Action Ispat and Power Private Ltd v/s Shyam Metalics and Energy Ltd: Civil Appeal No. 4041 of 2020

Estimated Reading Time: 11 minutes

Introduction:

The Insolvency and Bankruptcy Code (“IBC”) intends to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate firms. This Code replaced the erstwhile Part VII of the Companies Act, 1956 (“1956 Act”), under which Sections 433(e) and 434 authorized the High Court to adjudicate upon winding-up petitions brought before it by creditors on account of a company’s inability to pay its debts. However, under Section 434(1)(c) of the Companies Act, 2013 (“2013 Act”) read with the amendments brought in after the passing of the IBC [such as the modification to the earlier Section 271(1)(a) of the Companies Act, 2013, pending proceedings before the High Courts pertaining to winding-up petitions as a result of inability to pay debts, are to be transferred to the National Company Law Tribunal (“NCLT”).

The problem however, arises as a result of the first proviso to Section 434 (1) (c), which provides that only proceedings which are “at a stage as may be prescribed by the Central Government” may be transferred to the NCLT. While Parliament passed the Companies (Transfer of Pending Proceedings) Rules in 2016 (“Transfer Rules”), these Rules did not adequately address the question of the stage after which proceedings may not be transferred. Rule 5(1) provided that petitions under Section 433(e) of the 1956 Act where notice had not been served upon the respondent company, were to be transferred to the NCLT.

This was extended by the Supreme Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd. (“Forech”), wherein the Court expounded upon the need to have all pending winding-up proceedings before High Courts transferred to the NCLT. In this case, the Court noted that on a conjoint reading of Section 434 of the 2013 Act, the Transfer Rules and the IBC, the legislature intended to have all proceedings transferred to the NCLT in order to further the objectives of the IBC, which were to “resuscitate the corporate debtors who are in the red”. The Court further observed that keeping this objective in mind, even petitions wherein notice had been served and the matter was lis pendens before the High Court, could be transferred to the NCLT upon an application for the same having been made by the creditors.

Thus, this decision opened a Pandora’s Box of litigation wherein litigants applied for initiation of the CIRP process under the IBC and a transfer of proceedings to the NCLT. This is because corporate creditors wanted to opt for the contemporized rules under the IBC, which looks at resuscitation as the primary option through the appointment of the Resolution Professional, and the submission of resolution plans which would aim at revival of the company.

While expansively dealing with transferability of cases in light of the IBC, the Court in Forech missed answering the important question which has been continually left unaddressed: at what stage in the insolvency process if at all, does such a transfer petition become untransferable? While the Delhi High Court in Tata Capital Financial Services v. Shree Shyam Pulp and Board Mills addressed this point, the Court here only ruled that the power to transfer is discretionary, and that it is incumbent upon the courts to decide whether transfer is viable at that particular stage in the winding-up process.

However, another recent decision of the Delhi High Court provides more clarity on the Indian position regarding transfers after a winding-up order has been passed by the High Court and an Official Liquidator (“OL”) appointed. 

In the present case, the Supreme Court of India (“Supreme Court“) held that even after admission of a winding up petition, and after appointment of an official liquidator, discretion rests with the Company Court to transfer the petition to NCLT under Section 434 of the Companies Act 2013 (“2013 Act“). The appeals arose out of a division bench judgment of Delhi High Court by which a single judge’s order transferring a winding up petition to NCLT was upheld.

Facts:

A winding up petition under Sections 433(e) and (f), Section 434 and Section 439 of the Companies Act, 1956 was filed by Shyam Metalics and Energy Limited, seeking winding up of Action Ispat and Power Pvt. Ltd. (“Appellant Company“) Pursuant to filing of the winding up petition, the Company Judge in the Delhi High Court appointed the Official Liquidator. An application was then filed before the Company Court by State Bank of India (“SBI“) seeking transfer of the winding up petition to NCLT in view of the fact that SBI had filed an application before the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code“).

Company Court Order

The Company Court observed that the Delhi High Court has already held that the power under Section 434 (1) (c) of the 2013 Act, for transfer of a petition to NCLT is discretionary and has to be exercised basis the facts and circumstances of each case, so as to expeditiously deal with the winding up proceedings. The order observed that the Official Liquidator has only taken steps to seize the office of the Appellant Company and the factory premises, and all further exercises are still to be carried out. Thus, in the interest of justice and the interest of the Appellant Company, the Company Court transferred the winding up petition to the NCLT.

