(Prayer: This Company Application is filed under Section 434(1) of the Companies Act, 2013 praying to transfer the company petition No. 243/2014 on the file of the Hon’ble High Court of Karnataka to the National Company Law Tribunal, Bengaluru, under the insolvency and bankruptcy code, 2016 and grant such other and further relief as are just.
This Company Application is filed under Section 434(1) of the companies Act, 2013 praying to transfer the company petition No. 243/2014 on the file of the Hon’ble High Court of Karnataka to the National Company Law Tribunal, Bengaluru, under the insolvency and bankruptcy code, 2016.)
1. Company Application No. 300/2020 in Company Petition No.136/2016 and Company Application No. 167/2021 in Company Petition No. 243/2014 are taken up together, as identical interlocutory applications are filed in both the matters seeking transfer of the pending winding up proceedings to the National Company Law Tribunal (“NCLT” for short) to be disposed off in terms of “The Insolvency and Bankruptcy Code, 2016” (“IBC”, for short).
2. The parties are referred to by their ranks in the Company Petition.
3. Company Petition No. 243/2014 has been filed seeking an order of winding up of the respondent-Company, viz., M/s. Nitesh Residency Hotels Private Limited (hereinafter referred to as “ respondent-Company”) claiming that the respondent-Company had committed defaults as regards the payment of; rent, interest on rent, service tax and penalty on service tax. It is contended that the respondent-Company in committing default had demonstrated its inability to pay the debt and accordingly, the winding up proceedings had been initiated.
During the course of proceedings, Company Application No. 167/2021 has been filed by the respondent seeking transfer of the Company Petition pending on the file of this court to the NCLT to be disposed off in terms of IBC.
4. Company Petition No. 136/2016 has been filed against M/s. Nitesh Residency Hotels Private Limited asserting that the respondent was due to the petitioner a sum of Rs.65,38,700/- being the amount due arising out of services rendered under the work Order for General Trade Contract dated 25.08.2012. Accordingly, contending that the respondent-Company was unable to pay its debt, the winding up petition has been filed seeking an order of winding up of respondent-Company. During the pendency of such proceedings, the respondent has filed Company Application No.300/2020 in Company Petition No. 136/2016 seeking transfer of the proceedings to the NCLT to be disposed off in terms of IBC. The petitioners in both the Company Petitions have filed their objections opposing the application seeking transfer.
5. As regards Company Application No. 167/2021, the petitioner in Company Petition No. 243/2014 while opposing the application has asserted that no reasons are assigned in the application invoking exercise of discretion of this Court in terms of power vested under the fifth proviso to Section 434(1) of the Companies Act, 2013. It is submitted that the application has been filed belatedly only to protract the proceedings.
6. Insofar as Company Application No. 300/2020, the petitioner in Company Petition No. 136/2016 has also filed the statement of objections contending that the application for transfer does not make out any valid grounds, that the application was filed belatedly with an intention of protracting the proceedings. Similar contention relating to the exercise of discretionary power vested in the fifth proviso to Section 434(1) of the Companies Act, 2013 to be exercise while dealing with the application for transfer as sought in Company Application No.167/2021, has been raised.
7. Sri C.K. Nandakumar, learned counsel was appointed as Amicus Curiae to assist the Court taking note of the legal issues that have arisen.
8. Arguments were advanced by Sri.K.G. Raghavan, learned Senior Counsel appearing for Sri Nischal Dev B.R., for the (Corrected vide Court order dated 19.11.2021.) Respondent in Company Application No. 167/2021 ((Corrected vide Court order dated 19.11.2021.)Petitioner in Company Petition No. 243/2014) and Sri Shivabhushan S. Hatti, learned counsel appearing for Ms. ManeeshaKongovi learned counsel for the (Corrected vide Court order dated 19.11.2021.)Respondent in Company Application No. 300/2020 ((Corrected vide Court order dated 19.11.2021.) Petitioner in Company Petition No. 136/2016) and Sri. NamanJabakh and Sri. Vivek Holla, appearing for the (Corrected vide Court order dated 19.11.2021.) applicant, which is common in both the Company Applications. Both sides have filed their synopsis and the Amicus Curiae has also filed his written submissions which have been taken note of.
