Case BriefsHigh Courts

Karnataka High Court: S. Sunil Dutt Yadav, J., decided in the matter of a petition which was filed praying to transfer a company petition on the file of the High of Karnataka to the National Company Law Tribunal, Bengaluru under the Insolvency and Bankruptcy Code, 2016.

Company petition had been filed seeking an order of winding-up of the respondent-company claiming that it had committed defaults as regards the payment of; rent, interest on rent, service tax and penalty on service tax.

It was contended that the respondent company had demonstrated its inability to pay the debt and accordingly the winding up proceedings had been initiated and in between the proceeding a company application was filed by the respondent seeking transfer of the company petition to NCLT. The petitioner had opposed the application asserting that no reason was assigned in the application invoking exercise of discretion of the Court in terms of power vested under the fifth proviso to Section 434 (1) of the Companies Act, 2013. On this argument it was contended that provision of transfer of proceedings does not require any explanation.

It was further contended that transfer of proceedings to the NCLT would prejudice the interest of the petitioners’ claim insofar as IBC Code imposes rigours and the ambiguity in the orders of the NCLT and NCLAT as to whether rental dues was an operational debt would prejudice petitioners rights to realise its claims which otherwise was admissible in the present winding up proceedings pending before this court. It was contended that exercise of discretion under the fifth proviso to Section 434(1)(c) could be premised on various considerations including existence of parallel proceedings. It was also contended that exercise of judicial discretion cannot have the effect of prejudicing the rights of the petitioner nor can it be exercised in a manner so as to cause injustice.

It is further contended that transfer of proceedings to the NCLT would deny the petitioner the right to a remedy. It was specifically asserted that the court while exercising judicial discretion ought to also keep in mind as to whether provisions of the IBC in terms of which the winding up proceedings would be decided by the NCLT, would make the claim maintainable failing which the question of transferring the proceedings ought not to be considered at all.

The Court after the hearing both the parties reiterated that in the present case, notice having been served and the matter was pending for admission when the application invoking the fifth proviso under Section 434 of the Companies Act, 2013 had been filed, the manner of disposal of such application was to be done in terms of the fifth proviso and plain reading of the fifth proviso as extracted hereinabove would indicate that any party or parties to any proceedings may file an application for transfer and the court may by order transfer such proceedings to the Tribunal. However, what needs to be looked into was the interpretation placed by the Apex Court relating to the exercise of power under the proviso.

The Court analyzed the judgment of Supreme Court in Action Ispat and Power (P) Ltd. v. Shyam Metalics and Energy Ltd., Civil Appeal Nos. 4042-4043 of 2020 decided on 15-12-2020 and explained that where the winding up proceedings have reached a stage where it is irreversible making it impossible to set the clock back and in such an event, the Company Court must proceed with the winding up instead of transferring the proceedings to NCLT is to be noticed. It further reiterated the relevant context relating to the present case,

“27. …..As has been correctly pointed out by Shri Sinha, a discretionary jurisdiction under the fifth proviso to Section 434(1)(c) of the Companies Act, 2013 cannot prevail over the undoubted jurisdiction of the NCLT under the IBC once the parameters of Section 7 and other provisions of the IBC have been met….” (emphasis supplied)

Court further stated that it is clear that provisions of IBC would prevail over the provisions of the Companies Act relating to winding up proceedings.

It was noted that in the present case, there were no parallel proceedings before the NCLT apart from the present proceedings for winding up but the Court held that even in the absence of parallel proceedings exercise to transfer proceedings may involve taking note of other factors which may include the case made out by the Company demonstrating that if the matter is transferred to NCLT to be disposed off under the IBC, there would be a greater possibility of restructuring and revival of the Company. The Court rejected the contention of petitioner that no reasons need be assigned as long as power is available to be invoked as per the statutory provision thus under the fifth proviso to Section 434 of Companies Act, 2013 the party seeking such transfer must make out grounds.

In the present case, no such grounds are forthcoming as regards the need for restructuring of the Company, if proceedings are transferred to NCLT.

The Company applications were rejected by the Court stating, “The legal regime in winding up proceedings does not disentitle the consideration of winding up merely in light of pre-existing dispute and the considerations for declining to exercise jurisdiction under Section 434 of the Companies Act, 2013 is on different grounds and not necessarily attached to the existence of a dispute in parallel forum.”

