Whether shareholders can file an application to approve a settlement with the creditor after the Official Liquidator is appointed?

The article will discuss the powers of the liquidator. This article will also discuss the question of whether shareholders can file an application to approve the settlement with creditors after the official liquidator is appointed.
Estimated Reading Time: 8 minutes

Introduction

Whenever a company is in financial trouble, its shareholders, creditors may file an application in the court for the purpose of liquidation. Liquidation is executed by a qualified person called Liquidator. He takes control over the affairs and management of the company to wind up the company in a systematic manner. After the liquidator is appointed, it is the duty of liquidator to meet the claims of creditors while the shareholders of the company do anything directly. This article will discuss the powers of the liquidator. This article will also discuss the question of whether shareholders can file an application to approve the settlement with creditors after the official liquidator is appointed.

Meaning of official liquidator

Let us see who is an official liquidator. As per section 2 sub-sections 61 of the Companies Act 2013, an official liquidator is one who is appointed under section 359 sub-section 1 of the same act. Section 359 provides for the appointment of any person by the central government to discharge the functions of the Official Liquidator. The central government can appoint as many official liquidators as it thinks necessary. The official liquidator is appointed for the purpose of winding up the company by the tribunal. The official liquidator is the whole-time office of the government. The salary and other allowances of the official liquidator are provided by the central government. Section 350 provides for the powers of the official liquidator. As per section 350, the official liquidator will enjoy all those powers that are granted to him by the central government. The Official Liquidator may:[1]

  1. Exercise all the powers that can be exercised by a Company Liquidator under the provisions of this Act.
  2. Conduct inquiries or investigations in respect of matters arising out of winding up proceeding on the direction of the Tribunal or the Central Government.

Power of company liquidator

The power of the company liquidator is given under section 290 of the Companies Act 2013. As per this provision, a company liquidator in winding up of a company by the tribunal has the following powers.

  1. Power to carry on the business of the company in a way necessary for the beneficial winding up of the company.
  2. Power to do all acts and to execute all deeds, receipts, and other documents in the name and on behalf of the company.
  3. Power to sell the immovable and movable property and actionable claims of the company by public auction or private contract. Power to transfer such property to any person or body corporate.
  4. Power to sell the whole of the undertaking of the company.
  5. Power to raise any money required on the security of the assets of the company.
  6. Power to institute or defend any suit or legal proceeding in the name and on behalf of the company.
  7. Power to invite and settle a claim of creditors, employees, or any other claimant and distribute sale proceeds.
  8. Power to inspect the records or returns of the company on the files of the Registrar or any other authority.

Liquidator under Insolvency and Bankruptcy Code 2016

Section 34 of the Insolvency and Bankruptcy Code 2016 provides for the appointment of the liquidator for the liquidation of the corporate debtor. The resolution professional appointed for the corporate insolvency resolution process shall act as the liquidator for the purposes of liquidation unless replaced by the Adjudicating Authority. Sub-section 2 of section 34 provides that after the appointment of a liquidator under sub-section 1, he will enjoy all powers of the board of directors, key managerial personnel, and the partners of the corporate debtor. The fees for the conduct of the liquidation proceedings are to be paid to the liquidator from the proceeds of the liquidation estate.

As per section 230 sub-section (1) of the Indian Companies Act of 2013 where a company which is being wound up, the official liquidator has the power to file an application for compromise or arrangement between the company and its creditors or between the company and its members before the tribunal. After the application is submitted, the tribunal can order the meeting of creditors or the members to be held.

This provision allows the liquidator to file an application for compromise or settlement in a case where the company is being wound up. But it does not bar any shareholder from initiating any process for settlement between the company and the creditors. But the language of the provision is ambiguous on this point. Therefore, the judiciary has discussed this point in a case before it.

Indian Judiciary’s Observation

In the case of Rasiklal S. Mardia Vs. Amar Dye Chemicals Ltd. decided on 8th April 2019. The facts of the case are that the company was incorporated on 14th May 1954. In April 1993, it was suggested to the Board of Industrial and Financial Reconstruction (BIFR) that the company is a sick company. After its examination and due procedure, BIFR referred the Company to wind up before the Hon’ble High Court of Bombay in 1998. The High court admitted the winding-up petition on 9th December 1998. The High court in its order mentioned that the rehabilitation and revival of the company are not possible. Therefore the winding up of the company is in the public interest. The high court attached an official liquidator and directed him to take charge of all the affairs, assets, and properties of the company. In 2008 relying upon an order of the High Court, the promoter Mr. Rasiklal S. Mardia of Amar Dye Chem Ltd. presented a settlement scheme before the court. The high court in an order passed on 31st March 2010 allowed him to move ahead with the scheme. There was no objection against the scheme by the official liquidator appointed by the court. During the pendency of the suit, the ministry of corporate affairs issued a notification containing the Companies (Transfer of Pending Proceedings) Rules, 2016. This rule required the transfer of pending proceedings to the respective National Company Law Tribunals (NCLT). Accordingly, the petition was transferred to the NCLT (Mumbai) in 2017.

The NCLT heard the matter and concluded the matter referring to the section 230(1) of the companies act 2013 that once the company is in liquidation, it is the liquidator alone who was authorized to file the Company Petition either for compromise or arrangement in respect of the Company in liquidation.

