Registrar of Companies cannot strike off the name of a company when there is litigation or insolvency proceedings pending by or against it – NCLT Ahmedabad

The National Company Law Tribunal, Ahmedabad (“NCLT Ahmedabad”) has by an order dated November 6, 2019 (“NCLT Order”), held that the Registrar of Companies cannot, during the pendency of Corporate Insolvency Resolution Process (“CIRP”), strike off the name of a company involved in pending litigation.

FACTS
M/s. J. R. Diamonds Private Limited (“Company”) was incorporated in 1977 as a private limited company under the Companies Act, 1956. An Insolvency and Bankruptcy Petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was admitted against the Company by the NCLT pursuant to an order dated February 13, 2018, under which one Mr. Vinod Tarachand Agrawal (“Appellant”) was appointed as the resolution professional. The Appellant was subsequently appointed as the liquidator of the Company by NCLT Ahmedabad by its order dated October 1, 2018. Following this, by a letter dated December 20, 2018, the Appellant informed the Registrar of Companies, Gujarat (“Respondent”) of the order passed by the NCLT Ahmedabad for liquidation of the Company, to which no response was received from the Respondent. While the status of the Company at the time of initiation of CIRP was shown as being ‘Active’, the Appellant subsequently discovered from the web portal of the Ministry of Corporate Affairs that the name of the Company had been struck off from the register of companies maintained by the Respondent during the pendency of the liquidation process pursuant to an order dated August 6, 2018 passed by the Respondent. The present appeal was filed by the Appellant towards seeking restoration of the name of the Company in the register of companies maintained by the Respondent.

ARGUMENTS
The Appellant, inter alia, contended that at the time of Company’s name being struck off by the Respondent, the Company had assets valuing INR 81,26,35,384, which included an investment of INR 4,50,00,000 in the preference shares of M/s. Peacock Jewellery Limited (“PJL”). The Appellant further contended that the said preference shares had matured and the payment recovery was due from PJL, for which the Appellant, being the liquidator, had filed a petition with the National Company Law Tribunal, Bengaluru. The Appellant informed NCLT Ahmedabad that the said petition was pending as on the date of filing of the present appeal and hence the name of the Company ought to have not been struck off. The Appellant also contended that the Respondent had struck off the name of the Company from the register maintained by the Respondent primarily because the Company had failed to file its financial statements and statutory annual returns from the financial year 2013-14 onwards. It was further contended by the Appellant that the Respondent had not followed the correct procedure under Section 248(1) of the Companies Act, 2013 as it had proceeded to publish the notification for striking off the name of the Company in the official gazette without sending a notice to the Appellant seeking his representation in relation to the proposed strike-off, as is statutorily required.

The Respondent, on the other hand, argued that the present appeal was not maintainable because the Company had failed to file its statutory returns for a continuous period of more than two years which mandated the Respondent to strike-off the name of the Company from the register of companies maintained by it as prescribed under Section 248(1) of the Companies Act, 2013. Notwithstanding the above, the Respondent submitted that NCLT Ahmedabad may pass appropriate orders for restoration of the name of the Company subject to fulfilment of the following conditions: (i) the Company filing all its financial statements and annual returns for the years on which the same were not filed, as well as all other event based filings, as prescribed under the Companies Act, 2013, (ii) publication of notices in two leading newspapers circulating in the district and the official gazette of the Government of India with regard to restoration of the name of the Company, at the cost of the Appellant, (iii) assurance that the Appellant will ensure that the Company will not make any default in filing statutory returns in the future, and (iv) payment of such costs by the Appellant as may be deemed fit by the Respondent for restoring the name of the Company in the register of companies maintained by it.

OBSERVATIONS OF NCLT AHMEDABAD
NCLT Ahmedabad noted that the Appellant, being the liquidator of the deregistered Company, is competent to file the present appeal to seek restoration of the Company’s name in the register of companies maintained by the Respondent. NCLT Ahmedabad also observed that when the name of the Company was struck off by the impugned order dated August 6, 2018, the Insolvency and Bankruptcy Petition had already been admitted and the CIRP had commenced with effect from February 13, 2018. Further, moratorium was declared in relation to the Company under Section 14 of the IBC, and accordingly no proceeding against it could have been legally initiated nor the provisions of Section 248 of the Companies Act, 2013 could have been invoked during such moratorium period.

