Transferability of Winding-up Proceedings from High Court to NCLT

[Dheeresh Kumar Dwivedi is a lawyer at APJ SLG Law Offices New Delhi]

The Companies Act, 2013 (“Act of 2013”) was passed with the object of consolidating and amending the law of corporations in India. Before the passage of the Act, the winding-up of a corporate debtor on the ground of ‘inability to pay debts’ was governed by the provisions of sections 433(e) and 434 of Companies Act, 1956 (“Act of 1956”), where the relevant High Court having territorial jurisdiction over a company was the adjudicating authority in respect of winding-up proceedings. However, the Act of 2013 shifted the jurisdiction to adjudicate cases of winding-up due to inability to pay debts from the High Court to the National Company Law Tribunal (“NCLT”), though the relevant provisions of the Act were not notified immediately. Meanwhile, the Insolvency and Bankruptcy Code, 2016 (“the Code”), a law to consolidate and amend laws related to resolution of insolvency, liquidation, and bankruptcy of corporate persons, received presidential assent on May 28, 2016, thus becoming law. The Code conferred sole jurisdiction on the NCLT to adjudge the insolvency and bankruptcy proceedings against corporate debtors.

Thereafter, by way of a notification dated December 7, 2016, the Central Government notified the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules 2016”) providing for, inter alia, transfer of pending cases of winding-up from the High Courts to the NCLT under the Code. However, only those cases in which winding-up petitions were not served as per Rule 26 of the Companies (Court) Rules, 1959 (“CC Rules”) were transferable to NCLT (“Saved Petitions”), while others were to be continue to be heard and adjudicated by the High Court itself.

This classification of Saved Petitions and others opened the Pandora’s box of litigation where every creditor who had filed winding-up petition against a corporate debtor started moving the NCLT, as it provides for a quicker recovery process. This resulted in a situation where certain petitions against a company were served as per Rule 26 of the CC Rules while at the same time some of the petitions were un-served against the same company and before the same High Court. However, this was clarified by way of a notification dated June 29, 2017 by inserting the third proviso to rule 5 of the Transfer Rules, 2016 which provided that if some of the winding-up petitions are admitted against a company before the High Court as on December 15, 2016, other connected petitions against the same company shall together be heard and adjudicated by the High Court.

This transient complex legal position has resulted into unending litigation against corporate debtors before the High Court and the NCLT. One such instance of multifarious litigation is the case of Union Bank of India v Era Infra Engineering Ltd. (“Era Infra”) where Union Bank of India (“UBI”), a financial lender was instructed by the Reserve Bank of India to initiate insolvency proceedings against the corporate debtor before the NCLT under the provisions of the Code. However, the corporate debtor contended before the NCLT that since a number of winding-up petitions against it are already admitted before the Delhi High Court, the NCLT does not have any jurisdiction to entertain the application, as the Delhi High Court was already seized of the matter. However, the NCLT referred the matter to the special bench and framed the following question of law:

Whether the process and the Insolvency and Bankruptcy Code, 2016 can be triggered in the face of the pendency of the winding-up petitions or is it to be considered as an independent process?

The reference was made in wake of the fact that co-ordinate benches of the NCLT have taken divergent viewpoints on the issue, more specifically in Alcom Laboratories India Pvt Ltd v Vasan Health Care Pvt Ltd.,  and State Bank of India v Alok Industries Ltd on one hand, and in Nauvata Engineering Pvt Ltd v Punj Lloyd Ltd. on the other. Before answering the question, the NCLT also referred to various diverging views taken by National Company Law Appellate Tribunal (“NCLAT”) in Forech India Pvt Ltd. v Edelweiss Assets Reconstruction Company and in Unigreen Global Pvt Ltd v PNB & Ors.  The NCLT also referred to the decision of Bombay High Court in Jotun India Pvt Ltd v PSL wherein it was held that once a petition has been admitted by the NCLT, it can declare moratorium in accordance with section 14 of the Code whereunder no court can entertain or continue with the winding-up petition against the same corporate debtor. This was held in view of the fact that the NCLT and the High Court being equivalent in law, the former can impose a moratorium on cases pending before the latter. In view thereof, it was held that there is no bar on the NCLT to trigger insolvency resolution process on an application filed under sections 7, 9 and 10 of the Code even if a winding up petition is pending or admitted before the High Court, unless an official liquidator has been appointed and a winding up order is passed.

However, it is submitted that the aforesaid decision of the special bench of the NCLT and the decision of the Bombay High Court in Jotun India v PSL go contrary to the earlier decision of the Bombay High Court in https://indiankanoon.org/doc/51057115/ (“West Hill Reality”), wherein the Bombay High Court held that once a petition has been served by the applicant to the respondent company as contemplated under rule 26 of the CC Rules read with rule 5 of the Transfer Rules 2016, the High Court becomes seized of the matter and the matter cannot be transferred to the  NCLT. The Court further held that even though rule 26 of the CC Rules provides for service of petition before admission of the winding-up application, a careful reading of rule 26 of the CC Rules makes it clear that the ‘service of petition’ may be carried out even before the admission of the winding-up petition and, in such cases, the petition is liable to be transferred to the NCLT.[1]

Practical Considerations: Clash of jurisdiction between the High Court & the NCLT

It is pertinent to note here that the decision of the Bombay High Court in Jotun Industries v PSL was rendered by single judge by effectively overruling an earlier decision of a single judge, which is not permitted in common Law. Further, the decision of the NCLT in Era Infra also seems to have wrongly relied on Jotun Industries v PSL without considering the decision of the Bombay High Court in West Hills Reality. Thus, this view stipulates a situation where a creditor can initiate insolvency proceedings against a corporate creditor, even though that corporate debtor is already being wound up before High Court. This gives rise to conflict of jurisdiction between the High Court and the NCLT, and also allows two different and mutually exclusive authorities to wind up one single company.

