India: Position Of The Pending Commercial Cases After The Notification By Ministry Of Corporate Affairs For Transfer Of Cases From Commercial Division Of High Court To The Respective NCLT

Last Updated: 26 April 2019
Article by Vaidya Gopikrishnan

INTRODUCTION

In a recent order of the National Company Law Appellate Tribunal, New Delhi ("NCLAT") in the case of Rasiklal S. Maria versus Amar Dye Chem and 2 others1, certain legal issues were discussed with respect transfer of cases from the Commercial division in the High Court of Bombay ("Commercial division") pending for winding up proceedings to the National Company Law Tribunal ("NCLT") and jurisdiction of the Commercial division under section 390 (power to compromise or make arrangement with creditors) and section 446 (powers of Company Court to adjudicate matters relating to winding up proceedings in relation to section 390) of the Companies Act, 1956 (hereinafter referred to as the "Old Act"). The said order also provides clarity as to the powers of the Commercial division to adjudicate winding up proceedings when a company revival scheme petition was filed earlier before the Commercial division and the maintainability of a subsequent transfer of the revival scheme petition to the NCLT.  

FACTUAL BACKGROUND

The facts of the case are such that Amar Dye Chem ("the Company") was pending for winding up proceedings before the Commercial division, wherein initially the Company was referred to liquidation by the Board of Industrial and Financial Reconstruction ("BIFR"), which declared the Company as a 'sick company'. As per recommendations of the BIFR, the Company was not fit for revival and thereafter the Commercial division appointed an official liquidator to take control and charge over the assets of the Company. The Appellant (share holder) after the said order to appoint official liquidator, had informed the Commercial division that he along with other co-investors are willing to revive the Company as per powers to file a scheme of compromise under Section 391 to 394 of the Old Act2. The Commercial division as per its order dated 14.02.2008 had allowed the first motion application3 filed by the Appellant and granted extension of time to convene meeting between the shareholders and creditors of the Company. That upon filing of second motion application4 by the Appellant, he was informed by way of notice from the NCLT that the said Company revival scheme petition was transferred to the NCLT, Mumbai by the Ministry of Corporate affairs vide notification No. GSR 1119(E) dated 07.12.2016. After hearing the said petition the NCLT passed orders stating that no scheme of arrangement can be permissible in cases where the official liquidator had been already appointed and that only the liquidator was permitted to represent the Company in such matters relating to revival of the Company. Being aggrieved by the said order the Appellant filed an appeal against the impugned order of the NCLT Mumbai before NCLAT stating that the NCLT had interpreted the provisions of the Old Act wrongly and that the said order is liable to be set aside. The appeal was opposed by the appointed official liquidator stating that the NCLT was right to dismiss the revival scheme petition of the Appellant and further argued that a scheme of compromise can only be filed by the liquidator himself as otherwise there would be prolongation of proceedings in deciding the matter. The Appellant made further arguments stating that that when a direction to revive the Company was issued by the High Court of Bombay in 2010 in its first motion application and the same would be thereafter be decided upon merits, in such cases the NCLT did not have jurisdiction to re-open and examine the same and pass orders.          

ISSUES RAISED

  1. Whether a Promoter director having shareholding in a company under provisional liquidation can file an application under Section 391 of the Old Act after the appointment of the official liquidator?                                                                                                 
  2. Whether in case of any default by the NCLT in passing orders, can the Appellant move an application before the Commercial division which had initially granted extension of time to convene meetings between the members of the Company and submit a revival scheme?

