Role of Liquidator vs. RP in Insolvency Proceedings

Posted On - 5 March, 2020 • By - Shrusti Jenamaharathy

There are hundreds of cases that have been filed and closed under Insolvency and Bankruptcy Code, 2016 (“IBC”) or are being battled out. There are many lessons that can be learnt from the obvious mistakes committed by some of the best lawyers, courts, and creditors.  This article analyses such a case that has omitted the grey area of having matters filed against the same corporate debtor both as per the Companies Act, 1956(“1956 Act”) and Insolvency and Bankruptcy Code,2016.

FACTS

The creditors of Avani Project and Infrastructures Ltd.[1]
(“Avani Projects”) filed a winding
up petition before the Hon’ble High Court of Calcutta (“Calcutta High Court”) under the provisions of Section 433(e) of the
1956 Act in the year 2016. However, after repeated stages for repayment and
show cause, as the company was unable to pay off the debts as claimed by the creditors,
the Calcutta High Court moved with the passing of appointment of Official
Liquidator(“Liquidator”) in the year
2018. An inventory list was prepared and the list of assets of the company was in
the possession of the Liquidator.

Several applications made by the homeowners led to a delay in
proceeding with the winding up process. In the meanwhile, Devi Trading &
Holding Private Limited (“Devi Trading”),
one of the financial creditor of Avani Projects moved to NCLT, Kolkata by
filing an application[2] under Section 7 of the
Insolvency and Bankruptcy Code, 2016 (“IBC”). The Hon’ble NCLT, Kolkata appointed
an Interim Resolution Professional (“IRP”)
for ascertaining the creditors of Avani Projects and commencement of Committee
of Creditors(“COC”) thereby proceeding
with the resolution plan. The said order of the NCLT, Kolkata was passed
keeping in mind the proceedings that were taking place at Calcutta High Court.
The NCLT, Kolkata mentioned for the handover of documents from the Liquidator
to IRP to proceed with the resolution plan of Avani Projects.

CONTENTIONS IN FAVOUR AND AGAINST OF
THE PROCEEDINGS

Devi Trading moved to the Calcutta High
Court with the contentions that IBC has an overriding effect over all the other
laws in this field. IBC is a succeeding enactment and is made in consideration
with the Companies Act, 2013 (“2013 Act”).
Adding further, the sections of the 1956 Act have been repealed by the 2013
Act. The High Court had just appointed the  Liquidator and had not passed any order of
liquidation, thereby creating no embargo in failing the petition under IBC. The
Calcutta High Court has no power to stay the implementation of the order passed
under the provision of IBC. Therefore, the winding up petition cannot be
continued in view of the provision of section 238 of IBC. Devi Trading, along
with other creditors in support of its contention, pressed for a combined
hearing of both the IBC petition and winding up petition before the NCLT or
alternatively to stay the Calcutta High Court winding up petition. The creditors
supporting Devi Trading relied upon the judgement in the case of Impex Ferro
Tech Limited Vs. Auroma Coke Ltd [3] (“Impex-Auroma
judgement”) wherein it was held that once the proceedings under IBC are
admitted,  all proceedings pending before
the other courts should ordinarily be transferred to the tribunal SBU or
adjudicating authority. Another secured creditor of Avani Projects, State Bank
of India(“SBI”) pointed that the IBC
proceeding was filed prior to the Calcutta High Courts’ appointment of
Liquidator, hence, no leave is required to be obtained under Section 446 of the
1956 Act.

The creditors opposing the IBC petition
stated that the petition is not required to be transferred to NCLT, Kolkata in
lieu of Rule 3 of the Transfer Rules. It was contended that the winding up
petition before the Calcutta High Court was filed much prior to the Transfer Rules
and hence, the said rule is not applicable as such. Also considering a conjoint
reading of Section 465(1) read with 434(1) of the 2013 Act, it clearly states
that the matters not transferred to NCLT will be applicable and proceeded as
per the 1956 Act. The creditors pressed for a stay of the IBC proceeding to
avoid conflict between the IRP and the Liquidator. It has been held while
hearing an appeal from the rejection of an application seeking transfer of
winding up petition to the NCLT in the Impex- Auroma judgement that “a case
analysis on the grounds of balance and convenience and the like to be
undertaken by the Company Court before directing or refusing to direct the
transfer of any pending proceedings.” The creditors questioned upon the
time of 1 year taken by the NCLT to pass an order stating no difference in the
mechanism as per the IBC. Avani Projects, represented by its director, opposed
the prayer of the IRP and the action of Devi Trading by submitting that the
order of the NCLT passed on March 13, 2019, was an order without jurisdiction
and is null and void in law . The said order is required to be stayed till the
winding up proceedings pending before this Court is finally decided.

