Sunday, 8 November 2020

Jotun India Private Limited Vs. PSL Limited - Whether Company Court has jurisdiction to stay proceedings under IBC

High Court Bombay (05.01.2018) in Jotun India Private Limited Vs. PSL Limited [Company Application No. 572 OF 2017 in Company Petition No.434 of 2015] held that;  In the circumstances, there is no bar on NCLT, Ahmedabad from proceeding with IBC application. This application, therefore, has to succeed. The impugned stay order of company court dated 19th July 2017 is recalled/vacated.

Excerpts of the order;

# 1.  Respondent applicant PSL Limited, who is respondent in the company petitions, has filed this application seeking the order dated 19th July 2017 in company application (lodging) no.333 of 2017 be vacated/recalled. By this non speaking order, the Learned Company Judge was pleased to stay the proceedings filed by respondent applicant under Section 10 of Insolvency and Bankruptcy Code, 2016 (“IBC”) before National Company Law Tribunal (NCLT), Ahmedabad for insolvency resolution.

The issue which arises for consideration in the present application is whether the Company Court has any jurisdiction to stay the proceedings filed by a Corporate Debtor before NCLT even though a previously instituted company petition by a creditor may have been admitted (and therefore does not get transferred to NCLT) but where a provisional liquidator has not been appointed.


(I) Power to stay proceedings pending before NCLT.

# 13. The Insolvency and Bankruptcy Code, 2016 (IBC), is a complete code and provide mechanism to resolve the dispute, revival, restructuring and in the event of failure of scheme, to provide for liquidation of the assets of the company. On admission, IBC, as per Section 14, provides for moratorium of 180 days, where all proceedings initiated against the company gets stayed.


# 15. The issue is whether this Court can stay proceedings before NCLT, especially in light of the provisions of IBC, which specifically bars such intervention? It cannot, otherwise, in light of the fact that on admission of petition before NCLT, petition before this Hon’ble Court gets stayed as per Section 14, it will make provisions of IBC meaningless.


# 16. Section 63 of IBC bars jurisdiction of Civil Courts to entertain proceedings on the issue over which NCLT has jurisdiction. This Section is pari materia to Section 34 of SARFAESI Act, 2002. Section 231 of IBC, specifically curtails the power of Civil Courts or any other authority to restrain any action taken or to be taken before NCLT. This clearly curtails the power of this Court to pass any injunction against the Bank/Intervenor from pursuing the pending application.


# 17. The power of this Court to pass order to restrain proceedings before any other Court is under Section 446. The provisions of IBC, by virtue of Section 238 of IBC will override the provisions of the Companies Act to that extent.


# 19. In the matter of M/s. Innoventive Industries (Supra), the Hon'ble Apex Court, after considering the provisions of IBC, more particularly Section 238, came to a conclusion that even Statutory Injunction under Maharashtra Relief Undertaking Act (MRU Act) will not come in the way of Secured Creditor to initiate proceedings under IBC.


# 21.  ……….  Therefore, applying the ratio of this judgment to the present case, in view of Section 238 of IBC, provisions of IBC shall supersede and prevail over the Companies Act, to the extent of any inconsistency between the two.


(II) Whether NCLT can entertain a petition after the order of admission or appointment of Provisional Liquidator by Company Court?

# 22. The order of admission or the order of appointment of Provisional Liquidator, will not create any bar on filing of petition and passing of orders by NCLT as the order of admission is merely commencement of proceedings and not final order of winding up which is passed under Section 481 of the Companies Act, 1956. Till the company is ordered to be wound up, i.e., the final order is passed, NCLT can entertain a petition or an application.


# 23. A similar issue had come up before the Hon’ble Supreme Court in the case of Madura Coats Ltd. (Supra) where the Hon’ble Supreme Court stayed the proceedings before the Company Court, in view of the applicability of Section 15 and 22 of SICA even when the Company Court has directed that the Company be wound up. It is not out of place to mention that Section 15 of SICA wherein a reference to BIFR is made and consequently, all the proceedings pending before other courts are stayed as per Section 22 of SICA, the situation is analogous to the filing of petition under Section 7 of IBC by virtue of which, NCLT is empowered to declare Moratorium under Section 14 of IBC.


# 24. In view of the aforesaid, the legislative intent behind the enactment of IBC is to consolidate provisions of SICA and Companies Act.Section 15 of SICA is parimateria to section 10 of IBC and section 22 of SICA is similar to Section 14 of IBC.


