2025 (8) TMI 722 - AT - IBC

NCLAT Sets Aside NCLT Order for Lack of Reasons and Denial of Fair Opportunity Under Rule 37

The NCLAT set aside the impugned NCLT order dated 03.01.2025 for violating principles of natural justice by issuing an unreasoned order without recording ... Violation of principles of natural justice - unreasoned order - Adjudicating Authority without giving any reason and without recording of even prima facie satisfaction regarding the allegations made in the application, issued directions - No ample opportunity was given to the Respondents to oppose the application. Whether the impugned order dated 03.01.2025 contains any reason for passing the order? - HELD THAT:- The submission that the Applicant has reasons to believe, cannot substitute the requirement of giving reasons by a Court for passing an order on the application, that too, in election of a Club. Paragraph 5, which contains heading ‘Analysis and findings’, all sub-paragraph of paragraph 5.1 to paragraph 5.6 are only directions and the heading ‘Analysis and findings’, which is mentioned in paragraph 5, is misleading. Neither there is analysis, nor there are any findings in paragraph 5. The above order, thus, clearly indicates that neither any reason, nor even a conclusion of the NCLT was recorded for passing directions as contained in the impugned order. The copy of the notice dated 07.09.2024 has been brought on the record by the Club, by which election has been announced, which indicate that a team of Scrutinizer was appointed to assist the Election Officer. Thus, the present is a case where Scrutinizer was already appointed and the Scrutinizer report dated 01.10.2024 of voting by physical ballot is on record. The requirement of giving reasons in an order passed by a Court or Tribunal is a settled position of law. For passing any order by a Court or Tribunal, reasons are to be contained in the order. Reasons are soul and heart of the order and when order does not disclose any reasons, neither the litigant nor the Appellate Court can know as to what was the reason for passing the order. Requirement of reasons in an order has been insisted time and again - the order passed by NCLT being an unreasoned order, deserves to be set aside on this ground alone. No ample opportunity was given to the Respondents to oppose the application - HELD THAT:- Admittedly, no notice was issued - the opportunity, which was sought to be given to file reply affidavit on 09.12.2024 was an empty formality. It is true that in a case where both the parties agree and do not want to file any affidavits and advance submissions before the Court, the Court does not lack jurisdiction to hear the parties and decide the application on the same day. But granting of time to file reply indicates that parties have not dispensed with their right to file its reply or agreed to decide the application on the first day. When the Appellant has raised various objections to the application, which included maintainability of the application, each ground raised, required consideration by NCLT. The NCLT having not adverted to any ground, nor having given any reasons for its conclusion or directions, the order impugned is unsustainable. Appellant has placed reliance on a judgment passed by this Tribunal on Rule 37 in the case of Zee Entertainment Enterprises Ltd. vs. Invesco Developing Markets Fund and Ors. [2021 (10) TMI 390 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI], where this Tribunal has held that reasonable and sufficient opportunity should be given to the Appellants for filing a reply. Thus, the order dated 03.01.2025 is unsustainable and deserves to be set aside on the above grounds - The order impugned being an unreasoned order and the Appellant having not been given ample opportunity, as envisaged in Rule 37, order deserves to be set aside. Appeal allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the impugned order dated 03.01.2025 passed by the National Company Law Tribunal (NCLT) is an unreasoned order and thus liable to be set aside for failure to record reasons. 2. Whether the principles of natural justice were violated by the NCLT in passing the impugned order, specifically regarding the denial of reasonable opportunity to file a reply and be heard. 3. Whether the application filed challenging the election results was maintainable given the participation of the applicants in the election and the timing of the application. 4. Whether the appointment of an independent scrutiniser and directions for re-scrutiny of election results were justified on the facts and law. 5. Whether the NCLT complied with procedural requirements under Rule 37 of the NCLT Rules, 2016 in issuing notice and affording opportunity to the respondents. 6. The effect of interim orders passed by the Hon'ble Supreme Court in related proceedings on the adjudication of the present appeal. