Co-existence of Winding-up Petition and Application under Insolvency Code

[The
following post is contributed by Nitu
Poddar
, who is an Associate at Vinod Kothari & Co, and can be reached
at resolution@vinodkothari.com]
This post seeks to
address the question whether an application for resolution process of a company
can be filed under the Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in
case a winding up petition is pending before a High Court?
MCA Notification on transition for pending proceedings
The notification issued
by the Ministry of Corporate Affairs (“MCA”) in respect of the Companies
(Transfer of Pending Proceedings) Rules, 2016
  only provides for the transition of the litigation
process from High Court to the National Company Law Tribunal (“NCLT”).  These Rules lay down the criteria for
deciding whether the matter will be filed with and adjudged by the NCLT or by the
High Court.
In accordance with
Rule 5 of the said Rules, where the petition for winding up has been served on
the company and is pending before the relevant High Court, such petition shall
be adjudged by the High Court. When a matter is being adjudged by the High Court,
1956, the same will be governed by the provisions of the erstwhile Companies
Act, 1956 (“Act, 1956”).
Section 446 and 537 of Act, 1956 – stay of proceedings
and avoidance of certain transactions
Section
446 of the Act, 1956 envisages that when a winding up order has
been made or the Official Liquidator (OL) has been appointed as Provisional
Liquidator, no suit or other legal proceedings shall be commenced or, if pending
at the date of winding up order, shall be proceeded with against the company,
except with leave of the court. 
The bar against initiating
any suit becomes live only once an order for winding up is passed. In case the
winding up petition is merely served on the company and filed before the High Court
and no order for winding up as such is passed, section 446 does not become
applicable.
Section
537 of the Act, 1956 declares that any attachment, distress or
execution put in force without leave of the company court against the estate or
effects of a company before such a company is being wound up under the
supervision of the court shall be void.  Section
537 of the Act will apply only if a company is being wound up
by or subject to the supervision of the court. 
The difference between the two sections was discussed in the
matter of B. Suresh vs AP Mahesh
Co-Operative Urban
by the Andhra High Court. It observed as follows:
The distinction between Sections
446 and 537 of the Act is that while a person can proceed to have his
rights against the company that is being wound up/adjudicated with the leave of
the company court, no person is entitled to enforce such rights against such
company during the pendency of the winding up proceedings although such rights
have been determined by a competent court or tribunal without once again
obtaining the leave of the court. Further,
the adjudication proceedings can go on until a winding up order or an order of
the appointment of a provisional liquidator is made, without the necessity of
obtaining the leave of the company court whereas enforcement of any right
adjudicated or otherwise, cannot be made the moment the company is faced with a
winding up proceeding.
The logic is not difficult to understand while an adjudication only
declares the rights of the parties execution directly affects the assets of the
company and takes away the assets from the possession or custody of the company
and creates rights in favour of third parties and thereby result in the
proliferation of litigation if eventually the company is directed to be wound
up. It must be remembered that 
Section
446(1) does not declare that any adjudication made in
contravention of the said section to be void; whereas Section 537 declares–obviously, the reason is that though it is
desirable that the leave of the company court is to be obtained even at the
stage of the adjudication, the non-compliance of the requirement of Section 446(1) may not really affect the assets of the company in
liquidation as the enforcement of the rights so adjudicated is still required
to be done with the leave of the company court under Section 537.
Intent of section 446
In case of winding
up of a company – the assets of the company get distributed to the various
creditors and contributories. If parallel proceedings are continued along with
winding up (after the order has been passed) – there can be situations of chaos
amongst the creditors and contributories regarding the distribution of assets. The
idea of the provision is to prevent the company from such situations and to
safeguard the company against wasteful and expensive litigation by bringing
matters against the respondent company before a single adjudicatory forum as
far as possible.
Also, the purpose
of insisting on such leave is to keep the High Court, which is dealing with the
liquidation of the company, posted as a matter of fact as to all the happenings
regarding the assets of the company.
Several rulings on the section – no leave required if
winding up not ordered by the Court
1.         In Credit Capital Finance vs Foremost
Industries Ltd
, the Delhi High Court held that where in a proceeding
for winding up a conditional order was passed that the petition would be
dismissed on payment being made within the stipulated time and the time was
extended by the parties by mutual agreement, and no provisional liquidator was
appointed, it was held that leave of the court for continuation of a proceeding
was not needed. The Court observed:
It was further ordered that in the event of the said amount being
deposited within the specified time, the Company Petition would stand
dismissed. Further the order provides that in the event of the amount not being
deposited within the time allowed, the Company Petition would stand admitted
and it would be advertised in the Gazette etc. The crucial words in the said
order for present purposes are “in the event of the amount not being
deposited the Official Liquidator will also stand appointed as Provisional
Liquidator”. The Company Court also directed the Official Liquidator to
make an inventory of assets, moveable and immovable of the Company.
 