9. The learned counsel for the respondent has sought to contend that the Companies (Transfer of Pending Proceedings) Rules, 2016 [‘Transfer Rules, 2016’ for short) as amended by way of Second Amendment Rules, 2017 and Section 434 of the Companies Act, 2013 as amended on 06.06.2018 provide for party or parties to any proceedings to file an application seeking transfer. The respondent has sought to rely on the judgment of the Apex Court in the case of Forech India Limited v. Edelweiss Assets Reconstruction Company Limited And Another-(2019) 18 SCC 549 to contend that introduction of the fifth proviso in Section 434 of the Companies Act, 2013 has provided for application to be filed seeking transfer of the winding up proceedings which wound then “have to be transferred by the High Court to the adjudicating authority by treating it as an insolvency Petition under the Code” (see para-17 of the said decision).
10. Reliance is also placed on the observations of the Apex Court in the case of Action Ispat and Power Private Limited v. ShyamMetalics and Energy Limited in civil Appeal Nos. 4042-4043 of 2020 (arising out of SLP (Civil) Nos. 2033-2034 of 2020) decided on 15.12.2020 and particularly, on the observations in Para-22 to contend that transfer of the petition even post issue of notice in the petition and pre-admission is a consequence that would follow which would be similar to the consequences as contemplated under the Transfer Rules, 2016 where there would be a transfer of the proceedings when notice of the petition has not been served upon the respondent at a pre-admission stage. It is also pointed out that as long as the winding up proceedings have reached the stage where it would be irreversible making it impossible to set the clock back, the proceedings ought to be transferred to the NCLT to be disposed off.
11. The judgment of the Apex Court in the case of A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited & Others in Civil Appeal Nos. 4230-4234/2020 decided on 01.03.2021 is also relied upon to contend that it is only where a Company in winding up is near corporate death, that there ought to be no transfer of winding up proceedings to the NCLT. Accordingly, it is contended that the Transfer Rules 2016 did not prohibit parallel proceedings as regards to matters post notice stage and in order to avoid parallel proceedings that would lead to possible conflicting proceedings, the fifth proviso to Section 434(1)(c) of the Companies Act, 2013 has been inserted providing for making of applications seeking for transfer of proceedings to the NCLT. It is accordingly contended that the power of transfer is to be exercised keeping in mind the observations made in the judgments of the Apex Court subject to the rider that it is only in the cases where the Company is at the stage of near corporate death or where the proceedings have reached the stage where it would be irreversible making it impossible to set the clock back, the Court ought not to decline exercise of power for transfer.
12. As regards the factual aspects of the matter, the respondent has asserted that in both the maters, pleadings are complete and the matter is at the stage of hearing for admission of the company petitions and accordingly it cannot be contended that the proceedings have reached an irreversible stage as contemplated in the judgments of the Apex Court. It is also contended that apprehension relating to the maintainability of the proceedings in terms of IBC, if the matter is transferred, is imaginary and the legal framework under the IBC would afford a remedy as regards the very relief sought for in the winding up petitions.
13. As regards the contention raised by the petitioners opposing the application, it is contended that as long as the parameters of Section 7 and other provisions of IBC are met, the proceeding under Section 434(1)(c) of the Companies Act, 2013 must give way to the jurisdiction of NCLT under the IBC. It is further submitted that the provision for transfer of proceedings does not require any explanation and accordingly, the contention to the contrary, of the respondents is liable to be rejected.
14. It is further submitted that the question of delay in filing of the application would be irrelevant and application could be filed at any stage of the proceedings, that the petition would satisfy the requirement of an operation creditor under Section 5(20) of the IBC and the claim in respect of provisions of goods or services or a debt in respect of repayment of dues would be sufficient to qualify the concept of operational debt as defined under Section 5 (21) of the IBC. Accordingly, it is asserted that if the present petitioner were transferred to the Tribunal, same could be dealt with in terms of Sections 8 and 9 of the IBC and that debt owed to the petitioner in Company Petition No. 136/2016 is a debt which has arisen as a claim in respect of provisions of goods or services.
