Winding-up and Liquidation: Demarcation by the Bombay High Court

[Shubham Sancheti and Prashamsha  Tulachan are 4^th Year B.A., LL.B. (Hons.) studentsat NALSAR University of Law, Hyderabad]

The Insolvency and Bankruptcy Code, 2016 [“Code”] entailed various interpretation lacunae and, the Central Government is constantly seeking to bridge the emerging gaps. One of such lacuna pertained to the conflict between “Winding-up” under the Companies Act [“1956 Act” or “2013 Act”, as the case maybe] and “Corporate Insolvency Resolution Process” [“CIRP”] under the Code. This anomaly has been aptly discussed here. To state briefly, Section 433 of the 1956 Act empowered the Courts to wind up a company on the grounds mentioned therein. This section has been invoked, particularly on the ground of inability to pay debts, to pass a winding-up order. Subsequent to the enactment of the 2013 Act and the Code, the Parliament intended to transfer all the proceedings pertaining to companies to one forum – National Company Law Tribunal [“NCLT”].

Section 434(2) of the 2013 Act empowered the Central Government to come up with rules in order to effectuate the transfer of all the proceedings pertaining to, inter alia, winding up, to the NCLT in accordance with section 434(1)(c) of the 2013 Act. Subsequently, a proviso was added to Section 434(1)(c) when the Code was enacted:

“Provided that only such proceedings relating to the winding up of companies shall be transferred to the Tribunal that are at a stage as may be prescribed by the Central Government.”

The Central Government was supposed to fulfil two criteria – (a) facilitation of the timely transfer of the proceedings and, (b) determine a stage at which the said proceeding shall be transferred. Thus, the Companies (Transfer of Pending Proceedings) Rules, 2016 [“Transfer Rules”] were enacted. The Rules fulfilled both the criteria whereby all the petitions under section 433(e) of the 1956 Act were required to be transferred to the NCLT if (a) the matter is pending and, (b) the notice of the petition has not been served on the respondent. Succinctly, the legislature created a divide between the petitions which have been served on the respondent and, those which have not. The former were to be adjudicated upon in accordance with the 1956 Act while the latter were to be dealt with under the Code.

Addressing the lacuna

Factual Background

The position seemed to have been clarified to a great extent until recently when the Bombay High Court in Jotun India Private Limited v. PSL Limited [“Jotun”] took an interesting view of the nature of either of the proceedings. In this matter, Jotun India filed a winding-up petition against the PSL Limited under section 433(e) of the 1956 Act. Three months later, PSL made a reference to the Board of Industrial and Financial Reconstruction [“BIFR”] under the Sick Industrial Companies (Special Provisions) Act, 1985 [“SICA”]. Subsequent to the enactment of the Code, SICA was repealed and all the references under it could have been filed as an application under section 7, 9 or 10 of the Code within 180 days of such repeal. The winding-up petition against PSL was admitted by the High Court and subsequently, PSL filed an application under section 10 of the Code before the NCLT. The said application was admitted by the NCLT, but Jotun India filed an application in the High Court, seeking to appoint a Provisional Liquidator for PSL. The High Court enjoined the NCLT from proceeding with the application filed by PSL. Hence, PSL filed an appeal before the High Court.

To delineate the timeline–

Court’s Holding

The High Court agreed with the Respondent’s submissions and stated that the NCLT’s proceedings could not be barred by the High Court on the ground that the winding-up proceeding is sub-judice. The Court stated that since there is no explicit interpretation otherwise, the High Court cannot be said to have such power. Furthermore, since the Code has been accepted as a successor to the SICA, the conflict between the Code and the 1956/2013 Act needs to be resolved in the same manner as between SICA and the Act. Thus, the High Court held that, inter alia, by virtue of sections 238 and 64(2) of the Code, the High Court cannot restrain proceedings pending before the NCLT because (a) The Code has an overriding effect and, (b) Since the Code requires the NCLT to expeditiously dispose off the applications, it bars the other Courts from passing any injunction order against the NCLT.

Conflict between SICA and the Companies Act

The Supreme Court has categorically held that in the event of a conflict between the SICA and the Act, the former shall prevail because the aim of the legislations is not to result in culmination of the company’s existence but to rejuvenate it. However, the Courts acknowledged the fact that such overriding effect of the SICA may lead to abuse of process of law as the entities may deliberately seek moratorium in order to cease the legitimate proceedings ongoing under other legislation.

The definition of “winding-up” under the 2013 Act was inserted by the Eleventh Schedule of the Code and, includes liquidation under the Code.[1] Liquidation under the Code is a phase which gets triggered when the NCLT (a) does not receive any resolution plan from the Resolution Professional, and (b) rejects the resolution plan due to non-compliance of certain grounds. The Code specifically states under section 33(5) that as soon as the liquidation order has been passed by the Court/Tribunal, no suit or other legal proceeding can be instituted by or against the corporate debtor. Furthermore, the bar under section 11(d) of the Code states that if a liquidation order has been passed against the corporate debtor, then the corporate debtor is barred from filing an application under section 10 of the Code.

