Why NCLT Cannot Second-Guess Every Government Order Against a Company in Insolvency: The Embassy Property Ruling

When a company enters insolvency, its resolution professional inherits a powerful forum: the National Company Law Tribunal (NCLT), armed with the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) and a wide residuary jurisdiction under Section 60(5). It is tempting to treat that tribunal as a one-stop shop that can undo any decision standing between the corporate debtor and a clean resolution — including an adverse order from a government department. The Supreme Court closed that door on 3 December 2019 in Embassy Property Developments Pvt. Ltd. vs State of Karnataka ((2019) 17 SCALE 37; AIRONLINE 2019 SC 1652).

The ruling matters to every borrower, guarantor and resolution applicant because it draws a hard boundary around what the IBC machinery can and cannot do. A moratorium can freeze a recovery suit, but it cannot convert the NCLT into a substitute High Court for challenging the exercise of sovereign power. This playbook sets out the statutory position, the procedure, the defences that remain open, and the tribunal and High Court trend since the three-judge bench decided the case.

The Statutory Position

The IBC gives the NCLT two distinct sets of teeth. The first is the moratorium: Section 14 imposes a statutory stay on suits, recovery actions and transfer of assets from the insolvency commencement date until the corporate insolvency resolution process (CIRP) ends in either an approved resolution plan or liquidation. The second is the residuary jurisdiction in Section 60(5), which lets the tribunal decide "any question of priorities or any question of law or facts, arising out of or in relation to" the insolvency of the corporate debtor.

In Embassy Property the three-judge bench of Rohinton Fali Nariman, R. Subhash Reddy and V. Ramasubramanian, JJ. read Section 60(5) narrowly. The question was whether the NCLT could direct the Government of Karnataka to treat a corporate debtor's mining lease as deemed-renewed after the State had refused renewal under the Mines and Minerals (Development and Regulation) Act, 1957. The Court held it could not. A refusal to renew a lease is a public-law decision taken in the exercise of a statutory and sovereign function; it is not a dispute "arising out of or in relation to" insolvency merely because the lease sits on the corporate debtor's balance sheet.

The reasoning rests on the nature of the forum. The NCLT is a creature of statute, constituted under the Companies Act, 2013 and exercising jurisdiction under the IBC since 1 December 2016. It is not a constitutional court. Judicial review of an administrative or quasi-judicial decision of a public authority is a power reserved to the High Courts under Article 226 of the Constitution and to the Supreme Court under Article 32. The bench held that a corporate debtor cannot use IBC proceedings as a "bypass" route to sidestep the writ jurisdiction of the High Court. Section 238 of the IBC, which gives the Code overriding effect, does not expand the subject-matter jurisdiction of the tribunal; it resolves conflicts between statutes, not the constitutional allocation of judicial review.

The practical boundary this produces is best seen as a forum map. The table below shows where a grievance actually lies once a company is in CIRP.

The lesson for a corporate debtor and its resolution professional is that the moratorium is a shield, not a sword. It protects assets from creditors; it does not hand the tribunal jurisdiction over the full universe of disputes that touch the company. For readers tracking how the related recovery statutes interact, Oquilia's explainers on SARFAESI and the Debts Recovery Tribunal set out the two parallel tracks a secured creditor can run.

Procedure Step by Step

Because Embassy Property turned on which forum a dispute belongs in, the single most valuable procedural skill is correct routing. The sequence below reflects the position after the 3 December 2019 judgement.

1. Identify the true character of the order. Ask whether the decision complained of is a creditor action (recovery, enforcement of security) or a sovereign/public-law decision (grant, renewal, cancellation of a lease, licence or permit). The Court in 2019 made this the threshold test for jurisdiction.

1. If it is a creditor action, map it to the recovery statute. A secured creditor enforcing security files under the SARFAESI Act, 2002; a bank recovering dues of Rs 20 lakh or more proceeds before the Debts Recovery Tribunal under Section 17 of the RDDB Act, 1993. Neither of these belongs before the NCLT.