In view of extension of time for payment by mutual agreement between the
parties, it cannot be said that the Company has failed to deposit the amount by
the specified date.
2.         In Punjab National Bank vs Punjab
Finance Pvt Ltd
, it was held that no leave of the court was required by the plaintiffs to file a suit in
the civil court, as the winding-up order had not been passed by the date of
filing the suit nor was an order appointing the provisional liquidator in force

3.         In Erach Boman Khavar vs Tukaram Sridhar Bhat
& Ors
, Supreme Court of India referred to another ruling where
the Supreme Court considered
the contrary views expressed by different High Courts on the effect and purport
of s
ection 446(1) of the Act,
1956 and came to the conclusion that the view that failure to obtain leave
prior to institution of suit would not debar the court from granting such leave
subsequently and that the only consequence of the same would be that the
proceedings would be regarded as having been instituted on the date on which
the leave was obtained from the High Court.
Two
conclusions were derived from the reference to earlier decisions of the Supreme
Court:
First, grant of leave of
the court is not a condition precedent for initiation of a civil action or the
legal proceedings. It is because the Section does not expressly provide for
annulment of a proceeding that is undertaken without the leave of the court.
There can be no shadow of doubt that leave of the winding up court can be
obtained even after initiation of the proceeding. The second, the seminal object
behind engrafting of the said provision is to see that the interest of the
company is safeguarded so that it does not face deprivation of its right and
claims are adjudicated without the knowledge of the company court and further
the court has a discretion to see whether leave should be granted and, if so,
with what conditions or no condition. That apart, the court may grant leave if
it felt that the company should not enter into unnecessary litigation and incur
avoidable expenditure.
Stay of proceeding under IBC, 2016
Clause (d) of
section 11 of the IBC, 2016 restricts a corporate
debtor
(and not any creditor) from making an application under the IBC,
2016 – in case a liquidation order has been made against such corporate debtor.
Wrong perception
The MCA
notifications on transitioning to NCLT are inappropriately being mixed up with
the provisions of leave of the court in terms of section 446.
Transitioning
provisions are applicable where the applicant is considering whether it should
continue before the court, or move its matter to the NCLT. This is where the
same creditor, who had filed a winding up petition in the court, is seeking to
file a matter before the NCLT. In that case, the question as to whether or not affidavits
have been served on the other side becomes relevant. If so, the proceeding is
effectively initiated, and therefore the proper process for the creditor to
continue before the court.
If the creditor is
not the same creditor who filed for winding up, there is no question of
transitioning there. It is making an original reference –it never made any
application before the court. Such a creditor has to consider provisions of section
446 of the Companies Act 1956 (which is relevant, since winding up was
initiated under that Act). The language of the section is very clear.
NCLT’s view
1.         In Nikhil
Mehta & Sons v. AMR Infrastructure Ltd
, the Principal Bench of the NCLT
held that the application would not be maintainable since many winding up
petitions have been filed before the Delhi High Court. Even the OL has been
appointed as a provisional liquidator although the matter is presently pending
before the Appellate Bench with interim directions.
The
NCLT’s view in this matter was in concurrence of the provisions of section 446
of Act, 1956. Since the OL was already appointed for the corporate debtor, the
insolvency application could not be accepted by the NCLT.     
2.         In Alcon
Laboratories (India) Private Limited vs Vasan Health Care Private Limited
,
an objection was raised by the corporate debtor the that winding up petition is
sub judice before the High Court of
Madras, where the Court permitted Andhra Bank to appoint a suitable person to
conduct forensic audit of the corporate debtor.
The
NCLT held that pendency of the winding up petition cannot be a bar under the IBC,
2016 for initiating the corporate insolvency resolution process because the High
Court has not passed any order for winding up of the corporate debtor and no OL
has been appointed. Therefore, the objection raised was rejected.  
Conclusion
Taking into
consideration the provisions of Act, 1956, the Companies (Transfer of Pending
Proceedings) Rules, 2016 and the provisions of IBC, 2016, it is possible to conclude
as follows:
The possibility of
filing under the IBC, 2016 at various stages of winding up process is as
follows:
1.         If
application is served to respondent company and / or pending before the High
Court and no Order has been passed as on the date: – application under IBC,
2016 can be filed with the NCLT without any leave from the High Court;
2.         If a
winding up order has been passed – application under the IBC, 2016 can be filed
the with NCLT with prior leave from the concerned High Court;
There is no nexus
between transition rules, and the stay arising due to section 446 of the Act,
1956.
In our view, nothing
should prevent an entity from filing an application for resolution of a company
for which winding up proceedings have been initiated. Even in a case where
order has been passed in this regard, seeking leave from the Court is a matter
of protocol only. This should not be a stumbling block.
Assuming the OL
has been appointed, and a creditor goes to NCLT seeking resolution, and
therefore goes to court for seeking leave, there is no reason why the court
should not grant leave. If the creditors, under a collective process, decide
that the entity undertake corporate resolution rather than be wound up, of
course the law always prefers restructuring as the first option and winding up
as the last.
If leave is not
granted, one may make a reference to the SC. Since the admitted objective of
the IBC was to clear the deadwood from the system, it can be no one’s argument
that existing cases should remain with courts. After all, most of the major
corporate defaulters are defaulters for a long time now, and it is unlikely
that no creditor would have filed for winding up in such cases.
A creditor is
always free to make an application under sections 7, 8 and 9 of the IBC, 2016
irrespective of any pending winding up petition against the corporate debtor. Once
the application under IBC is admitted, the provisions of IBC become applicable.
In accordance with section 14 of the IBC, all winding up petitions filed and
pending before any forum (NCLT / High Court) will get stayed and no new winding
up petition can be instituted. The stay is from the date of admission of the
application until the completion of the corporate insolvency resolution
process.
Also, if the
resolution process under the Code culminates into liquidation for circumstances
enumerated under section 33 of the IBC, 2016, the same would occur in
accordance with the provisions of the IBC, 2016 and not the Companies Act.
Nitu Poddar