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Division Bench Order

The Appellant Company appealed before the Division Bench. The Division Bench dismissed the appeal and held that the process under the Code is to find the most beneficial solution to the concerned company and its creditors/stakeholders. It was further held that in the interest of equity and justice and keeping in mind the special nature of the Code, if the Company Judge has found it appropriate to transfer the petition to NCLT, then the Division Bench would not ordinarily interfere with the transfer order. The Division Bench observed that the Official Liquidator had not proceeded to take any effective or irreversible steps towards liquidation of the assets of the Appellant Company. As per the Division Bench, continuation of two parallel proceedings, one before the Company Court for liquidation and the other before the Code for resolution/revival, would serve no useful purpose.

Summary of the Judgment:

In Action Ispat and Power Pvt. Ltd. v. Shyam Metallics and Energy Ltd., a division bench of the Delhi High Court decided in favour of allowing a transfer of insolvency proceedings to the NCLT even after a winding-up order had been passed by the High Court and an OL had been appointed under Section 448 of the 1956 Act. In this case, wherein the creditors sought transfer of the insolvency petition, the Court delved into an analysis of Section 434 of the 2013 Act, Rule 5(1) of the Transfer Rules as well as the IBC. On a conjoint reading of the aforesaid provisions, the Court found that the power of the Company Court to transfer proceedings to the NCLT is discretionary, and not limited to cases covered by Rule 5(1).

Additionally, the Court found that the scope of proceedings under the High Court vis-à-vis that of the NCLT had to be looked into, and their relative benefits analysed. There was a difference in approach taken by the NCLT as opposed to an OL appointed by the Court. The NCLT, at all stages of the proceedings, looks at revival of the company as a primary option failing which the assets are liquidated. As opposed to that, the OL looks to satisfy creditors in a solely monetary sense, by liquidating the assets and letting each creditor have a proportional share. Relying on the judgment in Sudarshan Chits v. Sukumaran Pillai, the Court herein found that winding-up orders were not irrevocable and that even after the winding-up order is passed, the petition could be transferred. Thus, the Court found that looking into the objectives of the IBC and that of the insolvency resolution process as mentioned in Forech, the will of the creditors in transferring the petition has to be upheld, unless there are compelling and irrevocable circumstances justifying a departure from such a transfer.

The Supreme Court relied upon its own observations in the Swiss Ribbons judgment which dealt with the ‘raison d’etre‘ for the enactment of the Code to draw an analogy that winding up proceedings similar to liquidation, must only be availed as the last resort. The relevant portion from Swiss Ribbons is as below:

…maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. The Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. 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.”

Further, the Supreme Court analyzed its judgments in Jaipur MetalsForech and Kaledonia and summarized its observation as under:

  • The Code began tentatively by leaving proceedings relating to winding up of companies to be transferred to NCLT at a stage as may be prescribed by the Central Government.
  • This was done by the Companies (Transfer of Pending Proceedings) Rules, 2016. Rules 5 and 6 referred to three types of proceedings; only those proceedings which are at the stage of pre-service of notice of the winding up petition stand compulsorily transferred to the NCLT.
  • Post notice and pre-admission of winding up petitions, parallel proceedings would continue under both statutes, leading to an unsatisfactory state of affairs. This led to the introduction of the 5th proviso to Section 434 (1) (c) of the 2013 Act.
  • In Kaledonia, the Supreme Court in particular considered the 5th proviso to Section 434 (1) (c) of the 2013 Act, and held that the same is not restricted to any particular stage of a winding up proceeding, and thus the Company Court is vested with the discretion to transfer such petitions to the NCLT at any stage.
  • Thus, as a matter of law, even post admission of a winding up petition, and after the appointment of the Official Liquidator to take over assets of a company sought to be wound up, the Company Court can exercise its discretion to transfer such a petition to the NCLT. However, the important question that needs to be answered is to determine as to how such a discretion is to be exercised?
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To answer the aforesaid question, the Supreme Court analyzed various stages of winding up proceedings under the 2013 Act. It was observed that several stages are contemplated under the 2013 Act, with the tribunal retaining the power to control the proceedings in a winding up petition even after it is admitted. Thus, in a winding up proceeding where the petition has not been served in terms of Rule 26 of the Companies (Court) Rules, 1959 at a pre-admission stage, given the beneficial result of the application of the Code, such a winding up proceeding is compulsorily transferable to the NCLT to be resolved under the Code. Even post issue of notice and pre-admission, the same result would ensue.

