2023 (10) TMI 1259 - HC - Companies Law

Delhi HC transfers winding up proceedings to NCLT at nascent stage with only initial publication completed

UMA SHARMA Versus OCTAGON BUILDERS & PROMOTERS & ANR.

Delhi HC transferred winding up proceedings to NCLT, holding that when proceedings are at nascent stage with only initial publication completed, transfer ... Seeking transfer of winding up proceedings to National Company Law Tribunal (NCLT) - HELD THAT:- The said issue of transfer of pending cases has also been considered by this Court in Citicorp International Limited v. Shiv-Vani Oil & Gas Exploration Services Limited [2023 (7) TMI 1188 - DELHI HIGH COURT] wherein the Court relying on the decision of the Supreme Court in ACTION ISPAT AND POWER PVT. LTD. VERSUS SHYAM METALICS AND ENERGY LTD. [2020 (12) TMI 535 - SUPREME COURT] has 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 to now be decided in accordance with the provisions of the Code. A conjoint reading of Rule 5 of the notification dated 7th December, 2016 along with the aforementioned judgment would show that in cases where the petition is not at an advanced stage, the matter is to be transferred to the NCLT. Considering the fact that the winding up proceedings are at a nascent stage and only initial publication/citation was done in the newspapers, this Court is of the opinion that the matter cannot proceed before two fora - IBC being a statute which is meant to encourage revival of the company, it is deemed appropriate to transfer the present petition to NCLT, Allahabad Bench, Prayagraj. Petition disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether pending winding up petitions under Section 433(e) and Section 439 of the Companies Act, 1956 that are at a nascent/non-advanced stage should be transferred to the National Company Law Tribunal (NCLT) pursuant to the Insolvency and Bankruptcy Code, 2016 and Section 434 of the Companies Act, 1956 read with the Ministry of Corporate Affairs notification (Rule 5) dated 7th December, 2016. 2. Whether the appointment of an Official Liquidator and limited initial actions (publication/citation, deposit for publication, attempted takeover of assets) by the High Court amount to an advanced/irreversible stage of winding up that would preclude transfer to the NCLT. 3. Effect of a parallel insolvency proceeding before the NCLT (with an Interim Resolution Professional appointed) on the jurisdiction and propriety of continuation of High Court winding up proceedings. 4. Whether petitions previously disposed of as infructuous (with liberty to file claims before the Official Liquidator) ought to be revived and transferred to the NCLT along with the main petition. 5. Whether transactions carried out after the filing of the winding up petitions will be prejudicial to claimants or how such transactions are to be dealt with following transfer to the NCLT. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Transferability of pending winding up petitions to the NCLT Legal framework: Section 434 of the Companies Act, 1956 contemplates transfer of pending proceedings to the Tribunal on notification; the Ministry of Corporate Affairs notification dated 7th December, 2016 (Rule 5) specifically prescribes transfer of winding up petitions under clause (e) of Section 433 that are pending before High Courts and not served as required under Companies (Court) Rules, 1959, to be treated as applications under Sections 7, 8 or 9 of the IBC and dealt with in Part II of the Code. Precedent treatment: The Court relied on earlier High Court reasoning in Citicorp International Ltd. v. Shiv-Vani (following the Supreme Court's decision in Action Ispat and Power Ltd. v. Shyam Metalics) holding that where winding up is not at an advanced or irreversible stage, transfer to the NCLT is appropriate so that the matter can be resolved under the Code which aims at revival. Interpretation and reasoning: A conjoint reading of Section 434 and Rule 5 plus the cited precedents indicates that transfer is appropriate for matters not at an advanced stage because the Code's objective of corporate revival is better achieved by insolvency resolution mechanisms. The beneficial object of IBC and legislative scheme supporting revival as primary objective inform the interpretation. Ratio vs. Obiter: Ratio - pending winding up petitions not at an advanced/irreversible stage should be transferred to the NCLT and treated as IBC applications; Obiter - observations on policy/objectives of IBC supporting revival (although supporting ratio, policy remarks are ancillary). Conclusion: The Court concludes that such petitions at nascent stages are to be transferred to the NCLT for adjudication under the IBC. Issue 2 - Whether appointment of Official Liquidator and limited initial actions make the winding up advanced/irreversible Legal framework: Section 290 (referred to through analogy in precedent) allows a company liquidator to