Category: Compromise, arranagement and amalgamation

Transition from High Court to NCLT, compromise, arrangement, winding-up and other matters

The Insolvency and Bankruptcy Code, 2016 (31 of 2016)

 

Key words of Preamble to the Insolvency and Bankruptcy Code, 2016 (IBC):-

  • reorganization and insolvency resolution of- corporate person, partnership firms and individuals

– in a time bound manner

  • for maximization of value of assets
  • to promote entrepreneurship

  • availability of credit

  • balance the interest of all the stakeholders (including alteration in the order of priority of payment of Government dues)

  • to establish an Insolvency and Bankruptcy Board of India (IBB or IBBI)

 

What happened and when:

 

Date What
28/5/2016 IBC notified
05/08/2016 IBB related provisions notified
19/08/2016 Provisions empowering CG notified
29/08/2016 Salary Rules notified
01/10/2016 IBB established with office at New Delhi

Mr. M. S. Sahoo Chairperson

Ex-officio of Ministry of Finance, Ministry of Corporate Affairs, Ministry of Law and Justice and the Reserve Bank of India notified

01/11/2016 Provisions empowering IBB notified.

Also, Schedules to IBC notified – change in Central Excise, Service Tax, SICA

15/11/2016 Regulations for IPA and IP notified

Also, Schedules to IBC notified – change in SARFAESI, LLP Act 2008, Companies Act 2013, Payment and Settlement Systems Act, 2007

21/11/2016 IBBI (IPA) Regulations 2016 notified w.e.f. 21/11/2016
23/11/2016 IBBI (IP) Regulations 2016 notified w.e.f. 29/11/2016
30/11/2016 Ss. 4 to 32 – Provisions relating to Insolvency Resolution Process for Corporate Persons notified w.e.f. 01/12/2016

S. 236 Offences under IBC, triable by Special Court under CA 2013 – notified w.e.f. 01/12/2016

S.237 IBC overrides all other laws – notified w.e.f. 01/12/2016

S.231 No injunction notified w.e.f. 01/12/2016

S.239(2)(a) to (f) – CG to make Rules for application to NCLT

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notified w.e.f. 01/12/2016

01/12/2016 Ss. 4 to 32 of IBC notified (except for individuals, partnership firm and voluntary liquidation)

S. 60 transitory – for Court to NCLT for Personal Guarantor

01/12/2016 IB (Application to Adjudicating Authorities) Rules, 2016 notified

For filing applications u/s.7,8,9 of IBC

   

 

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

 

As you might be aware that the Government of India has notified the substantive provisions of the IBC with effect from 01 December 2016. The Government has also issued notifications for repeal of the Sick Industrial Companies (Special Provisions) Act, 1985 (the ‘SICA’). Thus, SICA is repealed with effect from 01st December 2016 and all proceedings, reference, inquiry or appeal before BIFR and AAIFR stands abated with effect from 01st December 2016.

 

Further with effect from 01st December, 2016, all matters relating to winding-up (except voluntary winding-up) of Companies and Limited Liability Partnerships (LLPs) are dealt with by the NCLT. Thus, High Courts (and in some part of the Country District Courts) do not have jurisdiction for dealing with new cases of winding-up on and after 01 December 2016. Cases of Voluntary winding-up to be dealt with by the NCLT on and after 01 April 2017.

 

Further, with effect from 15th December, 2016, cases relating to compromise, arrangement and reconstruction (including merger, amalgamation and demerger), reduction of share capital, variation of shareholder’s rights, recovery of property of company in wrongful possession of employees or ex-employees of Company etc. would be dealt with exclusively by the NCLT.

 

To have birds eye view of the transitory provisions for transfer of cases from High Courts to the NCLT, a tabular presentation is given below:

 

TRANSITORY PROVISIONS

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

National Company Law Tribunal (NCLT).

 

Section 434 (1) (c) of the Companies Act 2013 – as amended by Eleventh Schedule of IBC and further amendment by Order S.O. 3676(E) dated 7th December 2016.

 

Subject Matter Transferred to NCLT Retained with High Court
Winding-up under supervision of Court No. Yes.
Voluntary winding-up (Sec.484 of CA 1956)

(Rule 4)

No.

New cases to be filed with NCLT w.e.f. 01 April, 2017 as per the IBC.

Note that provisions relating to voluntary winding-up under the Companies Act, 2013 are omitted by the IBC.

 

Yes, for cases filed upto 31st March 2017.
Winding-up for inability to pay (Sec. 433(e) of CA 1956)

(Rule 5)

Yes, where petition has not been served on the Respondent.

Such petition to be treated as application u/Ss. 7, 8 or 9 of IBC.

Petitioner to submit additional information, including proposed insolvency professional, within 60 days from date of notification of the Rules on 07 December 2016. Thus, by 05 February, 2017. Failing which petition shall abate.