ANALYSIS OF THE COURT

The Calcutta High Court petition was
filed in January 2016 followed by all the notices and affidavit exchanged
before December 7, 2016, i.e. the cut-off date for transfer. Hence, as per the
provisions of Section 434(1) of the 2013 Act, the Calcutta High Court had
jurisdiction to hear the petition. Further, as per a conjoint reading of
Section 434 along with Rule 5 and Rule 6 of the Transfer Rules, it is made
clear that the 1956 Act would be applicable. Adding further, no application was
made by any of the creditors to the winding up for the transfer of the case to
the NCLT nor any application was filed by any creditor prior to March 14, 2018,
i.e. date of filing of petition by Devi Trading for transfer based on IBC.

The Calcutta High Couth held that even
if the NCLT has exclusive jurisdiction over the insolvency and bankruptcy
matter of the company, but also, in view of the specific retention power, the
Calcutta High Court would not lose its jurisdiction.  Further, the Calcutta High Court held that “I
am of the view that NCLT may be permitted to proceed upto the level of revival
of the said Company. If the revival effort fails, the Company Judge of this
Court shall proceed with the winding up proceedings and distribute the sale
proceeds received by selling its assets amongst the creditors under the
provisions of the Act of 1956 even if the said company has not yet being wound
up.”

The Calcutta High Court contended that
in the event, if the resolution plan fails, the liquidation part dealt under
Chapter III of the IBC will be taken up by the Calcutta High Court. However, if
the company is in the revival stage, the said should be taken up by the NCLT
under Chapter II of IBC.

The Court further stated that the IRP
would be free to approach the Liquidator for inspection and obtain copies of
the documents and information as required by it for preparing the resolution
plan to be submitted before the NCLT. The Calcutta High Court stated that “If
the IRP has to inspect any asset of the said Company for the preparation of the
Resolution Plan he should approach the Provisional Liquidator who will render
necessary assistance and cooperation.”

The Calcutta High Court answering to
the applicability of IBC on the earlier petition stated that the IBC is
applicable for the earlier saved petition wherever required; like its
applicability in the current petition. The Court stated as follows:  ”IBC, according to me, like all other statutes
has a prospective effect since it has not been specifically made operational
retrospectively. However, 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.”

The Calcutta High Court while answering
to the applicability of the order dated March 13, 2019, stated that it cannot
be outrightly stated that NCLT cannot pass such orders considering that the
winding up order has not been passed till date even after the appointment of Liquidator
in March 2018. The Calcutta High Court did state that the NCLT should have been
cautious while passing any such orders after knowing the fact that the
Liquidator has been appointed by the Calcutta High Court. The NCLT should have
observed and considered the effect of winding up petition which has a
representative character and all the creditors should have joined into it. The Calcutta
High Court passed the judgement stating that the Court had the powers to hear
the petition. Adding further, it stated that the liquidation part can be taken
up by the Calcutta High Court, however, if the company is in a stage of
revival, the NCLT through IRP/RP will take up the proceedings as per IBC.

CONCLUSION

This case can
be considered as one of those cases in conflict during the period of the boom
of the new IBC. The confusion between the creditors has led to a situation
where there is a tie between the decisions of two courts. The Calcutta High
Court has very promptly resolved the main issue in conflict and has brought a
reformation for all those cases which are in such a position due to the
confusion between the creditors. The Calcutta High Court has defined the line
of difference in the role to be played by RP and Liquidator.

It
is a considerable wise decision wherein the High Court is having the
jurisdiction in case the matter is proceeding with Liquidation. In all cases
where the Insolvency proceedings have started under IBC, the High Court
proceedings may be kept on hold or such applications should be filed before the
High Court.  

Contributed By – Shrusti Jena Maharathy
Designation – Senior Associate

King Stubb & Kasiva,
Advocates & Attorneys

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