2023 (8) TMI 944 - HC - Insolvency and Bankruptcy

Transfer of proceeding and jurisdiction for such transfer - Proceedings after commencement of IBC - company court can Suo Motu transfer a proceeding relating to winding up to NCLT or can such transfer only be made pursuant to an application by one of the parties? - Section 434(1)(c) last proviso of the Companies Act, 2013 read with Rules 5 and 6 of companies (Transfer of Pending Proceedings) Rules, 2016. HELD THAT - As would appear from the substituted Section 434(1)(c), the original sub-section has undergone several changes between 7th December, 2016 and 17th August, 2018. The first proviso to Section 434 (1)(c) after the substitution in 2016 clarified transfer of pending proceeding by the phrase only such proceeding relating to winding up the companies as may be prescribed by the Central Government. The stage at which such pending proceeding relating to the winding up of companies needs to be transferred has been prescribed and laid down by the Companies (Transfer of Pending Proceeding) Rules, 2016. The said rule was notified on 29th June, 2017. The fifth proviso to Section 434(1)(c) introduced by Act 26 of 2018 with effect from 6th June, 2018 was primarily to tide over the difficulties and the conflict that are likely to arise by reason of commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. By reason of IBC there could be a possibility of initiation of proceeding under Sections 7 and 8 of IBC in relation to a company against whom a winding up petition is pending. The reading of the provisions of IBC with the Companies Act, 2013 undoubtedly would show that the provision of IBC would have primacy in case of conflict over the Companies Act, 2013 as the ultimate object of IBC is to resuscitate the corporate debtors who are in the red. This approach is also in some cases necessary to transfer the winding up proceeding to NCLT to prevent parallel proceeding. In Action Ispat and Power Pvt. Ltd. 2020 (12) TMI 535 - SUPREME COURT a winding up application was filed under Section 433(e) and (f), 434 and 439 of the Companies Act against the Company seeking winding up in which it was also alleged that for the goods supply Action Ispat had failed to pay a sum of Rs.4.55 crores. The Company Judge in Delhi High Court passed an order on 27th August, 2018 admitting the winding up petition and appointed the official liquidator attached to the Supreme Court as the liquidator of the Company with further direction to take over all the assets, books of accounts and records of the Company forthwith. An application was then filed before the Company Judge by SBI being a secured creditor of Action Ispat seeking transfer of the winding up petition to the NCLT in view of the fact that the SBI had filed an application under Section 7 of the IBC Code 2016 which was pending before NCLT. The issue before the Supreme Court was whether the discretion exercised by the Company Court in transferring the winding up proceeding to NCLT was liable to be set aside. In Action Ispat and Power Pvt. Ltd. the Hon ble Supreme Court observed that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The IBC Code was held to be a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors - The Hon ble Supreme Court noticed that after the introduction of the transfer rules 2016 only those proceedings which are at the stage of pre service of notice of the winding up petition stand compulsorily transferred to NCLT. The Hon ble Supreme Court noticed that by reason of Rules 5 and 6 of the transfer rules which would result in parallel proceedings to continue before the Company Court and pre admission proceeding would be compulsorily transferred to NCLT. It was thus clarified that so long as no actual sale of the immovable or movable properties have taken place, nothing irreversible is done which would warrant a Company Court staying its hands on a transfer application made to it by a creditor or any party to the proceedings. It is only where the winding up proceedings have reached a stage where it would be irreversible, making it impossible to set the clock back that the Company Court must proceed with the winding up, instead of transferring the proceedings to the NCLT to now be decided in accordance with the provisions of the Code. The aforesaid judgment thus, clearly spell out that unless the court is convinced that the company is to suffer an inevitable corporate death the first choice would to be to make an all out attempt to revive the company and this procedure has been elaborately laid down in IBC. The Companies Act, 2013 is not suited for such situation. This is clearly reflected from the amended and substituted Section 434 of the Companies Act, 2013 read with Sections 7 and 8 of the IBC and the objects and reasons of both the statutes. There is no conflict between the two provisions. The Court has discretion to transfer the proceeding depending upon the stage of the proceeding. If it appears to the Company Court that the die is cast and the corporate death of the company is inevitable there is no requirement to transfer such proceeding. The said discretion is not always dependent upon any formal application being made but it is always desirable that the views of the petitioning creditor, secured creditors and the official liquidator are ascertained. Re M/s. Total Plastic Solutions Pvt. Ltd. (In Liquidation) - HELD THAT - Applying the aforesaid principles we find that the direction of the Company Court to transfer CA No. 8 of 2022, CP No. 419 of 2013 (M/s. Total Plastic Solutions Pvt. Ltd.(In Liquidation) was not proper as the report of the official liquidator in paragraph 9 has clearly stated that the corporate death of the company is inevitable. In view thereof the order dated 12th December, 2022 is set aside. The winding up of the company is required to be completed by the Company Court - Application allowed. Re M/s. Abhijeet Projects Limited (In Liquidation) - HELD THAT - The views of the secured creditors have not been accurately stated. One of the secured creditors, IDBI has clearly expressed its intention to continue with the proceeding in this Court as would be evident from the email dated August 1, 2023. In the said email the secured creditor has stated that the company petition shall not be sent to NCLT. The secured creditors unlike Action Ispat and Power Pvt. Ltd. did not file any application under Section 7 and 8 of IBC. In the event such applications were filed the company court could have been justified in transferring the proceeding to the Tribunal following Action Ispat and Power Pvt. Ltd. on a satisfaction being recorded that the corporate death of the company is not inevitable and NCLT would be the preferred choice - On such facts discretion could not have been exercised in favour of transferring the proceeding to NCLT. The creditors were not heard. Under such circumstances the order impugned is set aside. The Company Court shall proceed with the winding up of the company. APO 12 of 2023 with I.A. No. ACO 1 of 203 are allowed. Re M/s. Corporate Ispat Alloys Limited (In Liquidation) - HELD THAT - In the report the Official Liquidator in paragraph 8 has clearly stated that five financial institutions are of the view that the transfer of proceeding to NCLT as directed by the Hon ble Judge taking company matters may be implemented. In other words they consented to the proceeding being transferred to NCLT. Although the Act contemplates filing of an application for transfer of proceedings pending immediately before the commencement of the Insolvency and Bankruptcy Amendment Ordinance, 2018 in the present case having regard to the views expressed by the secured creditors insistent of any application for transfer would be a mere formality - Under such circumstances the order passed by the learned Single Judge in M/s. Corporate Ispat Alloys Limited is upheld. The department is directed to transfer the record of CP/419/2013 to the National Company Law Tribunal, Calcutta, forthwith.