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the impugned order dated 03.01.2025 is an unreasoned order - Relevant legal framework and precedents: The requirement for recording reasons in quasi-judicial orders is well-established under Indian law. The Supreme Court has held that reasons are the 'links between the materials on which certain conclusions are based and the actual conclusions' and are essential for transparency, fairness, and judicial accountability. Key precedents emphasize that reasons must be cogent, clear, and not mere 'rubber-stamp' or formalistic statements. Recording reasons is a fundamental component of due process and natural justice. - Court's interpretation and reasoning: The impugned order primarily recites facts and submissions of the parties up to paragraph 4.22 without any analysis or conclusion. The so-called 'Analysis and findings' section (paragraph 5) merely issues directions without any reasoning or prima facie satisfaction recorded by the NCLT. The statement that the applicant 'has reasons to believe' manipulation occurred is attributed to the applicant, not the Tribunal's own finding or satisfaction. - Key evidence and findings: The record shows that the election was conducted with a scrutiniser appointed, and the scrutiniser's report was on record. The application for re-scrutiny was filed two months after the election and after office bearers had taken charge. The NCLT did not analyze these facts or address objections raised regarding maintainability and delay. - Application of law to facts: The Tribunal's failure to provide any reasoned basis for appointing an independent scrutiniser and directing re-scrutiny amounts to an unreasoned order. This violates settled principles requiring courts and tribunals to record reasons for their decisions, especially when interfering with election results and management of a company/club. - Treatment of competing arguments: The appellant contended that the order lacked reasons and was thus unsustainable. The respondents argued that the Tribunal heard parties and considered submissions. The Court found that mere hearing without reasons does not satisfy the requirement of reasoned orders. - Conclusion: The impugned order is an unreasoned order and is liable to be set aside on this ground alone. Issue 2: Whether principles of natural justice were violated by denial of reasonable opportunity to file reply and be heard - Relevant legal framework and precedents: Rule 37 of the NCLT Rules, 2016 mandates issuance of notice to respondents with a copy of the application and reasonable opportunity to file reply and be heard. Principles of natural justice require that parties be given adequate opportunity to present their case before adverse orders are passed. - Court's interpretation and reasoning: On 09.12.2024, when the application was first listed, no notice was issued to the appellant. Although the NCLT allowed one week to file reply, it simultaneously reserved the order on the same day, effectively denying any opportunity to respond to the reply or make submissions thereafter. This was held to be a mere formality and not a meaningful opportunity. - Key evidence and findings: The appellant was present on 09.12.2024 and raised objections including maintainability, confidentiality, participation of applicants in election, and delay. The NCLT did not address these objections or provide opportunity for further submissions after the reply was filed. - Application of law to facts: The procedure adopted violated Rule 37 and natural justice, as the appellant was deprived of reasonable and sufficient time to file reply and be heard on the basis of that reply. The order was passed without affording a proper hearing. - Treatment of competing arguments: The respondents argued that the appellant was heard and filed written submissions, thus natural justice was complied with. The Court rejected this, emphasizing that filing a reply without opportunity to respond or argue on it is insufficient. - Conclusion: The impugned order was passed in violation of principles of natural justice and Rule 37 of the NCLT Rules, warranting its setting aside. Issue 3: Maintainability of the application challenging election results given participation of applicants and timing - Relevant legal framework and precedents: Challenges to elections must be filed by parties with locus standi and within reasonable time. Participation in the election may estop a party from challenging the process unless fraud or mismanagement is alleged and proved. Delay in filing may also render a challenge unsustainable. - Court's interpretation and reasoning: The applicants who filed the application challenging the election results had participated in the election. The application was filed more than two months after the election and after office bearers had taken charge. The appellant contended that such challenge was an afterthought and beyond the scope of the company petition. - Key evidence and findings: The Tribunal did not address these issues or analyze the maintainability of the application in the impugned order. The Court noted these submissions but refrained from deciding on merits due to procedural infirmities in the impugned order. - Application of law to facts: While these grounds raise serious questions on maintainability, the Court declined to adjudicate on them in the present appeal, given the primary defects in procedure and reasoning. - Treatment of competing arguments: Respondents argued that participation does not bar challenge and that preserving election materials was necessary for ultimate adjudication. The Court acknowledged these contentions but emphasized that the impugned order failed to address