1. If it is a public-law decision, prepare a writ petition. A refusal to renew a mining lease under the Mines and Minerals (Development and Regulation) Act, 1957 — the precise fact in Embassy Property — must be challenged under Article 226 before the jurisdictional High Court, not through a Section 60(5) application to the tribunal.

1. Preserve limitation in both tracks simultaneously. Filing the wrong application does not stop the clock on the right remedy. A borrower aggrieved by SARFAESI measures has 45 days under Section 17; a writ petition has no fixed statutory limitation but is governed by the doctrine of delay and laches, so promptness after the 2019 standard is essential.

1. Let the resolution professional invoke the moratorium only for what it covers. Section 14 stays recovery and asset transfers from the insolvency commencement date. It does not compel a government department to renew a lapsed entitlement; that direction, the Court held, was beyond the tribunal's power.

1. Escalate within the correct hierarchy. An NCLT order is appealable to the NCLAT and then to the Supreme Court; a DRT order on SARFAESI measures is appealable to the DRAT under Section 18; a High Court writ order goes in intra-court appeal and then to the Supreme Court. Cross-track appeals — for example, asking the NCLAT to review a State government's licensing decision — fail at the threshold under the 2019 rule.

For borrowers modelling the cost of staying in default while these forums are sorted out, Oquilia's foreclosure calculator and home-loan EMI calculator show how interest accrues through the pendency of litigation.

Borrower Defences Available

Embassy Property narrows one avenue but leaves the substantive defences of a borrower and corporate debtor intact. The defences simply have to be raised in the right forum, with the right deposit, within the right limitation. The table below consolidates the appeal architecture across the three recovery statutes, with the figures taken from the statutes themselves.

Several defences flow from this structure. First, the Section 17 SARFAESI application does not require any deposit, so a borrower who believes a notice under Section 13(2) or possession under Section 13(4) is defective can test it before the DRT within 45 days without putting money on the table. Second, the DRAT pre-deposit is a discretion, not an absolute bar: Section 18 permits the tribunal to bring the 50% deposit down to 25% for reasons recorded in writing, and Section 21 of the RDDB Act allows the standard 75% to be waived or reduced on the same recorded-reasons basis.

Third, the moratorium itself is a live defence for a corporate debtor. Once CIRP commences, Section 14 of the IBC stays enforcement of security against the corporate debtor's assets for the duration of the process; a SARFAESI sale attempted in breach of that stay is vulnerable before the NCLT, which — unlike the licensing dispute in the 2019 case — is squarely a matter "in relation to" insolvency under Section 60(5). The distinction Oquilia readers should hold onto is the one the Supreme Court drew: a creditor's breach of the moratorium is for the NCLT; a government's exercise of sovereign power is for the High Court. The moratorium glossary entry explains how the stay operates in practice.

Fourth, a one-time settlement (OTS) remains available throughout. Nothing in Embassy Property restricts a borrower from negotiating a compromise with the lender; the ruling only prevents the tribunal from rewriting a sovereign decision. A borrower modelling the cash required to clear dues through an OTS can use Oquilia's debt-consolidation calculator to compare the settlement figure against carrying the EMI.

Fifth, the threshold defences under the IBC survive. An application by a financial creditor under Section 7 of the IBC can only be admitted where the default is Rs 1 crore or more — the threshold raised from Rs 1 lakh by the Government of India's notification in March 2020. A corporate debtor can resist admission by showing the default falls below that floor, a defence that is unaffected by the jurisdictional boundary set in 2019.

Recent Tribunal/HC Position

The authority that governs this area is the Supreme Court's own decision, and it has hardened rather than softened since 3 December 2019. In Embassy Property Developments Pvt. Ltd. vs State of Karnataka, the bench of Nariman, Subhash Reddy and Ramasubramanian, JJ. laid down three propositions that every tribunal has since applied.