# 25. IBC has been enacted to revive the Corporate Debtor by declaring a Moratorium of various proceedings and appointing an Interim Resolution Professional (IRP) to manage the affairs of the Corporate Debtor. Similarly, both SICA and IBC contains non obstante provisions to the effect of overriding the provisions of any other law in force except as excluded expressly. There is in fact no inconsistency between the provisions of IBC and Companies Act. However, in the event of any inconsistency, the provisions of IBC will prevail in view of Section 238 of IBC. The provisions give overriding effect to any other law for time being in force, in case of any inconsistency or conflict with respect thereof. In view of Section 238, the judgment relied upon will apply with much greater force.


(III) Respondent’s submissions on the effect of Sections 63 and 64 of IBC :

# 35. A harmonious and purposive construction of IBC read as a whole must necessarily suggest and lead to the construction that Section 63 and Section 64 of IBC cannot apply to Saved Petitions.


(IV) Section 14 of IBC :

# 37. In fact, the legislative purpose of saving these winding up petitions along with all necessary and consequential power of the Company Court is to give this Company Court the discretion in saved petitions to decide whether to retain the winding up jurisdiction with respect to such companies or to allow the Adjudicating Authority to also deal with application with respect to such Companies.


# 38. Assuming that such a question was to arise, it is submitted on demurrer, that a harmonious and purposive construction of Section 14 of IBC and the saving provisions of the 2013 Act must necessarily lead to an interpretation that the inconsistent provisions of IBC, including the moratorium will not apply to Saved Petitions. The effect of Section 14 of IBC would otherwise, snatch away irreversibly the jurisdiction of the Company Court which is expressly saved under Section 434 of the 2013 Act irretrievably.


# 39. The fact that if a contrary view is taken, the jurisdiction of the Company Court will be irretrievably lost is apparent from Section 6 to Section 54 of IBC, which result in entering a resolution or a liquidation under IBC. IBC has no provision to permit the Saved Petitions to revive when the effect of the moratorium under Section 14 is taken


(V) The High Court shall exercise its powers under the 1956 Act to dispose the Saved Petitions :

# 40. With respect to the Saved Petitions including this present Petition, the High Court has the discretion to exercise all powers under the 1956 Act in order to hear and dispose of these proceedings. Accordingly, the High Court has the power to stay and/or restrain proceedings initiated or to be initiated in any other Court so that it may hear and dispose of such Saved Petitions.


# 41. It is not disputed even by Respondent that the Hon’ble High Court retains its jurisdiction and powers under the 1956 Act with respect to the Saved Petitions.


(VI) Impugned Order dated 19 th July 2017 :

# 44. Hon’ble Mr. Justice R. D. Dhanuka and the Hon’ble Mr. Justice A. S. Gadkari have duly exercised their aforesaid discretionary powers in passing the Orders dated 9th March 2017 (hereinafter referred to as the “Admission Order”) and 19th July 2017 (hereinafter referred to as the “Stay Order”), respectively.


(VII) Harmonious construction of the 1956 Act, the 2013 Act and IBC :

# 47. With respect to the Saved Petitions, the provisions of the 1956 Act, the 2013 Act and IBC must be read in a harmonious and purposive manner.

# 48. After hearing the counsel for opposing parties, I am inclined to agree with the submissions of Mr. Dwarkadas and my views are as under :

  • (I) Background and Object – Purpose of Insolvency Code :

# 49.. ………..  It is apparent from a reading of the object and purpose for which IBC has been enacted is to set up an Insolvency and Bankruptcy resolution process, which has to be implemented in a strict time bound manner, by the appointment of an IRP and creation of a creditors Committee. These are powers which can be exercised only by NCLT and not by the Company Court. It is for this reason that pending the InsolvencyResolution Process a moratorium is provided for under Section 14 of IBC. 

Therefore, the most fundamental distinction between the provision of the Companies Act and IBC is, whereas, under the Companies Act winding up would be a matter for the Court alone to decide, under IBC, there is a paradigm shift in as much as it displaces the management of the Company and an IRP is appointed and the Creditors Committee is left to decide the fate of the company.

  • (II) Broad comparison between the provisions of SICA and IBC :

# 50. Prior to the enactment of IBC, SICA required, what were defined as ‘Sick Industrial Companies’ to file a reference before BIFR. Once a reference was filed, the moratorium under section 22 of SICA kicked in, as a result whereof proceedings such as winding up, execution and the like could neither be filed nor proceeded with, if filed. SICA, however, did not apply to all companies. It applied to only those industrial undertakings as were set out in the Schedule of the said Act. Experience showed that SICA though enacted with the laudatory object of revival of sick companies was being abused by promoters, who on account of the moratorium available under Section 22 were dragging on the proceedings either before the BIFR

or AAIFR interminably, frustrating the object and purpose of the Act and defeating rights of creditors. IBC, on the other hand, as held by the Hon’ble Supreme Court in the case of M/s Innoventive Industries Ltd. (supra) and Mobilox Innovations Private Limited (supra) has certain features which mark a healthy departure from the failings of SICA.

