Insolvency and Bankruptcy Code, 2016 – ss.7, 238 – Respondent No.1-company became a non-performing asset – Board for Industrial and Financial Reconstruction (BIFR) was of prima facie opinion that the company ought to be wound up and same was forwarded to the High Court – High Court registered the case as a Company Petition – Respondent No.3 acquired financial debts of Respondent No.1 – After some time, respondent no.3 filed application u/s.7 of the Code before the National Company Law Tribunal (NCLT) stating that it had an assigned debt owed to it by the respondent No.1 – NCLT by order dated 13.04.2018 referred to the non-obstante clause contained in s.238 of the Code and held that it was satisfied that the conditions of s.7 had been fulfilled and therefore, admitted the application – High Court in company petition and other connected matters refused to transfer the winding up proceedings pending before it, and set aside the NCLT order dated 13.04.2018, stating that it had been passed without jurisdiction – Propriety of – Held: Though s.434 of the Companies Act, 2013, which relates to transfer of certain proceedings, was substituted by the Eleventh Schedule of the Code, yet Section 434, as substituted, appears only in the Companies Act, 2013 and is part and parcel of that Act – This being so, if there is any inconsistency between s.434 as substituted and the provisions of the Code, the latter must prevail – NCLT was absolutely correct in applying s.238 of the Code to an independent proceeding instituted by a secured financial creditor, namely, respondent no.3 – High Court was not right in stating that the proceedings before the NCLT were without jurisdiction – Proceedings before NCLT to be continued from the stage at which they had been left off – On this score, therefore, the High Court judgment set aside – Furthermore, the company petition pending before the High Court cannot be proceeded with in view of s.238 of the Code – Thus, other connected matters that are pending before the High Court disposed of in light of the fact that proceedings under the Code, 2016 must run their entire course – Companies Act, 2013 – s.434 (as amended w.e.f 17.08.2018) – Sick Industrial Companies (Special Provisions) Act, 1985 – s.20 – Companies (Transfer of Pending Proceedings) Rules, 2016 – rr. 5(2) and 6.
Allowing the appeal, the Court
HELD: 1. It is clear that under Section 434 of the Companies Act, 2013 as substituted by the Eleventh Schedule to the Insolvency and Bankruptcy Code, 2016 vide notification dated 15.11.2016, all proceedings under the Act, which relate to winding up of companies and which are pending immediately before such date as may be notified by the Central Government in this behalf shall stand transferred to the NCLT. The stage at which such proceedings are to be transferred to the NCLT is such as may be prescribed by the Central Government. [Para 12][938-C-D]
2. When Rules 5 and 6 of the 2016 Transfer Rules (unamended) are read, it is clear that three types of proceedings are referred to. Under Rule 5(1), petitions which relate to winding up under clause (e) of Section 433 of the Companies Act, 1956 on the ground of inability to pay debts that are pending before the High Court are to be transferred to the NCLT in case the petition has not been served on the respondent. They shall then be treated as applications under Sections 7, 8, or 9 of the Code and dealt with in accordance with Part II of the Code. Similarly, all petitions filed under clauses (a) and (f) of Section 433 of the Companies Act, 1956 pending before the High Court, in which the petition has not been served on the respondents, shall be transferred to the NCLT. Only such petitions will continue to be treated as petitions under the provisions of the Companies Act, 2013. The third category of cases dealt with by Rules 5 and 6 is contained in Rule 5(2). This category relates to cases where the BIFR has forwarded an opinion to the High Court to wind up a company under Section 20 of the SIC Act. All such cases, whatever be the stage, shall continue to be dealt with by the High Court in accordance with the provisions of the SIC Act. [Para 13] [938-D-G]
