&FS group from taking any action to recover their dues from IL&FS and its 348 group companies. The NCLAT Order, curiously enough, does not discuss the legal provisions under which such an order was passed. In this post, we critically analyse the legality of the NCLAT Order.

Powers of the NCLT and NCLAT under section 242 of the Companies Act:

The NCLAT Order does not discuss the provisions of the Companies Act, and the interpretation thereof which confer, if at all, the power upon the NCLT to pass an order which is as overarching as the NCLAT Order. The only reason assigned by the NCLAT to support the moratorium is “larger public interest” and “the economy of the nation”. Notably, a plain reading of the provisions under Chapter XVI of the Companies Act suggests that while the NCLT has plenary powers to pass any order in respect of the company before it, such orders ought not adversely affect parties other than such company and its shareholders and management. This is significant since the entire chapter deals with the internal management of a company and disputes inter se between the members and management of such company. Section 242(2), which provides an illustrative list of orders that can be passed by the NCLT, indicates that no order can be passed which affects any party other than the company itself without hearing such a party. In fact, section 242(2)(f) which provides for termination, modification, setting aside of any agreement entered into between the company and any other party requires the NCLT to give a hearing to such a third party.

However, section 242(2)(m) confers upon NCLT the power to make provisions where it is just and equitable to make such provisions. In addition, rule 11 of the NCLT Rules, 2016 confers inherent powers upon the NCLT to pass any orders to meet ends of justice and prevent abuse of the process of the tribunal. A combined reading of these two provisions indicates that the NCLT has powers to pass all orders which are found to be just and equitable or are required to meet ends of justice. One needs to bear in mind that “inherent powers” of a court or tribunal are those powers necessary for the ordinary and efficient exercise of jurisdiction already conferred upon it (see Arjun Singh v. Mohindra Kumar, AIR 1964 SC 993). Thus, section 242(2)(m) as well as rule 11 cannot be construed to enlarge and expand the powers of the NCLT which it otherwise does not enjoy. Assuming an order like the NCLAT Order can be passed by resorting to the said provisions, caution has to be exercised that phrases like ‘just and equity’ and ‘ends of justice’ are construed not only with reference to IL&FS but also with reference to creditors and other stakeholders of IL&FS. The Union of India ought to demonstrate that an order restraining the creditors of IL&FS to take any actions against IL&FS for recovery of their dues for a limited period of time will benefit the creditors at large in the long run. Further, given various investigations pending and suspected wrongdoings in the management of IL&FS, it would be an uphill task to prove equities in favour of IL&FS as against the creditors who seek immediate recovery of their dues.

The comparison with moratorium under the IBC

The order sought by the Union of India in respect of IL&FS is being mistaken to be similar to the moratorium envisaged under section 14 of the IBC. The moratorium under the IBC is not only to the benefit of the corporate debtor (by barring creditors from recovering dues from the corporate debtor) but also to the benefit of the creditors by barring the corporate debtor itself from alienating or transferring any of its assets. Thus, all assets as well as liabilities of the corporate debtor are frozen and the creditors are allowed to restructure the debt. However, the NCLAT Order seems to protect only IL&FS and its group companies without any corresponding protection to the creditors. Therefore, even by the standards of the IBC, the NCLAT Order is extraordinary and such a moratorium could not have been availed by IL&FS or any of its group companies under the IBC.

Protection to group companies of IL&FS

One striking feature of the NCLAT Order is that the moratorium granted therein applies to 348 group companies of IL&FS. There are multiple objections to this aspect of the NCLAT Order viz.: (1) the group companies were not before the NCLAT and thus no orders could have been passed in respect of such companies; (2) IL&FS is a separate legal entity from its group companies and cannot be treated to be acting for and on behalf of all the group companies; and (3) several group companies of IL&FS are incorporated under foreign laws and applicability of the NCLAT Order in respect of such group companies is unclear and fraught with several legal hurdles.

Moreover, since IL&FS and all its group companies are now under the scanner and are being governed by the government appointed board, it is unlikely that any illegalities would be committed in functioning thereof. However, if any of the 348 group companies to which the NCLAT Order applies is a company in which IL&FS has a minority stake, one cannot rule out the possibility of misuse of the protection from legal proceedings granted by the NCLAT Order.

