2025 (11) TMI 1347 - AT - IBC

Natural justice breach: company order set aside for deciding petition without counsel, fresh hearing ordered with cost deposit

Mr. Narappa Manohar Reddy, Shareholder and Erstwhile Director of M/s. Sagar Power (Neerukatte) Private Limited, Mrs. Narappa Sharada Reddy Shareholder and Erstwhile Director of M/s. Sagar Power (Neerukatte) Private Limited and M/s. New Age Infrastructure Private Limited Shareholder of M/s. Sagar Power (Neerukatte) Private Limited Versus Mr. Pankaj Srivastava, Liquidator of M/s. Sagar Power (Neerukatte) Private Limited, Bangalore

NCLAT (Chennai) held that the principles of natural justice were violated when the NCLT (Bengaluru) decided a company petition on merits in the absence of ... Principles of audi alterem partem (natural justice) - sufficient and effective hearing or not - hearing of the Appellant at the stage of submission of the transaction Audit Report or even at the stage when the Auditors were supposed to submit their Audit Report - HELD THAT:- It has been settled that the functions of the Tribunal or the Authority they are a mixture of both administrative and quasi judicial functions and only a fair opportunity to be heard is need to be given in order to ensure that none of the parties to the proceedings may have the grievance that they were not provided ample of opportunity by the Tribunal or the Court to prove or establish their case - The exercise of quasi judicial functions and doctrine of natural justice has had to be observed and complied with by the Tribunal(s) even if there is no procedure prescribed or as such laid down under the Statute. The duty to give an opportunity to the affected persons who represent his case necessarily involves a duty to give notice to the Applicant or to the Pleader who represents a litigant. In the case at hand, the Appellants did file their objection when the matter was being taken up, in context of the proceedings under Section 43, but, what is more important is that in accordance with the finding recorded by the Ld. Tribunal at the time when the Petition was being heard finally, the Appellants were not represented by any counsel. There is nothing on record to show that at any point of time the Tribunal took cognisance of the said aspect and had directed in the Company Petition, to set the proceedings ex parte as against the present Appellant, not directing the proceedings to be set ex parte against the Appellant itself will be in violation to the provisions contained under Order VIII of C.P.C., which prescribes for, that if the counsel is not appearing on a particular date, the Tribunal is not supposed to proceed to hear the matter on its merit rather it was bound to fix a date for ex parte hearing, after passing of an order to proceed ex parte, that was not the case at hand, which would vitiate the proceedings. Exclusively on the ground that, on the date when the Company Petition was itself decided finally, as the Appellants were not represented by any counsel, the Company Appeal is allowed, the impugned order dated 30.11.2022, would stand quashed, subject to the payment of costs of Rs. 50,000/- to be deposited into The Prime Minister’s Relief Fund within a period of 10 days from today. The Ld. NCLT Bengaluru Bench, is requested to decide the Company Petition, afresh after giving an opportunity to the party to the proceedings - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether proceeding to decide an application under Section 43 of the I&B Code without representation of a party whose pleadings are on record violates the audi alteram partem principle. 2. Whether hearing before an auditor or at the stage of submission of a transaction audit report can substitute for an effective adjudicatory hearing on merits under Section 43. 3. Whether the Tribunal was obliged, upon non-appearance of the party's counsel on the final hearing date, to (a) record an order to proceed ex parte in conformity with Order VIII Rule 10 CPC (as made applicable under Section 424 Companies Act), or (b) otherwise advert to and deal with the pleadings on record. 4. Whether a litigant should suffer the consequences of default, negligence or inability of his engaged counsel to appear, and what relief is appropriate where such absence results in an unrepresented final hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1: Violation of audi alteram partem where party was unrepresented at final hearing. Legal framework: The fundamental rule of natural justice - audi alteram partem - requires that a party be given a fair opportunity to represent its cause before adjudication. Tribunals exercising quasi-judicial functions must observe principles of natural justice even if no specific procedure is prescribed. The Code of Civil Procedure (as made applicable through Section 424 Companies Act) prescribes safeguards for proceedings where a party fails to appear. Precedent treatment: The Court relied on established authorities emphasizing that an innocent litigant should not suffer due to his advocate's default; adjudicatory bodies must ensure parties are not condemned unheard. Decisions cited indicate courts should scrutinize pleadings and not admit inadmissible evidence in ex parte scenarios. Interpretation and reasoning: The Tribunal's failure to hear or effectively consider the appellants' pleadings when they were unrepresented at the decisive hearing amounted to denial of a fair hearing. Mere presence of pleadings on record and any prior opportunity before auditors do not discharge the Tribunal's obligation to hear a party on merits when the