Jaipur Metals and Electrical Employees Organization v. Jaipur Metals and Electricals Ltd. 2019 (213) CC25

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This[1] is a major case in NCLT, and played a major factor for some  drastic changes in the bankruptcy code and the functioning of high courts and made several amendments to companies act 2013.

An employees’ union has filed an appeal opposing the High Court of Judicature’s Signature Not Checked Digitally signed by R NATARAJAN for Rajasthan judgement dated 01.06.2018, in which the High Court has Date: December 12, 2018, 17:02:43 IST The explanation for this is that The National Company Law Tribunal (“NCLT”) had declined to pass winding up proceedings pending before it to the NCLT, and has set aside an NCLT order dated 13.04.2018 under which the financial creditor’s petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 was accepted.

This case has a turbulent past. The Respondent No. 1 company’s account had been a non-performing asset on September 30, 1997. Because the company’s net worth had sunk below zero, a referral was made to the Board for Industrial and Financial Rehabilitation (“BIFR”) under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SIC Act”). The BIFR released a prima facie opinion on the company’s insolvency on September 26, 2002, referred to the High Court. The case was subsequently registered with the High Court as Business Petition No. 19/2009. Respondent No. 3 (Alchemist Asset Reconstruction Company Ltd.) inherited substantially all Respondent No. 1’s financial debts. The state of Rajasthan attempted but failed to resurrect the corporation. Finally, on 07.12.2017, the High Court, in a writ petition filed by a workers’ union, Writ Petition No. 504/2000, ordered the Official Liquidator to be provisionally attached to the Court and to join in the calculation of the worth of products and material lying in the company’s factory premises so that workmen’s dues could be charged.

Meanwhile, on 11.01.2018, Respondent No. 3 filed an application under Section 7 of the Insolvency Code, claiming that Respondent No. 1 owed it an assigned debt of INR 356 crores. Given that the company admitted the debt and that no liquidation order had been issued in the pending High Court winding-up proceedings, the NCLT held, citing the non-obstante clause in Section 238 of the Insolvency Code, it was satisfied that the conditions of Section 7 had been met and that; as a result, the application should be dismissed. As a result, under Section 14 of the Code, a moratorium was declared, and an interim resolution specialist was named.

Meanwhile, in Business Petition No. 19/2009 and Other Similar Issues, a series of writ petitions filed by trade unions, the High Court, in an interim order dated April 26, 2018, stayed the NCLT’s order of April 13, 2018. A Special Leave Petition (“SLP”) was filed in response to this order. On May 9, 2018, this Court dismissed the SLP as withdrawn and ordered the petitioner to send submissions to the High Court in the pending business petition and related matters. The High Court then released the challenged judgement on 01.06.2018, declining to move the pending winding-up proceedings and setting aside the NCLT order dated 13.04.2018, noting that it was issued without jurisdiction. As a result, on July 5, 2018, the writ petitions and the corporation petition were filed for further orders. This Court gave notice and ordered the impugned judgement to stay on July 16, 2018.

Shri Sidharth Luthra, who appeared on behalf of the appellant, and Shri P. Chidambaram, who appeared on behalf of Respondent No. 3 had argued that a perusal of the Eleventh Schedule of the Code and amendments that were made to the Companies Act, 2013, especially Section 434 therein, would indicate that all winding up proceedings pending before the High Court led to a breach of the Companies Act, 2013. They then applied to Rule 5 of the 2016 Companies (Transfer of Pending Proceedings) Rules (“2016 Transfer Rules”), specifically Rule 5(2). They then argued that since Rule 5(2) was not continued on or after June 29, 2017, it was clear that the High Court could not proceed to deal with the winding up of companies that were started under the SIC Act after such omission. According to them, the High Court ruling was erroneous because Rule 5 of the 2016 Transition Rules applied, not Rule 6. As a result of the omission of Rule 5(2), the cases must be passed to the NCLT in any event. Alternatively, they argued that, in any event, the 2018 addition to Section 434(1)(c) added a proviso authorising any party to any pending High Court winding-up proceedings to file an application for transfer, and the Court is then allowed to transfer the proceedings to the NCLT. They also argued that, in any event, Respondent No. 3’s Section 7 submission before the NCLT was a separate application that was properly accepted by the NCLT, which appropriately implemented Section 238 of the Insolvency Code. They also argued that, in any event, Respondent No. 3’s Section 7 submission before the NCLT was a separate application that was properly accepted by the NCLT, which appropriately implemented Section 238 of the Insolvency Code.