However, post the admission of a winding up petition and after the assets of the company sought to be wound up become custodia legis and are taken over by the Official Liquidator, Section 290 of the 2013 Act would indicate that the Official Liquidator may carry on the business of the company, if necessary, for the beneficial winding up of the company, and may even sell the company as a ‘going concern’. So long as no actual sales of the immovable or movable properties have taken place, nothing irreversible is done which would warrant a Company Court staying its hands on a transfer application.

The Supreme Court held that it is only where the winding up proceedings have reached a stage where it would be irreversible, making it impossible to set the clock back, that the Company Court must proceed with the winding up, instead of transferring the proceedings to the NCLT. In the present matter, since no irreversible steps towards winding up of the Appellant Company having taken place, it was held that the Company Court correctly exercised its discretion vested under the 5th proviso to Section 434(1)(c) of the 2013 Act and transferred the matter to the NCLT.

Analysis of the judgment:

Given the expansive analysis given by the Delhi High Court on the objectives of the IBC and the larger purpose of the insolvency resolution process, this decision merits some discussion. The author believes that the Delhi High Court rightly distinguished between the NCLT and the OL with respect to the functions and powers exercised. Section 457 of the Companies Act, 1956, which dealt with the powers of the OL, primarily allowed him to inter alia, carry out the business insofar as the beneficial winding-up may be necessary, to sell the movable and immovable property of the company and to do all other things as may be necessary for winding up the affairs of the company and distributing its assets.

Per contra, the IBC intends to provide a mechanism which balances the interests of all the stakeholders, which includes the company undergoing the insolvency resolution process. Accordingly, the author believes that the Delhi High Court rightly followed the verdict in Forech, and upheld the function of the IBC as a resuscitation mechanism. By distinguishing between the stages of “winding-up” and “dissolution,” the Court adequately found that the winding-up of operations did not imply that the company’s existence had to be concluded. This is consistent with the stance of the Karnataka High Court in Government of Karnataka v. NGEF Ltd., wherein the Court stated that if only a partial sale of assets can pay off the company liabilities, the winding-up order can be recalled and revival of the company sought. Thus, the Court was of the opinion that revival or resuscitation of the company must be left open as an option even at this stage, subject to the will of the Committee of Creditors (“CoC”). By providing for a mechanism which keeps revival as an option open at all stages of insolvency resolution, the CIRP presents an adequate and efficient alternative to the erstwhile liquidation process under the Companies Act, 1956, through the appointment of a trained resolution professional, whose primary task is to take steps to revive the company via the submission of resolution plans. Only upon the rejection of such plans, can the company proceed for liquidation under the Code.

Additionally, the NCLT faces a smaller backlog of cases as compared to the High Court, given the relative difference in the scope of cases before them. Therefore, transfer of proceedings would in fact ensure speedier resolution of insolvency petitions, while also allowing for a more technical consideration of issues. This is because the NCLT, apart from being less myopic than the OL or the High Court in its functioning, allows for the CoC to be the active and final determinants of how the insolvency resolution process is to take place. This was also highlighted in the Bankruptcy Law Reforms Committee Report, which sought that the final agreement be among the “creditors who are the financiers willing to bear the loss in the insolvency”. Thus, in upcoming judgments, the view of the Delhi High Court acts as good precedent.

Conclusion:

The issue of transferability even after winding-up is presently lis pendens before the Supreme Court in SBI v. Shakti Bhog Foods Ltd. Upon an analysis of the judgment in Action Ispat, the Supreme Court should rule in favour of allowing such a transfer. Given the objectives of the insolvency resolution process as has been identified in Forech, such a viewpoint would adequately preserve the objectives of the IBC, while upholding a more holistic and contemporary viewpoint on the corporate insolvency resolution process in India.

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