NCLT Ahmedabad also took cognisance of Circular No. 16 dated December 26, 2016, issued by the Ministry of Corporate Affairs, that sets out that the provisions of Section 248 of the Companies Act, 2013 would not be applicable in respect of companies against which any prosecution for any offence, an application for compounding of offence, or any litigation is pending, pursuant to the order of a competent court.

In arriving at its decision, NCLT Ahmedabad relied on the decision of the Delhi High Court in M.A. Panjwani v. Registrar of Companies and Another [(2015) 192 Comp. Case 380 Dec.], where it was held that when there is litigation pending by or against a company before any competent court of law, striking off the name of such company by the Registrar of Companies was not justified.

NCLT Ahmedabad also relied on the decision of the Honourable High Court of Andhra Pradesh and Telangana (“AP HC”) in Velamati Chandrasekhara Janardan Rao v. M/s. Sree Raja Rajeswari Paper Mills Limited and Another [(2016) 198 Comp. Case 335 (AP)], where it was held that under Section 560(6) of the Companies Act 1956, the company court has the power to order restoration of a company’s name to the register of companies either on an application made by such company or its members or creditors or when it appears to the company court that it is ‘otherwise just’ that the name of such company be restored in the register. In this matter, the AP HC observed that the company court has the discretion to order restoration, even if the company was not carrying on any business or was not in operation at the time of striking off, if it appears to the court to be ‘otherwise just’. In arriving at its decision, the AP HC had relied on the judgement of the Madhya Pradesh High Court in Bhogilal Chimanlal v. Registrar of Joint Stock Companies [(1954) 24 Comp. Case 279 (MB)], where it held that the effect of the order of the Registrar of Companies striking off the name of a company from the register of companies would be that the company will be deemed to be dissolved and it may be difficult for the petitioner to obtain any relief in a suit pending before the trial court.

In addition to the above, NCLT Ahmedabad noted that the impugned action by the Respondent was inoperative and void in law due of the provisions of Section 238 of IBC, which has an overriding effect over other legislations.

DECISION OF THE NCLT AHMEDABAD
Considering the above, NCLT Ahmedabad conditionally allowed the present appeal and directed the Respondent to restore the name of the Company in the register of companies maintained by it, subject to compliance of the following conditions by the Appellant on behalf of the Company: (a) the Appellant would file all overdue statutory returns on behalf of the Company with fees and imposed penalties, if any, within ninety days from the receipt of the NCLT Order, (ii) the Appellant would publish a notice in leading newspapers circulating in the district as well as in the official gazette of the Government of India with regard to the restoration of the name of the Company in the register of companies, and (iii) before compliance of the statutory requirements of the Respondent, the Appellant would verify and settle the statutory requirements of the IBC.

Vaish Associates Advocates View
The ratio decidendi adopted by NCLT Ahmedabad in this case, that courts can order restoration of the name of a deregistered company that appears to be ‘otherwise just’ gives definitive discretionary powers to courts/tribunals to settle such matters. In effect, the decision passed by NCLT Ahmedabad invalidates any action not in conformity with the provisions of the IBC during the pendency of CIRP, and reaffirms the overriding effect of the IBC.

This is in consonance with the intent of the said legislation requiring that the moratorium period provided thereunder should act as a bar against any additional statutory process being undertaken against a company, which would otherwise frustrate the very purpose of the CIRP.

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

Supreme Court: Definition of commercial disputes under the Commercial Courts Act, 2015 to include immovable property ‘actually used’ and not ‘likely to be used’, ‘ready to be used’ or ‘to be used’

The Honourable Supreme Court of India (“Supreme Court”) in its judgement, in Ambalal Sarabhai Enterprises Ltd. v. K.S. Infraspace LLP &Anr. {Civil Appeal No. 7843 of 2019} (decided on October 04, 2019) held that as far as disputes arising out of agreements relating to immovable property are concerned, only those disputes which arise of immovable property being actually and exclusively used in trade or commerce, shall be categorised as ‘commercial disputes.’