Yes, where petition has been served on the Respondent
Winding-up by Court

[Sec. 433(a) and (f)]

(Rule 6)

Only those cases where the petition has not been served on the respondent. Yes, where the petition has been served on the respondent.
BIFR u/s.20 of SICA

[S. 434(1)(d) of CA 2013 r/w Rule 5(2)]

w.e.f. 01/12/2016 Sick Industrial Companies (Special Provisions) Repeal Act, 2003 brought to force, including section 4(b) thereof.

No.

 

Proceedings before BIFR and AAIFR abates.

However, reference within 180 days can be made to NCLT as per Companies Act 2013.

Yes, where opinion has been forwarded by BIFR and no appeal is pending and winding up is initiated u/s. 20 of SICA.
Arbitration, Compromise, arrangement and reconstruction

(Second proviso to Section 434(1)(c) of CA 2013 read with Rule 3)

Yes, except those cases reserved for orders for allowing or otherwise, i.e. final disposal (cases heard but orders reserved) w.e.f. 15th December, 2016 Those cases reserved for orders for allowing or otherwise (Cases heard and pronouncement of order is pending or reserved) w.e.f. 15th December, 2016
Reduction of Capital (Sec. 100 of CA 1956 – corresponding Sec. 66 of CA 2013) As above As above
Cancellation or variation of rights of shareholders (Sec. 106 of CA 1956  –corresponding sec. 48(1) of CA 2013) As above As above
To restrain fraudulent persons from managing companies (Sec. 203 of CA 1956) As above As above
For order that affairs of a Company ought to be investigated (Sec. 237 of CA 1956 – corresponding sec. 213 of CA 2013) As above As above
Applications under section 439 for the winding-up of a company, or under section 583 for the winding up of an unregistered company, or under section 584 for the winding-up of a foreign company

(Corresponding Sec.376 of CA 2013)

As above As above
Applications for a declaration under section 542 (XI Schedule) in the course of proceedings under section 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company

(Corresponding Sec.339 of CA 2013)

As above As above
Applications by a creditor or member under section 543 (XI Schedule) in the course of proceedings under section 397 or 398, to enquire into the conduct of any of the persons mentioned in section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(Corresponding Sec.340 of CA 2013)

As above As above
Applications under section 633(2) by an officer of a company for relief.

(Corresponding Sec.463 of CA 2013)

As above As above
Applications under section 560(6) to restore a company’s name to the Register of Companies

(Corresponding Sec.248 of CA 2013 – does not contain similar provision)

As above As above
Applications under section 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(No corresponding provision under CA 2013)

As above As above

 

All proceedings transferred from High Court to NCLT, to be dealt with as per the Companies Act, 1956 and the Company (Court) Rules, 1959. [Third proviso to Section 434(1)(c) of the Companies Act 2013].

All proceedings transferred from High Court to NCLT, to be dealt with from the same stage as were before their transfer. [Section 434(1)(c) of the Companies Act 2013].

Demerger whether do not require approval of High Court, in view of Section 180 of Companies Act 2013?

This otherwise is a routine case of demerger, however has posed an interesting question – Whether demerger do not require court approval in view of section 180 of the Companies Act, 2013?

In Re: United Spirits Limited, 2015(2) AKR 243

In a scheme of demerger, Regional Director (Ministry of Corporate Affairs) objected that the scheme of demerger was only a hive-off by way of a slump sale. And that the sale of an undertaking is covered under Section 293(1)(a) of the Companies Act, 1956 up-to 11-9-2013 and with effect from 12-9-2013 under Section 180(1)(a) and sub-Section (4) of the Companies Act, 2013, which speaks of the restrictions of the powers of the Board. Therefore, in terms of Section 180 of the Companies Act, 2013 the approval of the Board of Directors is required. In case a sale of an undertaking required the approval of the Hon’ble High Court, then such a condition would exist in Section 180. However, Section 180 does not provide for any approval by the High Court. Therefore, the scheme does not require the approval of the High Court under Section 180.

Petitioner Company submitted that even assuming that the contention of the Regional Director is that it is not a sale or amalgamation or reconstruction but a slump sale, not only this Court but various High Courts have held that even in a case of a slump sale, the provisions of Sections 391 to 394 stand attracted requiring the approval of the Company Court. In support reliance was placed on (i) the Judgment of the Gujarat High Court in the case of Health Products Ltd.[1] and Nirma Limited[2] (ii) the unreported Judgment of Hon’ble Karnataka High Court dated 16-6-2008[3] and the unreported Judgment of Bombay High Court dated 24th January, 2014[4].

It was held that Sections 391 to 394 is a complete code by itself and hence necessarily it would have precedence over the other provisions of the Act. It is not the case where the provisions of Section 180 of the Act are not being complied with and the scheme is sought to be sanctioned otherwise than in accordance with law. Therefore, it cannot be said that the non-compliance of Section 180 would run contrary to the provisions of Sections 391 to 394. In view of the judicial pronouncements of the High Courts as well as the Supreme Court reiterating the fact that Sections 391 to 394 is a code, thereby other provisions of the Statute not forming part and parcel of the code, necessarily the provisions of these Sections would have precedence over the other provisions of the Act.