3. It is clear that the present case relates to Rule 5(2) alone. Despite the fact that Section 20 of the SIC Act speaks of a company being wound up under the Companies Act, 1956 under the just and equitable provision, which is Section 433(f) of the Companies Act, 1956, yet, since cases that fall under Section 20 of the SIC Act are dealt with separately under Rule 5(2), they cannot be treated as petitions that have been filed under Section 433(f) of the Companies Act, 1956, which are separately specified under Rule 6. The High Court is therefore not correct in treating petitions that are pursuant to Section 20 of the SIC Act as being pursuant to Section 433(f) of the Companies Act, 1956 and applying Rule 6 of the 2016 Transfer Rules. [Para 14][938-G-H; 939-A]
4. However, though the language of Rule 5(2) is plain enough, it has been argued that Rule 5 was substituted on 29.06.2017, as a result of which, Rule 5(2) has been omitted. The effect of the omission of Rule 5(2) is not to automatically transfer all cases under Section 20 of the SIC Act to the NCLT, as otherwise, a specific rule would have to be framed transferring such cases to the NCLT, as has been done in Rule 5(1). The real reason for omission of Rule 5(2) in the substituted Rule 5 is because it is necessary to state, only once, on the repeal of the SIC Act, that proceedings under Section 20 of the SIC Act shall continue to be dealt with by the High Court. It was unnecessary to continue Rule 5(2) even after 29.06.2017 as on 15.12.2016, all pending cases under Section 20 of the SIC Act were to continue to be dealt with by the High Court before which such cases were pending. Since there could be no opinion by the BIFR under Section 20 of the SIC Act after 01.12.2016, when the SIC Act was repealed, it was unnecessary to continue Rule 5(2) as, on 15.12.2016, all pending proceedings under Section 20 of the SIC Act were to continue with the High Court and would continue even thereafter. This is further made clear by the amendment to Section 434(1)(c), with effect from 17.08.2018, where any party to a winding up proceeding pending before a Court immediately before this date may file an application for transfer of such proceedings, and the Court, at that stage, may, by order, transfer such proceedings to the NCLT. The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. It is thus clear that under the scheme of Section 434 (as amended) and Rule 5 of the 2016 Transfer Rules, all proceedings under Section 20 of the SIC Act pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post 17.08.2018. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code. [Para 15] [939-B-G]
5. The High Court judgment, therefore, though incorrect in applying Rule 6 of the 2016 Transfer Rules, can still be supported on this aspect with a reference to Rule 5(2) read with Section 434 of the Companies Act, 2013, as amended, with effect from 17.08.2018. [Para 16][939-H; 940-A]
6. It is clear that Respondent No. 3 has filed a Section 7 application under the Code on 11.01.2018, on which an order has been passed admitting such application by the NCLT on 13.04.2018. This proceeding is an independent proceeding which has nothing to do with the transfer of pending winding up proceedings before the High Court. It was open for Respondent No. 3 at any time before a winding up order is passed to apply under Section 7 of the Code. [Para 17][940-B-C]
7. The contention of Respondent nos.4 and 5 that since Section 434 of the Companies Act, 2013 is amended by the Eleventh Schedule of the Code, the amended Section 434 must be read as being part of the Code and not the Companies Act, 2013, must be rejected for the reason that though Section 434 of the Companies Act, 2013 is substituted by the Eleventh Schedule of the Code, yet Section 434, as substituted, appears only in the Companies Act, 2013 and is part and parcel of that Act. This being so, if there is any inconsistency between Section 434 as substituted and the provisions of the Code, the latter must prevail. The NCLT was absolutely correct in applying Section 238 of the Code to an independent proceeding instituted by a secured financial creditor, namely, the respondent no.3. This being the case, it is difficult to comprehend how the High Court could have held that the proceedings before the NCLT were without jurisdiction. On this score, therefore, the High Court judgment has to be set aside. The NCLT proceedings will now continue from the stage at which they have been left off. Obviously, the company petition pending before the High Court cannot be proceeded with further in view of Section 238 of the Code. The writ petitions that are pending before the High Court have also to be disposed of in light of the fact that proceedings under the Code must run their entire course. [Para 18][940-D-H]
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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