The Delhi High Court, in the case of Action Ispat and Power Limited v. Shyam Metalics and Energy Limited (decided on October 10, 2019) held that an application seeking transfer of proceedings from the Delhi High Court to the National Company Law Tribunal operating under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is maintainable.

FACTS
Pursuant to a winding up petition filed against Action Ispat and Power Limited (“Appellant”) by Shyam Metalics and Energy Limited (“Respondent 1”) under Section 433 of the Companies Act, 1956, on August 27, 2018, the winding up petition was admitted and Official Liquidator (“OL”) was appointed who was directed to take over all the assets, books of accounts and records of the Appellant. During the pendency of the proceedings, but before the passing of the winding up order on August 27, 2018, State Bank of India (“Respondent 2”) filed a petition under Section 7 of the IBC and filed an application to the Company Judge, praying for a transfer of the pending winding proceedings to the National Company Law Tribunal (“NCLT”).

The Company Judge, vide an order dated January 14, 2019 allowed this transfer, and held that the power to transfer proceedings to the NCLT is discretionary and should be exercised keeping in mind the facts and circumstances of each case so as to expeditiously deal with the proceedings. It was observed that liquidation was at the initial stage since after the appointment of the OL, the office and factory premises of the Appellant were sealed but further exercise was yet to be carried out. It was opined that such transfer was in the interest of justice, as well as in the interest of the Appellant and the creditors involved and accordingly, an appeal was preferred before a Division Bench of the Delhi High Court.

ISSUE
Whether application seeking transfer of proceedings from the Delhi High Court to the NCLT operating under the IBC is maintainable?

ARGUMENTS
The Appellant argued that since the winding up order has already been passed, and an OL has been appointed, the winding up proceedings should continue before the Company Judge and the OL alone has jurisdiction to liquidate the assets of the Appellant and settle the claims of all the creditors and contributors. It was further contended that consequent to the passing of the winding up order by the Company Judge under Section 433(e) of the Companies Act, 1956, no party has the right to seek transfer of proceedings, as, once a winding up order is passed, the creditors are required to approach the OL and file their respective claims.

The power of the Company Judge to recall a winding up order was also questioned by the Appellant. The judgements of the honourable Supreme Court of India in the cases of Forech India Limited v. Edelweiss Assets Reconstruction Company Limited (decided on January 22, 2019) (“Forech Case”) and Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Limited (decided on December 12, 2018) (“Jaipur Metals Case”), where transfer of proceedings was permitted were cited, in an attempt to draw a distinction between the instant case and the formed legal position. It was argued that in the Forech Case and the Jaipur Metals Case, no OL was appointed, whereas in the instant case, the OL has been appointed and has commenced his duties. It was further submitted that the legislative intent was to harmonize the provisions of the Companies Act, 1956 and IBC, and therefore at this late stage, the proceedings should not be transferred.

The Respondent 2 argued that the transfer was fully in compliance with the provisions of law and that the matter should have been transferred to the NCLT, as the object of IBC was aimed towards the protection of interests of the creditors, the corporate debtor, and to maximize the value of the assets of the corporate debtor. Hence, proceedings before the NCLT for initiation of corporate insolvency resolution process under IBC seek to resolve the debts of the Company and are also aimed at its revival.

Further, the Jaipur Metals Case was cited by the Respondent 2, wherein, it was held that a proceeding under the IBC is an independent proceeding with regards to the transfer of pending winding up proceedings before the Delhi High Court. It was held therein:

“it was open for the Respondent No.3 at any time before a winding up order is passed to apply under section 7 of the Code.”

The Respondent 2 contended the argument made by the Appellant and stated that the liquidation order was not passed, but was merely admitted, and that the OL was given only the limited mandate to take over all the assets, books of accounts and records of the Appellant, to publish citations in newspapers, to prepare a complete inventory of all the assets and to conduct valuation. Hence, it could be said that no liquidation proceedings had commenced, and the winding up of the company had not been achieved.

OBSERVATIONS OF THE DELHI HIGH COURT
The Court observed that the scope of the proceedings before the Company Court after admission of the winding up petition is unidirectional, as the OL acts with the mandate of liquidating the assets of the company with a view to satisfy the claims of the secured and other creditors. On the other hand, the NCLT is a specialized body which looks to revive the company, if feasible, and only if the revival of the company is not feasible, proceeds to take steps to wind it up. Further, the Delhi High Court referred to its judgement in the case of Rajni Anand v. Cosmic Structures Limited (decided on September 27, 2018), where it was held that the power of the court to order transfer of the winding up proceedings to the NCLT is discretionary in nature, and that the best interests of all the creditors has to be considered while deciding on the aspect of the transfer of the winding up proceedings to the NCLT.

Further, reference was given to Section 238 of the IBC, which states that the provisions of the IBC can override other laws. It was further held that the decision of the Company Court to order winding up is not irrevocable, and that winding-up of a company is a multi-tiered process, that is not achieved merely when an order is passed. Reliance was placed on the case of Sudarshan Chits v. Sukumaran Pillai [AIR 1984 SC 1579], where it was held that:

“a winding up order once made can be revoked or recalled but till it is revoked or recalled it continues to subsist”.

DECISION OF THE DELHI HIGH COURT
The Court held that merely because the winding up of the Appellant was directed, it does not mean that the Appellant should be compulsorily wounded up and dissolved. Further, other options available, namely to resolve/ revive the company can and should always be explored for which purpose the NCLT is invested with the jurisdiction, unless irrevocable steps towards liquidation have already been undertaken. Therefore, the proceedings should be transferred to the NCLT.

Vaish Associates Advocates View
The Delhi High Court’s stand would go a long way in ensuring that procedural hurdles which may have limited the impact of the IBC are cleared to a certain extent. The Delhi High Court’s observation, that the IBC envisages resolution rather than liquidation, and should therefore, be the preferred approach to take is a ringing endorsement of the IBC and the aims and objectives of the legislature in enacting the same. In order to ensure the success of laws such as the IBC, the courts must take spirited and pro-active stances in ensuring that the legislative intent is not mired in procedural quagmires, and that resolution and continuation of corporate debtors as going concerns takes prominence over liquidation and dissolution.

For more information please write to Mr. Bomi Daruwala at [email protected]

DOWNLOAD PDF FILE