FACTS
On February 14, 2012, Ambalal Sarabhai Enterprises Limited (“Appellant Company”) executed an agreement (“Agreement”) to sell a piece of land (“Said Land”) to one Ketan Bhailalbhai Shah (“Respondent No. 2”). Thereafter, Respondent No. 2 assigned and transferred all his rights under the Agreement to K.S. Infraspace LLP (“Respondent No. 1”), by executing a Deed of Assignment (“Assignment Deed”) dated October 12, 2017. Consequently, Respondent No. 1 purchased the Said Land from the Appellant Company by way of a Deed of Conveyance (“Conveyance Deed”) dated November 03, 2017. Since there were some aspects of the Said Land that were to be changed, particularly with reference to its nature of use, the right of the Appellant Company was required to be protected. In pursuance of the same, a Memorandum of Understanding dated November 03, 2017 (“MOU”) was executed amongst the Appellant Company, Respondent No. 1 and Respondent No. 2. As per the terms of the MOU, a mortgage deed was to be executed in favour of the Appellant Company. Accordingly, a Mortgaged Deed (“Mortgage Deed”) was executed on November 03, 2017, albeit it was not registered. The Appellant Company, thereafter, sought to enforce execution of the Mortgage Deed, by filing a Commercial Civil Suit (“Suit”) before the Commercial Court at Vadodara (“Commercial Court”). Furthermore, the Appellant Company also sought permanent injunction and other reliefs before the Commercial Court.

On being notified of the Suit, Respondent No. 1 and Respondent No. 2 (collectively referred to as “Respondents”) contended that since the dispute was not a ‘commercial dispute’ as per Section 2(1)(c)(vii) of the Commercial Courts Act, 2015 (“CC Act”), the Suit would not be maintainable. In addition, the Respondents filed an application under Order VII Rule 10 of the Civil Procedure Code, 1908 (“Application”) seeking that the plaint be presented in the Court in which such a Suit should have been actually instituted. However, the Commercial Court rejected the Application by way of its order dated October 17, 2018. The Commercial Court had relied upon the Memorandum of Association and Articles of Association of the Appellant Company to take note of the business that the Appellant Company could undertake.

Thereafter, the Commercial Court concluded that the Appellant Company seemed to be carrying on a business as an estate agent and thus the dispute that had transpired between the Appellant Company and the Respondents was a ‘commercial dispute.’ Aggrieved by the aforementioned order of the Commercial Court, the Respondents filed an appeal in the High Court of Gujarat (“High Court”). The High Court passed an order dated March 01, 2019, that allowed the petition of the Respondents and set aside the order dated October 17, 2018, passed by the Commercial Court. By the aforementioned order, the High Court also allowed the Application, directing that the plaint was to be returned to the Appellant Company, in order to be presented to an appropriate Court. The High Court had taken a conclusive view that the immovable property, was in fact, not being used for either trade or commerce. The Appellant being aggrieved by the order of the High Court, thereby approached the Supreme Court.

ISSUE
Whether a dispute arising out of an agreement involving an immovable property could be considered as a ‘commercial dispute’ so as to enable the Commercial Court to entertain such a suit?

ARGUMENTS
The Appellant Company contended that it was running an industry on the Said Land and had indeed acquired the same for the very purpose. Furthermore, it contended that the Respondent No. 1 had purchased the Said Land for developing it and thus, the Said Land is being used for trade and commerce purposes.

On the other hand, the Respondent No. 1 contended that the Appellant Company had ceased to function for the past several years. Owing to the factum that the Appellant Company was defunct, the Said Land was not being used for either trade or commerce. Respondent No. 1, further elaborated that though it had sought for change in the use of Said Land for developing it, the same would be subject to such change of land use that would be granted and the use for which would it would be put to, in the future. Therefore, the Said Land, at present was not being used for either trade or commerce and thus, the dispute would not be maintainable before the Commercial Court.

Moreover, Section 2(1)(c)(vii) of the CC Act states, “a commercial dispute means a dispute arising out of agreements relating to immovable property used exclusively in trade or commerce.” With regard to the same, the Appellant Company relied on the decision of the Division Bench of the High Court of Delhi in Jagmohan Behl v.State Bank of Indore [2017 SCC On Line Del 10706] (“Appellant Company’s Case Law”). Herein, it was held that the expression “arising out of” and “in relation to immovable property” should not be given the narrow and restricted meaning and the expression would include all matters relating to agreements in connection with immovable property.