 

Regional Director had also objected that the appointed date should be shifted from 1-4-2013 to 1-4-2014.

Petitioner relied on the Circular No. 12 dated 21st February, 1977 issued by the Department of Company Affairs

“241/Sec 210: Annaual Accounts-General-Drawing up of final accounts in respect of companies which are under process of amalgamation-Whether obligatory.

A question has been raised whether a company which is in the presence of being amalgamated with another company is required to draw up its final accounts as required under Sections 210 and 211. This matter has been examined in the Department and it has been decided that till the amalgamation order is made by the court and the amalgamation scheme is in facts sanctioned, the transferor-company is required to continue complying with the various provisions of the Act including those relating to preparation, presentation, circulation and filing of accounts as and when they become due for compliance. The failure to do this will, among others, mean the denial to me shareholders and the public knowledge about the financial position of the company because the amalgamation petition for some reason or the other may not be decided for quite some time.”

In view of the clarification by the Department of Company Affairs, objection of RD was not sustained.

 

[1] 2005(62) SCL 393 (Gujarat)

[2] in Company case No. 146/2010 & 147/2010 dated 14-3-2011

[3] passed in Company Petition No. 45/2008 connected with 146/2008 and 147/2010

[4] in Company Petition No. 696/2013

Amalgamation – objection to change name as part of scheme

In Re: Michelin India Private Limited [MANU/TN/0817/2015] Madrad High Court

In a scheme of amalgamation, it was proposed that name of the transferor company shall be deemed to be name of the transferee company. The Regional Director, Ministry of Company Affairs (‘MCA’), objected to the same on the ground that as per General Circular No. 45/2011 dated 8.7.2011 of MCA on Name Availability Guidelines, 2011, a proposed name is considered to be undesirable if it is identical with or too nearly resembling with name of the company in existence and names already approved by the Registrar of Companies. The Transferee Company shall follow the Procedures and Rules laid down for such change of name.

The petitioner company relied upon unreported judgement of Madras High Court in C.P. Nos. 54 to 56 of 2014, Eye Foundation Ltd. vs. Lasik Centre (India) P. Ltd.[1] wherein Madras high Court referred judgement of Bombay High Court In Re: PMP Auto Industries Ltd.[2] and the judgment of the Karnataka High Court in Mysore Cements Limited[3] where the compliance of Section 21 was dispensed with on the ground that Section 391 of the Companies Act invests the court with powers to approve or sanction a scheme of amalgamation/arrangement and in doing so, if there are any other things which for effectuation, require a special procedure to be followed except reduction of capital, then the court has power to sanction them, while sanctioning the scheme itself. And that section 391 is a complete code in the nature of a “single window clearance” system: (i) order passed by our High Court in C.P. Nos. 177 and 178 of 2008 in Mehala Machines Limited, and M/s. Sanmarco Texmac P. Ltd..

 

The petitioner company also relied on the judgment of the Gujarat High Court in Mekaster Valves and Engineering Services Private Limited[4], wherein, reliance was placed on the judgment of the Bombay High Court in Vasant Investment Corporation Limited v. Official Liquidator, Colaba Land and Mill Co. Ltd.[5], which has dealt with the wide powers under Section 391 of the Companies Act, 1956.

And reliance was also placed upon the judgment of the Supreme Court in Bhagwati Developers v. Peerless General Finance and Investment Co. and others[6], wherein it was observed that these Circulars (referring to MCA circulars) are merely advisory in character.

 

Madras High Court held that General Circular No. 45/2011 dated 8.7.2011 of MCA does not have any mandatory effect and it is merely advisory in character. Hon’ble High Court also considered sections 21 of the Companies Act 1956 and Section 13 of the Companies Act 2013. And observed that Chapter V (of Companies Act 1956) is a complete code by itself on the subject of arrangement/compromise and reconstruction comprehensive enough to include a change in the name consequent on the amalgamation or arrangement.

It may be noted that Rule 8 (8) of the Companies (Incorporation) Rules, 2014 was not brought to notice of Hon’ble Court, which provides that names released on change of name shall not be allowed to be taken by any other company (including group company) for a period of three years, except where specific directions given by competent authority in course of compromise, arrangement and amalgamation.

[1] [ 2013 ] 113 CLA 93 ( Mad. ), [ 2013 ] 176 CompCas 345 ( Mad )

[2] [ 1994 ] 80 CompCas 289 ( Bom ); 1991 ( 4 ) BomCR 387

[3] [ 2009 ] 150 CompCas 623 ( Kar ); [ 2010 ] 97 SCL 290 ( Kar ); 2009 ( 4 ) KCCR 2707; 2009 ( 4 ) KarLJ 388

[4] [2009] Comp. Cases 593

[5] (1981) 51 Comp. Case 20

[6] AIR 2005 SC 3345