OBSERVATION AND FINDINGS

The NCLAT examined the impugned order passed by the NCLT, Mumbai wherein the first issue was taken up relating to the applicability of section 391 (1) of the Old Act which states that in case of a compromise between a company and its creditors  "The Tribunal may on the application of the company or any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members , as the case may be, to be called, held and conducted in such manner as the tribunal directs." It was observed by the NCLAT that the NCLT misread section 391 (1) of the Old Act, to only construe liquidators as authorised persons in cases of application for compromise or arrangement in cases of winding up of companies and that NCLT had relied upon Sunil Gandhi & Anr. Vs A.N. Buildwell Private Limited on 15 March, 2017 only to the extent that the official liquidator has rights to propose a compromise or arrangement. The Appellant had made submissions quoting cases5 wherein the right to file an application to compromise by the liquidator was only in addition to the rights of the members, shareholders and creditors of the company. The Official Liquidator relied on judgement in the case of Rajiv Sachdeva Vs. Rajhans Steel Ltd. wherein it was held that upon accepting the recommendations of the BIFR to rehabilitate the company the Appellants despite not challenging the same by way of appeal or in writ jurisdiction cannot file scheme of compromise before the Commercial division so as to stall time and indefinitely drag the winding proceedings hence were directed to continue with the winding up proceedings.

The NCLAT in the present case considering the submissions of the Appellant and the Respondent, stated that despite the judgement relied by the Respondent liquidator in Rajiv Sachdeva (supra), the liquidator is only an additional person apart from the members, shareholders and creditors of the company and cannot be considered as an exclusive person thereby clarifying its stance regarding section 391 of the Companies Act, 1956.

With respect to the second issue relating to exclusive jurisdiction of Commercial division, the NCLAT clarified that the said order with respect to convening meeting between the members of the company was passed by the Commercial division in 2010 and that the said notification to transfer all company cases to the NCLT was issued in 20166. As per Rule 5 of the notification, it was specifically stated that any proceedings relating to winding up of a company due to inability to pay debts where no petition of notice was given to the official liquidator shall be transferred to the Tribunal for adjudication. In the present case, the liquidator never objected to the scheme of compromise filed by the Appellant and the liquidation proceedings were transferred to the NCLT by way of NCLT office letter dated 07.01.2017. In light of the above facts the NCLAT passed orders to stay the liquidation proceedings pending before NCLT, until the said application to compromise is moved before the Commercial division of the High Court by the Appellant and further noted that in the present case the winding up proceedings and scheme of compromise must be dealt with by the same forum i.e. the Commercial division of the High Court of Bombay and only in case of independent proceedings the jurisdiction of the NCLT would be absolute.       

COMMENTS

The NCLAT in the present case has resolved legal issues in cases relating to revival of companies in provisional liquidation which would strictly constitute an exception and that such cases are different from independent proceedings which would be otherwise transferred to the NCLT wherein any omissions in passing orders would be remanded to the NCLT by the NCLAT. Further it was asserted that the transfer of the winding up proceedings in the present case was not judicial in nature and that the said notification by Ministry of Corporate Affairs dated 07.12.2016, did not give powers to automatically transfer any such cases in which company scheme petition relating to winding up petition was already filed before the Commercial division. Moreover, it was stated that the Commercial division had powers vested under the Old Act, until the ultimate step is taken to dispose the assets. Hence, it can be understood that the present legal position taken by NCLAT relating to provisional liquidation reasserts the powers of the Commercial division and the powers to make compromise/ arrangements by members of the concerned company in addition to the official liquidator.  

Footnotes

1 Company Appeal (AT) No. 337 of 2018  (NCLAT) Order dated 08.04.2019 https://nclat.nic.in/Useradmin/upload/10915932945cac29f794003.pdf

2  Section 391 – Power to compromise or make arrangements; Section 392 – Power of High Court to enforce compromises and arrangements; Section 393 – Information as to compromises or arrangements with creditors and members Section 394 – Provision for facilitating reconstruction and amalgamation of companies

3  Company Application No. 137 of 2010

4  Companies Scheme Petition 243 of 2012

5  Vasant Investments Corporation Ltd 1978 SCC Online Bom 151, Rajendra Prasad Agarwalla & Ors. Versus the Official liquidator, High Court 1977 SCC Online Cal 189, National Steel & General Mills Versus Official Liquidator 1989 SCC Online Del 118 – it was considered that liquidator is only an additional person who can file scheme of revival with respect to section 391 of the old act.

6  GSR 1119 (E) dated 07.10.2016 " The Companies (Transfer of pending proceedings) Rules, 2016

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