Winding Up v. The Insolvency and Bankruptcy Code, 2016

With the introduction of the Insolvency and Bankruptcy Code 2016 (“the IBC”), the multiple Benches of the National Company Law Tribunal have been flooded with petitions (mainly under Sections 7 and 9 of IBC). Two features of the IBC found attraction with petitioners that invoked the jurisdiction of the NCLT: (i) the time-bound nature offered by the IBC vis-à-vis completion of resolution, revival and rehabilitation of companies; and (ii) the lack of discretionary jurisdiction provided to the NCLT whilst admitting/rejecting petitions. To elaborate, under the erstwhile winding-up regime, the High Courts could exercise its discretion in considering whether or not to wind up a company. Seeing as the NCLT was not assigned such discretionary jurisdiction, creditors have used the IBC as a tool for quick resolution of the debts due to them. However, serious questions of law are bound to arise when substituting a legal regime, especially to established legal credit and debt practices. The authors, being regular practitioners before the NCLT have sought to address some of these questions.

Issues

  1. Can the National Company Law Tribunal pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016[1] against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956[2]?

If yes, then:

  1. Is it necessary to obtain leave from the High Court concerned prior to admitting a petition under inter alia Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016?

Analysis

  1. One of the reasons why the Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted was to ensure speedy resolution of insolvent and bankrupt companies in India. The erstwhile regime of winding up under the provisions of the Companies Act, 1956 and the Sick Industrial Companies (Special Provisions) Act, 1985[3] (“SICA”) were seemingly ineffective insofar as providing a timely resolution of such companies that were unable to pay their debts are concerned. With no definitive timeline set out in the provisions of the Companies Act, 1956, winding up proceedings before the respective High Courts in India took up years in litigation (especially including appellate proceedings). The same could be said about the proceedings before the Board of Industrial and Financial Reconstruction (“BIFR”) under the provisions of SICA. In effect, the IBC is a successor statute to the provisions relating to winding up under the Companies Act, 1956 and SICA. In fact, as per the information published by the Official Liquidator attached to the Bombay High Court on its website, 1478 companies are currently undergoing liquidation under the provisions of the Companies Act, 1956. In case of one of them, Akhil Bharat Printers Ltd. , the order of winding up had been made on 22-6-1956 – making it amongst the first companies to be ordered to be wound up under the (then new and novel) Companies Act[4]. Needless to say, a need was felt to streamline the manner in which corporate insolvency could be dealt with. The SICA, as has been noted by the Supreme Court of India in Swiss Ribbons (P)   v. Union of India [5], also failed to ameliorate the situation and rather contributed to the creation of what  R.F. Nariman, J. referred to as a “defaulter’s paradise[6].
  1. The path towards the IBC began in the year 1999 when the Central Government established the Justice Eradi Committee to formulate a framework to replace SICA, as it was felt insufficient and inefficient. The report of this committee culminated in the promulgation of the Companies (Amendment) Act, 2002, and the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. A framework was sought to be created within the Companies Act, 1956, itself for restructuring of stressed corporations. However, the relevant portion of this amendment, and consequently the entirety of the Sick Industrial Companies (Special Provisions) Repeal Act of 2003, was not brought into force due to several legal challenges and hurdles, including challenges to the formation and constitution of National Company Law Tribunals.
  1. The framework mooted in the amendment, however, continued to evolve notwithstanding that it was stillborn. The framework proposed in the Companies (Amendment) Act, 2002, found its way, with some modifications, into the Companies Act, 2013. However, the legal challenges to the National Company Law Tribunals persisted and Chapter XIX of the Companies Act, 2013, which was to be the comprehensive framework for corporate insolvency could not be enforced. Ultimately, the Bankruptcy Law Reforms Committee submitted its report[7] to the Government of India on 4-11-2015 and this report became the basis for the IBC. As things would transpire, the IBC came into force by repealing Chapter XIX of the Companies Act, 2013, before it could be enforced.
  1. Since its enactment, the IBC has been, largely, well received and has even been considered as one the reasons attributed to India’s rise in the Ease of Doing Business Index[8]. However, like most newly enacted legislations in India, several questions of law arose from various proceedings before the National Company Law Tribunal (“ NCLT”), the National Company Law Appellate Tribunal, the High Courts and the Supreme Court of India. One of these questions of law is the first issue that the authors shall address, can the NCLT pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the IBC against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956? While there are multiple judgments of our courts and tribunals that address this question, not all lawyers and Judges in our country seem to have a unified answer to this question.

