Revisiting audi alterem partem: With special reference to Sree Metaliks limited and another vs. Union of India and another (2017)

Introduction

The Insolvency and Bankruptcy Code of 2016 (herein referred to as the ‘Code’) comes as a regulator of the insolvency procedures in the country. The Code is a specially designed set of regulations that specifically talks about insolvency regulators, the creation of licensed insolvency professionals, segregating the period of insolvency for companies and start-up ventures, etc.

The Code specifically aims to bring under its ambit all sorts of procedures concerning insolvency and seeks to be the sole reference and authority for same. For instance, the winding up of companies is dealt with under Section 59 of the Code when the winding up is due to insolvency. Similarly, the provision of initiation of corporate insolvency by the financial creditor is under Section 7 of the Code.

A financial creditor owes a financial debt including anybody upon whom it is legitimately transferred or entrusted; Section 5(7) of the Code defines a financial creditor. The case of Sree Metaliks Limited discusses the validity of Section 7 of the Code and whether the principles of natural justice are applicable to the tribunals or not.

Facts of Sree Metaliks limited and another vs. Union of India and another

The petitioner of the case appealed to the court challenging the power of Section 7 of the Code. The first petitioner informed the court of receiving a letter from the Company Secretaries’ firm informing him of the petition filed by the firm under Section 7(4) of the Code.

However, the petitioner informs that the letter did not mention the date and time of the hearing and subsequently the hearings took place at NCLT, Kolkata Bench where the aforesaid petition was filed. Again, the NCLT moved with the hearings as this being related to insolvency was disposed of off by February 2017 a month after the first hearing took place in January 2017.

The NCLT passed an ex-parte order without hearing the petitioner. An Interim Resolution Professional was appointed in this regard and subsequently, the person was changed to someone else.

This aggrieved the petitioner who moved to the NCLAT and expressed his problem of not being able to represent himself at the NCLT with a mention to Section 424 of the Companies Act, 2013 highlighting that the principle of natural justice was not adhered to and expressed his grief.

Most importantly, the NCLAT did not press for the principle of natural justice as the appeal was against the January order. We know that any appeal against the judgment under Section 7 of the Code can be made to the NCLAT under Section 61 of the Code with appropriate reasons. But the case pressed for the non-representation of the petitioner, who again was not heard as claimed.

However, the court finds that the Code remains silent on the application of principles of natural justice during tribunal hearings and therefore, it does not impose any problem upon the NCLT or NCLAT. But, Section 424 of the Companies Act, 2013 is binding on the tribunals during their process of hearing and therefore, the tribunals must adhere to it.

The Code of Civil Procedure, 1908 does not impose any restrictions upon the tribunals to adhere to the principles of natural justice but the Companies Act of 2013 does. Therefore, it is binding upon the tribunals to ensure both parties hear as liquidation is a serious matter and it affects the future of the company severely.

Being such a drastic matter, both the NCLT and NCLAT must allow the hearing of the parties before ensuring such dissolution as it will impact the stakeholders of the company. Further, it presses on Section 424 of the Companies Act of 2013 allowing the practice of Audi alterem partem to be practiced by the tribunals without fail.

The petitioner being the financial debtor needs to be heard not only because of the principle of natural justice but also to ascertain the fact that the application filed by the financial creditor has merit and therefore, can be taken forward. In any case, the right to be heard cannot be subsided after a proper application is mandated that both parties are heard and the facts of the case are ascertained.

Observations

Section 7 of the Code mainly talks about the initiation of the corporate insolvency resolution process by a financial creditor. Here we need to note that the process can also be initiated by a group of financial creditors.

Again, the case highlights Section 7 sub-clause 4 of the Code that is, the adjudicating authority within fourteen days of receipt of the application by the financial creditor needs to examine the existence of default and ascertain the same after going through the records or any such information provided by the financial creditor in his application.
This allows for the insolvency process to be initiated against the company. However, the case highlights that there is no defect in the application and a direct implication of a faulty trial cannot be made.

The court ascertains the fact of Audi alterem partem which is binding as a principle of natural justice. The petitioner has the right to be heard. But the Code remains silent concerning the adherence to such a principle by the NCLT and NCLAT.

