Initiation of Corporate Insolvency Resolution Process in Pending Winding up Proceedings – By Madhav Sinhal

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Initiation of Corporate Insolvency Resolution Process in Pending Winding up Proceedings

-By Madhav Sinhal,
(3rd year Law Student of LLB at Panjab University)

Introduction

Section 434(1)(c) of Companies Act, 2013 (‘2013 Act’) read with Rule 5 of The Companies (Transfer of Pending Proceedings) Rules, 2016 (‘Transfer Rules’) provides for transfer of those winding up proceedings to the National Company Law Tribunal (‘Tribunal’) filed under Section of 433(e) of Companies Act, 1956 (‘1956 Act’) i.e. on the ground of inability to pay debts where the petition has not been served to the respondent in compliance with Rule 26 of the Companies (Court) Rules, 1959 (‘1959 Rules’). Thereafter, these petitions are to be treated as applications under Section 7, 8 or 9 of Insolvency and Bankruptcy Code, 2016 (‘Code’). This article attempts to explain how provisions of the Code can still be used to initiate corporate insolvency resolution process (CIRP) in relation to a Corporate Debtor even if the winding up petition against the same Corporate Debtor is not transferred under Rule 5.

Analysis

A perusal of Section 434(1)(c) of the 2013 Act and Rule 5 of the Transfer Rules will show that following two situations may arise:

  1. Where petition has not been served upon the respondent under Rule 26 of the 1959 Rules; or
  2. Where petition has been served upon the respondent under Rule 26 of the 1959 Rules

Under Situation 1, there remains no other option, and the petition has to be transferred to the Tribunal and treated as applications under the Code[1]. However, the petitioner had to submit all the information required to get the petition admitted under Sections 7,8 or 9 under the Code up to 15th July, 2017[2], otherwise the petitioner will have to file fresh applications under the Code before the Tribunal in accordance with other provisions of the Code as provided under Second Proviso of Rule 5.

Under Situation 2, the petition is not transferred to the Tribunal and is to be dealt with in accordance with provisions of the 1956 Act and 1959 Rules[3]. However, irrespective of the stage at which the petition is pending, the parties to the petition have the option to file an application under last Proviso (added in 2018[4]) of Section 434(1)(c) of the 2013 Act  before the court where it is pending to transfer such petition to the Tribunal and the proceedings so transferred shall be treated as application for initiation of CIRP under the Code. It is to be noted here that this Proviso is not limited in application only to winding up petitions filed under Section 433(e) of 1956 Act but could also be applicable to other winding up petitions as well, including petitions filed under Section 20 of Sick Industrials Companies (Special Provisions) Act, 1985(SICA, 1985)[5]. Whenever this is done, the court may order the transfer of the proceedings and since the Proviso uses the word ‘may’, the court is not bound to transfer the proceedings after the application is filed.

In Sicom Ltd v. Hanung Toys and Textiles Ltd.[6], the Hon’ble Delhi High Court stated at which stages the winding up petition may be transferred to the Tribunal if an application is made under last proviso of Section 434(1)(c). It said that when a Provisional Liquidator is appointed and the process is at initial stage, then normally, the matter would be transferred to the Tribunal but if progress has been made and chances of insolvency resolution process are bleak, then the matter is not to be transferred. The Court went on to state that once the Official Liquidator is appointed as Liquidator, then normally, the winding up petition is not to be transferred. In another case[7] also, the Hon’ble Delhi High Court transferred the winding up proceedings to the Tribunal since the process was still at its initial stage. However, the Hon’ble Supreme Court in Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Limited[8] while dealing with the transfer of proceedings under Section 20 of the SICA, 1985 pending before the High Court insisted on transferring the proceedings and observed that (para 17 SCC):

“17. …… Once this is done, the High Court must transfer such proceedings to NCLT which will then deal with such proceedings as an application for initiation of corporate insolvency resolution process under the Code.”

