Impact of winding up petitions on insolvency filings by Nitu Poddar

Can an Application for resolution process of a company be filed under IBC, 2016 in case a winding up Petition is pending before a High Court?

MCA Notification on transition for pending proceedings

MCA notification for Companies (Transfer of Pending Proceedings) Rules, 2016[1]  only provides for the transition of the litigation process from High Court to the NCLT.  This Rule lays down the criteria for deciding whether the matter will be filed with and adjudged by NCLT or by High Court.

As per the Rule 5 of the said Rules, where the Petition for winding up has been served on the Respondent Company and is pending before the respective High Court, such Petition shall be adjudged by the High Court.

When a matter is being adjudged by the High Court under Act, 1956, the same will be governed by the provisions of the erstwhile Act, 1956.

Section 446 and 537 of Act, 1956 – stay of proceedings and avoidance of certain transactions

Section 446 of the Act, 1956 envisages that when a winding up order has been made or the Official Liquidator has been appointed as Provisional Liquidator, no suit or other legal proceedings shall be commented or if pending at the date of winding up order shall be proceeded with against the company except with leave of the court.

The bar of initiating any suit becomes live only once an order for winding up is passed. In case the winding up petition is merely served on the Respondent Company and filed before the High Court and no order for winding up as such is passed, section 446 does not become applicable.

Section 537 of the Act, 1956 declares that any attachment, distress or execution put in force without leave of the company court against the estate or effects of a company before such a company is being wound up under the supervision of the court, to be void.  Section 537 of the Act will apply only if a company is being wound up by or subject to the supervision of the court.

The difference between the two section was discussed in the matter of B. Suresh vs AP Mahesh Co-Operative Urban[2] by the Andhra High Court.

The distinction between Sections 446 and 537 of the Act is that while a person can proceed to have his rights against the company that is being wound up/adjudicated with the leave of the company court, no person is entitled to enforce such rights against such company during the pendency of the winding up proceedings although such rights have been determined by a competent court or tribunal without once again obtaining the leave of the court. Further, the adjudication proceedings can go on until a winding up order or an order of the appointment of a provisional liquidator is made, without the necessity of obtaining the leave of the company court whereas enforcement of any right adjudicated or otherwise, cannot be made the moment the company is faced with a winding up proceeding.

The logic is not difficult to understand while an adjudication only declares the rights of the parties execution directly affects the assets of the company and takes away the assets from the possession or custody of the company and creates rights in favour of third parties and thereby result in the proliferation of litigation if eventually the company is directed to be wound up. It must be remembered that Section 446(1) does not declare that any adjudication made in contravention of the said section to be void ; whereas Section 537 declares–obviously, the reason is that though it is desirable that the leave of the company court is to be obtained even at the stage of the adjudication, the non-compliance of the requirement of Section 446(1) may not really affect the assets of the company in liquidation as the enforcement of the rights so adjudicated is still required to be done with the leave of the company court under Section 537.

Intent of the section 446:

In case of winding up of a company – the assets of the company gets distributed to the various creditors and contributories. If parallel proceedings are continued along with winding up (post the Order has been passed) – there can be situations of chaos amongst the creditors and contributories regarding the distribution of asset. The idea of the provision is to prevent the company from such chaos and also to safeguard the company against wasteful and expensive litigation by bringing matters against the respondent company under one court as far as possible.

Also, the purpose of insisting on such leave is to keep the company court, which is dealing with the liquidation of the company, posted as a matter of fact, as to what is happening to the assets of the company.

Several rulings on the section – no leave required if winding up not ordered by the Court

1. In the matter of Credit Capital Finance vs Foremost Industries[3] Ltd, the Delhi High Court held that where in a proceeding for winding up a conditional order was passed that the petition would be dismissed on payment being made within the stipulated time and the time was extended by the parties by mutual agreement, and no provisional liquidator was appointed, it was held that leave of the court for continuation of a proceeding was not needed.

It was further ordered that in the event of the said amount being deposited within the specified time, the Company Petition would stand dismissed. Further the order provides that in the event of the amount not being deposited within the time allowed, the Company Petition would stand admitted and it would be advertised in the Gazette etc. The crucial words in the said order for present purposes are “in the event of the amount not being deposited the Official Liquidator will also stand appointed as Provisional Liquidator”. The Company Court also directed the Official Liquidator to make an inventory of assets, moveable and immovable of the Company. 

In view of extension of time for payment by mutual agreement between the parties, it cannot be said that the Company has failed to deposit the amount by the specified date.

2. In the matter of Punjab National Bank vs Punjab Finance Pvt Ltd[4], it was held no leave of the court was required by the plaintiffs to file the suit in the civil court, as the winding-up order had not been passed by the date of filing the suit nor was an order appointing the provisional liquidator in force
3. In the matter of Erach Boman Khavar vs Tukaram Sridhar Bhat & Ors[5], Supreme Court of India refereed to another Supreme Court Ruling where the Court considered the contrary views expressed by different High Courts on the effect and purport ofSection 446(1)of the 1956 Act and came to the conclusion that the view that failure to obtain leave prior to institution of suit would not debar the court from granting such leave subsequently and that the only consequence of the same would be that the proceedings would be regarded as having been instituted on the date on which the leave was obtained from the High Court.