Moreover, while traversing through the provisions of the Code, the Sick Industrial Companies (Special Provisions) Act, 1985 and the Act of 2013 and their respective interpretation by the Supreme Court in Madura Coats Ltd. v Modi Rubber Ltd.,  the NCLT seems to have ignored the decision of the Bombay High Court in West Hills Reality and the second amendment to Transfer Rules 2016 dated June 29, 2017.

This brings us to a peculiar situation where a winding-up petition against a company has been served as per rule 26 of CC Rule and the High Court is seized of the matter of winding-up, and a new insolvency initiation application is initiated against the same company before NCLT under the provisions of the Code. However, this seems to be contrary to the intention of the legislature, as the Transfer Rules and more specifically the second amendment specifically provide that those winding-up petitions which have been served to the respondent shall be adjudicated by the High Court only, while others shall be transferred to the NCLT. It is submitted that had the intention of the legislature been to allow initiation of fresh insolvency proceedings before the NCLT, it would have specifically provided so in the Transfer Rules.

Secondly, the effect of this interpretation is cumbersome and costly for the creditors. Now, even the winding-up petitions which have been admitted by the High Court (but no liquidator has been appointed) can be subject to fresh insolvency proceedings before the NCLT, and the creditors who are party to the proceedings before the High Court shall be compelled to make fresh start before the NCLT. This will not serve the object and purpose of the Code as it will significantly raise the cost and time of the resolution of the corporate insolvency in India.

Another undesirable yet important implication of this judgment is that now the fate of the Saved Petitions will be decided by two different forums, namely High Court and the NCLT, governed by two completely different and mutually exclusive legal regimes viz., the Act of 1956 and the Code, and in relation to the same company and against same cause of action. It is relevant to note here that the process and relief under these two mutually exclusive regimes are also different, and the two different forums might issue contradictory orders. This is also important in the view that once a petition is admitted by the NCLT under the Code, a moratorium is declared under section 14 of the Code and, until the moratorium so declared is in force, no proceedings can be initiated or continued before any court or tribunal. Further, the decision on insolvency and bankruptcy under the Code is taken by the committee of creditors under the Code, which potentially limits the possibilities of an operational creditor of recovering their dues. Further, as per section 441 of the Act of 1956, winding-up of a company is deemed to commence as on date of presentation of the petition for winding-up. Therefore, if a High Court passes an order of winding-up and fresh proceedings are initiated under the Code, the NCLT may face a situation where it would wound up a company already wounded up in eyes of law.

Conclusion- A Case for Consolidation?

The dual regime of the Act of 1956 and the Code brings more ambiguity and inconsistency in the legal regime relating to insolvency and bankruptcy in India, which is not desirable, specifically in view of the objects and purposes of the Code. Therefore, a more holistic approach is needed where the interest of all the stakeholders may be protected. One of the suggestions is that the spirit of the second amendment to the Transfer Rules be followed; meaning thereby, all the cases against a company pending before the High Court be consolidated if some of the winding-up petitions have been admitted or the petition has been served as per rule 26 of the CC Rules while others have not. This will ensure that the there is no conflict of jurisdiction between to forums, and the issue is conclusively determined by one of the forums only. This will also help avoiding multiplicity of proceedings and shall be conducive to doctrine of comity.

– Dheeresh Kumar Dwivedi

[1] West Hills Reality, at para 10.

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3 comments

  • It is very strange that such an important issue escaped and escaping attention of the law makers. Hopefully, the situation would be normal once the conflict is resolved by an expeditious notification to consolidate the law under the Companies Act, 2013.

  • A cc of the post @ G+ (my time line) :

    OFFHAND

    “Therefore, a more holistic approach is needed where the interest of all the stakeholders may be protected. One of the suggestions is that the spirit of the second amendment to the Transfer Rules be followed; meaning thereby, ALL THE CASES AGAINST A COMPANY PENDING BEFORE THE HIGH COURT BE CONSOLIDATED if some of the winding-up petitions have been admitted or the petition has been served as per rule 26 of the CC Rules while others have not. This will ensure that the there is no conflict of jurisdiction between to forums, and the issue is conclusively determined by one of the forums only. THIS WILL ALSO HELP AVOIDING MULTIPLICITY OF PROCEEDINGS AND SHALL BE CONDUCIVE TO DOCTRINE OF COMITY.” (FONT supplied)

    The suggestion to ‘consolidate’ may at best ‘help’, as said, but not avoid multiplicity of proceedings in all situations, in general. For, that again is dependent upon whether the second amendment to the Transfer Rules, more so ‘in spirit’, could conceivably be/or amenable to being followed in all cases so bunched for disposal by court, or needs to be examined on a case to case basis.

    Instantly comes to one’s mind a couple of instances of a recent origin; in which such consolidation of pending cases on ‘issues’ seemingly ‘common’ but not really so, hence failed to serve the intended purpose of ‘avoiding multiplicity of proceedings, so as to be ‘conducive to the doctrine of comity ‘ spoken of. The reference is to the apex court’s judgments in two tax cases, – that is, as covered in, among others, in the personal Blogs – Links supplied below.

    http://www.frontline.in/cover-story/inconsistent-decisions/article4613887.ece#.WrcZqhcP0HE.blogger

    Personal Blog(s) (attempted to cover, in extenso)>

    http://vswaminathan-swamilook.blogspot.in/2018/03/balance-of-convenience.html?zx=ad4b677c436c31cc

    To be READ with >

    http://vswaminathan-swamilook.blogspot.in/2018/03/balance-of-convenience.html

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