Kar HC | Interplay between IBC and Companies Act regarding winding up petitions; Court decides in matter of transfer of company petition to NCLT

Karnataka High Court: S. Sunil Dutt Yadav, J., decided in the matter of a petition which was filed praying to transfer a company petition on the file of the High of Karnataka to the National Company Law Tribunal, Bengaluru under the Insolvency and Bankruptcy Code, 2016.

Company petition had been filed seeking an order of winding-up of the respondent-company claiming that it had committed defaults as regards the payment of; rent, interest on rent, service tax and penalty on service tax.

It was contended that the respondent company had demonstrated its inability to pay the debt and accordingly the winding up proceedings had been initiated and in between the proceeding a company application was filed by the respondent seeking transfer of the company petition to NCLT. The petitioner had opposed the application asserting that no reason was assigned in the application invoking exercise of discretion of the Court in terms of power vested under the fifth proviso to Section 434 (1) of the Companies Act, 2013. On this argument it was contended that provision of transfer of proceedings does not require any explanation.

It was 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 was an operational debt would prejudice petitioners rights to realise its claims which otherwise was admissible in the present winding up proceedings pending before this court. It was contended that exercise of discretion under the fifth proviso to Section 434(1)(c) could be premised on various considerations including existence of parallel proceedings. It was 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.

It is further contended that transfer of proceedings to the NCLT would deny the petitioner the right to a remedy. It was 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.

The Court after the hearing both the parties reiterated that 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 had been filed, the manner of disposal of such application was to be done in terms of the fifth proviso and plain reading of the fifth proviso as extracted hereinabove would indicate that any party or 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 was the interpretation placed by the Apex Court relating to the exercise of power under the proviso.

The Court analyzed the judgment of Supreme Court in Action Ispat and Power (P) Ltd. v. Shyam Metalics and Energy Ltd., Civil Appeal Nos. 4042-4043 of 2020 decided on 15-12-2020 and explained that 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. It further reiterated the relevant context relating to the present case,

“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….” (emphasis supplied)

Court further stated that it is clear that provisions of IBC would prevail over the provisions of the Companies Act relating to winding up proceedings.

It was noted that in the present case, there were no parallel proceedings before the NCLT apart from the present proceedings for winding up but the Court held that even in the absence of parallel proceedings exercise to transfer proceedings may involve taking note of other factors which may include the case made out by the Company demonstrating 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. The Court rejected the contention of petitioner that no reasons need be assigned as long as power is available to be invoked as per the statutory provision thus under the fifth proviso to Section 434 of Companies Act, 2013 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.

The Company applications were rejected by the Court stating, “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.”

[Nitesh Residency Hotels (P) Ltd. v. Archdiocese of Bangalore, 2021 SCC OnLine Kar 14704, decided on 28-09-2021]

For the applicant: Sri K.G. Raghavan, Senior Advocate for Sri Nischal Dev B.R., Advocate

For the respondent: Sri Naman Jabakh, Advocate for Sri S. Vivek Holla, Advocate; Sri C.K. Nandakumar, Advocate as Amicus CURIE

Sri Shivabhushan S. Hatti Advocate for Smt Maneesha Kongovi, Advocate


Suchita Shukla, Editorial Assistant has reported this brief.

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