15. It is contended that the directions of the Apex Court in the case of Action Ispat (supra) admit of no ambiguity and any effort to construe to the contrary could clearly be an effort to overreach the directions of the Apex Court, which is binding on this Court by virtues of Article 141 of the Constitution of India.
16. The petitioners have also addressed arguments in detail opposing the application while contending that the Transfer Rules, 2016, particularly, Rules 5 and 6 provides for transfer of proceedings pending before the High Court in which copy of the petition has not been served to the Company under Rule 26 of the Companies (court) Rules, 1959 and such proceedings would stand automatically transferred to the NCLT. It is submitted that category of proceedings that are sought to be transferred as per the Transfer Rules, 2016 are to be construed to be a statutory transfer as once the conditions envisaged under Rules 5 and 6 are fulfilled, then the High Court is bound to transfer the said proceeding to the NCLT. It is however contended that insofar as the transfer of proceedings as contemplated under fifth proviso to Section 434 (1) (C) of the Companies Act, 2013, the transfer is not automatic, but the court is vested with discretion to transfer the proceedings to the NCLT. It is submitted that the word “may” found in the fifth proviso to Section 434(1)(c) indicates the vesting of discretionary power.
17. The learned Senior Counsel Sri K.G. Raghavan has drawn attention to the observations in Para-22 of the judgment in Action Ispat (supra) to contend that discretion is vested in the fifth proviso to Section 434 (1) (c) of the Companies Act, 2013. It is specifically asserted that exercise of discretion to transfer in terms of fifth proviso would require the applicant to putforth reasons for seeking transfer of proceedings and reliance is placed on the observations of the High Court of Allahabad (Lucknow Bench) in the case of Reserve Bank of India v. Sahara India Financial Corporation Ltd. Reported in 2019 SCC Online All 410. Reliance is also placed on the judgment in the case of Milestone Real Estate Fund v. Prisha Properties India Private Limited reported in 2019 SCC Online Kar 1739.
18. It is further contended that transfer of proceedings to the NCLT would prejudice the interest of the petitioners’ claim insofar as IBC Code imposes rigours and the ambiguity in the orders of the NCLT and NCLAT as to whether rental dues is an operational debt would prejudice petitioners rights to realise its claims which otherwise is admissible in the present winding up proceedings pending before this Court.
19. It is submitted that a meaningful reading of the judgment of the Apex Court would not lead to a conclusion that transfer of proceedings is automatic. It is contended that exercises of discretion under the fifth proviso to Section 434(1)(c) could be premised on various consideration including existence of parallel proceedings. It is also contended that exercise of judicial discretion cannot have the effect of prejudicing the rights of the petitioner nor can it be exercised in a manner so as to cause injustice. Reliance is placed on the judgment of the Apex Court in the case of Aero Traders (P) Ltd. V. Ravinder Kumar Suri reported in (2004) 8 SCC 307. By placing reliance on the judgment of Common Cause (A Registered Society) v. Union of India and Another reported in (2018) 5 SCC 1, it is contended that where the exercise of discretion keeps open possibilities that are both lawful, then judicial discretion is to be exercised to arrive at a just result in larger public interest.
20. It is also asserted that the respondent in its statement of objections has specifically asserted that it is financially stable and if that were to be so, the respondent’s submission that it needs to avail the benefits of restructuring of itself under the IBC Code is an afterthought, lacks bona fide and is an attempt to abuse the process of law.
21. Learned Senior Counsel, Sri K.G. Raghavan has specifically contended that pendency of parallel proceedings is a requirement for transfer of proceedings to the NCLT.
