NCLT’s ability to issue warrants strengthens insolvency resolution

By Sonam Gupta and Saumay Kapoor, Bharucha & Partners
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The inability to resolve the insolvency of a corporate debtor does not merely stem from the fact that the entity is, in fact, distressed. In many cases, the resolution professional (RP) is unable to obtain the assistance and co-operation of the personnel, promoters and suspended directors of the corporate debtor, making it difficult to trace the corporate debtor’s assets and manage its affairs effectively. If the RP does eventually trace and uncover assets, there is often little to no value left to realise.

NCLT’s ability to issue warrants strengthens insolvency resolution Sonam Gupta
Sonam Gupta
Partner
Bharucha & Partners

Section 19 of the Insolvency and Bankruptcy Code, 2016 (IBC), makes it incumbent on the management of the corporate debtor to co-operate with the RP and to provide all required documents and information. Where the management refuses to co-operate, the RP can apply to the National Company Law Tribunal (NCLT) for appropriate directions and for the initiation of criminal proceedings under section 70 of the IBC for such misconduct. However, RPs continue to struggle with collecting information and documents as, despite the provisions of the IBC, the management of the corporate debtor is often unco-operative.

It was against this background that the NCLT, in Vikram Puri and Anr v Universal Buildwell Private Limited and Anr, was compelled to issue non-bailable warrants (NBW) against the suspended directors for their failure to cooperate with the RP and for their failure to appear before the NCLT, despite the tribunal issuing a number of orders for them to do so. In July 2018, proceedings for the resolution of Universal Buildwell commenced. The RP, however, could not effectively conduct the resolution process and manage the affairs of Universal Buildwell as its promoters and suspended directors had not provided the information and documentation he requested. The NCLT, on an application by the RP, directed the promoters and suspended directors to provide the required documents. However, despite repeated notices issued over a period of three years between 2018 and 2021, no documents and information were provided. The NCLT then issued NBWs against the suspended directors, directing them to appear and surrender before the registrar, NCLT.

In a challenge by the suspended directors to this order, the National Company Law Appellate Tribunal (NCLAT) upheld the issue of NBWs by the NCLT. The appellate tribunal also held that both the NCLT, which is the adjudicating authority under the IBC, and the NCLAT have the power to issue warrants, with or without bail, to summon, and enforce the attendance of, any person or to compel the production of documents under the provisions of section 19 read with rule 135 of the NCLT Rules, 2016, rule 77 of the NCLAT Rules, 2016, and orders XVI and XVII of the Code of Civil Procedure, 1908.

While the NCLT and the NCLAT are empowered to issue NBWs, the NCLT Rules and the NCLAT Rules do not prescribe the mode and manner in which they may be issued and executed. It, therefore, remains to be seen how the powers of arrest of the NCLT and the NCLAT will work in practice. In Vikram Puri, the NCLT directed that the suspended directors surrender before the registrar of the NCLT. However, had the suspended directors surrendered before the registrar, it is unclear what action, if any, the registrar could have taken, as it has no statutory power in this regard.

Questions also necessarily arise as to the powers of the NCLT and the NCLAT to cancel NBWs and grant bail, including the imposition of conditions such as the surrender of passports. Unfortunately, these questions remain unanswered due to gaps in the legislative framework. The uncertainty is further increased by the fact that the NCLT and NCLAT are tribunals, not courts. The effectiveness of NBWs in ensuring compliance is also questionable since, in Vikram Puri, the NCLT was unable to compel compliance even though it had issued a number of NBWs since 2018.

The issue of an NBW is a coercive measure. Tribunals must keep in mind that such measures are not to be used in a manner that would lead to the IBC approving coercive recovery litigation. The power to issue NBWs should be exercised only in instances of wilful failure of the erstwhile management to assist the RP in carrying out the smooth conduct of the insolvency resolution process.

Sonam Gupta is a partner and Saumay Kapoor is an associate at Bharucha & Partners.

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