Initiation of CIRP under the Code

The question now arises is whether application for initiation of CIRP under Section 7, 9 or 10 of the Code can be filed in relation to a Corporate Debtor before the Tribunal when the winding up petition against the same Corporate Debtor is not transferred to the Tribunal. In this regard, the Courts have time and again held that the proceedings under the Code are independent proceedings[9] and has nothing to do with the pending winding up petitions before the High Court[10]. The Hon’ble National Company Law Appellate Tribunal in SBI v. Shakti Bhog Foods Limited[11] held that there is no provision in the Code which indicates that if a ‘winding up’ or ‘liquidation’ proceedings has been initiated against the ‘Corporate Debtor’, the petition under Section 7 or Section 9 against the said ‘Corporate Debtor’ is not maintainable. Also, in Jaipur Metals (supra), Supreme Court held that it was open for Respondent No. 3 (a Financial Creditor) therein to apply under Section 7 of the Code at any time before a winding up order is passed. Furthermore, in Civil Appeal no. 4536 of 2018 titled as SBI vs Shakti Bhog Foods Ltd[12]. before Hon’ble Supreme Court the issue is pending as to whether an application under Section 7 or 9 of the Code can be initiated once the Official Liquidator has been appointed as a Liquidator by a Company Court or not[13]. It is pertinent to note here that Section 11 (d) of the Code bars a corporate debtor to apply before the Tribunal under Section 10 in respect of whom a liquidation order has been passed. Meaning thereby, a corporate debtor can also apply to the Tribunal under Section 10 of the Code when a winding up petition under Section 433(e) of 1956 Act against him is pending before the High Court provided that liquidation order is not passed by the Court in the said winding up petition.

Moreover, a Bench of Single Judge of Hon’ble Bombay High Court in PSL Limited vs Jotun India Pvt. Ltd.[14] had held that if an application for CIRP is filed and admitted by NCLT, consequences under IBC, including under Section 14, shall also apply to post notice winding up proceedings whatever their stage may be. This was upheld by Division Bench of Hon’ble Bombay High Court[15] and was ultimately approved by Hon’ble Supreme Court in Forech India (supra). Meaning thereby, the winding up proceedings cannot be proceeded with further if an application for CIRP is admitted by the Tribunal. This is also supported by Section 238 of the Code i.e. the non-obstante clause of the Code.

Conclusion

The above decisions by various courts show that they are giving due importance to the Code and upholding its spirit by allowing the transfer of winding up proceedings to the Tribunal and also by allowing fresh applications under the Code to initiate CIRP even when the winding up proceedings are pending before the High Court. However, there is no clarity by Supreme Court as to the stage of winding up proceedings at which the fresh applications under the Code may be allowed to be filed and proceedings be allowed to be transferred to the Tribunal. Though in Jaipur Metals case (supra), the Hon’ble Court said that respondent no. 3 therein is allowed to apply under Section 7 of the Code before a winding up order is passed, the judgement is to be read in light of the facts thereof.  Nonetheless, the judgement of Delhi High Court in Sicom Ltd v. Hanung Toys and Textiles Ltd.[16] seems to be the most logical one on this issue.

Reference

[1] Rule 5(1) of the Transfer Rules

[2] First Proviso to Rule 5 of the Transfer Rules

[3] Third Proviso to Section 434(1)(c) of 2013 Act

[4] Section 39 of The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Act no. 26 of 2018)

[5] Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Limited [(2019) 4 SCC 227]

[6] (2019) SCC OnLine Del 10399

[7] Action Ispat &Power Pvt. Ltd. vs Shyam Metalics and Energy Ltd. [(2019) SCC OnLine Del 10424]

[8] (2019) 4 SCC 227

[9] Forech India Ltd. vs Edelweiss Assets Reconstruction Co. Ltd. [(2019) SCC OnLine SC 87]

[10] Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Limited [(2019) 4 SCC 227]

[11] Company Appeal (AT) (Insolvency) No. 83 of 2018

[12] Last listed on 20.02.2020 before Hon’ble Justice Rohinton F. Nariman and Hon’ble Justice S. Ravindra Bhat

[13] Sicom Ltd v. Hanung Toys and Textiles Ltd (para 45 supra)

[14] (2018) 2 Bom R 350

[15] Jotun India Pvt. Ltd. v. PSL Limited [(2018) SCC OnLine Bom 1952]

[16] supra

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