The Respondents relied on the decision of the Division Bench of the High Court in Vasu Healthcare Private Limited v. Gujarat Akruti TCG Biotech Limited [AIR 2017 Gujarat 153] (“Respondent’s Case Law No. 1”). Herein, the High Court concluded that on a plain reading of Section 2(1)(c) of the CC Act, the expression “used” must mean “actually used” or “being used”. It was elaborated in the aforesaid decision that if the legislature had intended to expand the scope of the definition, it would have employed phrases such as “likely to be used” or “to be used”. The Respondents also relied on Federation of A.P. Chambers of Commerce and Industry and Others v. State of A.P. and Others [(2000) 6 SCC 550] (“Respondent’s Case Law No. 2”) wherein, the Supreme Court had observed that the terminology “land is used for any industrial purpose” and “land is used for any other non-agricultural purpose” meant that there has to be a finding of the fact that the land at present, is being used for an industrial purpose, or a commercial purpose, or any other non-agricultural purpose. The Supreme Court has also observed that such juxtaposition was important to ascertain whether a piece of land should be assessed at the rate specified for a land used for an industrial purpose.

The Appellant Company argued that the strict interpretation applied in the facts of Respondent’s Case Law No. 2 emanated from the point that in the particular instance, it was the case of a taxing statute. It was argued that unlike the strict interpretation applied in taxing statutes, it would not be appropriate to adopt an identical approach in issues relating to jurisdiction. The Appellant Company contended that the statements of objects and reasons of the CC Act provided that the reason for enacting the CC Act was the speedy disposal of high value commercial disputes so as to create a positive image to the investors world about the independent and responsive Indian legal systems. It was also argued that a wider purport must be assigned while considering the dispute to be a ‘commercial dispute’.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court was of the view that since the dispute is a civil suit, the nature of the dispute and the jurisdiction to try the dispute should be reflected in the plaint. However, the Supreme Court observed that the plaint filed in the Commercial Court had neither mentioned the nature of the land nor the type of use to which it was being put to, as on the date of Agreement or MOU or as on the date of the Suit.

Para 22 of the plaint which provided for the jurisdiction of the Commercial Court is reproduced herein below:

“22. Jurisdiction: The Plaintiff states that the Defendants having their office at Vadodara land which is the subject matter of the instant suit is situated within the territorial jurisdiction of this Hon’ble Court and hence this Hon’ble Court has the jurisdiction to hear and decide the matter.”

The Supreme Court was of the view that the Appellant Company had not mentioned any reason as to why the Commercial Court had exclusive jurisdiction to try the said dispute. It would not suffice to point that simply because the office of the Respondents and the Said Land is situated at Vadodara, it would automatically confer jurisdiction upon the Commercial Court. It was also noted that the plaint sought for specific performance of the terms of the MOU, particularly, wherein it was agreed that the Mortgage Deed will be executed. The Supreme Court stated that even if the immovable property under the Mortgage Deed was the subject matter of dispute, it was necessary to plead and indicate that such immovable property was being used for trade or commerce purposes as only in such cases, can the jurisdiction of a Commercial Court be invoked.

The Supreme Court observed that the Appellant Company’s Case Law pertained to those immovable properties which were undoubtedly being used for either trade or commerce, and where the suit was instituted for recovery of rent or mesne profit, security deposit, etc. for the use of such immovable property. The Supreme Court, therefore, concurred with the views expressed by the High Court in Respondent’s Case Law No. 1.

Referring to the purpose of the CC Act, the Supreme Court is of the firm belief that the purpose of the CC Act would be defeated if a wider interpretation is given to the term ‘commercial disputes’. The reason being that every suit which is filed because of its high value and with the intention of seeking an early disposal, would lead to clogging of the systems and blocking the way for genuine commercial disputes. Moreover, even if the CC Act is strictly interpreted, it would not mean that litigants will be excluded from any other remedy. It is notable that such litigants can always approach an ordinary Civil Court.

