Feb 1, 2019

Transfer of Winding up Proceedings to Adjudicating Authority

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Enforcement of the Insolvency and Bankruptcy Code, 2016 (the ‘Code’)amended many other statutes including Companies Act, 2013 (the ‘Act’) in terms of eleventh schedule of the Code (with effect from 01.12.2016) which inter alia dealt with the substituted Section 434 of the Act. Section 434 (c) of the Act thus substituted provided as follows:

(c) all proceedings under the Companies Act, 1956, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the Tribunal and the Tribunal may proceed to deal with such proceedings from the stage before their transfer:

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.

To deal with the matter related to winding up of companies, Ministry of Corporate Affairs notified Companies (Transfer of Pending Proceedings) Rules, 2016 (the ‘Rules’) which were made effective from 15.12.2016[1]. Rule 5 of the Rules dealt with “transfer of pending proceedings of Winding up on the ground of inability to pay debts”  which inter alia provided that the Petitions filed u/s 433 (e) where notice under Rule 26 of the Companies (Court) Rules, 1959 has not been served, shall be transferred to the Bench of the Tribunal established under sub-section (4) of Section 419 of the Act. The Rules further provided that the petitioner shall submit relevant informationrequired for admission of the petition under Sections 7, 8 or 9 of the Code, as the case may be, within sixty days, failing which the petition shall abate. The said period of sixty days was further amended to Six Months vide notification dated 28.02.2017 by the Ministry of Corporate Affairs[2].

Vide its notification dated 30.06.2017[3], the said period of 6 months was further amended uptil 15.07.2017 and it was clarified that after the said date, parties may file fresh applications under relevant provisions of the Code. Such amendment further provided that where a petition relating to winding up of a company is not transferred under the amended Rules and remains in the High Court and where there is another petition under clause (e) of section 433 of the Act for winding up against the same company pending as on 15th December, 2016, such other petition shall not be transferred to the Tribunal, even if the petition has not been served on the respondent. 

Section 434 of the Act was further amended on 17.08.2018 and Section 434 (c) further to this amendment wherein further provisos were added and provided as:

Provided further that only such proceedings relating to cases other than winding up, for which orders for allowing or otherwise of the proceedings are not reserved by the High Courts shall be transferred to the Tribunal:

Provided also that—

  • all proceedings under the Companies Act, 1956 other than the cases relating to winding up of companies that are reserved for orders for allowing or otherwise such proceedings; or
  • the proceedings relating to winding up of companies which have not been transferred from the High Courts; shall be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959

Provided also that proceedings relating to cases of voluntary winding up of a company where notice of the resolution by advertisement has been given under sub-section (1) of Section 485 of the Companies Act, 1956 but the company has not been dissolved before the 1st April, 2017 shall continue to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959:

Provided further that any party or parties to 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 Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (31 of 2016).

The above summary makes it clear that the winding up petitions for which notice was already issued upon the respondent under Rules 26 of the Companies Court Rules, 1959 were supposed to remain with the High Court and were to be decided as per provisions of Companies Act, 1956/2013. However, there was a divergence of views in the interpretation of the aforesaid rules. The Bombay High Court in Ashok Commercial Enterprises vs. Parekh Aluminex Limited, (2017) 4 Bom. CR 653, stated 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. On the other hand, the Madras High Court in M/s. M.K. &Sons Engineering v/s. Eason Reyrolle Ltd. in CP/364/2016 has held that the notice under Rule 26 is referable to a 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. For this purpose, the Madras High Court strongly relied upon Form No. 6 appended to Rule 27 and the expression “was admitted” occurring in the Notice of Petition contained in the said Form.

Hon’ble Supreme Court of India in the case of Forech India Ltd. Vs. Edelweiss Assets Reconstruction Co. Ltd. Decided on 22.01.2019[4] while deciding an appeal preferred by the Operational Creditor to continue with a winding up petition that has been filed by the said creditor way back in 2014 dealt with the issue of transfer of pending proceedings of Winding up on the ground of inability to pay debts viz a viz provisions of the Code and Sick Industrial Companies Act, 1986. Brief facts of the case are:

  • That Forech India Limited (Creditor- as it was referred at that time) filed a winding up petition before the High Court of Delhi on 10.01.2014 u/s 433 (e). Notice in the said petition was issued and served. Company (as it was referred at that time) had admitted its liability towards the creditor.
  • Company filed a reference with Board for Industrial and Financial Reconstruction (BIFR) under the SickIndustrial Companies Act, 1985, on 14.07.2015, which, however, as per Sick Industrial Companies Repeal Act abated as on 11.12.2016.
  • Another operational creditor (as it is referred now) filed an application under Section 9 of the Code, against the same Corporate Debtor (as it is referred now) which was allowed to be withdrawn so that the aforesaid operational creditor could go to the High Court in a winding up petition which would then be heard along with the Petition of the other creditor pending disposal.
  • Meanwhile, Edelweiss Assets Reconstruction Co. Ltd (financial creditor) moved an application u/s 7 of the Code against the same Corporate Debtor before National Company Law Tribunal which got admitted (‘Admission Order’). 
  • Forech India Limited preferred an appeal before National Company Law Appellate Tribunal challenging Admission Order inter alia stating the position of pendency of the winding up petition u/s 433 (e) of the Act wherein notice has already been issued. However, such appeal before National Company Law Appellate Tribunal was dismissed u/s 11 of the Code inter alia stating that since there was no winding up order by the High Court, the financial creditor’s petition would be maintainable.
  • Therefore, Forech India Limited approached Hon’ble Supreme Court of India against the said order of National Company Law Appellate Tribunal.

Hon’ble Supreme Court held that Section 11 (d) which provides that a corporate debtor in respect of whom a liquidation order has been made shall not be entitled to make an application to initiate corporate insolvency resolution process is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the Code in respect of whom a liquidation order has been made. From a reading of this Section, it does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9 asthe case may be, as has been held by the Appellate Tribunal. Hence, any reference to Section 11 in the context of the problem is wholly irrelevant. However, Hon’ble Supreme Court of India decline to interfere with the ultimate order passed by the Appellate Tribunal because it is clear that the financial creditor’s application which has been admitted by the Tribunal is clearly an independent proceeding which must be decided in accordance with the provisions of the Code and not contained with the petition pending before High Court.

Therefore, the position now stands:

  • A company petition filed u/s 433 (e) of the Companies’ Act, 1956, would not be transferred and heard under the provisions of the said Act when notice under Rule 26 of the Companies Court Rules, 1959 has been served upon the Respondent.
  • However, other parties may choose to institute a fresh application u/s 7 or 9 of the Insolvency and bankruptcy Code, 2016, as the case may be against the Corporate Debtor even if petition against the same Corporate Debtor is pending before the High Court under Companies Act, 1956 unless the liquidation order is passed against such corporate debtor.

AUTHORED BY

Mr. Karan Gandhi

Senior Manager

CS, LLB

karan@indiacp.com

+91 11 40622286

Mr. Manoj Kumar

Partner & Head – M&A & Transactions

FCS

manoj@indiacp.com

9910688433

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