these issues. - Conclusion: Maintainability issues remain open for consideration by the NCLT in appropriate proceedings; the present appeal did not decide on these merits. Issue 4: Justification for appointment of independent scrutiniser and directions for re-scrutiny of election results - Relevant legal framework and precedents: Courts may appoint independent officers such as receivers or special officers to ensure fair scrutiny in cases of alleged mismanagement or manipulation, subject to prima facie satisfaction and reasoned orders. - Court's interpretation and reasoning: The NCLT appointed an independent scrutiniser based on the applicant's 'reasons to believe' manipulation occurred, without recording its own satisfaction or reasons. The directions were issued without analysis of the scrutiniser's report already on record or the objections raised. - Key evidence and findings: The scrutiniser's report dated 01.10.2024 was on record. The election was conducted by an appointed team of scrutinisers. The application for re-scrutiny was filed belatedly and without prima facie findings by the Tribunal. - Application of law to facts: The appointment and directions lacked a reasoned basis and were premature. The Court found the order unsustainable due to absence of reasons, not on the substantive merits of the appointment. - Treatment of competing arguments: The appellant argued the directions were unwarranted and an afterthought. The respondents contended that the appointment was necessary to preserve election materials and ensure fairness. The Court did not decide on these competing contentions due to procedural defects. - Conclusion: The impugned directions are set aside for want of reasoned order; the question of appointment merits fresh consideration by the NCLT with proper reasoning and opportunity to parties. Issue 5: Compliance with procedural requirements under Rule 37 of NCLT Rules, 2016 - Relevant legal framework and precedents: Rule 37 mandates issuance of notice to respondents with copy of application and reasonable opportunity to file reply and be heard. Failure to comply violates natural justice and grounds for setting aside orders. - Court's interpretation and reasoning: No formal notice was issued to the appellant on IA No.225 of 2024. The order on 09.12.2024 allowed one week to file reply but simultaneously reserved the order, denying any hearing on the reply. This was held to be a violation of Rule 37 and natural justice. - Key evidence and findings: The appellant raised objections on maintainability and other grounds which required consideration. The NCLT did not address these or provide opportunity for submissions post filing of reply. - Application of law to facts: The procedural lapses vitiated the impugned order. Precedents of this Tribunal emphasize that reasonable and sufficient time must be granted for filing reply and hearing before adjudication. - Treatment of competing arguments: The respondents contended that written submissions were filed and parties were heard. The Court rejected this as inadequate to fulfill Rule 37 requirements. - Conclusion: The impugned order is set aside for non-compliance with Rule 37 and principles of natural justice. Issue 6: Effect of interim orders passed by the Hon'ble Supreme Court in related proceedings - Relevant legal framework and precedents: Interim orders by the Supreme Court in related appeals restrain the NCLT from passing final orders but do not preclude consideration of interlocutory applications or appeals against orders passed prior to such interim orders. - Court's interpretation and reasoning: The impugned order was passed on 03.01.2025, prior to the Supreme Court's interim orders dated 19.05.2025 and 18.07.2025. Hence, the present appeal against the impugned order was to be decided on merits. - Key evidence and findings: The Supreme Court's subsequent orders restrained further proceedings in the Company Petition but did not invalidate the impugned order or bar this appeal. - Application of law to facts: The Tribunal proceeded correctly to decide the appeal on merits as the impugned order predated the Supreme Court's interim directions. - Treatment of competing arguments: No significant competing arguments on this issue were raised. - Conclusion: The appeal was maintainable and properly decided on merits notwithstanding the Supreme Court's interim orders in related proceedings. 3. FINAL CONCLUSIONS - The impugned order dated 03.01.2025 is an unreasoned order lacking any recorded reasons or prima facie satisfaction by the NCLT, thereby violating settled legal principles and warranting setting aside. - The order was passed in violation of principles of natural justice and Rule 37 of the NCLT Rules, 2016, as the appellant was denied reasonable and sufficient opportunity to file a reply and be heard on the application. - Procedural infirmities in the impugned order preclude adjudication on the substantive merits of the application challenging the election results and the appointment of an independent scrutiniser. - The appeal is allowed, the impugned order is set aside, and the interim order passed by this Tribunal is discharged. - Custody of election materials deposited with the Tribunal is directed to be returned to the appellant. - No order as to costs is made.