Justice Bhanumati has written a concurring opinion offering strong reasoning as to the true intention of the CC Act. With immense transparency, it was brought to fore that the CC Act is to be interpreted to enable quick disposal of commercial litigations, at a fair and reasonable cost. It was noted that merely because an immovable property is likely to be used in relation to trade or commerce, it cannot attract the jurisdiction of the Commercial Court. It was brought to fore that the expression “used exclusively in trade or commerce” is to be interpreted purposefully. It was reiterated that the expression “used” should only mean “actually used”, and not “ready for use”, “likely to be used” or “to be used”. A wide interpretation would essentially defeat the objects of the CC Act and implementation of its fast track procedure.

DECISION OF THE SUPREME COURT
The Supreme Court dismissed the appeal stating that neither the Agreement mentioned that the immovable property was exclusively used for the purpose of trade or commerce, nor was there any pleading to that effect in the plaint filed before the Commercial Court. Furthermore, the relief sought by the Appellant Company is for execution of the Mortgage Deed in the manner of specific performance of the terms of the MOU. Herein also, there is no reference to the immovable property being used in trade or commerce as on the date of the Suit.

Vaish Associates Advocates View
It is quite discernible from the judgement of the Supreme Court that a plaint filed in a Commercial Court is required to have a certain degree of specification. It was pointed out that the plaint did not provide substantial reasoning as to why a Commercial Court was to be conferred with jurisdiction. It is one thing to claim that an immovable property happens to be within the territorial jurisdiction because of a mere address and an entirely different thing to establish with staunch reasoning as to how dispute relating to an immovable property at hand fits the bill for a ‘commercial dispute’ within the meaning of the CC Act. There can be innumerable disputes of different forms that have remedies at ordinary Civil Courts. However, it is the nature of current usage of the property that gives the dispute relating to it, a certain level of credibility to qualify into a ‘commercial dispute’.

The judgement has also affirmatively cleared the coast as to the true interpretation of the expression “used”, that the expression indicates actual and current usage and not a hypothetical likelihood or a distant historical association with trade or commercial usage. It is also pertinent for the parties that the commercial documents relating to immovable property be appropriately registered and clauses be drafted with skill to reflect on record as to how an immovable property is indeed exclusively, being used for trade or commercial purposes. The disputes that may possibly spiral out with reference to an immoveable property would not automatically be a commercial dispute merely because of its high value or some underlying assumption. This development definitely provides a judicious insight to parties that plan on approaching Commercial Courts.

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

Delhi High Court: Applications seeking transfer of proceedings from the High Court to the National Company Law Tribunal operating under the IBC are maintainable

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]

Promoter of a corporate debtor in liquidation is ineligible to apply for the compromise and arrangement of such corporate debtor

In Jindal Steel and Power Limited v. Arun Kumar Jagatramka and Another (dated October 24, 2019) the National Company Law Appellate Tribunal (“NCLAT”) has held that even though a compromise and arrangement is permissible with respect to a company undergoing liquidation, however, the promoter of such a company is ineligible to make an application for such compromise and arrangement.

FACTS
An appeal was filed by Jindal Steel and Power Limited (“Unsecured Creditor”) which is an unsecured creditor of Gujarat NRE Coke Limited (“Corporate Debtor”) against an order passed by National Company Law Tribunal, Kolkata (“NCLT, Kolkata”). In the said matter, the Corporate Debtor ran into financial crisis due to adverse market conditions and was driven to filing an insolvency application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) (initiation of corporate insolvency resolution process by corporate applicant). The said application was admitted. However, the committee of creditors formed was unable to approve a resolution plan and eventually the NCLT passed a liquidation order against the Corporate Debtor. Thereafter, the promoter of the Corporate Debtor filed an application before the NCLT under Sections 230 to 232 of the Companies Act, 2013 (“Companies Act”) to obtain the sanction for a scheme of compromise and arrangement between the promoter, the Corporate Debtor, its creditors and its shareholders. Pursuant to this application, NCLT Kolkata passed an order to convene the meeting of the shareholders and creditors of the Corporate Debtor. Aggrieved by the said order, the Unsecured Creditor filed an appeal before the NCLAT contesting the same.