[Nitesh Residency Hotels (P) Ltd. v. Archdiocese of Bangalore, 2021 SCC OnLine Kar 14704, decided on 28-09-2021]

For the applicant: Sri K.G. Raghavan, Senior Advocate for Sri Nischal Dev B.R., Advocate

For the respondent: Sri Naman Jabakh, Advocate for Sri S. Vivek Holla, Advocate; Sri C.K. Nandakumar, Advocate as Amicus CURIE

Sri Shivabhushan S. Hatti Advocate for Smt Maneesha Kongovi, Advocate


Suchita Shukla, Editorial Assistant has reported this brief.

Op EdsOP. ED.

Prefatory

With the introduction of the Insolvency and Bankruptcy Code, 20161 (the Code) and the consequential amendments made to Sections 2702, 2713 and 2724 of the Companies Act, 2013 (the Act),5 a winding-up petition under the Act cannot be filed against a company for inability or failure to pay debts. However, in terms of Section 271, a winding-up proceeding may still be initiated under the Act against a company on the following grounds:

  • the company has, by special resolution, resolved that the company be wound up by the Tribunal;
  • if the company has acted against the interests of the sovereignty or integrity of India, national security, friendly relations with foreign States, public order, decency or morality;
  • if on an application made by the Registrar of Companies or such person authorised by the Central Government to do so, the Tribunal is of the opinion that affairs of the company are being conducted in fraudulent manner, that the company was formed for a fraudulent purpose or the management of the company has been guilty of fraud, misfeasance or misconduct, and the Tribunal believes it proper that the company be wound up;
  • if the company has defaulted in filing its annual returns with the Registrar of Companies for the preceding five consecutive years; or
  • if the Tribunal is of the opinion that it is just and equitable that the company be wound up.

The provisions of Section 271(1)(a) of the Act i.e. “winding up by special resolution” ought not to be confused with a voluntary application for initiation of corporate insolvency resolution process under Section 10 of the Code6 or an application for voluntary liquidation under Section 597. Unlike other proceedings, the reason for the existence of the remedy under Section 271(1)(a) of the Act is to facilitate the execution of the will of the shareholders of companies. It is based on the understanding that a company has a right to apply for its own winding up if its shareholders wish to and, by means of a special resolution, elect to discontinue the company.8 As Lord Cairns in Suburban Hotel Co., In re:9 observed:

…a certain number of persons are willing to undertake to supply a limited amount of capital upon the terms of the business being managed by persons who shall be elected in a particular manner…. They have certain means by which the business can be put an end to. If the requisite majority wish it to be discontinued a special resolution can at any time be passed to wind up the company. On the other hand, if any of the tests of insolvency or the impossibility of carrying on business, which are mentioned in 79th section of the Act [Section 122 of the Insolvency Act], occur, then the shareholders have a further right to have the company wound up accordingly. But subject to the wishes of the majority, and subject to the occurrence of any of those tests mentioned in the Act, I apprehend that the contract means that the shareholders will supply the specified amount of capital for the purpose of carrying on business as long as it can be carried on.

Winding up by special resolution

A company by a special resolution can decide that it would be wound up by the tribunal. The resolution can be passed for any reason.10 This clause is based on the premise that, the shareholders being corporate entities have the requisite skill to judge and decide as to whether or not the company should go out of existence. Further, as noted above, a company has the right to apply for its own winding up and this right is generally exercised by its directors. However, the directors do not have the right to seek for such winding up without the express permission of the general body of shareholders in the form of a special resolution.11However, the directors may file this application, subject to the ratification of proposal.12

The company has to call general body meeting and pass a special resolution specifically setting out grounds in the explanatory statement attached thereon explaining why winding up of the company is necessary. A resolution of the company’s Board of Directors is not a substitute for shareholders’ resolution. The appointment of a provisional liquidator does not by itself necessitate an order of winding-up.13Where the notice for an extraordinary meeting neither provide the actual wordings of the resolution nor state that the resolution was to be passed as an extraordinary resolution, the court held that the resolution for the winding up of the company was not passed in accordance with law.14

A company which applies for a winding-up order is not confined to relying upon the fact that a special resolution for winding up has been passed,15 but may invoke other grounds contained in Section 271.16 This must, of course, be established in the ordinary way and it is therefore not enough to show that a simple majority of members is in favour of winding up.17Further, the procedure to be followed for passing such a special resolution may also depend on the articles of association of a company. Although the articles cannot alter the statutory majority prescribed for special resolutions, there seems to be nothing to prevent the company from making it difficult to pass a resolution for the purpose of winding up voluntarily. A company is, therefore, entirely within its powers to mandate a larger quorum for such occasions.18 Similarly, it may require a high majority for such special resolutions. In Ramakrishna Industries (P) Ltd. v. P.R. Ramakrishnan,19 the articles of the company required “every member shall vote in favour of the resolution for winding up when such contingencies arise”. This requirement was challenged on the ground that provision in articles was void in view of Section 9 of the Companies Act, 195620 vis-à-vis Section 433(f) of that Act. The Court, however, held that, the provision was not void inasmuch as the articles of association have a contractual force between the company and its members as also between the members inter se and that the said provision in the articles was what is provided in Section 433(a) of the Companies Act, 1956. It was not contrary to the provision in Section 433(f) of the Companies Act, 1956.

