Insolvency & Bankruptcy Code, 2016 – ss.7, 9, 11, 238, 255 and The Eleventh Schedule – Proceedings u/ss.7 and 9, if independent of winding up process pending in High Court – Winding up petition filed by the appellant before High Court, against Respondent No.2-Company, alleging inability to pay dues – Respondent No.1, financial creditor of the self-same corporate debtor, filed insolvency petition u/s.7 of the 2016 Code before National Company Law Tribunal (NCLT) – Petition admitted – Appeal filed by the appellant against the order – Dismissed by Appellate Tribunal – Plea of appellant inter alia that notice u/r.26 of the 1959 Rules was served much prior to the commencement of the Code, hence, the winding up petition should be allowed to carry on and not proceedings filed by other creditors under the Code – Held: When the Code was enacted, only winding up petitions, where no notice u/r.26 of the 1959 Rules was served, were to be transferred to the NCLT and treated as petitions under the Code – However, on working of the Code, the Government realized that parallel proceedings in the High Courts and before the adjudicating authority in the Code would stultify the objective sought to be achieved by the Code, i.e. to resuscitate the corporate debtors who are in the red – Accordingly, the Rules kept being amended, until finally s.434, 2013 Act was itself substituted in 2018, adding a proviso by which even in winding up petitions where notice was served and pending in the High Courts, any person could apply for transfer of such petitions to the NCLT, which would then be transferred by the High Court to the adjudicating authority and treated as insolvency petition under the Code – Appellate Tribunal’s reasoning is not correct as reference to s.11 of the Code in the context of the present problem is wholly irrelevant – However, the ultimate order passed by the Appellate Tribunal is not interfered with because Respondent No.1’s application admitted by the Tribunal is an independent proceeding to be decided in accordance with the provisions of the Code – However, the appellant is granted liberty to apply under the proviso to s.434 of the 2013 Act (added in 2018), to transfer the winding up proceeding pending before the High Court to the NCLT, which can then be treated as proceeding u/s.9 of the Code – Companies Act, 1956 – s.433(e) – Companies Act, 2013 – s.434 – Companies (Transfer of Pending Proceedings) Rules, 2016 – r.5 – Companies(Transfer of Pending Proceedings) Second Amendment Rules, 2017 – Companies (Court) Rules, 1959– rr.26 and 27. Companies (Court) Rules, 1959 – rr.26 and 27 – Notice under – Pre-admission or post-admission – Held: Rules 26 and 27 clearly refer to a pre-admission scenario making it clear that the notice contained in Form No. 6 appended to r.27 has to be served in not less than 14 days before the date of hearing – Hence, the expression “was admitted” in Form No. 6 only means that notice has been issued in the winding up petition which is then “fixed for hearing before the Company Judge” on a certain day.
Disposing of the appeal, the Court
HELD: 1.1 Rules 26 and 27, Companies (Court) Rules, 1959 clearly refer to a pre-admission scenario as is clear from a plain reading of Rules 26 and 27, which make it clear that the notice contained in Form No. 6 has to be served in not less than
14 days before the date of hearing. Hence, the expression “was admitted” in Form No. 6 only means that notice has been issued in the winding up petition which is then “fixed for hearing before the Company Judge” on a certain day. Thus, the Madras High Court view in M/s. M.K. & Sons Engineering case is plainly incorrect whereas the Bombay High Court view in Ashok Commercial Enterprises case is correct in law. [Para 16] [489-A-B]
1.2 As a first step, when the Insolvency & Bankruptcy Code, 2016 (the Code) was enacted, only winding up petitions, where no notice under Rule 26 of the Companies (Court) Rules was served, were to be transferred to the NCLT and treated as petitions under the Code. However, on a working of the Code, the Government realized that parallel proceedings in the High Courts as well as before the adjudicating authority in the Code would stultify the objective sought to be achieved by the Code, which is to resuscitate the corporate debtors who are in the red. In accordance with this objective, the Rules kept being amended, until finally Section 434 was itself substituted in 2018, in which a proviso was added by which even in winding up petitions where notice has been served and which are pending in the High Courts, any person could apply for transfer of such petitions to the NCLT under the Code, which would then have to be transferred by the High Court to the adjudicating authority and treated as an insolvency petition under the Code. [Para 17] [489-C-E]
1.3 The Appellate Tribunal’s reasoning is not correct. Section 11 of the Code specifies which persons are not eligible to initiate proceedings under it. This Section is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the Code in respect of whom a liquidation order has been made. From a reading of this Section, it does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9 of the Code as the case may be, as has been held by the Appellate Tribunal. Hence, any reference to Section 11 in the context of the problem before Supreme Court is wholly irrelevant. However, the ultimate order passed by the Appellate Tribunal is not interfered with because it is clear that the financial creditor’s application which has been admitted by the Tribunal is clearly an independent proceeding which must be decided in accordance with the provisions of the Code. [Paras 21, 22] [491-G; 492-C-D]
1.4 Though, the Appellate Tribunal’s order dismissing the appeal is not being interfered with, liberty is granted to the appellant to apply under the proviso to Section 434 of the Companies Act (added in 2018), to transfer the winding up proceeding pending before the High Court of Delhi to the Code. NCLT, which can then be treated as a proceeding under Section
9 of the Code. [Para 23] [492-E-F]
PSL Limited v. Jotun India Private Limited. (2018) 2 AIR Bom R 350 – approved.
Ashok Commercial Enterprises v. Parekh Aluminex Limited (2017) 4 Bom. CR 653 – held correct law. M/s. M.K. & Sons Engineering v. Eason Reyrolle Ltd. Decision of Madras High Court in CP/364/2016 – held incorrect view.
Jaipur Metals & Electricals Employees Organization Through General Secretary Mr. Tej Ram Meena v. Jaipur Metals & Electricals Ltd. Through its Managing Director &Ors. 2018 (15) SCALE 836 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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