22. It is asserted that the judgments of Apex Courts in Forech India Limited and Action Ispat and Power Pvt. Ltd., (supra) where applications were allowed transferring the winding up proceedings was in light of pursuing of parallel proceedings. In the case of Jaipur Metals (supra) the proceedings for winding up were initiated under the provisions of the Sick Industrial Companies Act, 1985. The insolvency proceedings were initiated under Section 7 of IBC before the NCLT when application was filed seeking transfer of proceedings to NCLT. The High Court of Rajasthan refused to transfer the proceedings to NCLT while holding that the proceedings initiated before the NCLT was one without jurisdiction which when challenged before the Apex Court came to be set aside.
23. It is submitted that by the learned Senior Counsel Sri K.G. Raghavan that unlike in the factual matrix as could be discerned on a reading of the judgments of the Apex Court referred to supra, in the present case there are no parallel proceedings pending against the respondent-Company, viz., proceedings before the Company Court and the NCLT and accordingly, the observations of the Apex Court ought to be construed appropriately as being applicable only where there are parallel proceedings and cannot be extended to the present case where no proceedings before the NCLT are pending consideration. It is also pointed out that even the judgment of the Apex Court in Kaledonia Jute and Fibres Private Limited v. Axis Nirman and Industries Limited and Others reported in (2021) 2 SCC 403 was rendered in the context of parallel proceedings. Further it was submitted that the Apex Court in the case of A. Navinchandra Steels (supra) also had passed the order where the proceedings were pending before the NCLT under IBC.
24. It is pointed out that while considering the observations of the Apex Court in the case of Action Ispat (supra) with particular reference to the observation at Para-22, the Court ought to keep in mind that that reliance on the observations made in the decision must be in the context of the factual situation which was the subject matter of the case where orders are passed and judgments of Courts are not to be construed as provisions of a statue. Reliance is placed on the judgment of the Apex Court in the case of Bharat Petroleum Corpn. Ltd and Another v. N.R. Vairamani and Another reported in (2004) 8 SCC 579 in support of the above contention.
25. It is further contended that transfer of proceedings to the NCLT would deny the petitioner the right to a remedy. It is specifically asserted that the court while exercising judicial discretion ought to also keep in mind as to whether provisions of the IBC in terms of which the winding up proceedings would be decided by the NCLT, would make the claim maintainable failing which the question of transferring the proceedings ought not to be considered at all.
26. Learned counsel appearing for the petitioner in COP No. 136/2016 has reiterated the contentions raised by learned Senior Counsel for the petitioner appearing in COP No. 243/2014 as referred to supra. It is pointed out that the fifth proviso to Section 434(1) of the Companies Act, 2013 provides that any party of any party or parties ‘may’ file an application for transfer, and the court, ‘may’ by order transfer such proceedings to the Tribunal and the expression ‘may’ used on two occasions would by itself indicate the vesting of discretionary power in the court while considering transfer of the winding up petition.
27. It is pointed out that the Allahabad High Court in the case of Reserve Bank of India v. Sahara India Financial Corporation Ltd. Reported in 2019 SCC Online All 410 has recorded a correct stand pointing out that the proviso does not provide for automatic transfer of proceedings and specifying that the discretion is left with the court.
28. It is also asserted relying on the same judgment that reasons ought to be assigned while seeking transfer of the winding up petition.
29. In the context of legal contentions advanced and after hearing the Amicus Curiae, the Company Applications are considered as per the discussion infra.
30. It is not in dispute that the present application requires to be decided in terms of fifth proviso introduced to Section 434 of the Companies Act, 2013, which reads as follows:
“Provided further that any party or parties to any proceedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankrupty Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (31 of 2016).”
This amendment has come into force with effect from 06.06.2018. The first proviso to Section 434 (c) provides for transfer of the proceedings that are at a stage as may be prescribed by the Central Government and the Rules provide for the stages viz., where notice is not served on the respondent as per Rules 26 of the Companies (Court) Rules 1959. The Companies (Transfer of pending proceedings), Rules 2016 has not much to do with consideration of the legal question leading tot eh disposal of the application, as the Rule 5 and 6 relate to transfer of proceedings where notice has not been served on the respondent under Rule 26 of the Companies (court) Rules, 1959. The present winding up petitions are concerned with transfer post service of notice to the respondent as regards which the ‘Transfer Rules 2016’ which do not apply.