Winding-up orders on this ground are uncommon as companies usually resort for the cheaper and less complicated voluntary liquidation. The proceedings under Section 271(1)(a) and its earlier versions seem to have been invoked only where other liquidation proceedings provided a particular group of creditors an unfair advantage over others. For instance, in United Investments Co., In re,21an application for voluntary winding up by special resolution was filed so as to reduce the assets available for distribution on winding up to preference shareholders. In that case, the company’s articles distinguished the amounts shareholders would receive based on whether such shares were preference shares or ordinary shares. The ordinary shareholders took advantage of the equivalent of Section 122(1)(a)22 in order to bring about a form of liquidation which was more favourable to their own interests.

It is also important to note that the power of the Tribunal to order winding up is generally considered as being discretionary and the Tribunal may not exercise it where winding up is considered as being opposed to the public or the company’s own interests. Generally, unless there are such special circumstances, the Tribunal will allow the petition and make an order for winding up of the company.23In United Fuel Investments Ltd., In re24, the Court refused to interfere with a special resolution for compulsory winding up in the absence of proof that the action of the majority was fraudulent or something akin to it. However, the Tribunal must see that the winding up is not opposed to public interest or the interest of the company as a whole.25The Tribunal is also to take into account the possibility of the company to have a financial revival, when the company is incurring loss that led the company to pass special resolution for winding up.26

Reasons and motives in relation to a special resolution

In a petition under Section 271(1)(a), the Tribunal is essentially asked to terminate a contract that the shareholders of the company entered into when they became members of the company. Thus, to that extent, the tribunal must decide on an issue that is at its core contractual. Consequently, the Tribunal has to decide the question in terms of that contract and the memorandum of association and articles of association which prescribe the limits of rights of members. However, the tribunal may go into the reason behind the company’s decision to wind up by means of a petition under Section 271(1)(a). It is not bound to order winding up merely because the company has so resolved.27

Where a company is unable to pay its debts, or where its substratum is gone, the company may choose to file a winding-up petition even if it is presented by the company itself after a special resolution to that effect. In such cases, the motive may be irrelevant. Equally, the reason for the strained circumstances that a company may face is irrelevant even if such circumstances are due to mismanagement.28

Where a company by a special resolution filed a petition for winding up, the Official Liquidator objected that the directors had defrauded the depositors. The Court, observed that the company owed huge debts with no prospects of survival, ordered for the company to be wound up. It, however, observed that the directors would not be absolved of their legal responsibilities merely on account of such an order.29 In another case, a government company had several decrees that has been passed against it in suits for repayment of various loans. But the company was unable to discharge its liabilities and was found to have lost its financial substratum. The Court ordered windingup.30 However, a company may not be entitled to bring a petition merely because it is finding it difficult to dispose assets in the open market.31

Checklist for filing a petition under Section 271 of the Companies Act, 2013

  • A petition under Section 271 shall be presented only by persons mentioned in Sections 272(1)(a)-(f).
  • A petition under Section 271(1)(a) can be presented by the company, subject to the company duly passing a special resolution at a validly convened meeting of the company.
  • A petition under Section 271(b) can only be presented the Central Government or a State Government in terms of Section 272(f) of the Act.
  • A petition under Section 271(1)(c) may only be presented by the persons prescribed under Section 272(1)(d) or Section 271(1)(e) provided the prerequisites mentioned under Section 271(1)(c) are duly satisfied.
  • A petition under Section 271(1)(d) can be made by the company itself, any contributory, the Registrar of Companies.
  • A petition under Section 271(1)(e) can be made either by the company, any contributory or any person authorised by the Central Government on their behalf.

