NCLAT holds that shareholders can file application to approve settlement with creditors even after appointment of official liquidator May 27, 2019
Published in: Between The Lines
While every care has been taken in the preparation of this Between the Lines to ensure its accuracy at the time of publication, Vaish Associates, Advocates assumes no responsibility for any errors which despite all precautions, may be found therein. Neither this bulletin nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter. All logos and trademarks appearing in the newsletter are property of their respective owners.
In a recent judgement in the case of Rasiklal S. Mardiya v. Amar Dye Chem Limited (decided on April 8, 2019), the National Company Law Appellate Tribunal (“NCLAT”) has stated that shareholders can file application to approve settlement with creditors even after appointment of official liquidator.
The case arises from a winding up petition filed before the Bombay High Court in 1998, upon the recommendation of the Board for Industrial and Financial Reconstruction (“BIFR”). In 2008, Rasiklal S. Mardiya, the promoter of Amar Dye Chem Limited (“Appellant”), attempted to resolve differences with the creditors. The Bombay High Court granted him liberty to do so. He subsequently filed application for convening the meeting of shareholders and creditors which was allowed by the Bombay High Court in 2010. The official liquidator did not object to these proceedings. During the pendency of the same, the Ministry of Corporate Affairs on December 7, 2016, issued the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules”) transferring pending proceedings to the respective National Company Law Tribunals (“NCLT”). Consequently, the petition was transferred to the NCLT, Mumbai in 2017.
The matter was continued in NCLT, Mumbai which held that under Section 391(1) of the Companies Act, 1956 (“Old Act”), of which the corresponding provision in the Companies Act, 2013 (“New Act”) is Section 230(1), once a company is in liquidation, only the liquidator was authorized to file a petition for compromise or arrangement. Aggrieved by the NCLT Mumbai’s judgement, the Appellant approached the NCLAT.
The following issues were examined by the NCLAT:
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?
Relying on the observations of the Bombay High Court, the Appellant claimed that he had locus to submit the scheme which was permitted by the Bombay High Court and his locus was wrongly held against him by the NCLT, Mumbai. Reference was made to the Order of the Bombay High Court dated July 21, 2011, whereby extension of time was granted for convening meetings of the shareholders and creditors. It was argued that official liquidator of the Amar Dye Chem Limited (“Respondent”), had never objected to the right of Appellant to file such scheme of compromise/ arrangement under Section 391–394 of the Old Act and therefore the NCLT, Mumbai could not have reopened the issue whether or not the Appellant was competent to file the scheme when the company was already in liquidation.
The Respondent filed reply and opposed the appeal trying to justify the view taken by NCLT, Mumbai stating that when the company is in liquidation, only the official liquidator could apply for scheme of arrangement/ compromise. The Respondent, cited the judgement of the Jharkhand High Court in the case of Rajiv Sachdeva v. Rajhans Steel Limited (In Liquidation) (decided on August 12, 2010) (“Rajiv Sachdeva Judgement”) to support the NCLT, Mumbai’s conclusion on who can file for settlement, where it was stated that when the proceedings had been initiated initially before BIFR, it becomes matter of record that rehabilitation was not possible and consequently, the company was required to be wound up. The Respondent drew the NCLAT’s attention to the Delhi High Court judgement in case of Sunil Gandhi and Others v. A.N. Buildwell Private Limited and Others (decided on March 15, 2017) (“Sunil Gandhi Judgement”). The NCLT, Mumbai had only relied on the Sunil Gandhi Judgement to ascertain the issue regarding filing of application by official liquidator for compromise or settlement. The Respondent’s contention was that Sunil Gandhi Judgement also comprehensively covers the second question insofar as it holds that NCLT should not exercise jurisdiction when winding up proceedings is in advanced stage in the High Court. It was also averred that transferring the proceedings was not envisaged in the Transfer Rules and should be avoided as it only leads to protracted litigation.
Observations of the NCLAT
The NCLAT took note that the NCLT, Mumbai had not addressed the first question on merits at all. Rather, it had only read Section 391(1) of the Old Act/ Section 230(1) of the New Act restrictively to hold that the liquidator “alone” could file for settlement. The NCLAT has noted that the NCLT, Mumbai had read the word “alone” into the provision which did not appear to be the legislature’s intention.
The NCLAT went on to analyse the judgement of the Division Bench of Delhi High Court in National Steel & General Mills v. Official Liquidator (decided on March 9, 1989) (“National Steel Judgement”) wherein it was held that liquidator is not the exclusive person who can move an application under Section 391 of the Old Act but is only an additional person. Categorizing the liquidator’s power as a general power, the Delhi High Court had underlined 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 resonance of this opinion in the Supreme Court’s judgement in Meghal Homes (P) Limited v. Shree Niwas Girni K.K. Samiti (decided on August 24, 2007) (“Meghal Homes Judgement”).
The National Steel Judgement and the Meghal Homes Judgement were weighed against the Jharkhand High Court’s observations in the Rajiv Sachdeva Judgement. The NCLAT distinguished the Rajiv Sachdeva Judgement insofar as the observations therein could aid in deciding the merits of the instant matter, but it does not express judicial opinion on Section 391 of the Old Act, per se. Hence, on the first issue, the NCLAT stated that the Appellant could have filed a petition for settlement with creditors before NCLT/Company Court under Section 391 of the Old Act.
The NCLAT answered the second issue, which was the issue of which of the two fora is appropriate for filing of a settlement application in the instant matter. It relied on the extensive observation made by the Delhi High Court in Sunil Gandhi Judgement. Finding itself in agreement with the Delhi High Court, the NCLAT stayed the NCLT, Mumbai proceedings and allowed the Appellant to move to the Bombay High Court. This was done as the NCLAT found the transfer to be bad in law as the Transfer Rules explicitly stated that all cases where winding up was ongoing following BIFR recommendation were to stay with the respective High Courts.
Decision of the NCLAT
The NCLAT reversed the NCLT, Mumbai’s stance and stated that the Appellant could have filed a petition for settlement with creditors before NCLT/Company Court under Section 391 of the Old Act. On the second issue, the NCLAT stated that the transfer of proceedings to the NCLT, Mumbai was bad in law.
Vaish Associates View
The legislature has been resolute in its intention to keep promoters out of the corporate insolvency resolution process. Section 29A was inserted into the Insolvency and Bankruptcy Code, 2016 vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 to prohibit promoters from bidding for their companies during the corporate insolvency resolution process as well as in case of liquidation as a going concern. This was done to take care of the moral hazard that is apparent in allowing promoters who were primarily responsible for the company’s mismanagement and loss of value to buy it back later at a discount. This judgement’s practical application may strike a dent into the legislature’s intention. It may create a backdoor entry for promoters to cling on to their companies. Hence, in all the fresh liquidation proceedings before the NCLTs, it may have to entertain the application of the promoters for settlement/compromise.
Contributors: Mr. Arpit Sinhal, Ms. Batul Barodawala, Mr. Mahim Sharma, Mr. Drushan Engineer and Ms. Ishita Mishra
For more information please write to Mr. Bomi Daruwala at email@example.comDOWNLOAD NEWSLETTER