5. Pre-IBC Jurisprudence

5.1 Before referring to judgments that address the first issue, it is of relevance to understand an aspect of erstwhile winding-up regime vis-à-vis the SICA. For example, a question of law akin to the aforementioned first issue arose in Real Value Appliances Ltd. Canara Bank[9] (Real Value Appliances), where a Division Bench of the Supreme Court of India held inter alia that the intent of the SICA is to:

(a) revive and rehabilitate a company before it can be wound up under the provisions of the Companies Act, 1956;

(b) ensure that no proceedings against the assets of a company are taken before a decision has been arrived at by BIFR for in the event a company’s assets are sold, or if a company is wound up it may become difficult later to restore status quo ante.

The relevant portions of the judgment delivered by the Supreme Court of India in Real Value Appliances[10] have been culled out and reproduced hereinbelow:

“23.… the [SICA] is intended to revive and rehabilitate sick industries before they can be wound up under the [Companies Act, 1956]. Whether the Company seeks a declaration that it is sick or some other body seeks to have it declared as a sick company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by  BIFR for in case the Company’s assets are sold, or the Company wound up it may indeed become difficult later to restore the status quo ante…

5.2 In Rishabh Agro Industries Ltd. P.N.B. Capital Services Ltd.[11] (Rishabh Agro Industries), a Division Bench of the Supreme Court of India, whilst following the holding in Real Value Appliances[12], held that a reference in terms of Section 15 of the SICA could be made to BIFR for revival/resolution of a company even after the passing of a winding up order by the High Court. Furthermore, the Supreme Court held that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is not a culmination of proceedings before the High Court concerned. The Court further noted that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is, in fact, the commencement of the process which only meets its end when an order of dissolution is passed under Section 481 of the Companies Act, 1956. The relevant portions of this judgment have been culled out and reproduced hereinbelow:

“9.… it cannot be said that … the provision of Section 22 [of the SICA] [which is para materia to Section 14 [of the IBC] would not be attracted after the order of winding up of the company is passed… the effect of [Section 22 of the SICA] would be applicable even after the winding-up order is passed…

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  1. It may also be noticed that winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings pending before the Company Judge but is in effect the commencement of the process. The ultimate order to be passed in such a petition is the dissolution of the company in terms of Section 481 of [the Companies Act, 1956] …

5.3 In Madura Coats Ltd. Modi Rubber Ltd.[13] (Madura Coats), a Full Bench of the Supreme Court of India:

(a) affirmed the aforementioned holdings of its Division Bench judgments in Real Value Appliances[14] and Rishabh Agro Industries[15];

(b) held that once a reference was made to BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act, 1956. Therefore, in such circumstances, proceedings under the Companies Act, 1956 shall give way to proceedings under the SICA.

The relevant portions of Madura Coats[16] have been culled out and reproduced hereinbelow:

“20. While referring to the provisions of  SICA, this Court in Real Value [Appliances] […][17] […] held that [the] SICA is intended to revive and rehabilitate a sick industry before it can be wound up under [the Companies Act, 1956]. The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante…

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  1. … this Court in Rishabh Agro [Industries] […][18] took the view that it could not be said that the provisions of Section 22 of SICA would not be attracted after an order of winding up is passed. While referring to this section it was held that there was no doubt that the provision would be applicable even after the winding-up order is passed and no proceedings even thereafter could be taken under [the Companies Act, 1956]. It was noted that a winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings before the Company Court but is in effect the commencement of the process which ultimately would result in the dissolution of the company in terms of Section 481 of [the Companies Act, 1956]…

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  1. From the above it is quite clear that different situations can arise in the process of winding up a company under [the Companies Act, 1956] but whatever be the situation, whenever a reference is made to BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of [the Companies Act, 1956] and proceedings under [the Companies Act, 1956] must give way to proceedings under SICA.”

