Madras HC stays insolvency proceedings before NCLT in Nissan-Renault case

The first bench of Madras High Court, comprising Chief Justice Indira Banerjee and Justice Abdul Quddhose, has stayed the insolvency proceedings against car makers Nissan Motor India and Renault Nissan Automotive India before the National Company Law Tribunal (NCLT)..The issue stems from a winding up petition, which was moved by SRL Advisors, a firm which was engaged by the petitioners, Nissan and Renault, for finance, tax and accounting services..SRL’s services were later terminated due to frauds in their dealings. While the termination letter was not challenged by SRL, a winding up petition for unpaid dues was moved in the Madras High Court. Allegations by SRL during the High Court proceedings were mala fide, contend the petitioners..The winding up proceedings were subsequently transferred to the NCLT to be dealt as an application under provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). The transfer of this winding up petition to the NCLT was a consequence of Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016 read along with the Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2016 (Transfer Rules)..The petition moved by Nissan and Renault, while praying for an interim stay from proceedings against the two companies at the NCLT, also seeks to challenge the vires of the said Rule 5 of the Transfer Rules..The Transfer Rules while transferring a certain class of winding-up petitions pending before the High Courts to the NCLTs, have the effect of treating such transferred petitions as applications under the IBC. The petitioners have submitted that treating winding-up petitions as insolvency applications is ‘clearly impermissible in law and beyond the legislative intent/competence of the Central Government’..The petitioners further submitted that the ‘insolvency resolution mechanism under the IBC is substantially different from the mechanism for winding up under the Companies Act, 1956 and as such, without a specific statutory provision to the contrary, existing provisions cannot be altered or abated’..While challenging the vires of Rule 5 of the Transfer Rules, the petitioners also heavily relied on a ruling of the National Company Law Appellate Tribunal (NCLAT) where the NCLAT expressly doubted the power of the Central Government to frame these Transfer Rules given the surrounding legislative scheme..Pursuant to notification of the Transfer Rules, the Madras High Court also by a common order dated 11 January, 2017 transferred ‘all company petitions filed for winding up under Section 433(e) of the Companies Act, 1956 in which pre-admission notices have been served, unserved or in the process of service’ to the NCLT. .The stance taken by the Madras High Court in its common order also appears to be contrary to the view taken by the Delhi and Bombay High Courts, where company winding up petitions that have been served upon the respondents pursuant to the notice issued by the Judge have been saved to be dealt under provisions of the Companies Act, 1956..While an interim stay against the NCLT proceedings have been granted, it appears that no interim stay has been granted against Rule 5 of the Transfer Rules.