[Note: In Antrix Corpn. Ltd. v. Devas Multimedia (P) Ltd.32, the Court noticed that the consolidated petition under Sections 271-273 of the Companies Act, 2013 was maintainable and the ingredients under Sections 271(1)(e) were clearly satisfied];

Note: Sub-section (4) of Section 272 of the 2013 Act addresses the ability of the Registrar to file a petition. A Registrar evidently cannot file a petition for winding up on the special resolution passed by the company, or where winding up of the company is on the orders of the tribunal under Section 265 of the 2013 Act33.

The ground under Section 271(1) provides for winding up of the company on the special resolution of the shareholders, to be done by the Tribunal, and is to be distinguished from the voluntary winding up of the company in terms of Section 270(1)(b), the procedure for which is enumerated below in Sections 304 to 323 in Part II of Chapter XX34.]

7) Every petition, application or reference shall be submitted in Form WIN-1 or Form WIN-2 (as the case may be) as prescribed under Rule 3 of the Companies (Winding Up) Rules, 202035. In addition to the same, the same shall be coupled with:

  • (i) A notice of admission in Form NCLT-2 (as per usual NCLT practice in every fresh application) and Form NCLT-5 as per the provisions of Rule 34 of the National Company Law Tribunal Rules, 201636.
  • (ii) A verifying affidavit in Form WIN-3.

8) Where the petition is being filed by the company, the company also has to file its “statement of affairs” in Form WIN-4, and the same is a mandatory enclosure which has to be enclosed either with Form WIN-1 or Form WIN-2.

9) Copies of the memorandum and articles of association of the company must be annexed.

10) Copies of latest annual report and balance sheet.

11) Copy of special resolution [if being filed under Section 271(1)(a).]

12) Copies of the notice calling the meeting in which the special resolution of the company las required under Section 271(1)(a)] was convened and duly passed.

13) It should be indexed and stitched together in a paper book form.

14) One copy should be given to the opposite party. Notice to opposite party should be issued in Form NCLT-5.

15) The fees payable is prescribed in Rule 165 of the NCLT Rules, 2016 and may be paid by way of a demand draft or through BharatKosh or through the NCLT e-filing website.

16) Fee: Rs 1000 (This is the prescribed fee for an application under Sections 271-273 of the Companies Act, 2013 as can be seen from the drop down menu in the NCLT e-filing website.).


*  Authors are advocates based out of Chennai and practice on the company/commercial side.

1http://www.scconline.com/DocumentLink/86F742km.

2http://www.scconline.com/DocumentLink/7H1M93X2.

3http://www.scconline.com/DocumentLink/GxMubOA7.

4http://www.scconline.com/DocumentLink/nM14Vc61.

5With effect from 15-11-2016.

6http://www.scconline.com/DocumentLink/Kp5IKPzm.

7http://www.scconline.com/DocumentLink/f0R8Qem8.

8Patiala Banaspati and Allied Products Co. Ltd., In re, AIR 1953 Pepsu 195; Oriental Navigation Co. v. BhanaramAgarwalla, 1921 SCC OnLine Cal 264.

9(1867) 2 Ch App 737, 742-743 (CA) (“The reasoning in that case has stood the test of time’’: Bondi Better Bananas Ltd, Re [1951] 3 D.L.R. 522 at 529, per Ferguson, J.)

10For the provision relating special resolution see, S. 433(a) of the Companies Act, 1956; S. 271(1)(b) of the 2013 Act.

11State of Madras v. Madras Electric Tramways (1904) Ltd., 1956 SCC OnLine Mad 150.

12Galway & Salt Hill Tramways Co., In re, (1918) 1 IR 62/521 LG 93.

13Asra Estates Ltd., In re, 2007 SCC OnLine AP 1046.

14 Swadeshi Cotton Mills Ltd, In re, [1932] Comp Cas 411 (All).

15State of Madras v. Madras Electric Tramways (1904) Ltd., 1955 SCC OnLine Mad 182; Ex p. Edenvale Wholesalers Ltd, 1959 (2) S.A. 477.

16Langham Skating Rink Co, In re, (1877) 5 Ch D 669 (CA); Smith v.Duke of Manchester, (1883) 24 ChD 611; Emmadart Ltd, In re, 1979 Ch 540 :(1979) 2 WLR 868 : (1979) 1 All ER 599.

17Anglo-Continental Produce Co. Ltd., In re, (1939) 1 All ER 99.

18Ayre v. Skelskey’s Adamant Cement Co. Ltd.,(1904) 20 TLR 587; Cambrian Peat Fuel Co, De La Mott’s Case, Re (1875) 31 L.T. 773; Grand Lodge of N.S.W. Masonic Hall Co v. Sly, (1913) 13 S.R. (N.S.W.) 512.