The party aggrieved by the judgment of NCLT approached the National Company Law Appellate Tribunal. The issues before the NCLAT were:

  1. Whether the NCLT (Mumbai) was correct in holding that the liquidator alone can file for compromise or settlement?
  2. Whether the transfer of proceedings from the Bombay High Court to NCLT (Mumbai) was good in law?

The appellant argued that on relying on the observations of the Bombay High Court, the Appellant claimed that he had the option to submit the settlement scheme which was permitted by the Bombay High Court in its own order date on 31st March 2010 and his option was wrongly held against him by the NCLT (Mumbai). The order of the Bombay High Court dated July 21, 2011, was considered by the appellant in which extension of time was granted to him for convening meetings of the shareholders and creditors. It was argued that the official liquidator of the Amar Dye Chem Limited (the respondent) did not object to the right of the Appellant to file such a scheme of compromise or arrangement under Section 230 of the Companies Act 2013. Therefore the NCLT (Mumbai) should not have again raised the issue of whether the appellant has the capacity to file the scheme when the company was already in liquidation or not.

The Respondent replied and opposed the appeal of the appellant. The Respondent tried to justify the view taken by NCLT asserting that when the company is in liquidation, only the official liquidator can apply for a scheme of compromise or arrangement. The Respondent quoted the judgment of the Jharkhand High Court in the case of Rajiv Sachdeva v. Rajhans Steel Limited, decided on August 12, 2010, to support the NCLT’s decision on who can file for settlement, in the case  it was stated that when the proceedings had been commenced originally before BIFR. It was evident that rehabilitation was not possible and consequently the company was required to be wound up. The Respondent put before NCLAT the Delhi High Court judgment in case of Sunil Gandhi and Others v. A.N. Buildwell Private Limited and Others decided on March 15, 2017. The NCLT had only relied on the Sunil Gandhi Judgement to determine the issue concerning the filing of the application by the official liquidator for compromise or settlement. The Respondent contended that Sunil Gandhi Judgement also thoroughly deal with the second issue as it considers that NCLT should not exercise jurisdiction where the winding-up proceedings have reached the advanced stage in the High Court. It was also affirmed that transferring the proceedings was not intended in the Transfer Rules. Thus, it should be avoided because it will only lead to the delayed litigating procedure.

The NCLAT observed that the NCLT (Mumbai) has not addressed the first issue on all its merits. It has only read Section 230(1) of Companies Act 2013 in a narrow sense to draw an opinion that the liquidator “alone” could file for settlement. The NCLAT observed that the NCLT(Mumbai) has read the provision and concluded that only the Liquidator can file an application for settlement. However, the language of the section indicates that it was not the intention of the legislator.

The NCLAT analyzed the judgment of the Division Bench of Delhi High Court in National Steel & General Mills v. Official Liquidator, decided on March 9, 1989. In this judgement it was held that liquidator is not the only person who can file an application under Section 391 of the Old Act but he is an additional person along with the shareholders, creditors and members of the company. It stated that the liquidator’s power as general power. The Delhi High Court pointed out that it does not take away the special power of the member, creditor, and the company to file a petition for settlement, after the commencement of liquidation proceedings. The NCLAT also found a similar opinion in the Supreme Court’s judgment in Meghal Homes Pvt Ltd V. Shree Niwas Girni K.K. Samiti decided on August 24, 2007.

The “National Steel Judgement” and the “Meghal Homes Judgement” were considered against the observation of the High Court of Jharkhand in the Rajiv Sachdeva Judgement. The NCLAT distinguished the Rajiv Sachdeva Judgement accordingly as the observations, in this case, could help in deciding the merits of the above matter. But this judgment does not express a judicial opinion on Section 391 of the Old Act. Therefore while studying the first issue; the NCLAT stated that the appellant could have filed an application for settlement with creditors before NCLT or Company Court under Section 230 of the Companies Act.

The NCLAT addressed the second issue. The second issue was which of the two forums is fit and appropriate for filing a settlement application in the above matter. For this issue, the NCLAT relied upon the wide observation made by the Delhi High Court in Sunil Gandhi Judgement. NCLAT agreed with the view of the High Court of Delhi. The NCLAT stopped the proceeding before the NCLT permitted the Appellant to move to the Bombay High Court. NCLAT took this step as it realised the transfer to be bad in law because the Transfer Rules clearly stated that every case where winding up is ongoing following BIFR recommendation is to stay with the respective High Courts.

The NCLAT reversed the decision of the NCLT (Mumbai) and stated that the appellant can file a petition for settlement with creditors before a tribunal under section 230 of the Companies Act 2013. Answering the second issue the NCLAT stated that the transfer of a proceeding that is already pending in a court to the NCLT is bad in law.

Conclusion

We can conclude that the decision of the Rasiklal Case clearly suggests that a shareholder can file a petition for settlement with creditors after the commencement of the liquidation process and appointment of the official liquidator. The court has interpreted the language of section 230 of the Companies Act 2013 and said that there is nothing written in the provision which indicates that exclusively the official liquidator can file an application for the compromise or arrangement where a company is being wound up. Therefore, a shareholder or promoter or any member of the company can approach the tribunal for settlement with the creditors even after the official liquidator is appointed.

Also read Shareholder vs Stakeholder Theory: A Historical Perspective in India


[1] Section 350 of the Companies Act 2013