matter is finally adjudicated. Ratio vs. Obiter: Ratio - A final adjudication without effective representation where pleadings exist contravenes audi alteram partem and vitiates the proceeding. Obiter - General remarks on the mixed administrative/quasi-judicial character of tribunals and the desirability of fairness in all proceedings. Conclusion: The proceeding was vitiated by denial of effective hearing; the impugned order cannot stand on this ground. Issue 2: Sufficiency of hearing before auditor/at audit report stage as substitute for adjudicatory hearing on Section 43 issues. Legal framework: Determination of preferential transactions under Section 43 is an adjudicatory exercise requiring parties to be heard on the merits of contentions and evidence; procedural fairness must attend the adjudication stage. Precedent treatment: Authorities recognize that technical or preliminary hearings (for audit submission) do not equate to a substantive hearing on contested legal rights and liabilities before the adjudicating forum. Interpretation and reasoning: Hearing at the audit stage or before auditors is not a substitute for representation and argument before the Tribunal when the Tribunal is making final findings under Section 43; the party must be represented and heard on the merits or on arguments raised by the applicant. Ratio vs. Obiter: Ratio - Audit-stage interaction is not sufficient to fulfill the Tribunal's duty to provide an effective hearing prior to final adjudication under Section 43. Conclusion: The Tribunal erred in treating prior audit-stage interactions as adequate hearing for purposes of final adjudication. Issue 3: Obligation to follow Order VIII Rule 10 CPC principles (ex parte proceedings) when counsel is absent; duty to advert to pleadings. Legal framework: Order VIII Rule 10 CPC prescribes consequences where defendant (or a party) does not appear; Section 424 Companies Act makes CPC principles applicable to proceedings under the Code, thereby importing safeguards on non-appearance and ex parte proceedings. Precedent treatment: Authority requires courts/tribunals, even when proceeding ex parte, to scrutinize available pleadings and documents, consider evidence, and apply rationale consideration to the respondent's written pleas; where counsel is absent, courts should either direct ex parte proceedings after following prescribed steps or give opportunity to engage alternative counsel. Interpretation and reasoning: On the date of final hearing the counsel's non-appearance required the Tribunal to either (a) record and direct that the matter proceed ex parte in accordance with applicable CPC principles, or (b) adjourn/give a direction enabling engagement of alternate counsel. No order was recorded setting aside the party or proceeding ex parte; the Tribunal did not advert to the appellant's pleadings nor provide reasons accepting or rejecting them. Such omission violates procedural safeguards and vitiates the order. Ratio vs. Obiter: Ratio - Tribunal must follow the procedural steps consonant with Order VIII Rule 10 CPC (as applicable) when counsel is absent and must, in any event, consider and address pleadings on record before rendering decisive findings. Conclusion: Failure to direct ex parte proceedings or to otherwise deal with the pleadings in a reasoned manner rendered the Tribunal's adjudication procedurally flawed. Issue 4: Liability of litigant for counsel's default and appropriate remedial relief. Legal framework: Courts have held that parties should not be made to suffer due to lapses or voluntary acts of their advocates; where counsel's conduct causes denial of opportunity, relief by setting aside and restoration/remand may be appropriate; costs may be imposed on parties or counsel depending on circumstances. Precedent treatment: The Court followed precedents holding that the innocent litigant ought not to suffer for an advocate's non-appearance and has power to restore and direct rehearing; courts have in some cases directed costs to be recovered from defaulting advocates. Interpretation and reasoning: The absence of the engaged counsel on the final hearing date, without notice to the litigant, left the appellant unrepresented through no fault of the litigant. The Tribunal's failure to ensure adherence to procedural safeguards meant the litigant should not be penalized by the resultant order. Accordingly, the appropriate remedy is to quash the impugned order and remit the matter for fresh decision after giving the party an effective opportunity to be heard. A costs direction to be paid into a public fund was imposed as equitable consequence. Ratio vs. Obiter: Ratio - Where the counsel's non-appearance results in an unrepresented final hearing and the Tribunal fails to follow required procedural safeguards, the resulting adjudication should be set aside and the matter reheard; the litigant should not suffer for the advocate's default. Obiter - The specific quantum or recipient of costs is discretionary. Conclusion: The impugned order was quashed and the matter remitted for fresh consideration after affording opportunity to be heard; costs were imposed to be paid into a public relief fund as directed by the Court. Cross-References Issues 1 and 3 are interlinked: the failure to follow ex parte procedural safeguards (Issue 3) directly resulted in denial of audi alteram partem (Issue 1). Issue 2 reinforces that prior audit-stage interactions do not cure procedural defects identified in Issues 1 and 3. Issue 4 addresses the remedial consequence flowing from the defects identified under Issues 1-3.