A question, therefore, arises– what constitutes a liquidation order? Is it equivalent to a dissolution order passed under section 481 of the 1956 Act or does a mere appointment of the Official Liquidator suffice? For an order to be passed under section 433(e), the debt shall be determined and due; “inability to pay the debts” shall be read as commercial insolvency[2] and must not be resorted to for merely extracting dues out of the company.[3]

NCLAT’s Take on the Conflict

The National Company Law Appellate Tribunal [“NCLAT”] in M/s. Unigreen Global Private Ltd. v. Punjab National Bank [“Unigreen”] stated that if a winding-up proceeding has been initiated against the Debtor or the liquidation order has been passed, the bar under section 11 activates. However, the NCLAT drew a line between this and the instance where the winding up petition is pending and no winding-up/liquidation order has been passed.

The NCLAT adopted the reasoning of the Unigreen in Innoventive Industries v. Kumar Motors Pvt. Ltd. where the application was filed by the financial creditor of the Company under Section 7 of the Code. The NCLAT upheld the NCLT’s view that the proceedings where the petition is served on the Respondent shall be dealt with by the High Court itself because the Transfer Rules had flowed from Eleventh Schedule of the Code and thus, application of section 238 of the Code will render the purpose of Transfer Rules otiose. Therefore, the NCLAT created an exception of Winding-up proceeding for section 238 of the Code to apply.

The NCLAT further stated that under the Code, if a liquidation order has been passed against a Corporate Debtor, the Creditors are not entitled to file a CIRP application under Section 7 or 9 because the NCLT passes liquidation order only after ascertaining the viability of the Resolution Plan and the creditors may express their stake before the Resolution Professional is appointed. Similarly, since liquidation under the Code corresponds to the Winding-up under the 1956/2013 Act, then allowing the NCLT to admit the application under Section 7, 9 or 10 leaves a gap between Winding-up and liquidation under the newly added section 2(94)(A) of the 2013 Act.

High Court’s Omission

In Jotun, the High Court admitted the winding-up petition and stated–

“…since all assets of the respondent company are secured assets in favour of the secured creditors and are under their control, I do not propose to appoint official liquidator at this stage. The petitioner will be at liberty to apply for appointment of the official liquidator at the latter stage if it is found that the assets of the respondent company are jeopardized.”

The application under section 10 was filed after the aforementioned order was passed (Refer to the Table above). The order clearly intended that the entity was supposed to be wound up but since there was no immediate prejudice to the creditors, the Court delayed the appointment of the liquidator.

The term “winding-up order” has been widely discussed in numerous cases. One such interpretation to which the Bombay High Court had subscribed as well was where the Supreme Court held that passing of a winding-up order is not the termination of the proceedings before the High Court but, in fact, a beginning to the process of winding-up.[4] The ultimate order is a dissolution order passed under section 481 of the 1956 Act. Therefore, the winding-up proceeding was ongoing in Jotun when the section 10 application was filed by the respondent.

One of the arguments presented by Jotun India in Jotun was that under section 442 of the 1956 Act, the High Court does have the power to restrain any suit or proceeding against the Corporate Debtor in any Court. Moreover, Jotun India argued that in accordance with section 446 of the 1956 Act, no proceeding in any other court shall be commenced or continued with if a winding-up order has been passed. With due respect, the Bombay High Court in Jotun looked at the dispute only through the lens of the Code (and its overriding effect) rather than taking into account the petitioner’s arguments pertaining to the 1956 Act.

Conclusion

The Transfer Rules were enacted so as to facilitate the Code and reduce the burden of the High Courts. However, the Transfer Rules have been misused by the Corporate Debtor in order to delay the winding-up proceeding in the High Court as, when the NCLT admits the application, the moratorium period imposed by the NCLT ceases the proceeding going on in the High Court. The Legislature could not have intended for two proceedings to go on simultaneously against the same entity as the purpose of reducing the litigations with the Courts stands defeated. Thus, in pursuance of that intention, if there is any conflict between the NCLT and the High Court, the said purpose shall be taken into consideration.

– Shubham Sancheti & Prashamsha Tulachan

[1] Companies Act, 2013, section 2(94)(A).

[2] Commercial Solvency means whether the company can pay its liabilities and dues as and when they arise.

[3] Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH, (2005) 7 SCC 42.

[4] Rishabh Agro Industries Ltd. v. PNB Capital Services Ltd., AIR 2000 SC 1583.