Calcutta HC on whether High Court retains jurisdiction over WU matters admitted by the Court, after IBC is enacted

The Calcutta High Court recently in the case of Avani Projects and Infrastructure Limited vs. The Official Liquidator, High Court, Calcutta C.P. No.1 of 2016, adjudicated upon the issue of whether it retains the jurisdiction to adjudicate upon a winding up petition and its connected applications filed before the commencement of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and where a Provisional Liquidator has already been appointed by the Court? Facts of the Case A creditor winding up petition under Section 433(e) of the Companies Act, 1956 was filed against Avani Projects and Infrastructure Limited (“Avani”) on January 4, 2018 and the petition was admitted on December 1, 2017. Subsequently, the Court vide order dated September 7, 2018, appointed the Official Liquidator as the Provisional Liquidator to prepare an inventory of the list of assets of Avani and to be in symbolic possession thereof. In the interregnum, corporate insolvency resolution process was admitted against Avani by the Kolkata bench of National Company Law Tribunal, Kolkata under the Insolvency and Bankruptcy Code, 2016 (“IBC”) on March 13, 2019, and an Interim Resolution Professional (“IRP”) was appointed. Whilst admitting, NCLT had passed the following direction “The Hon’ble Court may direct the Official Liquidator attached to this Hon’ble Court acting as the Provisional Liquidator be released with respect to the respondent company, and to hand over physical possession of its records and the assets to the petitioner, being the Interim Resolution Professional of the respondent Company. and such further and/or other order and orders, as this Hon’ble Court may deem fit and necessary.” Arguments Devi Trading prayed for stay of all the proceedings before the High Court till a logical conclusion is arrived at the NCLT or, transfer the proceedings/petition and all connected applications pending before the Court, to the NCLT, as it argued that IBC proceedings would prevail over the proceeding under the Companies Act. Per contra, the creditors opposing the stance of Devi Trading contended that the said petition falls under the category of cases mentioned under Rule 5(1) or Rule 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules”) [The Court in its judgment defined such a petition to be a “saved petition”]. Thus, following Rule 3 of the Transfer Rules, the Court was not required to transfer the matter to NCLT as the winding up petition was filed much prior to December 7, 2016. Thus, as per their submissions, the Court would retain jurisdiction over the winding up proceedings. Additionally, it was also argued that an Official Liquidator being the Provisional Liquidator is more equipped to deal with the post winding up situation and therefore, there should be a stay on the order of admission passed by the NCLT in order to prevent any conflict in the functioning of the Provisional Liquidator and the IRP. The aforesaid stance of the opposing creditors was also adopted by Avani and it was argued on their behalf that the order dated March 13, 2019 passed by the NCLT, is an order without jurisdiction and a nullity which can be challenged even in collateral proceedings. After hearing both the parties and an elaborate discussion on the change in scenario of the laws governing Companies and Insolvency, the Court framed the following issues for adjudication "Does this Court retain jurisdiction to hear the winding up petition being CP 1 of 2016 and the connected applications thereto? If so, what are the provisions of law applicable to adjudicate the said petition? Should the Provisional Liquidator be released/discharged and directed to make over possession of the properties and assets, books of accounts of the said Company in his possession to the IRP appointed by NCLT? Should further hearing of the winding up petition (C.P 1 of 2016) along with all connected applications be stayed? Should the winding up petition along with all connected applications be transferred to NCLT to be further heard by it? Does NCLT have the jurisdiction to hear out the petitions filed by the intending purchasers? Are the provisions of IBC applicable to the instant winding up petition when the same has been filed on 4th January, 2016 i.e. much prior to IBC coming into operation? Whether the order dated 13th March, 2019 could have been obtained from NCLT without first obtaining leave of this Court under the provisions of section 446 of the Act of 1956? Is the order of NCLT dated 13th March, 2019 in the absence of leave under section 446 of the Act, 1956 or is otherwise an order without jurisdiction and a nullity” Decision by the Court With regard to issue no. (i) on jurisdiction, the Court held that it would retain jurisdiction over the winding up petition since the said petition fell in the category of the winding up petitions which were not required to be transferred to the NCLT as the service was effected and affidavits were exchanged before December 7, 2016 i.e. the cut-off date declared by the Central Government and further held that “On conjoint reading of section 434 of the Act of 2013 and Rule 5 and 6 of the 2016 Transfer Rules, it is clear that the Act of 1956 and the 1959 Rules are applicable for the purpose of adjudicating the said petition and/or connected applications.” Distinguishing the judgments