Corporate Insolvency Resolution Proceedings under IBC are independent of winding-up proceeding under Companies Act, 1956

By Ankit Parhar

In Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.[See endnote 1], the Supreme Court has held that an Insolvency Petition may be filed against a corporate debtor irrespective of the pendency of a winding-up petition before a High Court

The facts before the Supreme Court were that an Operational Creditor (“OC1”) had filed a winding-up petition under Section 433(e) of the Companies Act, 1956 (“Companies Act”) before the Delhi High Court against the Corporate Debtor (“CD”). While the winding-up petition filed by OC1 was pending, another Operational Creditor (“OC2”) filed an insolvency petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the CD. Subsequently, the insolvency petition filed by OC2 was withdrawn so that it could file a separate winding-up petition and have the same heard along with the winding-up petition filed by OC1.

Meanwhile, a Financial Creditor (“FC”) filed an insolvency petition against the CD under Section 7 of the IBC. The said petition was admitted by the National Company Law Tribunal, New Delhi (“NCLT”). OC1 challenged the order of the NCLT before the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT referred to Section 11(d) of the IBC which inter alia provides that a corporate debtor in respect of whom a liquidation order has been made is not entitled to make an application to initiate corporate insolvency resolution process (“CIRP”) and held that the petition filed by the FC would be maintainable as no winding-up order had been passed by the High Court.

OC1 challenged the order of the NCLAT before the Supreme Court. OC1 argued that the winding-up petition filed by it would be saved by Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2015 as notice was issued on the winding-up petition much prior to the commencement of the IBC. The FC argued that the whole object of the IBC would be frustrated if petitions for winding-up were to continue in the face of insolvency petitions under the IBC. The FC also argued that the objective of the IBC is to infuse life into a corporate debtor who is in the red, and it is only if the CIRP fails that liquidation takes place.

The Supreme Court referred to the amendments to Section 434 of the Companies Act brought into force by Section 255 of the IBC read with the Eleventh Schedule which relate to the transfer of proceedings to the NCLT. The Supreme Court also referred to the proviso added to Section 434 of the Companies Act w.e.f. 17.08.2018 which provides that any proceedings relating to the winding-up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the NCLT and the proceedings so transferred shall be dealt with by the NCLT as an application for initiation of CIRP under the IBC. The Supreme Court further referred to Rule 26 and 27 of the Companies (Court) Rules, 1959 which provide for the service of petitions and notice of petitions and the time of service.

The Supreme Court noted that there was a divergence of the views expressed by the Bombay High Court in Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[See endnote 2] and the Madras High Court in M/s. M.K. & Sons Engineering v. Eason Reyrolle Ltd.[See endnote 3] in as much as the Bombay High Court had 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 would be retained in the High Court and the Madras High Court had held that the notice referred to in Rule 26 was a post-admission notice and hence only those petitions where a winding-up order is already made can be retained in the High Court.

The Supreme Court held that Rules 26 and 27 clearly refer to a pre-admission scenario and that the view of the Bombay High Court is correct in law. The Supreme Court also approved the decision of the Bombay High Court in PSL Ltd. v. Jotun India Pvt. Ltd.[See endnote 4] wherein it was held that the transitional provisions could not affect the remedies available to a person under the IBC against a company in respect of which a winding-up petition has been retained by a High Court.

In this background, the Supreme Court held that the reasoning of the NCLAT based on Section 11(d) of the IBC was not correct as Section 11(d) is of limited application and only bars a corporate debtor from initiating voluntary CIRP under Section 10 of the IBC if a liquidation order has been made in respect of such corporate debtor. The Supreme Court referred to its earlier judgment in Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd.[See endnote 5] and concluded that proceedings under the IBC are independent proceedings having nothing to do with the transfer of pending winding-up proceedings before a High Court and it is open to any creditor to approach the NCLT under the IBC before a winding-up order is passed.

However, the Supreme Court declined to interfere with the ultimate order passed by the NCLAT as the FC’s petition before the NCLT was an independent proceeding which is to be decided in accordance with the IBC. The Supreme Court also granted OC1 liberty to seek transfer of the winding-up petition pending before the Delhi High Court to the NCLT under the proviso to Section 434 of the Companies Act as amended w.e.f. 17.08.2018.

Many issues have arisen due to the divergent views taken by different High Courts regarding the interpretation of the transitional provisions. Moreover, the so-called conflict between the IBC and the Companies Act has been a bone of contention for some time. This judgment finally settles the position and provides much needed clarity on these aspects.

 [The author is a Joint Partner in Commercial Dispute Resolution practice, Lakshmikumaran & Sridharan, New Delhi]