ISSUES
The issues framed by the NCLAT were as follows:
1. Whether in a liquidation proceeding under IBC, the scheme for compromise and arrangement can be made in terms of Sections 230 to 232 of the Companies Act?
2. If so permissible, whether the promoter is eligible to file application for compromise and arrangement, while he is ineligible under Section 29A of the IBC to submit a ‘Resolution Plan’?

ARGUMENTS
The arguments of the parties were not discussed by the NCLAT.

FINDINGS OF THE NCLAT
While determining the first issue, the NCLAT referred to its judgement in S.C. Sekaran v. Amit Gupta and Others [Company Appeal (AT) (Insolvency) Nos. 495 and 496 of 2019] (“S.C. Sekaran”) and Y. Shivram Prasad v. S. Dhanapal and Others [Company Appeal (AT) (Insolvency) No.224 of 2018] (“Y. Shivram Prasad”). In the aforementioned judgements, the issue was the same as the one in the instant case that is whether during a liquidation proceeding under IBC, an application under Sections 230 to 232 of the Companies Act can be entertained by the NCLT or not. The NCLAT had held that even during liquidation, the liquidator could sell the business of the corporate debtor as a going concern. It was further held 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 is thus, a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.

It further emphasized on the Supreme Court judgement in Meghal Homes Private Limited v. Shree Niwas Girni K.K. Samiti and Others [(2007) 7 SCC 753] whereby, it was held that Section 391(1)(b) of the Companies Act, 1956 (now replaced by Section 230 of the Companies Act) gives a right to the liquidator in the case of a company which is being wound up, to propose a compromise or arrangement with creditors and members indicating that the provision would apply even in a case where an order of winding up has been made and a liquidator had been appointed. The NCLAT in Y. Shivram Prasad accordingly held that before taking steps to sell the assets of the corporate debtor, the liquidator would take steps in terms of Section 230 of the Companies Act. In view of the aforesaid decisions of NCLAT
in Y. Shivram Prasad and S.C. Sekaran, the first question was answered in the affirmative, that is, in a liquidation proceeding under the IBC, a petition under Section 230 to 232 of the Companies Act was maintainable.

Pronouncing on the second issue, NCLAT relied on yet another Supreme Court judgement, Swiss Ribbons Private Limited and Another v. Union of India and Others [Writ Petition (Civil) No. 99 of 2019], which states that ‘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’. It was held that the aforesaid judgement clarified that even during the period of liquidation, for the purpose of Sections 230 to 232 of the Companies Act, the corporate debtor is to be saved from its own management, meaning thereby, the promoters, who are ineligible under Section 29A of the IBC, are not entitled to file an application for compromise and arrangement in their favour. Proviso to Section 35(f) of the IBC prohibits the liquidator to sell the immovable and movable property or actionable claims of the ‘Corporate Debtor’ in liquidation to any person who is not eligible to
be a resolution applicant. It states that, “Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely:–….(f) subject to Section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation… Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.”Accordingly, the promoter was ineligible to file an application for compromise and arrangement under Sections 230-232 of the Companies Act.

DECISION OF THE NCLAT
The NCLAT held that although a scheme of compromise and arrangement is maintainable even if a Corporate Debtor is under liquidation, the promoter of the Corporate Debtor shall not be eligible to propose such a scheme.

Vaish Associates Advocates View
The NCLAT previously in the case of Rajesh Balasubramanian v. M/s. Everon Castings Private Limited and Another (dated February 25, 2019) and Y. Shivram Prasad had held that if the members of the corporate debtor or the creditors approach the company through the liquidator for compromise or arrangement by making a proposal of payment to all the creditor(s), the liquidator on behalf of the company will move an application under Section 230 of the Companies Act before the National Company Law Tribunal. However, none of these judgements envisaged a situation where the promoter of the corporate debtor, who very likely will be a member of the corporate debtor, would approach the liquidator/tribunal with a compromise and arrangement proposal.

This judgement clarifies the position and holds that the ineligibility of the promoter to submit the resolution plan would continue even in the event of liquidation where a compromise and arrangement between the shareholders and the creditors is to be considered. The reasoning provided, backed by the proviso to Section 35(f) of the IBC, is that one of the purposes of the IBC is to protect the corporate debtor from its own management. The principle that the control of the corporate debtor should not be given to the very same entity that drove it to insolvency has been upheld in various other judgements as well and seems to be sound.

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