Supreme Court on the Relationship between Insolvency and Winding-up Proceedings

[Akhil Kumar is a Fourth Year BA LLB (Hons.) student and Ayushi Singh a Third Year BA LLB (Hons.) student at NUALS, Kochi]

The Insolvency and Bankruptcy Code, 2016 has amended several provisions of the Companies Act, 2013 through the eleventh schedule of the Code. This has, on a few occasions, led to several uncertainties regarding the application of the amended provisions to various company petitions pending before the various courts. One such issue arose in Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.  In this case, the Supreme Court was called upon to clarify the following:

1. Whether an application for corporate insolvency resolution process (CIRP) under the Code is an independent proceeding as against winding up under section 433 of the Companies Act, 2013?

2. Whether the notice under rules 26 and 27 of the Companies (Court) Rules, 1959 amounts to a pre-admission notice?

3. Whether the reliance of the National Company Law Appellate Tribunal (NLCAT) on section 11 of the Code was proper while dismissing the appeal?

Background and Facts

Forech India Ltd filed a winding up petition against Tecpro Systems Ltd before the High Court of Delhi under section 433 (e) of the Companies Act, 2013 owing to Tecpro’s inability to pay certain dues. Several orders were passed by the High Court in this case. In one of the orders the High Court inter alia observed that there existed a debt or liability against Tecpro.

SKF India Ltd., an operational creditor moved a CIRP application under section 9 of the Code before the National Company Law Tribunal, Delhi (NCLT). However, the said application was later allowed to be withdrawn mainly with the view that the same could be heard alongside the winding up petition being adjudicated before the High Court.

Edelweiss Assets Reconstruction Co. Ltd, being a financial creditor, approached the NCLT for a CIRP under section 7 of the Code. The said application was admitted by the NCLT and the same was appealed before the National Company Law Appellate Tribunal (NCLAT) by Forech. The NCLAT dismissed the said appeal stating that the CIRP application was maintainable since there was no winding up order against the company. Aggrieved by the order of the NCLAT, Forech approached the Supreme Court.

Whether Independent Proceeding

As regards the first issue above, one of the main objectives of the Code is to inspire life into a corporate debtor struggling to repay its debt. It is only upon the failure of the completion of the CIRP in accordance with the provisions of the Code that the entire process of liquidation comes into the picture. It is pertinent to note that the legislative scheme of section 434 of the Companies Act, 2013 was substituted in 2018 in order to bring it in line with the object of the Code. Consequently, a proviso that facilitated the transfer of winding up petitions pending before the High Courts to the NCLT at post-notice stage was added to section 434 of the Companies Act. In this regard, the Court referred and approved the judgement rendered by the Bombay High Court in PSL Limited v. Jotun India Private Ltd. In this case, it was held that, merely because the post-notice winding up petitions are to be dealt with under the Companies Act, 1956, it does not bar or suspend the applicability of the Code.

The Court also relied on its judgement in Jaipur Metals & Electricals Employees Organization Through General Secretary Mr. Tej Ram Meena v. Jaipur Metals & Electricals Ltd. Through its Managing Director & Ors. Wherein, while reading section 7 with section 238 of the Code, the Court held:

It is clear that Respondent No. 3 has filed a section 7 application under the Code on which an order has been passed admitting such application by the NCLT on 13.04.2018. This proceeding is an independent proceeding which has nothing to do with the transfer of pending winding up proceedings before the High Court. It was open for Respondent No. 3 at any time before a winding up order is passed to apply under Section 7 of the Code.

The Court, therefore, held that the CIRP under the Code can continue independent of any pending winding up process against the corporate debtor pending in the High Court under the Companies Act.

Whether Pre-admission Notice

On the second issue above, rules 26 and 27 of the Companies (Court) Rules, 1959 deal with service of petition, notice of petition and time of service respectively. There was a divergence in the interpretation of these rules by the Bombay and the Madras High Courts. The Bombay High Court in Ashok Commercial Enterprises v.  Parekh Aluminex Limited  held  that  the  notice  referred  to  in  rule  26  was  a  pre-admission notice and, hence, held that all winding up petitions where pre-admission notices were issued and served on the respondent will be retained in the High Court.

Conversely, the Madras High Court in M.K. &Sons Engineering v. Eason Reyrolle Ltd. [Co. Pet. 364 of 2016] had held that the notice under RULE 26 corresponds to the post-admission position of the winding up petition and accordingly held that only those petitions where a winding up order is already made can be retained in the High Court. While doing so, the Madras High Court had placed a strong reliance on the term “was admitted” mentioned in the notice of petition in form no. 6 appended to rule 27.

From a bare reading of rules 26 and 27, it is understood that the notice under form no. 6 shall be served in not less than 14 days before the date of hearing. The Supreme Court found the Madras High Court view to be plainly incorrect in law and upheld the view of the Bombay High Court and reiterated that the notice under rules 26 and 27 of the Companies (Court) Rules, 1959 amount to pre-admission notice.

Reliance on Section 11 of the Code

On the third issue above, section 11 of the Code provides for persons who are not entitled to make CIRP applications. However, on a careful perusal of the provision, it is clear that this provision only bars a corporate debtor from initiating a petition under section 10 of the Code. The present matter on the other hand arose out of a section 7 application filed by Edelweiss, which is a financial creditor. Therefore, the reliance on section 11 by the NCLAT was found to be erroneous.

The Court, however, declined to interfere with the order passed by the NCLAT on the ground that the instant case being a section 7 petition filed by a financial creditor was an independent proceeding altogether. As a relief to Forech, the Court granted them liberty to apply under the proviso to section 434 of the Companies Act, 2013 in order to transfer the winding up petition from the High Court to the NCLT. [The winding up petition has now been transferred to NCLT Delhi through an order of the High Court of Delhi dated 22 February 2019.] Furthermore, the Supreme Court has also clarified that upon transfer the proceeding would be treated as one under section 9 of the Code.

Conclusion

This judgement is of great importance because it has paved a way for the transfer of post-notice winding up petitions pending before the different High Courts. In effect, the ruling will help in reducing the pendency of cases before the High Courts as more parties will choose to transfer their cases before the NCLT. This would ultimately lead to a situation where the winding up and the CIRP applications will be heard in the same forum and will thus serve as a relief to the creditors as well as the corporate debtors.

The Court has also supplied greater emphasis on the objectives of the Code. It has been emphasised that liquidation shall be an option of the last resort and can only be resorted to upon the failure of the CIRP. This will effectively ensure that more efforts are taken for the revival of corporate debtors in most cases. Lastly, the Court has also clarified the law with respect to persons not entitled to make CIRP application under section 11 of the Code and, therefore, will go a long way in curbing the misuse of this provision by the NCLTs as well as the NCLAT.

– Akhil Kumar & Ayushi Singh

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