  

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

7 comments

  • IMPROMPTU
    "Co-existence of……"- ? As quickly read, and attempted to be made out, wprt the clinching observations in paragraph, – "Intent of section 446", the one and only outstanding poser, to which an answer has to be found seems to be this: Who really is the cook principally- in- charge; and /or who, perhaps, is supposed to be on the proverbial task of, "cooking someone else's goose" ? Beg to be excused if the common sense analogy, instantly coming to mind, is not appropriate or to the mark!

  • Hi – i wish to know if an individual person as an creditor – can file a winding up petition in the NCLT, for their pending dues and debts? Not sure if its possible in IBC.

    Thanks,

  • Yes a individual person if he is covered under the definition of financial or operational creditor can file case under IBC against debtor

  • No, During pend-ency of a suit , An operational creditor would not be allowed to file IBC proceeding in NCLT , however no such embargo has been imposed on Financial Creditor and proceedings initiated by Corporate Debtor himself under Sec 10 (provided Corp. Debtor fulfills the conditions prescribed under Sec 11).

  • While a creditor file IBC proceedings before NCLT against a company XYZ which debar anybody to file a case in any court?

    Isn't is a violation of fundamental right of citizens that he/she cannot file case against the company XYZ in court of law for their grievance against the company XYZ ?

    Please advise

  • Thanks for the great article -Co-existence of Winding-up Petition and Application under Insolvency Code at indiacorplaw site
    would like to see your clarity/views on following point :-
    1) What if a company’s case is admitted by High Court for winding up but still pending for further steps, can statutory authorities like PF/Income tax take action against the promoters/directors/employees ?
    2) If the petition in the High Court is of 2014 , will it get covered under NCLT , going by the fact that the case is still pending at High court

    Will appreciate your view point on this subject.

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