What the Supreme Court held on transfer of winding up cases pending in High Courts
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What the Supreme Court held on transfer of winding up cases pending in High Courts

Aditya AK

The Supreme Court has held that winding up cases under Section 20 of the defunct Sick Industrial Companies (SIC) Act pending before the High Court must be transferred to the National Company Law Tribunal (NCLT) once a party files an application as per Section 7 of the Insolvency and Bankruptcy Code.

A judgment to this effect was passed by a Bench of Justices Rohinton Nariman and MR Shah in a petition filed by the workers’ union of Jaipur Metals & Electricals (company).

The appeal in the Supreme Court was filed challenging the judgment of the Rajasthan High Court passed on June 1 this year, by which the High Court had refused to transfer winding up proceedings pending before it to the NCLT. While doing so, the High Court has set aside an order of the NCLT by which a financial creditor’s petition under Section 7 of the Code had been admitted.

Back in 1997, Jaipur Metals & Electricals had become a non-performing asset, and a reference was made to the Board for Industrial and Financial Reconstruction (BIFR) under SIC Act. Five years later, the BIFR forwarded its opinion to the High Court that the company ought to be wound up.

After the case was registered in the High Court, Alchemist Asset Reconstruction Company Ltd. (Respondent No. 3) acquired all the financial debts of the company.

In January 2018, Alchemist preferred an application under Section 7 of the Code, stating that it had an assigned debt of Rs. 356 crore owed to it by the company. The NCLT accepted the application, and declared a moratorium in terms of Section 14 of the Code.

In April this year, the High Court stayed the implementation of this order. In June, the High Court passed the impugned judgment, in which it refused to transfer the winding up proceedings pending before it, and set aside the NCLT order passed in April for want of jurisdiction. Petitions were then filed in the Supreme Court challenging this order, after which the Court issued notice and stayed the operation of the High Court judgment.

Senior Advocates Sidharth Luthra – appearing on behalf of the appellant union – and P Chidambaram, appearing for Alchemist contended that the Eleventh Schedule of the Code and amendments made to the Companies Act, 2013, particularly to Section 434, would show that all winding up proceedings pending before the High Court are to stand transferred to the NCLT.

On the other hand, Siddharth Dave argued that as per Rule 5(2) of the Companies (Transfer of Pending Proceedings) Rules, 2016, the present proceedings would continue before the High Court, being proceedings for winding up of a company pursuant to Section 20 of the SIC Act.

It was also noted that as per an amendment made to Rule 5 in June 2017, no mention was made of Rule 5(2). As per Luthra and Chidambaram, this meant that winding up of companies that are initiated under the SIC Act cannot, after such omission, be continued to be dealt with by the High Court. Per contra, Dave submitted that the omission of this Rule in the amendment would not impact the High Court continuing to deal with this matter.

Giving its interpretation of the status of Rule 5(2), the Court held,

“However, though the language of Rule 5(2) is plain enough, it has been argued before us 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.”

At this point, the Court made reference to the August 2018 amendment to Section 434(1)(c) of the Companies Act, according to which any party to a winding up proceeding pending before a Court may file an application for transfer of such proceedings, and the Court, may by order, transfer such proceedings to the NCLT. The Court held,

“…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.”

It was also observed that if there is any inconsistency between Section 434 of the Act and the provisions of the Code, the latter would prevail, as per Section 238 of the Code.

“We are of the view that the NCLT was absolutely correct in applying Section 238 of the Code to an independent proceeding instituted by a secured financial creditor, namely, the Alchemist Asset Reconstruction Company Ltd. 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 Court, therefore, held that proceedings in the NCLT will continue from they left off, and that the petition pending before the High Court cannot be proceeded with, on account of Section 238. With this direction, the Bench set aside the judgment of the High Court.

Read judgment:

Jaipur-Metals-SC-Dec-12.pdf
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