Another aspect to be considered as regards the group companies of IL&FS is that the premise of Union of India to approach the NCLT and NCLAT to seek moratorium under section 242 of the Companies Act was that IL&FS being a financial service provider was excluded from application of the IBC and therefore, IL&FS could not avail of moratorium under section 14 of the IBC. Besides the fact that Union of India can pass necessary notification under section 227 of the IBC to put IL&FS through the IBC procedure, it is unsettling that several group companies of IL&FS are not financial service providers and can avail of provisions of the IBC. Therefore, the fundamental premise of the Union of India that IL&FS cannot avail of the IBC process and therefore an order ought to be passed under the Companies Act, does not apply to several group companies.

In these circumstances, the case of IL&FS has demonstrated an urgent requirement of not only a comprehensive bankruptcy law for financial service providers (like the Financial Resolution and Deposit Insurance Bill) but also a framework for resolving group insolvencies in India.

An Order without hearing the creditors

It is of concern that the NCLAT Order appears to have been passed without any notice to the creditors of IL&FS or its group companies. The NCLAT Order does not even delve into the reasons for granting such an ex-parte relief without giving hearing to the creditors of IL&FS and its group companies.

However, the NCLAT appears to be cognizant of the absence of the creditors and has directed that the five largest creditors be impleaded as respondents to the appeals in the representative capacity of all the creditors. It is uncertain whether five largest creditors of IL&FS will represent all the creditors of IL&FS and its group companies. In any event, if certain creditors are not satisfied with the five largest creditors leading their case, it is unclear if such individual creditors will be granted an opportunity to be heard. Moreover, the NCLAT has entirely overlooked that each class of creditors ought to be represented before the NCLAT and not merely five largest creditors.

Effect of NCLAT Order on proceedings under the IBC

Although the NCLAT has directed a moratorium in respect of IL&FS and its 348 group companies, it is irresistible to test its tenability as against the proceedings under the IBC. The question is whether any proceeding pending under the IBC or to be filed under the IBC is affected by the NCLAT Order. In this regard it is necessary to refer to sections 64(2) and 231 of the IBC. Section 64(2) reads as under:

“(2) No injunction shall be granted by any court, tribunal or authority in respect of any action taken, or to be taken, in pursuance of any power conferred on the National Company Law Tribunal or the National Company Law Appellate Tribunal under this Code.”

Section 231 of the IBC reads as under:

“231. Bar of jurisdiction.- No civil court shall have jurisdiction in respect of any matter in which the Adjudicating Authority or the Board is empowered by, or under, this Code to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority or the Board under this Code.”

From the above-quoted provisions, it is clear that no court or authority can grant an injunction to restrict: (a) the powers of the NCLT or NCLAT under the IBC; or (b) any actions taken or to be taken pursuant to any order passed by the NCLT under the IBC. The question of injuncting the IBC proceedings fell for consideration before the Bombay High Court in the case of Jotun India Private Limited v. PSL Limited (26 July 2018), wherein the Division Bench recognized the primacy of the IBC over the Companies Act and in unequivocal terms held that the proceedings under the IBC cannot be stalled by an order of the High Court. One may argue that while no other court or authority can restrict the powers of the NCLT or NCLAT, the order of NCLAT itself would not be barred by sections 64(2) and 231 of the IBC. However, that argument deserves to be rejected because the NCLAT has passed the NCLAT Order as the tribunal constituted under the Companies Act which is to be distinguished from the adjudicating authority and appellate authority under the IBC. The non-obstante clause under section 238 of the IBC further fortifies the argument and establishes the supremacy of the IBC over any provision of or order passed under the Companies Act.

In these circumstances, in our considered view, the NCLAT Order would not affect the proceedings (whether pending or filed after the NCLAT Order) under the IBC and this may defeat the very purpose of the NCLAT Order.


Needless to say, the NCLAT Order is problematic on various counts and sets a dangerous precedent. The interim order passed by the NCLAT appears to have been handed out merely upon the asking. Undeniably, IL&FS needs immunity to work out a viable plan for the resolution of the group insolvency. However, the statutory source of such immunity is unlikely to be section 242 of the Companies Act. IL&FS perhaps needs to look elsewhere and consider approaching the constitutional courts for such an order under its extraordinary jurisdiction in view of grave public interest. While the NCLAT Order is an interim order, it is hoped that the NCLAT will answer all these legal issues before finally disposing of the appeal. At this point it cannot be ruled out that some of the creditors of the IL&FS group would approach the Supreme Court against the NCLAT Order. It would be interesting to see how these legalities would finally get resolved.

– Manaswi Agarwal & Aayush Mitruka

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