carry on business as necessary for beneficial winding up; the transfer inquiry depends on whether irreversible actions (e.g., actual sale of property or complete consummation of winding up steps) have occurred. Precedent treatment: Reliance on Action Ispat reasoning that post admission and where assets become in custodia legis, transfer may still be permissible unless irreversible steps making it impossible to 'set the clock back' have occurred. Interpretation and reasoning: The Court examined the factual matrix - only initial procedural steps (publication, deposit for publication, limited attempts to take over assets; incomplete statement of affairs; alleged non-cooperation by directors) had been taken. No actual sales or irrevocable disposals of immovable or movable properties had occurred. The existence of nascent stage actions does not preclude transfer where no irreversible disposition has taken place. Ratio vs. Obiter: Ratio - appointment of an Official Liquidator and limited preparatory acts do not invariably render a winding up so advanced as to preclude transfer; Obiter - discussion on what constitutes 'irreversible' conduct is explanatory. Conclusion: The Court found the winding up was not at an advanced/irreversible stage and therefore transfer to the NCLT was appropriate; the order appointing the liquidator was recalled. Issue 3 - Impact of parallel NCLT proceeding with an IRP on High Court winding up Legal framework: IBC provides for Corporate Insolvency Resolution Process before the NCLT; Rule 5 treats transferred petitions as IBC applications; concurrent jurisdiction should be avoided to prevent multiplicity of fora. Precedent treatment: The Action Ispat approach and related High Court decisions recognizing that where IBC proceedings are pending, continuation of parallel winding up in the High Court is undesirable if transfer is appropriate. Interpretation and reasoning: An IRP had already been appointed by the NCLT in a parallel petition. Given the nascent status of the High Court winding up and the IRP's appointment, the Court held that matters should not proceed before two fora and that the NCLT is the appropriate forum to deal with insolvency/resolution. Ratio vs. Obiter: Ratio - existence of an IRP-appointed insolvency proceeding before the NCLT militates in favor of transfer of nascent High Court winding up petitions to the NCLT to avoid duplicity. Conclusion: Transfer ordered to the NCLT; claimants are permitted to pursue claims before NCLT/IRP. Issue 4 - Revival of previously disposed petitions and scope of transfer Legal framework: Rule 5 and Section 434 permit transfer of pending winding up petitions and prescribe timelines; High Court retains discretion to revive petitions that were disposed of as infructuous where appropriate. Precedent treatment: The Court applied the same transfer principles to petitions earlier disposed of with liberty to file claims before the Official Liquidator, treating those petitioners as entitled to have their petitions revived and transferred so they may pursue claims under the IBC framework. Interpretation and reasoning: Since those petitions were connected to the same company and had been disposed of only because of the appointment in another petition, equitable and procedural fairness required revival and transfer so all claimants can proceed before the appropriate forum (NCLT). Ratio vs. Obiter: Ratio - related petitions previously disposed of with liberty to file claims before the Official Liquidator may be revived and transferred to NCLT to be adjudicated under the Code. Conclusion: The Court revived specified petitions and directed their transfer to the NCLT. Issue 5 - Treatment of post-filing transactions and preservation of petitioners' interests Legal framework: IBC and transfer provisions preserve NCLT power to examine antecedent transactions; insolvency/resolution law addresses avoidance/setting aside of preferences, undervalued transactions and other prejudicial acts. Precedent treatment: The Court observed established principle that NCLT will deal with transactions post-filing in accordance with law and that such transactions will not prejudice claimants. Interpretation and reasoning: By transferring the matter, the Court ensured that any transactions undertaken after filing would be open to scrutiny by the NCLT and dealt with as per statutory provisions, thereby protecting petitioners' interests despite recalling the High Court liquidator appointment. Ratio vs. Obiter: Ratio - transactions post filing remain subject to being dealt with by the NCLT in accordance with law and do not prejudice the rights of petitioners; Obiter - general assurance of non-prejudice is explanatory of transfer consequences. Conclusion: The Court directed that post-filing transactions are to be addressed by the NCLT and will not prejudice petitioners; electronic records to be transmitted to the NCLT for continuation of proceedings.