rendered by the Supreme Court in the cases of Jaipur Metal and Electrical Employees Organization through General Secretary, Mr. Tej Ram Nike vs. Jaipur Metal and Electrical Limited through its Managing Director and ors. Civil Appeal No. 1203 of 2018 and Forech India Limited vs. Edelweiss Assets Reconstruction Company Limited Civil Appeal No. 818 of 2018, the Court, observed that- “Neither of these judgments say that the High Court does not have jurisdiction to deal with saved petitions. The legislative intent is also very clear from the Act of 2013 and the Transfer Rules of 2016 by allowing the High Court to retain jurisdiction over the saved petitions.” The Court also, while placing reliance upon the judgment rendered in the case of Jaipur Metal (supra), reiterated that IBC proceedings being an independent proceeding, should be brought to a logical conclusion and went onto interpret the term “logical conclusion” by stating that- “If “logical conclusion” is interpreted as to the liquidation of a company on failure of a resolution plan then retention of a saved petition before Company Court becomes inconsequential. This cannot also be the legislative intent otherwise there was no need to create a separate category of winding up petitions like the saved petition. Considering the said judgment and the legal provisions, my interpretation as to bring a logical conclusion will mean up to the stage of either acceptance or rejection of the resolution plan.” The Court further opined that revival of a company is to be governed as per the norms enumerated under IBC since it has to be implemented in a time bound manner and therefore, NCLT would be the appropriate authority. On the other hand, liquidation proceedings should fall within the domain of the Company Court. Additionally, the Court also observed that an Official Liquidator being an officer appointed by the Central Government will be more accountable and responsible than the Resolution Professional for the purposes of undertaking the liquidation procedure. The Court, thus, held that a company judge of the Court retains the jurisdiction to try the winding up petition falling in the category of saved petition, even if an insolvency proceeding is initiated against the same company before the NCLT under the provisions of IBC by another creditor like Devi Trading in the instant case. The applicable law for such petitions for the company Court will be the Act of 1956 and Rules of 1959. In regard to issues no. (ii), (iii) and (iv), the Court held that there is no need for the provisional liquidator to make over the possession of the property and assests, books of accounts of Avani to the IRP since the proceedings under Section 7 of IBC is now pending before the NCLT should be proceeded with until the stage of the resolution plan is either accepted or rejected. The Court further noted that- “Once the resolution plan is accepted, further orders may be sought for regarding the discharge of the Provisional Liquidator depending upon the provisions of the resolution plan. There may also be a situation where a Provisional Liquidator may be allowed to carry out the resolution plan that may be approved by the NCLT.” Additionally, the Court also, held that- “In the event, the resolution plan to be prepared and submitted before the NCLT is not approved or an appeal from such non-approval is dismissed and such order rejecting the resolution plan achieves finality, the winding up of the said company be proceeded with by the Company Judge of this Court when the Provisional Liquidator will act in terms of the subsequent orders that may be passed by the Company Judge. In view of the fact that the Company Judge retains the jurisdiction, the question of transfer of the said petition or of the applications connected thereto in the facts and circumstances of the case does not arise.” With regard to issue no. (v.), the Court held that- “..in view of the provisions of a winding up petition which is a saved petition being transferred to NCLT for being heard before it like a petition under Section 9 of the IBC, it cannot be said that the provisions of IBC has not been made applicable to the saved petitions like the said petition, even if, the same has been filed prior to IBC coming into force.” Lastly, while adjudicating upon issued (vi.) and (vii.), the Court held that- “The NCLT was well within its competence to entertain such application despite prior leave under the provisions of Section 446 of the Act of 1956 having not been obtained. The NCLT, however, should have been cautious before passing the order dated 13th March, 2019 at the instance of a creditor (Devi Trading) when the fact that the Provisional Liquidator had been appointed in a saved petition by the Company Judge was brought to its notice particularly when the application appears to have been moved about an year after filing...” Further, as a parting note, the Court also observed that NCLT while exercising its jurisdiction under IBC ought to have been more cautious while passing orders directing the Provisional Liquidator to hand over the books, documents and assets of the company knowing that the Provisional Liquidator was appointed by the Company Judge of the Court in a saved petition and further on being informed that the Company Judge is considering an application of the IRP for discharge of the Provisional Liquidator. This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).