The first proposition is that Section 60(5)(c) of the IBC is not a residuary writ jurisdiction. The Court held that the words "arising out of or in relation to the insolvency resolution" cannot be stretched to cover a decision taken by a statutory authority under a wholly different statute — there, the Mines and Minerals (Development and Regulation) Act, 1957. The dispute must have a nexus with the insolvency, not merely with an asset of the company in insolvency.

The second proposition is that a public-law decision is reviewable only by a constitutional court. The judgement reaffirmed that the power of judicial review under Article 226 is a basic feature of the Constitution and cannot be exercised by a tribunal constituted under ordinary legislation. The NCLT, operating under the IBC since 1 December 2016, has no writ jurisdiction; a party aggrieved by the refusal to renew the lease had to approach the Karnataka High Court.

The third proposition is that the IBC cannot be used as a bypass. The Court expressly disapproved of the resolution professional routing a licensing grievance through the tribunal to avoid the discipline — and the limitation — of writ proceedings. This "no-bypass" principle has been the ratio applied in later insolvency matters where resolution professionals sought tribunal orders against tax authorities, regulators and licensing bodies: the consistent line is that tribunal jurisdiction stops where the exercise of sovereign or statutory public-law power begins.

For the borrower and the corporate debtor, the net effect of the 2019 ruling is clarity rather than loss. The forum is now predictable: creditor and insolvency disputes to the NCLT and DRT, sovereign-power disputes to the High Court under Article 226. The full text of the judgement is available on Indian Kanoon, and the governing statutory provisions — IBC Sections 14, 60(5) and 238, and the SARFAESI and RDDB appeal sections — can be read at India Code.

FAQ

Can the NCLT overturn a government order against a company in insolvency?

No. The Supreme Court held on 3 December 2019 in Embassy Property that the NCLT cannot adjudicate a public-law decision of a government or statutory authority, such as the refusal to renew a mining lease under the Mines and Minerals (Development and Regulation) Act, 1957. That challenge lies only before the High Court under Article 226.

Does the IBC moratorium stop a government from refusing a licence renewal?

No. Section 14 of the IBC stays recovery actions, suits and asset transfers against the corporate debtor from the insolvency commencement date. The 2019 judgement confirmed it does not compel a public authority to grant or renew an entitlement, which is an exercise of sovereign function outside the moratorium's scope.

What is the difference between Section 60(5) of the IBC and Article 226?

Section 60(5) gives the NCLT residuary power over questions "arising out of or in relation to" the insolvency of the corporate debtor. Article 226 gives High Courts the constitutional power of judicial review over public authorities. The Court held in 2019 that these do not overlap: a creature-of-statute tribunal cannot exercise writ jurisdiction.

Where does a borrower challenge a SARFAESI possession notice?

Before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act, 2002, within 45 days, with no mandatory deposit at that stage. A further appeal to the DRAT under Section 18 requires a deposit of 50% of the debt due, reducible to not less than 25% for recorded reasons.

What is the pre-deposit to appeal a DRT order under the RDDB Act?

Section 21 of the RDDB Act, 1993 requires a deposit of 75% of the debt due as determined by the tribunal before the DRAT entertains the appeal, which the tribunal may waive or reduce for reasons recorded in writing. The appeal itself must be filed within 45 days under Section 20.

Does Embassy Property stop a one-time settlement?

No. The ruling only limits the tribunal's jurisdiction over sovereign decisions. A borrower remains free to negotiate a one-time settlement with the lender at any stage, and can model the cash outflow against continuing EMIs using Oquilia's loan calculators.

What is the default threshold for admitting an IBC application?

A financial creditor's application under Section 7 of the IBC can be admitted only where the default is Rs 1 crore or more, the threshold raised from Rs 1 lakh by the Government of India's notification of March 2020. A corporate debtor can resist admission by showing the default is below that figure.