  • (III) IBC has Primacy :

# 53. It has now been held by the Supreme Court in Bank of New York Mellon (Supra) that by virtue of Section 252 of IBC, even in the case of a company where a winding up order has been passed, it is open to such a company, whose reference was deemed to be pending with BIFR, to seek remedies under IBC before NCLT.

  • (IV) No carving out of existing winding up proceedings :

# 55. The effect of this substituted Section 4(b) is therefore to confer an express power upon the company to make a reference to NCLT under IBC within 180 days of the commencement of IBC, i.e. 1.12.2016, which reference will be dealt with “in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.”

  • (V) Admission of a winding up petition does not entail stay of NCLT proceedings :

# 62. In fact, the Hon’ble Supreme Court in the case of Madura Coats Ltd. v. Modi Rubber Ltd. (supra) has held that the provisions of SICA would prevail over the provisions of the Companies Act and proceedings under the Companies Act must give way to proceedings under SICA. Therefore, since SICA is repealed and replaced by IBC (S. 252 read with VIII Schedule of IBC), the provisions of IBC should prevail over the provisions of the Companies Act, 2013.

  • (VI) Effect of Repeal :

# 68. Further, there is express as well as an implied intention on the part of the legislature to (i) take away the right to file winding up petitions under the Companies Act, 1956; and (ii) to apply the provisions of IBC without exception to all proceedings undertaken regarding insolvency resolution and revival of companies. This is also apparent from the peremptory and express language of Sections 14, 63 and 64 (2) of IBC.

# 70. It is clear from the above that the winding up petitions retained by the High Court are being decided under the Companies Act, 1956 only as a transitional provision. It only provides that winding up proceedings under Section 433 (1) (e) pending in the High Court would continue in the High Court Prasanta Kumar Mitra (Supra).

# 73. The mere fact that post notice winding up proceedings are to be “dealt with” in accordance with the provisions of the Companies Act, 1956 does not bar the applicability of the provisions of IBC in general to proceedings validly instituted under IBC, or does it mean that such proceeding can be suspended.

  • (VII) The Company Court does not have the jurisdiction to restrain NCLT, Ahmedabad, from proceeding with IBC Application :

# 75. The jurisdiction of the Company Court in relation to proceedings under IBC is expressly barred by virtue of section 63 of IBC. Further, by virtue of Section 64(2) of IBC, the Company Court is prohibited from injuncting NCLT from exercising its jurisdiction under IBC. By virtue of section 238 of IBC, it overrides the provisions of the Companies Act, 1956.

  • (VIII) No power to Injunct :

# 77. NCLT is not a court subordinate to the High Court and hence as prohibited by the provisions of Section 41 (b) of the Specific Relief Act, 1963 no injunction can be granted by the High Court against a corporate debtor from institution of proceedings in NCLT.

# 81. It may also be noted that apart from there being no provision in the Companies Act, 1956 to injunct proceedings before NCLT instituted under IBC, petitioner cannot take recourse under the inherent powers of the High Court to support the impugned order. This argument has been expressly rejected by the Hon’ble Supreme Court in Cotton Corporation of India Limited (supra).

# 82. Besides there is an express bar contained in Section 64 (2) of IBC which prevents any court, tribunal or authority from granting any injunction in respect of any action taken, or to be taken, in pursuance of any power conferred on NCLT under IBC.

# 85. In view of the above since the IBC is admittedly a successor statute to SICA, and Section 64 (2) of IBC being parimateria to Section 22 of SICA, the argument that the Company Court has the power to injunct proceedings before under NCLT in cases of pending winding up petitions is entirely misplaced and contrary to legislative intent.

  • (IX) The Company Court has the jurisdiction to recall an earlier order :

# 86. As per rule 6 of the Companies (Court) Rules, 1959, the provisions of the Code of Civil Procedure, 1908, will apply to proceedings under the Companies Act, 1956, unless such application would be contrary to the express provisions of the said rules. Rule 9 of the Companies (Court) Rules, 1959, provides that the Company Court may exercise its inherent powers. Section 141 of the Code of Civil Procedure, 1908, makes it applicable to all proceedings in any court of civil jurisdiction. A combined reading will show that the Company Court has ample powers to recall any order previously passed by it [Dr. Writers Food Products Private Limited (supra)].

  • (X) An order can be recalled if it was passed without jurisdiction :

# 87. The Hon’ble Supreme Court of India has held that an order may be recalled by a court or tribunal if there was an inherent lack of jurisdiction to pass such an order [Budhia Swain &Ors v. Gopinath Deb &Ors (supra)].


# 88. In the circumstances, there is no bar on NCLT, Ahmedabad from proceeding with IBC application. This application, therefore, has to succeed. The impugned order dated 19th July 2017 is recalled/vacated.



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Disclaimer:

The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.