This results in the ignorance by the tribunals and the opportunity of the petitioner who could not represent himself due to improper information is not heard by the NCLAT and the ex-parte order is upheld. This results in the petitioner pressing for the application of Section 424 of the Companies Act, 2016 which makes the NCLT and NCLAT binding to apply the principles of natural justice in its hearings.

The Court also accepts the fact that a company being put into liquidation is a very serious matter and an action that decides the fate of the company cannot be taken single-handedly. An opportunity to hear both sides is a must which allows for the financial debtor to explain his state and reason.

Also, this stands as a verification of the facts made by the financial creditor who wishes to dissolve the company. The opportunity of being heard is not enforceable by the Code of Civil Procedure, 1908 but yes, it is strictly enforced by the Companies Act, 2013.

Thus, even in cases of liquidation or winding up a chance to both parties is ought to be given with equal opportunity and the upholding of the maxim audi alterem partem is desired. The case is based on Section 7 of the Code but focuses on the principles of natural justice and highlights the following:

• Whether the tribunals like NCLT and NCLAT can skip the aspect of natural justice.
• Whether the aggrieved party is put under liquidation devoid of his voice?
• Whether the NCLAT has ignored the maxim of Audi alterem partem showing ignorance?
• Whether the actions of NCLT and NCLAT are final in nature or not?

Considering the above questions, we understand the following when it comes to the case aforementioned:

The tribunals have the authority and power based on the regulations as specified but they cannot scrap the basic rights of the individual. A company is an entity of its shareholders and therefore, the financial creditor upon apprehension and understanding can move for liquidation or dissolution of the company. This does not mean that the position of the financial debtor be ignored, he has the right to be heard which is explained by Section 424 of the Companies Act, 2013

The petitioner who is the aggrieved party in the case can never be robbed of his voice. The letter by the firm of Company Secretaries did not mention the time and date of the hearing rather it just informed the petitioner that the firm had filed a petition under section 7(4) of the Code. This was enough to explain why the petitioner could not appear before the NCLT, Kolkata Bench and this can be the sole reason why the court had to remind both the NCLT and NCLAT that it is bound under Section 424 of the Companies Act, 2013.

Ignorance can cause chaos. The decision of the NCLAT explained the same, the petitioners’ aggrieved appeal was rejected and this ensured the violation of his right. indirect favouritism towards the financial creditors can be seen here.

The tribunals are bound under the legislations of the country and therefore, cannot go beyond them. The scope of their jurisdiction is limited to their regulation. The NCLT and NCLAT both surpassed their jurisdiction by ignoring the principles of natural justice and creating a problem for the petitioner. The court in its judgement implied the nature of the liquidation process and its gravity. It strictly mentioned that both NCLT and NCLAT cannot go beyond the maxim of Audi alterem partem. The right to be heard is a natural right that the petitioner enjoys and therefore, it in any case cannot be robbed off.

Conclusion

The decision of the court highlighted the jurisdictional liability of the tribunals and that they are bound by specific regulations. They cannot rob someone’s right for the sake of ignorance and therefore must adhere to the principles of natural justice.

In this case, we also find that for this particular aspect the Code of Civil Procedure, 1908 is not binding upon NCLT and NCLAT rather the provision of Section 424 of the Companies Act, 2013 prevails. In any case, the aggrieved party cannot be allowed to receive an ex-parte order if the reason for his non-appearance is justified.

The court emphasizes the grave nature of liquidation and its impact on the company and the people involved. Therefore, both parties must be heard. The most interesting aspect is that the Code remains silent when it comes to the principle of natural justice and therefore, other regulations need to be referred to. The case reveals the fault in the Code and the necessity of the maxim audi alterem partem through its facts and judgement by the court.

References:
1. The Insolvency and Bankruptcy Code, 2016
2. Administrative Law By J.J.R Upadhyay, 2021 Edn., Central Law Agency
3. Company Law And Practice by G.L. Kapoor Et. Al., 24th Edition, Taxmann Publications

This article has been authored by Soham Banerjee, a student at J.B. Law College, Guwahati.