6. Post-IBC Jurisprudence

6.1 In Jotun India (P) Ltd. PSL Ltd.[19] (Jotun II), a Division Bench of the Bombay High Court whilst inter alia adjudicating the conflict of law between the provisions of the IBC and the Companies Act, 1956, held that the provisions of the IBC shall prevail over the provisions of the Companies Act, 1956. What is interesting to note here is that while adjudicating this question of law, the Bombay High Court drew a parallel with the provisions of the SICA and the holding of the Supreme Court of India in Madura Coats[20]. The relevant portions of the judgment of the Division Bench of the Bombay High Court in Jotun II[21] have been culled out and reproduced hereinbelow:

“35. A comparative analysis of the provisions of [the] SICA clearly indicates that under the provisions of Section 22 of [the] SICA once the proceeding was initiated, the other proceedings pending before the different forums were suspended. In fact, there was an injunction operating in case the jurisdiction under [the] SICA was invoked by a concerned party. The learned counsel for the appellant made efforts to persuade us that the provisions of [the] SICA and [the] IBC are not pari-materia legislations to make it applicable to the saved petitions under [the Companies Act 1956] …In case the forum [i.e. the NCLT] under the IBC fails to revive the company or to successfully complete the resolution plan, then whether the Company Court and the NCLT would go ahead simultaneously in liquidating the company and complete the winding up proceedings. This situation needs to be harmonized and balanced.

36.We may refer to observations made by the Supreme Court in respect of provisions of [the] SICA in [Madura Coats][22], in paras 27 and 28 which read as under:

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  1. There could be a situation where there are two special statutes operating in the field or a special statute and statute generally governing the field, which may be referred to as general law. Even if it is considered that in respect of subject-matter there are two special statutes operating, one [the Companies Act, 1956] and other [the] IBC […], we need to have a purposive approach and harmonious interpretation to the provisions of law. A harmonious and balanced approach is required to be adopted for the purpose of interpreting the IBC […] and the jurisdictional limitations and areas operating in respect of saved petitions before the Company Court.
  2. The purpose of the IBC […] and the NCLT hearing petitions is primarily to revive the company by having a resolution method. Whereas in the winding up petition pending before the Company Court, ultimate approach and object is to wound up the company. Even under the IBC, if efforts to revive the company fails, then the liquidation proceedings get initiated under Chapter III of the IBC […]. Taking into consideration the statutory scheme of the IBC […] we are of the view that [the] NCLT constitutes a separate and distinct forum and it cannot be attributed to be a subordinate forum to the Company Court as constituted under [the Companies Act, 1956].
  3. The general legal principles of interpretation of statute state that the general law should yield to the special law. In the context of the present statute i.e. [the] IBC […], we are of the view that [the Companies Act, 1956] could be treated as general law and IBC […] to be a special statute to the extent of the provisions relating to revival or resolution of the company as per provision under Chapter II of the IBC. Even if [the Companies Act, 1956] and the IBC […] are considered as special statutes operating in their respective field, we are of the view that the IBC […] being later enactment and in view of the statement and objects and the purpose for which it was enacted, the provisions relating to revival/resolution of the company incorporated under Chapter II will have to be given primacy over the provisions of the winding up proceeding pending before the Company Courts […]

6.2 In Bank of Baroda Topworth Pipes & Tubes (P) Ltd.[23] (Topworth Pipes & Tubes), a Division Bench of the NCLT (Mumbai Bench) whilst inter alia relying on Rishabh Agro Industries[24], Madura Coats[25] and Jotun II[26], admitted a petition filed under Section 7 of the IBC against a company even after the passing of an order directing the commencement of winding up against the same company. The underlying inspiration for admitting the petition in Topworth Pipes & Tubes[27] by the NCLT (Mumbai Bench) appears to be drawn from the reasoning adopted by the Supreme Court of India in Rishabh Agro Industries[28], viz the passing of an order under Section 433(e) r/w Section 434 of the Companies Act, 1956 inter alia directing the commencement of winding up is in not a culmination of proceedings, rather the proceedings culminate when an order of dissolution under Section 481 of the Companies Act, 1956 is passed. The NCLT (Mumbai Bench) did, however, note that in view of the provisions of Section 11(d) of the IBC, a petition filed under Section 10 of the IBC cannot be admitted should a winding up order under Section 433(e) r/w Section 434 of the Companies Act, 1956 already have been passed. The relevant portions of Topworth Pipes & Tubes[29] have been culled out and reproduced hereinbelow:

“8… the Division Bench of the Bombay High Court [in Jotun II][30] […] held as under:                                                                                                                                                      ***

  1. The [IBC] itself contemplates a bar on filing an application for insolvency resolution under specific circumstances by certain entities. Section 11(d) of the [IBC] inter alia prohibits a corporate debtor against which a liquidation order has been passed from making an application for initiating corporate insolvency resolution process… The intention of the legislation is clear from Section 11(d) of the [IBC], which only bars insolvency proceedings against a corporate debtor, after an order of liquidation against it, in case of an application by the said corporate debtor itself and conspicuously omits any such restriction for applications by financial or operational creditors.

                                                    ***

  1. The Supreme Court in [Rishabh Agro Industries][31] has held that:

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  1. The aforesaid findings in the matter of [Rishabh Agro Industries][32] have been relied upon by the Supreme Court in para 25 in [Madura Coats][33]

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  1. In light of the aforesaid, the position seems settled that an order of winding up or liquidation in no manner means a culmination of proceedings and it is only once an order under Section 481 of [the Companies Act, 1956] is passed for dissolution of the company that the proceedings culminate.

15.… not only can a company be revived post an order of winding up but the ‘proceedings’ post an order of winding up would be covered under the term ‘proceedings’ under Section 14 of the [IBC] and would necessarily be stayed upon admission of an insolvency application under the [IBC].

  1. The question of applicability of the moratorium under SICA to ‘proceedings’ post a winding up order was before the Supreme Court in [Madura Coats][34]. The Supreme Court has held as under: […]

18.The  Supreme Court in  [Rishabh Agro Industries][35] examined the operation of the moratorium under the SICA to ‘proceedings’ post winding up in greater detail and held as under:

                           *                         *                     *

21… The object of the Code, as is evident from its “Statement and Objects” is to provide a consolidated legal framework for insolvency resolution in a time bound manner. Under the winding up provisions under [the Companies Act, 1956] a single creditor, whose debt was undisputed could wind up a company, thus bringing about its untimely financial death of a debtor. The [IBC] on the other hand mandatorily requires that an attempt at revival be made by appointing an [Interim Resolution Professional] to examine whether such company can be revived…

22.… It is hence clear that the object of the [IBC] would be defeated in its entirety if a petition for insolvency resolution could not be admitted after an order of winding up has been passed. As discussed above, till an order under Section 481 of [the Companies Act, 1956] is passed there is scope to revive a company…

23.… Hence, it could never be the intention of the legislature that despite the existence of the provisions of [the IBC], a company should be wound up without giving it a chance for resolution of its insolvency…

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  1. … We hereby admit this petition filed under Section 7 of [the IBC] against the corporate debtor for initiating corporate insolvency resolution process against the corporate debtor and declare moratorium with consequential directions…

6.3 In Forech India Ltd. Edelweiss Assets Reconstruction Co. Ltd.[36] (Forech India), a Division Bench of the Supreme Court of India, while validating Jotun II[37], held that the bar imposed vide Section 11(d) of the IBC only applies to petitions under Section 10 of the IBC and not to petitions under Sections 7 or 9. The relevant portions of Forech India[38] have been culled out and reproduced hereinbelow:

“20. … We may hasten to add that the law declared [in Jotun II[39]] has our approval.

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  1. … Section [11(d)] is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the [IBC] 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 as the case may be, as has been held by the [National Company Law] Appellate Tribunal…”

7. Addressing the 1st Issue

7.1 What can be stated without any uncertainty is that in view of the specific provisions of Section 11(d) read with Topworth Pipes & Tubes[40] and Forech India[41], is that a petition filed under Section 10 of the IBC against a company cannot be admitted by the NCLT in the event a prior order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company.

