The Hon’ble Supreme Court on December 12, 2018, passed a judgement in the matter of Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Ltd. setting aside the judgement and order dated June 1, 2018 passed by the High Court of Rajasthan in which the High Court of Rajasthan refused to transfer the winding up proceedings pending before it to the Hon’ble NCLT. The Hon’ble High Court also set aside Order dated April 13, 2018 passed by the NCLT in which a financial creditor’s petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) was admitted. 

Facts of the case: 

On September 30, 1997, the account of the Respondent No. 1 company had become a non-performing asset and since the company’s net worth turned negative, a reference was made before the BIFR under the Sick Industrial Companies (Special Provisions) Act 1985 (“SICA”).  On September 26, 2002, the BIFR was of the prima facie opinion that the company ought to be wound up and the opinion was forwarded to the High Court.  The case was ultimately registered by the High Court as Company Petition No. 19/2009. In the meanwhile all the financial debts of Respondent No. 1 were acquired by Alchemist Asset Reconstruction Company Ltd. (Respondent No. 3).  Attempts were made by the State of Rajasthan to revive the Respondent No. 1 company but the same could not be achieved. By an Order dated December 7, 2017 passed by the Hon’ble Rajasthan High Court in a Writ Petition filed by the worker’s union, the Official Liquidator was directed to conduct evaluation of the value of the goods and materials lying in the factory premises of the company so that the dues of the workman could be paid. 

In the meanwhile, on January 11, 2018, the Respondent No. 3 preferred an application under Section 7 of the Code stating that it had an assigned debt of INR 356 crores owed to it by Respondent No. 1. Considering the fact that the debt was admitted by the company and the fact that till date no liquidation order had been passed in the winding up proceedings pending before the Hon’ble High Court, the NCLT whilst referring to the non obstante clause contained in section 238 of the Code held that it was satisfied on the conditions set out under section 7 of the Code being fulfilled and accordingly admitted the application.  A moratorium in terms of section 14 of the Code was declared and an interim resolution professional was appointed.  Meanwhile in Company Petition No. 19 of 2009 and in other connected writs filed by labour unions an interim order dated April 26, 2018 was passed by the Hon’ble Rajasthan High Court staying implementation of the Order dated April 13, 2018.  Against this Order a Special Leave Petition (SLP) came to be filed which was dismissed and the matter was transferred back to the Hon’ble High Court directing the Petitioner to make necessary submissions accordingly.  The Hon’ble High Court thereafter passed an impugned Judgement dated June 1, 2018 in which it refused to transfer the winding up proceedings pending before it, and further set aside the NCLT Order dated April 13, 2018 admitting the Section 7 application.  An appeal was therefore preferred before the Hon’ble Supreme Court impugning the Order of June 1, 2018. 

The question which came up  before the Hon’ble Supreme Court was whether the Hon’ble High Court was right in passing the impugned Judgement of June 1, 2018 by which it refused to transfer the winding up proceedings pending before it and also whether the Hon’ble High Court was right in setting aside the Order dated April 13, 2018 passed by the Hon’ble NCLT admitting the petition filed by Respondent No. 3 under section 7 of the Code.  

Supreme Court’s observation and findings: 

When referring to rules 5 and 6 of the Companies (Transfer of Pending Proceedings)  Rules (“Rules”), the Hon’ble Supreme Court held that although the present case relates to Rule 5 (2) of the Rules wherein cases would continue to be dealt with by the High Court, where the opinion has been forwarded by the Board for Industrial and Financial Reconstruction for winding up of a company to a High Court, it has been argued that Rule 5 (2) was substituted on June 29, 2017 as a result of which Rule 5 (2) has been omitted and therefore it would be unnecessary to continue to apply Rule 5(2) even after June 29, 2017.

 Giving its interpretation of the status of Rule 5(2), the Court held:

“However, though the language of Rule 5(2) is plain enough, it has been argued before us that Rule 5 was substituted on 29.06.2017, as a result of which, Rule 5(2) has been omitted. The effect of the omission of Rule 5(2) is not to automatically transfer all cases under Section 20 of the SIC Act to the NCLT, as otherwise, a specific rule would have to be framed transferring such cases to the NCLT, as has been done in Rule 5(1). The real reason for omission of Rule 5(2) in the substituted Rule 5 is because it is necessary to state, only once, on the repeal of the SIC Act, that proceedings under Section 20 of the SIC Act shall continue to be dealt with by the High Court.” 

The Hon’ble Supreme Court also made a reference to the amendment to Section 434(1)(c) of the Companies Act with effect from August 17, 2018, wherein any party to a winding up proceeding pending before a Court immediately before this date may file an application for transfer of such proceedings, and the Court, may by order, transfer such proceedings to the NCLT.  The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. The Hon’ble Court also held, 

“…all proceedings under Section 20 of the SIC Act pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post 17.08.2018. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.” 

It was also observed that if there is any inconsistency between Section 434 of the Act and the provisions of the Code, the latter would prevail, as per Section 238 of the Code. 

“We are of the view that the NCLT was absolutely correct in applying Section 238 of the Code to an independent proceeding instituted by a secured financial creditor, namely, the Alchemist Asset Reconstruction Company Ltd. This being the case, it is difficult to comprehend how the High Court could have held that the proceedings before the NCLT were without jurisdiction. On this score, therefore, the High Court judgment has to be set aside.” 

The Hon’ble Supreme Court, therefore, held that proceedings in the NCLT will continue from they left off, and that the petition pending before the High Court cannot be proceeded with, on account of Section 238. With this direction, the Bench set aside the judgment of the High Court.