31. Insofar as the Transfer Rules 2016 are concerned, as adverted to by learned counsel appearing for the petitioners and the respondents, the said Rules provide for transfer which prima-facie is one which is automatic subject to the fulfillment of condition under the Rule, i.e. ‘notice’ ought not to have been served on the respondent-Company.
32. While in the present case, notice having been served and the matter was pending for admission when the application invoking the fifth proviso under Section 434 of the Companies Act, 2013 has been filed, the manner of disposal of such application is to be done in terms of the fifth proviso.
33. A plain reading of the fifth proviso as extracted hereinabove would indicate that any party of parties to any proceedings may file an application for transfer and the court may by order transfer such proceedings to the Tribunal. However, what needs to be looked into is the interpretation placed by the Apex Court relating to the exercise of power under the proviso.
34. In all the cases relied upon by the respondent/applicant, as rightly, pointed out by the petitions the factual matrix reveals the existence of parallel proceedings i.e., the proceedings before the Company Court seeking for passing of winding up order and the proceedings initiated under the provisions of IBC. It needs to be kept in mind that the observations of Apex Court and the resultant orders must be read in the context of the factual matrix, i.e. existence of parallel proceedings.
35. Insofar as the observations of the Apex Court at para-22 of the judgment in the case of Action Ispat (supra) is an aspect that requires attention. Para-22 of the said decisions reads as follows:-
“22. Given the aforesaid scheme of winding up under Chapter XX of the Companies Act, 2013, it is clear that several stages are contemplated, with the Tribunal retaining the power to control the proceedings in a winding up petition even after it is admitted. Thus, in a winding up proceeding where the petition has not been served in terms of Rule 26 of the Companies (Court) Rules, 1959 at a pre-admission stage, given the beneficial result of the application of the Code, such winding up proceeding is compulsorily transferable to the NCLT to be resolved under the Code. Even post issue of notice and pre admission, the same result would ensue. However, post admission of a winding up petition and after the assets of the company sought to be wound up become in custodial egis and are taken over by the Company Liquidator, Section 290 of the Companies 30 Act, 2013 would indicate that the Company Liquidator may carry on the business of the company, so far as may be necessary, for the beneficial winding up of the company, and may even sell the company as a going concern. So long as no actual sales of the immovable or movable properties have taken place, nothing irreversible is done which would warrant a Company Court staying its hands on a transfer application made to it by a creditor or any party to the proceedings. 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. Whether this stage is reached would depend upon the facts and circumstances of each case.”
36. Though learned counsel for the respondent has drawn attention to the observations of Apex Court to contend that the consequence of transfer in the pre-admission stage as per the rules would follow even post-issuance of notice, the reading of observations in the entirely in the same paragraph would also indicate that as long as nothing irreversible is done which would warrant the Court staying its hands on transfer application made by the creditor or any party to the proceedings, the transfer petition is to be ordered.
37. The further observations of Apex Court that it is only where the winding up proceedings have reached a stage where it is irreversible making it impossible to set the clock back and in such an event, the Company Court must proceed with the winding up instead of transferring the proceedings to NCLT is to be noticed. The crucial observation that “whether this stage is reached would depend upon the facts and circumstances of each case” would clearly indicate that the power of transfer is indeed an exercises of judicial discretion, taking note of the riders which are indicated while considering the transfer applications which could be deciphered from a plain reading of para-22 of the decision extracted above.
38. The observation “even post issue of notice and pre-admission of a winding up petition, the same result would ensue” must be read in proper context.
39. Indeed the observations of court are not to be dissected or interpreted as a statutory provisions and without understanding the context of such observations. Clearly to conclude that the court has judicial discretion is something that flows from the very observations in para-22 of the Apex Court’s decision, if read in its entirety.
