BY- Prabhan Patel, SLS Hyderabad

CITATION: CIVIL APPEAL NO. 12023 OF 2018 [ARISING OUT OF SLP(C) NO.18598 OF 2018]

FACTS OF THE CASE

There was a winding-up proceeding pending against the Respondent in the High Court of Judicature for Rajasthan. The appellants had presented the High Court with an application to move the case to the National Company Law Tribunal (NCLT) which was rejected by the Court. An employee’s union had challenged the judgment of the High Court and had filed the present appeal to question the judgment and the order set aside of the NCLT by the Court through which the “Financial Creditor’s petition under Section 7 of the Insolvency and Bankruptcy Code, 2016” is admitted.

ISSUE OF THE CASE

  • Whether the application to transfer the case to NCLT had been wrongfully refused?

JUDGEMENT

Justice Nariman held that the case is to be distinguished with the Companies Act,2013 read along with the Insolvency and Bankruptcy Code,2016. He was of the opinion that upon reading Section 434 Act which was substituted by the Eleventh Schedule to the Code that all proceedings which are related to winding up of companies shall be passed on to the NCLT in compliance with the Companies Act,2013 immediately and the process of the transition of these proceedings to the NCLT will be as specified by the Central Government. It is evident that only Rule 5(2) applies in this situation. While Section 20[1] talks about a firm being wound up under the Companies Act,1956 under equal and fair clauses, i.e., Section 433(f) of the Companies Act,1956, however, as cases falling under Section 20 under are treated differently and alone under Rule 5(2), they can not be considered as petitions submitted under Section 433(f) which are similarly defined under Regulation 6. Consequently, the High Court was not right in dealing with the petitions under Section 20 which are in accordance with Section 433(f) and for filing for Regulation 6 of the 2016 Transfer Rules. However, while Rule 5(2) is sufficiently clear, it has been argued in front of us that Rule 5 was replaced on 29.06.2017 which led to the omission of Rule 5(2). This omission of Rule 5(2) does not mean that all the cases referred to in Section 20 must immediately be moved into the NCLT as otherwise, as in Rule 5(1), a special rule is to be formulated to incorporate those cases into the NCLT. The true explanation for the absence of Rule 5(2) in Rule 5 is that it must be mentioned once, on the abrogation of the SIC Act, that the High Court is still dealing with proceedings according to Section 20. The continuation of Rule 5 (2) after 29.06.2017 was needless, as on 15.12.2016, the High Court was to proceed with all pending cases under section 20 of the SIC Act. As no advice under Section 20 of the SIC Act could be given by the BIFR, it was pointless to continue Rule 5(2) after the repeal of the SIC Act on 01/12/2016. “The High Court had to begin and would continue, right after that, all of the cases pending under Section 20 of the SIC Act. That is further demonstrated by an extension of section 434(1)(C) with effect as at 17.08.2018, where an application for transfer of such proceedings may be brought by any party to the winding-up case pending before the Court immediately preceding that date and the Court may, by order, transfer these proceedings to NCLT at that time.”[2] The conveyed procedure would then be addressed as an NCLT request for the start of a proceeding under the Code for corporate insolvency resolution. It is also obvious that Both procedures under Section 20 lying in front of the Court are expected to resume as such, pending the submission by a party to the High Court to Transfer of those proceedings after 17.08.2018, under Section 534 and Rule 5 of the 2016 Transfer Rule. After this, the High Court is to transfer the proceedings to the NCLT which will then admit the application and treat it as an “initiation of the corporate insolvency resolution process application under the IBC,2016.” Therefore, while Rule 6 of the 2016 Transfer Rules apply inappropriately, the High Court’s decision can still be referred to in Section 434 of the Companies Act 2013, regarding Rule 5(2) effective August 17, 2018. But that doesn’t finish the problem. Respondent No. 3 is evident to have filed on 11.01.2018, a Section 7 application under the Code which has been accepted and submitted on 13.04.2018 from the NCLT. This process is individual, not requiring the referral to the High Court of ongoing dissolution proceedings. Respondent 3 had plenty of time to apply for an application under Section 7 of the IBC,2016 before the winding-up order was passed. As the Code modifies Section 434 of the 2013 Companies Act, the revised Section 434 must be read as a part of the Code and not as part of the Companies Act 2013, must be refused because while the Eleventh Schedule of the Code substitutes Section 434 of the companies act,2013, the replacement of Section 434 is only included in and is part of the Company Act,2013. The Court held that “If the rules of Section 434 are peculiar in nature and do not comply with the provisions of the code, then the latter shall prevail and the code shall be enforced.” In extending Section 238 of the Code to a separate proceeding shall be issued by a secured financial creditor in Alchemist Asset Reconstruction Company Ltd., the court held that the NCLT was completely right. Keeping this in mind, the Supreme Court questioned the decision of the High Court as to “how and why did the High Court hold that the proceedings before NCLT were without jurisdiction.” The Apex Court held that the High Court was wrong in doing so and that the judgment passed by the High Court was to be set aside. The proceedings would continue before the NCLT from the exact point they were left off at. The Hon’ble Supreme Court allowed the appeal and disposed the writ petitions pending with the High Court as the proceedings must conclude the Code.


CITATIONS

[1] Sick Industrial Companies Act,1985

[2] https://www.icsi.edu/media/webmodules/FINAL%20MCS%20BOOK%2010-01-2019.pdf

JAIPUR METALS & ELECTRICALS EMPLOYEES ORGANISATION V. JAIPUR METALS & ELECTRICALS LIMITED AND ORS.

Leave a Reply

Your email address will not be published. Required fields are marked *