On behalf of Respondents Nos. 4 and 5, Shri Siddharth Dave learned lawyer, backed the High Court’s decision. Even if Rule 5 of 2016 Transfer Rules applied, Rule 5(2) made it clear that the current proceedings, which are proceedings for the winding up of a corporation pursuant to Section 20 of the SIC Act, will remain before the High Court. Since the SIC Act has been repealed with effect from 01.12.2016, it was appropriate to note that proceedings for winding up that were started under Section 20 of the SIC Act will continue to be dealt with by the High Court, the absence of this Rule in the amendment, made to Rule 5 on June 29 2017, will have no bearing on the High Court which continues to deal with this matter. When Rule 5 was modified, it became pointless to comply with the said clause since all such cases would be handled by the High Court on and after the repeal of the SIC Act. Section 238 of the Code, too, according to the learned lawyer, has little application because it is a non-obstante provision that prohibits a dispute between the Insolvency Code and other laws. Section 238 would have no application unless the changes to Section 434 of the Companies Act, 2013 were made pursuant to the Eleventh Schedule of the Insolvency Code, and the winding-up proceedings pending before the High Court would have to continue to their logical conclusion. As a consequence, the High Court’s ruling is right.

After hearing learned counsel for both sides, we shall first answer Shri Siddharth Dave’s preliminary opposition. According to the learned lawyer, Respondent No. 3 has lodged an appeal against the judgement dated 01.06.2018, and as the appeal is still pending, we do not entertain an SLP filed at the request of an employers’ union that is in cahoots with Respondent No. 3. We would have relegated the appellant to the Division Bench, but since the issues addressed are of general interest, it is preferable to reach an authoritative opinion as soon as possible. As a result, we have agreed to hear this SLP specifically against a single Judge’s order. Shri Luthra has also stated that it is erroneous to state that the client he serves is a derecognised or unrecognised union working in collusion with Respondent No. 3 and has produced a certificate of registration for the said union. However, since this SLP poses critical legal issues that must be resolved as soon as possible, we have ignored this preliminary objection.

Section 255 of the Insolvency Code reads as :

“255. Amendments of Act 18 of 2013.— The companies Act, 2013 shall be amended in the manner specified in the Eleventh Schedule.” In pursuance of this Section, the Eleventh Schedule to the Code makes various amendments to The companies Act, 2013

On 15.11.2016, with effect from 01.12.2016, Section 434 of the Companies Act, 2013 was substituted as follows: Transfer of certain pending proceedings.—(1) On such date as may be notified by the Central Government in this behalf,—

(a) all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this Section referred to as the Company Law Board) constituted under sub-

section (1) of Section 10-E of the Companies Act, 1956, immediately before such date shall stand transferred to the Tribunal and the Tribunal shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act;

(b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order:

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and

(c) all proceedings under the Companies Act, 1956, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately  before such date before any District Court or High Court, shall stand transferred to the Tribunal, and the Tribunal may proceed to deal with such proceedings from the stage before their transfer:

Just those cases relating to the winding-up of firms that are at a level prescribed by the Central Government shall be transferred to the Tribunal:

434. Transfer of certain pending proceedings.—(1) On such date as may be notified by the Central Government in this behalf,—

(a) all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this Section referred to as the Company Law Board) constituted under sub-section (1) of Section 10-E of the Companies Act, 1956, immediately before such date shall stand transferred to the Tribunal and the Tribunal shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act;

(b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order:

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and

(c) all proceedings under the Companies Act, 1956, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the Tribunal, and the Tribunal may proceed to deal with such proceedings from the stage before their transfer:

Just those cases relating to the winding-up of firms that are at a level prescribed by the Central Government shall be transferred to the Tribunal:

Provided further that only certain prosecutions relating to cases other than winding upon which the High Courts have not reserved directions for accepting or dismissing the proceedings shall be referred to the Tribunal:

Also provided that—

I all prosecutions under the Companies Act, 1956, except those relating to company winding up, which are reserved for orders enabling or preventing such proceedings; or

(ii) cases relating to company winding up that have not been moved from the High Courts;

The following sections of the Companies Act of 1956 and the Companies (Court) Laws of 1959 will be applied: Provided also the proceedings relating to voluntary winding up of a company under which notice of the resolution by advertisement has been provided under sub-section (1) of Section 485 of the Companies Act, 1956 but the company has not been dissolved before April 1 2017, it shall then continue to be dealt with in accordance with the Companies Act, 1956 and the Companies (Court) Rules.