40. In fact, at para-23, the Apex Court has observed “..This being so, the Company Court has correctly exercised the discretion vested in it by the 5th proviso to Section 434(1)(c) …” This fortifies the view that the power of transfer is a product of exercise of judicial discretion.
41. It is also to be noted that the judgment in the case of A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited &Ors. Disposed off on 01.03.2020 in Civil Appeal Nos. 4320-4234/2021, which Bench comprised of R.F. Nariman J, who was also part of the Bench in the case of Action Ispat, at para-27 while referring to the power of transfer has referred to the requirements of satisfaction of all the parameters of Section 7 and other provisions of IBC.
42. The observations of the Apex Court which would be relevant in the present context is extracted as bellow:
“27. …. As has been correctly pointed out by Shri Sinha, a discretionary jurisdiction under the fifth proviso to Section 434(1)(c) of the Companies Act, 2013 cannot prevail over the undoubted jurisdiction of the NCLT under the IBC once the parameters of Section 7 and other provisions of the IBC have been met…”
Insofar as the observations of the same para, it is clear that the provisions of IBC would prevail over the provision of the Companies Act relating to winding up proceedings. The above observations would also indicate that the claim of the petitioner which is pending adjudication before the Court requires to fulfill the appropriate parameters of a claim under the provisions of the IBC. But, however, if proceedings are initiated under the IBC, obviously such proceedings would override the provisions of the Companies Act.
43. It ought to be noted that in the present case, there are no parallel proceedings before the NCLT apart from the present proceedings for winding up.
44. Even in the absence of parallel proceedings, the exercise to transfer proceedings may involve taking note of other factors which may include the case made out by the Company demonstrat
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ing that if the matter is transferred to NCLT to be disposed off under the IBC, there would be a greater possibility of restructuring and revival of the Company. Apart from the stage of the proceedings before the Company Court, keeping in mind the observations of the Apex Court, the admissibility of the claim pending before the Company Court upon transfer if the same is to be considered as a claim under the provisions of the IBC and there may be other factors that would inform exercise of judicial discretion which power by its very essence forbids an exhaustive enumeration. 45. The party seeking transfer of proceedings must make out the grounds for exercise of discretion and in that context, the contention of petitioner that no reasons need be assigned as long as power is available to be invoked as per the statutory provision requires to be rejected. 46. Having concluded that the power under the fifth proviso to Section 434 of Companies Act, 2013 involves exercise of judicial discretion, the party seeking such transfer must make out grounds. In the present case, no such grounds are forthcoming as regards the need for restructuring of the Company, if proceedings are transferred to NCLT. 47. As pointed out by Amicus Curiae, in case of transfer, Rule 5(1)2 of the Transfer Rules, 2016 and the proviso to Rule 5(1) would require that other information is to be furnished by the petitioner as may be required for admission of the petition under Rules 7, 8 or 9 of IBC. This needs to be kept in mind which if considered along with the observations at para-27 of Navin Chandra’s case would establish that the claim in the winding up petition must be the one that could be considered under the IBC. 48. The pecuniary limit in terms of the claim is also an aspect that needs to be kept in mind as pointed out by the Amicus Curiae, the pecuniary threshold in terms of the claim under the IBC was rupees one lakh as mandated enhanced to rupees one crore as per the Notification dated 24.03.2020 by the Central Government. This aspect of pecuniary threshold bar is also a relevant factor that ought to be kept in mind while considering the transfer petitions. 49. The existence of a dispute would confer power on NCLT under Section 9 to reject the application made by the creditor without entering into the question of bona fides or substance of such dispute. This aspect of the matter may also have a bearing while exercising the judicial discretion relating to transfer. The legal regime in winding up proceedings does not disentitle the consideration of winding up merely in light of pre-existing dispute and the considerations for declining to exercise jurisdiction under Section 434 of the Companies Act, 2013 is on different grounds and not necessarily attached to the existence of a dispute in parallel forum. 50. Accordingly, the Company Application Nos. 167/2021 and 300/2020 are rejected. The proceedings in the main matter to continue. Costs to be quantified.