Summary

Issues Involved:
1. Whether the company court can Suo Motu transfer a proceeding relating to winding up to NCLT or can such transfer only be made pursuant to an application by one of the parties?

Summary:

The principal issue raised in this appeal by the appellants is whether the company court can Suo Motu transfer a proceeding relating to winding up to NCLT or can such transfer only be made pursuant to an application by one of the parties. The appellants argued that according to Section 434(1)(c) last proviso of the Companies Act, 2013 read with Rules 5 and 6 of Companies (Transfer of Pending Proceedings) Rules, 2016, the direction to transfer the company petition to the National Company Law Tribunal (NCLT) Kolkata is without jurisdiction. They contended that Section 434 does not contemplate automatic transfer of all winding up petitions and that the company court retains jurisdiction unless an application for transfer is made by a party.

Mr. Moloy Kumar Sil, representing UCO Bank, argued that the Company Court retains discretion in post-admission winding up matters to transfer proceedings to NCLT, depending on whether an irreversible situation has arisen. The clear legislative intent is to oust the jurisdiction of the Court and transfer proceedings to the Tribunal to resuscitate corporate debtors and prevent parallel proceedings.

The Court referred to the substituted Section 434(1)(c) and the Companies (Transfer of Pending Proceedings) Rules, 2016, noting that only pre-service of notice winding up petitions are compulsorily transferable to NCLT. The discretion to transfer post-admission petitions lies with the Company Court, which should consider whether any irreversible steps have been taken in the winding up process.

In Action Ispat and Power Pvt. Ltd. vs. Shyam Metalics and Energy Ltd., the Supreme Court observed that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor. The Court must consider whether any irreversible situation has arisen before deciding to transfer the proceeding to NCLT.

Applying these principles, the Court found that in the case of M/s. Total Plastic Solutions Pvt. Ltd. (In Liquidation), the corporate death of the company is inevitable, and thus, the winding up of the company should be completed by the Company Court. The order to transfer the proceeding to NCLT was set aside.

In the case of M/s. Abhijeet Projects Limited (In Liquidation), the Court found that the secured creditors did not file any application under Section 7 and 8 of IBC and one of the secured creditors, IDBI, opposed the transfer. Therefore, the discretion to transfer the proceeding to NCLT could not have been exercised, and the Company Court shall proceed with the winding up.

For M/s. Corporate Ispat Alloys Limited (In Liquidation), the Court noted that five financial institutions consented to the transfer of proceedings to NCLT. Given the views of the secured creditors and the lack of substantial progress in the liquidation proceeding, the order to transfer the proceeding to NCLT was upheld.

The appeals were decided accordingly, with directions for the Company Court to proceed with the winding up in some cases and to transfer the records to NCLT in others.