Provided further that if any party or parties to any proceedings relating to the winding-up of companies pending before any Court immediately prior to the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, the party or parties may file an application for transfer of those proceedings, and the Court may by order transfer those proceedings to the Tribunal, and the proceedings so transferred shall be referred to as “the proceedings so transferred” (31 of 2016).

The Central Government may make rules to ensure prompt transfer of all matters, lawsuits, or cases pending before the Company Law Board or the courts to the Tribunal under here in compliance with the provisions of this Act.”

The Companies (Transfer of Pending Proceedings) Regulations, 2016, came into force on December 12, 2016, with the powers under Section 434 of the Companies Act, 2013, read with Section 239 of the Insolvency Code, with effect from 01.04.2017. Laws 5 and 6 of the 2016 Rules, which are set out as follows, are applicable to the decision in this case:

Transfer of pending proceedings of Winding up on the ground of inability to pay debts.—(1) All petitions relating to winding up under clause (e) of Section 433 of the Act on the ground of inability to pay its debts pending before a High Court, and where the petition has not been served on the respondent as required under Rule 26 of the Companies (Court) Rules, 1959 shall be transferred to the Bench of the Tribunal established under sub-section (4) of Section 419 of the Act, exercising territorial jurisdiction and such petitions shall be treated as applications under section 7, 8 or 9 of the Code, as the case may be, and dealt with in accordance with Part II of the Code:

Provided that the petitioner shall submit all information, other than information forming part of the records transferred in accordance with Rule 7, required for admission of the petition under section 7, 8 or 9 of the Code, as the case may be, including details of the proposed insolvency professional to the Tribunal within sixty days from date of this notification, failing which the petition shall abate.

The proceedings for winding up initiated under the Act, according to Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, shall continue to be dealt with by such High Court in accordance with the proviso in all cases where the Board for Industrial and Financial Reconstruction has forwarded an opinion for winding up of a company to a High Court and where no appeal is pending.

The proceedings for winding up initiated under the Act, according to Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, shall continue to be dealt with by such High Court in accordance with the proviso in all cases where the Board for Industrial and Financial Reconstruction has forwarded an opinion for winding up of a company to a High Court and where no appeal is pending.

By an amendment dated 29.06.2017, Rule 5 was then substituted as follows:

“5. Transfer of pending proceedings of Winding up on the ground of inability to pay debts.—(1) All petitions relating to winding up under clause (e) of Section 433 of the Act on the ground of inability to pay its debts pending before a High Court, and where the petition has not been served on the respondent under Rule 26 of the Companies (Court) Rules, 1959 shall be transferred to the Bench of the Tribunal established under sub-section (4) of Section 419 of the Companies Act, 2013 exercising territorial jurisdiction and such petitions shall be treated as applications under section 7, 8 or 9 of the Code, as the case may be, and dealt with in accordance with Part II of the Code:

Provided that the petitioner shall submit all information, other than information forming part  of the records transferred in accordance with Rule 7, required for admission of the petition under section 7, 8 or 9of the Code, as the case may be, including details of the proposed insolvency professional to the Tribunal up to 15  July 2017, failing which the petition will stand abated:

Furthermore that any party or parties to the petition after the 15th day of July 2017, be eligible to file fresh applications under section 7, 8 or 9 of the Code, as the case may be, in accordance with the provisions of the Code:

Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this Rule and remains in the High Court and where there is another petition under clause (e) of Section 433 of the Act for winding up against the same company pending as on December 15 2016, other such petition shall not be transferred to the Tribunal, even if the petition has not been served to the respondent.”

It is clear that all proceedings under the Companies Act, 2013 that apply to business winding up and are pending immediately before such date as may be notified by the Central Government in this regard shall be transferred to the NCLT under Section 434 as substituted by the Eleventh Schedule to the Code through a notification dated 15.11.2016. The stage at which such proceedings should be transferred to the NCLT is determined by the Central Government.

When reading Rules 5 and 6 of the 2016 Transition Rules (as written), it is clear that three distinct forms of proceedings are listed. Petitioners who are pending in the High Court for the closing of the company under clause (e) of Section 433 of the Companies Act, 1956 for failure to pay debts must be referred to the NCLT under Rule 5(1) if the petition has not been served on the respondent. They will then be treated as programmes under Parts 7, 8, or 9 of the Code, which will be dealt with under Part II of the Code.

