NCLT Mumbai: Conversion Of Corporate Debtor To Private Company Can’t Be Denied Due To Pending SFIO Probe Once Resolution Plan Approved
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, has held that an application for conversion of a company from a public limited company to a private limited company under an approved resolution plan cannot be rejected on the ground that prosecutions or Serious Fraud Investigation Office (SFIO) probes are pending against the corporate debtor, as such proceedings abate once the plan is approved. The Bench comprising Sh. Prabhat Kumar (Technical Member) and Sh. Sushil Mahadeorao Kochey (Judicial Member) was hearing an application filed under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) by Sterling Biotech Limited (Corporate Debtor), seeking directions to record its conversion to a private limited company following approval of an acquisition plan.
Background of the Case
The Corporate Debtor was admitted to CIRP in June 2018, followed by liquidation in May 2019. Perfect Inc. submitted an acquisition plan to acquire the company as a going concern, which included delisting its shares and converting it into a private company. The plan was approved by the Tribunal on November 11, 2022. Pursuant to the order, the company applied to the Registrar of Companies (ROC) and the Regional Director (RD), MCA, to record its conversion and issue a new certificate of incorporation. However, the RD opposed the application citing Rule 41(7)(ii) of the Companies (Incorporation) Rules, 2014, which disallows conversion where prosecutions or investigations are pending.
Contentions
The applicant argued that once a resolution or acquisition plan is approved, it takes effect on a clean slate basis. Therefore, pending prosecutions or investigations cannot be a ground to deny conversion. It also pointed out that the Tribunal’s approval order had attained finality and could not be re-examined in the garb of Rule 41 objections. The RD, however, submitted that since one prosecution and an ongoing SFIO investigation were pending against the company, conversion was barred under Rule 41(7)(ii). It further argued that the Tribunal’s approval could not override statutory restrictions, citing Section 30(2)(e) of the IBC.
Tribunal’s Observations
The Tribunal rejected the RD’s objections, holding that its earlier order approving the acquisition plan had attained finality and could not be reviewed. It observed that under Section 32A of the IBC, the liability of a corporate debtor for offences committed prior to the commencement of CIRP ceases after the approval of a resolution plan, provided there is a change in management or control.
The Bench held: “Even if any prosecution and SFIO investigation is pending against the company, the said prosecution or SFIO investigation has to abate qua the Corporate Debtor’s assets sold in liquidation. Accordingly, no adverse view can be taken by the Respondent while according his approval to the proposed conversion even in terms of Rule 41(7)(ii), as such proceedings or investigation stand abated qua Corporate Debtor’s assets.” It clarified, however, that such proceedings could continue against individuals responsible for the earlier offences, but not against the corporate debtor itself.
Verdict
Invoking its powers under Section 60(5) of the IBC read with Section 424(3) of the Companies Act, the Tribunal directed the RD to decide the conversion application without reference to pending prosecutions or investigations, and to pass a reasoned order within 30 days. It also directed depositories to cancel the existing ISIN numbers for Sterling Biotech Limited’s extinguished equity shares and debentures and issue fresh identifiers in the name of Sterling Biotech Private Limited. Accordingly, the application was allowed.
Cause Title: Andhra Bank V. Sterling Biotech Limited
Case No: IA(I.B.C)/2216( MB)2025 IN C.P. (IB)/490(MB)2018
Coram: Sh. Prabhat Kumar [Technical Member], Sh. Sushil Mahadeorao Kochey [Judicial Member]