Two conclusions derived from the reference of earlier decisions of the Supreme Court were:

First, grant of leave of the court is not a condition precedent for initiation of a civil action or the legal proceedings. It is because the Section does not expressly provide for annulment of a proceeding that is undertaken without the leave of the court. There can be no shadow of doubt that leave of the winding up court can be obtained even after initiation of the proceeding. The second, the seminal object behind engrafting of the said provision is to see that the interest of the company is safeguarded so that it does not face deprivation of its right and claims are adjudicated without the knowledge of the company court and further the court has a discretion to see whether leave should be granted and, if so, with what conditions or no condition. That apart, the court may grant leave if it felt that the company should not enter into unnecessary litigation and incur avoidable expenditure.

Stay of proceeding under IBC, 2016

Clause (d) of section 11 of the IBC, 2016 restricts a corporate debtor (and not any creditor) to make an application under the IBC, 2016 – in case a liquidation order has been made against such corporate debtor.

Wrong perception

The MCA notifications on transitioning to NCLT are inappropriately being mixed up with the provisions of leave of the court in terms of section 446.

Transitioning provisions are applicable where the applicant is considering whether he should continue before the court, or move his matter to NCLT. This is where the same creditor, who had filed a winding up petition in the court, is seeking to file a matter before NCLT. In that case, the question as to whether affidavits have been served on the other side or not, becomes relevant. If that is so, the proceeding is effectively initiated, and therefore, the proper process for the creditor to continue before the court.

If the creditor is not the same creditor who filed for winding up, there is no question of transitioning there. He is making an original reference – he never made any application before the court. Such a creditor has to consider provisions of sec. 446 of the Companies Act 1956 (which is relevant, since winding up was initiated under that Act). The language of the section is very clear.

NCLT’s view

In the matter of Nikhil Mehta & Sons vs AMR Infrastructures Ltd

In the matter of Nikhil Mehta & Sons vs AMR Infrastructure Ltd[6], the Principal Bench of NCLT held that the application would not be maintainable since many winding up petitions have been filed before Hon’ble Delhi High Court. Even OL has been appointed as a provisional liquidator although the matter is presently pending before the Appellate Bench with interim directions.

The NCLT’s view in this matter was in concurrence of the provisions of section 446 of Act, 1956. Since the OL was already appointed for the corporate debtor, the insolvency application could not be accepted by the NCLT.

In the matter of Alcon Laboratories (India) Private Limited vs Vasan Health Care Private Limited

In the matter of Alcon Laboratories (India) Private Limited vs Vasan Health Care Private Limited[7], an objection was raised by the corporate debtor that winding up petition is sub judice before the Hon’ble High Court of Madras, where the Court permitted Andhra Bank to appoint suitable person to conduct forensic audit of the corporate debtor.

The NCLT held that pendency of the winding up petition cannot be a bar under the IBC, 2016 for initiating the corporate insolvency resolution process, because the Hon’ble High Court has not passed any order for winding up of the corporate debtor and no Official Liquidator has been appointed. Therefore, the objection raised was rejected.

Conclusion

Taking into consideration the provisions of Companies Act, 1956, the Companies (Transfer of Pending Proceedings) Rules, 2016 and the provisions of IBC, 2016, we conclude the following:

Possibility of IBC filing at various stages of winding up process is as follows:

1. If application is served to the respondent company and / or pending before the High Court and no Order has been passed as on the date – Application under IBC, 2016 can be filed with NCLT without any leave from the High Court
2. If a winding up order has been passed – Application under IBC, 2016 can be filed with NCLT with prior leave from the respective High Court

There is no nexus between transition rules, and the stay arising due to sec 446 of the Companies Act 1956

In our view, nothing should be blocking an entity to file an application for resolution of a company for which winding up proceedings has been initiated. Even in case where order has been passed in this regard, seeking leave from the Court is a matter of protocol only. This should not be a stumbling block.

Assuming OL has been appointed, and a creditor goes to NCLT seeking resolution, and therefore, goes to court for seeking leave, there is no reason why the court should not grant leave. If the creditors, under a collective process, decide that the entity be resolved rather than wound up, of course the law always prefers restructuring as the first option and winding up as the last.

If leave is not granted, for not granting of the leave, one may make a reference to SC. Since the admitted objective of the IBC was to clear the deadwood from the system, it can be no one’s argument that existing cases should remain with courts. After all, most of the major corporate defaulters are defaulters for a long time now, and it is unlikely that no creditor would have filed for winding up in such cases.

A creditor is always free to make an application under section 7, 8 and 9 of the IBC, 2016 irrespective of any pending winding up petition against the corporate debtor.

Once the application under IBC is admitted, the provisions of IBC become applicable.

As per section 14 of the Code,  all winding up petitions filed and pending before any forum (NCLT / High Court) will get stayed and no new winding up petition can be instituted. The stay is from the date of admission of the application until the completion of the corporate insolvency resolution process.

Also, if the resolution process under the Code culminates into liquidation for circumstances enumerated u/s 33 of the IBC, 2016,      the same happens as per the provisions of the Code and not as per Companies Act.

[1] http://www.mca.gov.in/Ministry/pdf/CompaniesTransferofPending_08122016.pdf

[2] https://indiankanoon.org/doc/275545/

[3] https://indiankanoon.org/doc/1719381/

[4] https://indiankanoon.org/doc/1753977/

[5] https://indiankanoon.org/doc/12453563/

[6] http://nclt.gov.in/Publication/Principal_Bench/2017/Others/AMR%20Infrastructure%20Ltd.%20(Nikhil%20Mehta).pdf

[7] http://nclt.gov.in/Publication/Chennai_Bench/2017/Others/vasan%20health%20care%20(2).pdf

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By: Nitu Poddar:nitu@vinodkothari.com