7.2 However, a harmonious reading of Real Value Appliances[42], Rishabh Agro Industries[43], Madura Coats[44], Jotun II[45], Topworth Pipes & Tubes[46] and Forech India[47] seems to suggest that petitions filed against a company under Sections 7 or 9 can be admitted by the NCLT even after the passing of an order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company unless an order of dissolution has already been passed under Section 481 of the Companies Act, 1956.

7.3 It is also noteworthy to mention the IBC, in a sense, is a successor statute to the SICA insofar as resolution, revival and rehabilitation are concerned. The Supreme Court in Real Value Appliances[48], Rishabh Agro Industries[49] and Madura Coats[50] has unequivocally held that a reference could be made to BIFR under the provisions of the SICA even after the passing of a winding up order. Considering this, the proposition that a company that has been ordered to be wound up (in accordance with inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956) cannot be resolved, revived or rehabilitated under the provisions of the IBC, but could be under the provisions of the SICA seem to be manifestly arbitrary and wholly unjust for the simple reason that such a company would lose an opportunity to resolve, revive and/or rehabilitate itself before being wound up/liquidated.

7.4 In summation, the specific answer to the 1st issue is: Yes, the NCLT can pass an order inter alia admitting a petition under Sections 7 or 9 of the IBC against a company even after the passing of an order passed by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956. However, the NCLT cannot do the same in a petition filed under Section 10 of the IBC.

7.5 Of course, the matter does not necessarily end here. The IBC, through Section 255 read with the Eleventh Schedule, carried out several amendments to the Companies Act, 2013; including substitution of Section 434 of the Companies Act, 2013. The substituted Section 434 of the Companies Act, 2013 was also amended through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, and the Companies (Removal of Difficulties) Fourth Order, 2016. Section 434 of the Companies Act, 2013 now reads as below:

434. Transfer of certain pending proceedings.- (1) On such date as may be notified by the Central Government in this behalf, —

(a) all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this section referred to as the Company Law Board) constituted under sub-section (1) of Section 10-E of [the Companies Act, 1956], immediately before such date shall stand transferred to the [NCLT] and the [NCLT] shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act;

(b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order:

Provided that the High Court may if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and

(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 [NCLT] and the [NCLT] 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:

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 [NCLT] and the proceedings so transferred shall be dealt with by the [NCLT] as an application for initiation of corporate insolvency resolution process under the [IBC]:

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 [NCLT]:

Provided further that –

(i) 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

(ii) 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.

(2) The Central Government may make rules consistent with the provisions of this Act to ensure timely transfer of all matters, proceedings or cases pending before the Company Law Board or the courts, to the Tribunal under this section.”

                                                                                                      (emphasis supplied)

7.6 The second proviso to Section 434(1)(c) allows any party to a winding up proceeding to apply to the High Court where such winding up proceeding is pending for the purpose of transferring those proceedings to the NCLT which would thereafter initiate a Corporate Insolvency Resolution Process of that company in accordance with the provisions of the IBC. The Supreme Court of India had the occasion to examine the history and intent behind this provision in Jaipur Metals and Electricals Employees Organisation Jaipur Metals and Electricals Ltd. [51], where it was held:

“15.…This is further made clear by the amendment to Section 434(1)(c), with effect from [17 August 2018], where any party  to a winding up proceeding pending before a Court immediately before this date may file an application for transfer of such proceedings, and the Court, at that stage, may, by order, transfer such proceedings to the NCLT. The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. It is thus clear that under the scheme of Section 434 (as amended) and Rule 5 of the 2016 Transfer Rules, all proceedings under Section 20 of the [SICA] pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post [17 August 2018]. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.”

7.7 Thus, the legislative intent appears to favour the IBC as a method of dealing with insolvent corporate entities even in respect of companies for which proceedings relating to their winding up are pending before a High Court under the provisions of the Companies Act, 1956. A perusal of these provisions would show that the legislative intent is to give an option to the stakeholders of a company being wound up under inter alia Section 433 of the Companies Act, 1956 to apply to the High Court concerned for transfer of the proceedings so that they may be dealt with by the NCLT in accordance with the provisions of the IBC. It may also be noted that since the proceedings are being “transferred”, the bar of Section 11 of the IBC may also not apply to the transferred proceedings, as Section 434(1)(c) does not seem to suggest that the transferred proceeding is to be admitted as a normal petition under Sections 7, 9 or 10. In fact, this would be perverse as that would give scope to the NCLT to reject a transferred petition – thus indirectly reviving a company which had been ordered to be wound up.

