In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Chennai Bench, held that a suspended director has no locus standi to intervene or challenge counterclaim proceedings before an Arbitral Tribunal during the pendency of the Corporate Insolvency Resolution Process (CIRP). The Tribunal clarified that all management powers vest exclusively in the Resolution Professional under Section 17 of the Insolvency and Bankruptcy Code, 2016, and that the moratorium imposed under Section 14 does not prevent the Adjudicating Authority from permitting arbitral counterclaims against the Corporate Debtor.
The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member), while adjudicating a batch of two Company Appeals and connected Interlocutory Applications, held that a suspended director has no locus to intervene or challenge proceedings relating to counterclaims before an Arbitral Tribunal during CIRP, as all management powers vest exclusively in the Resolution Professional under Section 17 of the Insolvency and Bankruptcy Code, 2016.
The Appellate Tribunal dealt with two interconnected appeals arising from an order of the Adjudicating Authority permitting the Respondent to file a counterclaim before the Arbitral Tribunal, subject to the declaration of the award being kept in abeyance. The Appellant, being the suspended director of the Corporate Debtor under CIRP, challenged the said order as well as the rejection of his intervention application, contending that the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, barred continuation or initiation of arbitration proceedings, including counterclaims. He argued that the Adjudicating Authority had erred in relying upon precedents subsequently overruled by the Supreme Court, including Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL and SSMP Industries Limited v. Perkan Food Processors Private Limited, REEDLAW 2019 Del 07503, instead of adhering to the settled ratio in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REEDLAW 2021 SC 03526.
The Appellate Tribunal observed that the Appellant had filed an intervention application seeking impleadment in the proceedings concerning permission for filing a counterclaim, asserting that his rights as a suspended director would be affected. The Tribunal examined whether the Appellant qualified as a necessary or proper party under Order I Rule 10 CPC and found that he neither had an enforceable right in the arbitration proceedings nor established that the matter could not be effectively adjudicated in his absence. Since the Corporate Debtor was already under CIRP, all management powers vested in the Interim Resolution Professional under Section 17 of the Code, thereby divesting the Appellant of any authority to act on behalf of the Corporate Debtor.
The Tribunal further held that the relief sought in the Respondent’s application before the Adjudicating Authority was limited to allowing the Arbitral Tribunal to consider a counterclaim in the pending arbitration, where the Appellant was not a party. Therefore, his apprehension of being indirectly affected by the outcome was unfounded. The Tribunal concluded that the Appellant’s impleadment plea was rightly rejected, as he failed to satisfy the parameters required under Order I Rule 10 CPC. Consequently, his appeal challenging the rejection of the intervention application was dismissed.
Having dismissed the appeal relating to impleadment, the Tribunal held that the Appellant had no locus to challenge the order permitting the counterclaim to be adjudicated before the Arbitral Tribunal. It affirmed that the Adjudicating Authority’s direction to the Arbitral Tribunal did not suffer from any illegality or material irregularity. Accordingly, both appeals were dismissed, and all pending interlocutory applications were closed.