Similarly, all petitions pending before the High Court under clauses (a) and (f) of Section 433 of Companies Act, 1956, under which the petition has not been served on the respondents, will be moved to the NCLT. Only such petitions will be treated as petitions under the Companies Act of 2013’s provisions. Law 5 deals with the third group of cases protected by Rules 5 and 6. (2). This group includes cases in which the BIFR has sent the High Court an opinion to wound up a corporation under Section 20 of the SIC Act. All such proceedings, regardless of their level, will be resolved by the High Court in compliance with the SIC Act’s provisions.

It is clear that the current case is purely about Rule 5(2). In the knowledge of the fact that Section 20 of the SIC Act applies to a company being closed down under the Companies Act, 1956, under the fair and equal clause of Section 433(f) of the Companies Act, 1956, cases coming under Section 20 of the SIC Act are dealt separately under Rule 5(2) and cannot be considered as petitions filed under Section 433(f) of the Companies Act, 1956. The High Court is, therefore, standing corrected 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.

About the fact that Rule 5(2)’s wording is straightforward, it has been argued before us that Rule 5 was substituted on June 29, 2017, as a result of which Rule 5(2) was excluded. The omission of Rule 5(2) has the effect of not immediately moving all cases under Section 20 of the SIC Act to the NCLT, as otherwise, a particular rule transferring such cases to the NCLT will have to be framed, as has been done in Rule 5. (1). The real explanation for Rule 5(2)’s absence in the substituted Rule 5 is that it is appropriate to mention only once, on the repeal of the SIC Act, that proceedings under Section 20 of the SIC Act will be handled by the High Court. As of 15.12.2016, all pending cases under Section 20 of the SIC Act had to be dealt with by the High Court in which those cases were pending; it was needless to continue Rule 5(2) even after 29.06.2017. Since the BIFR did not give an opinion under Section 20 of the SIC Act after 01.12.2016, when the SIC Act was repealed, it was needless to hold Rule 5(2) in effect because, as of 15.12.2016, all pending cases under Section 20 of the SIC Act were to be heard by the High Court and would be heard even after that. This is further explained by the amendment to Section 434(1)(c), which takes effect on 17.08.2018, which provides that any party to a winding-up proceeding pending before a Court immediately before this date can file an application for transfer of such proceedings, and the Court may transfer such proceedings to the NCLT by order at that time. The NCLT will then comply with the litigation as an application for the start of the corporate insolvency settlement process under the Code. As a result, it is clear that under the scheme of amended Section 434  and Rule 5 of the Transfer rules 2016, all proceedings under Section 20 of the SIC Act pending before the High Court will begin before a party files an application with the High Court for transfer of those proceedings after August 17, 2018. The High Court must then pass the cases to the NCLT, which would treat them as an application for the commencement of the corporate insolvency resolution process under the Code.

In this regard, the High Court decision, though erroneous in implementing Rule 6 of the 2016 Transfer Rules, can also be followed by a reference to Rule 5(2), with Section 434 of the Companies Act, 2013, as amended and with effect from Augst 17, 2018.

This, though, is not the end of the storey. It is clear that Respondent No. 3 submitted a Section 7 application under the Code on 11.01.2018, and the NCLT released an order on 13.04.2018 accepting the application. This is a separate proceeding that has nothing to do with the High Court’s decision to move pending winding-up proceedings. Respondent No. 3 could apply under Section 7 of the Code at any time before a winding-up order was issued. This is easily visible from a reading of Section 7 in accordance with Section 238 of the Code, which states:

“238. Provisions of this Code to override other laws.—The provisions of this Code shall have the effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Shri Dave’s clever claim that, because the Eleventh Schedule of the Code amends Section 434 of the Companies Act, 2013, the amended Section 434 must be read as part of the Code and not the Companies Act, 2013, must be dismissed because, while Section 434 of the Companies Act, 2013 is replaced by the Eleventh Schedule of the Code, Section 434, as substituted, still applies. As a result, any discrepancy between Section 434 as substituted and the provisions of the Code must be settled in favour of the latter. We assume the NCLT did the right thing when it extended Section 238 of the Code to an individual proceeding initiated by a protected financial borrower, the Alchemist Asset Restoration Company Ltd. Given this; it’s impossible to see how the High Court might have ruled that the NCLT’s trials were barred through lack of jurisdiction. As a result, the High Court ruling must be reversed on this issue. The NCLT’s hearings will now resume from where they were last left off. In view of Section 238, the business petition currently pending before the High Court cannot be pursued any further. In light of the fact that trials under the Code must run their full course, writ petitions pending before the High Court must also be resolved. As a result, we approve the appeal and overturn the High Court’s ruling.


[1] 2019 (213) CC25

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