8. Addressing the 2nd Issue

8.1 This brings us to an important question of law the 2nd issue which had not been addressed in Topworth Pipes & Tubes[52]. The provisions of Section 446 of the Companies Act, 1956 make it manifestly clear that once a company has been be directed to be wound up, the continuance or initiation of any legal proceeding against the company can only be done after obtaining leave of the High Court that directed the commencement of winding up of that company.

8.2 In fact, in Murli Industries Ltd. Primo Pick N. Pack (P) Ltd. [53] (Murli Industries), a Single Judge Bench of the Bombay High Court has specifically held that in the event a company has been directed to be wound up/liquidated under the provisions of the Companies Act, 1956, Section 446 mandates that leave of the High Court be sought prior to initiation or continuance of proceedings under Sections 7 or 9 of the IBC. The relevant portions of Murli Industries[54] have been culled out and reproduced hereinbelow:

“33. Section 446 [of the Companies Act, 1956] is an intrinsic part of that process. It mandates that leave of the Company Court to file or continue with any such proceeding, must be obtained. The rationale being that the Company Court must be made aware of any other claims raised against the Company so that it can effectively go about its job of liquidation of the Company. If this is not to happen, there would be a reasonable possibility of two conflicting claims being made and allowed in respect of the Company and authorities allowing such claims would be at their wit’s end in implementing them. Resolution of insolvency of a Company and liquidation of a Company are two processes which pull at each other. Former is about rejuvenation of life and the latter is about termination of life. In such a case, the logic of law, here Section 446 of [the Companies Act, 1956], would require that a forum dealing with a proceeding more drastic in consequences is allowed to take a call on the revival possibility of the Company before it is too late in the day. This would mean that no application can be filed or continued with regard to initiation of resolution process under Chapter II of Part II of the IBC without leave of the Company Court under Section 446(1) of [the Companies Act, 1956]. It would then follow that if any resolution process is initiated without leave of the Company Court, it would be a defective proceeding in the eye of the IBC read with [the Companies Act 1956]. Such a proceeding will acquire sanctity only when leave under Section 446(1) of [the Companies] Act 1956] is granted…

  1. Such an interpretation, in my considered view, is also consistent with the legislative intent as broadly reflected by the aims and objects of the IBC.

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  1. The object of the IBC is to consolidate and amend the law relating to re-organisation and insolvency resolution of the corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The whole theme of [the] IBC is based upon efficacy and speed to be achieved in making efforts to revive a dying Company, and securing protection of the interests of its creditors and other stakeholders. The object of the IBC is not to repeal [the Companies Act, 1956] and substitute it by another enactment, but it is to consolidate and amend relevant laws. Such an object of the IBC should underline the need for attaining harmony while interpreting the provisions of […] the IBC […] qua Section 446 of [the Companies Act, 1956] so that what is in the best of interests of the Company and its stakeholders is allowed to happen in a natural way. This is what I have done in the present case and accordingly, I conclude that leave to continue with the proceedings before the NCLT, under Section 446(1) of [the Companies Act, 1956], is necessary …

8.3 In view of this, the answer to the 2nd issue is: Leave of the concerned would be required to be obtained for the continuation or initiation of proceedings filed under Sections 7 or 9 of the IBC. However, we would have to also consider Section 434 of the Companies Act, 2013, described above. Taking the essence of the judgments set out above and applying them to Section 466(1) of the Companies Act, 1956, as well as Section 434(1)(c) of Companies Act, 2013, a picture emerges where the legislature intends for pending winding up proceedings to be transferred rather than for individual creditors to invoke the IBC without involving the High Court seized of the winding up proceedings. This would make sense as the High Court cannot be denuded of any discretion in the matter. For example, if the Official Liquidator has identified avoidable transactions during the course of his activities, or has taken out proceedings alleging misfeasance against the erstwhile management of the company in liquidation, the High Court may choose to decline transferring the proceedings out of its jurisdiction pending the outcome of those proceedings. That being said, judicial pronouncements consistently suggest that the route of IBC is preferable to winding up under the Companies Act, 1956.

9. To summarise, in the event a company has been directed to be wound up by a High Court under Sections 433(e) r/w Section 434 of the Companies Act, 1956, the NCLT may admit a petition filed under Sections 7 or 9 of the IBC provided leave has been granted by the High Court concerned in terms of Section 446 of the Companies Act, 1956, or the High Court concerned makes an order for transferring the proceedings under Section 434(1)(c) of the Companies Act, 2013. However, in the former case, petitions under Section 10 of the IBC are not maintainable in the event an order directing the commencement of winding up has already been passed.


*Advocate-on-Record, Supreme Court of India, BBA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

**Advocate, Bombay High Court, BA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

[Authors’ Note: The views expressed herein are personal and independent. No third party has funded inter alia the issuance of this paper or the research conducted by the authors. The authors have based their views in this research paper on prevalent legislation, judicial opinions/interpretations pertaining to the same and their experience as practicing advocates in India.]

[1] Insolvency and Bankruptcy Code, 2016

[2] Companies Act, 1956

[3] Sick Industrial Companies (Special Provisions) Act, 1985 

[4]http://www.officialliquidatormumbai.com/pdf/Alphabetical%20List%20Under%20Liquidation.pdf

[5] (2019) 4 SCC 17

[6]Ibid  at para 121, p. 121

[7] Reports on Insolvency and Bankruptcy, Viswanathan Committee Report (Insolvency and Bankruptcy)

[8]Srivastava, P. “Ease of Doing Business 2019: GST, IBC big winners; list of reforms that put India among top 10 improvers”. Financial Express (dated 31 October 2018). https://www.financialexpress.com/economy/ease-of-doing-business-2019-gst-ibc-big-winners-list-of-reforms-that-put-india-among-top-10-improvers/1368186/

[9] (1998) 5 SCC 554

[10]Ibid

[11] (2000) 5 SCC 515

[12] (1998) 5 SCC 554

[13](2016) 7 SCC 603

[14] (1998) 5 SCC 554

[15] (2000) 5 SCC 515

[16] (2016) 7 SCC 603

[17] (1998) 5 SCC 554

[18]  (2000) 5 SCC 515

[19] 2018 SCC OnLine Bom 1952

[20]  (2016) 7 SCC 603

[21] 2018 SCC OnLine Bom 1952

[22] (2016) 7 SCC 603

[23] 2018 SCC OnLine NCLT 31299

[24] (2000) 5 SCC 515

[25] (2016) 7 SCC 603

[26] 2018 SCC OnLine Bom 1952

[27] 2018 SCC OnLine NCLT 31299

[28] (2000) 5 SCC 515

[29] 2018 SCC OnLine NCLT 31299, pp. 8-14

[30] 2018 SCC OnLine Bom 1952

[31] (2000) 5 SCC 515

[32]Ibid

[33]  (2016) 7 SCC 603

[34] (2016) 7 SCC 603

[35] (2000) 5 SCC 515

[36] 2019 SCC OnLine SC 87

[37] 2018 SCC OnLine Bom 1952

[38]  2019 SCC OnLine 87

[39] 2018 SCC OnLine Bom 1952

[40] 2018 SCC OnLine NCLT 31299

[41]  2019 SCC OnLine 87

[42] (1998) 5 SCC 554

[43] (2000) 5 SCC 515

[44] (2016) 7 SCC 603

[45]  2018 SCC OnLine Bom 1952

[46] 2018 SCC OnLine NCLT 31299

[47] 2019 SCC OnLine 87

[48] (1998) 5 SCC 554

[49]  (2000) 5 SCC 515

[50] (2016) 7 SCC 603

[51] (2019) 4 SCC 227

[52] 2018 SCC OnLine NCLT 31299

[53] 2018 SCC OnLine Bom 4178  

[54]Ibid

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