191985 SCC OnLine Mad 260.

20http://www.scconline.com/DocumentLink/4gZMIxor.

21(1961) 31 D.L.R. (2d) 331. See also, Fallis & Deacon v. United Fuel Investments Ltd., (1963) 40 DLR (2d) 1 (Can. Sup. Ct); Byrom Motors Ltd.v. Dolphin House Ltd.,(1958) 3 SA 52 (S.R.).

22http://www.scconline.com/DocumentLink/L0LUD0q7.

23Hillig v. Darkinjung Pty Ltd., [2006] NSWSC 137; (2006) 205 F.L.R. 450 [S Ct (NSW)].

24Hillig v. Darkinjung Pty Ltd., [2006] NSWSC 137; (2006) 205 F.L.R. 450 [S Ct (NSW)].

25B. Viswanathan v. Seshasayee Paper and Boards Ltd. 1991 SCC OnLine Mad 525.

26Advance Television Network Ltd. v. Registrar of Companies, 2011 SCC OnLine Del 2673.

27New Kerala Chits & Traders (P) Ltd. v. Official Liquidator, 1979 SCC OnLine Ker 202.

28Bombay Metropolitan Transport Corpn. Ltd. v. Employees of Bombay Metropolitan Transport Corpn. Ltd., 1990 SCC OnLine Bom 237.

29Antariksh Credit and Commercial Ltd. v. Union  of India, 1999 SCC OnLine All 1286.

30Gujarat Small Industries Corpn. Ltd. v.Borsad Urban Coop. Credit Society Ltd., 2008 SCC OnLine Guj 245.

31Compare Anglo-Continental Produce Co., In re, (1939) 1 All ER 99.

32 CP No. 06/BB/2021, order dated 19-1-2021 [NCLT, Bengaluru].

33http://www.scconline.com/DocumentLink/8OI5a72o.

34http://www.scconline.com/DocumentLink/Hr8j8AGB.

35http://www.scconline.com/DocumentLink/wi6z8aEO.

36http://www.scconline.com/DocumentLink/sv5G3cTf.

Case BriefsSupreme Court

Supreme Court: In a sequel to its earlier order directing winding up of six mutual fund schemes of Franklin Templeton Mutual Fund, a Division Bench of S. Abdul Nazeer and Sanjiv Khanna, JJ. ruled that the trustees are required to seek consent by majority of the unit holders, when they by majority decide to wind up a  mutual fund scheme. Also, consent by majority of the unit holders should be sought post-publication of the notice and disclosure of the reasons for winding up.

In its earlier order dated 12-2-2021 [Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88], the Supreme Court has allowed the winding up of six mutual fund schemes by Franklin Templeton Mutual Funds, by holding that as per the poll results, the unit holders of the six schemes have given their consent by majority to wind up the six schemes. It had however not examined certain aspects then. The task before the Supreme Court now was two-fold. First, decide whether the decision of the trustees to wind up a scheme under Regulation 39(2)(a) of the SEBI (Mutual Funds) Scheme, 1996 must muster the consent of the majority of the unit holders as per Regulation 18(15)(c). And second, decide the challenge to the constitutional validity of certain provisions of the SEBI (Mutual Funds) Regulations, 1996 itself.

Below is a comprehensive analysis of the entire discussion by the Supreme Court:

(A) Interpretation of Regulations 39 to 42, their interplay and harmonious construction with Regulation 18(15)(c) of the Mutual Funds Regulations, 1996

Regulations 39 to 42 and 18(5)(c)

Regulation 39 relates to ‘winding up’ of a scheme of a mutual fund. In terms of sub-regulation (2), a scheme of a mutual fund can be wound up: (a) on the happening of any event, which, in the opinion of the trustees[1], requires the scheme to be wound up; (b) if 75% of its unit holders[2] pass a resolution for winding up of the scheme; or (c) SEBI directs winding up of the scheme in the interest of the unit holders. When a scheme “is to be wound up” under sub-regulation (2), the trustees are required by sub-regulation (3) of Regulation 39 to issue a public notice in newspapers as specified.

Regulation 40, which is in the nature of statutory injunction, states that on and from the date of publication of notice under Regulation 39(3), the trustees and the Asset Management Company (“AMC”)[3] shall cease to: (a) carry on any business in respect of the scheme to be wound up; (b) create or cancel units of the scheme; and (c) issue or redeem units of the scheme. Regulation 41 relates to the procedure and manner of winding up. Regulation 42 states that after receipt of the report under Regulation 41(3), if SEBI is satisfied that all measures relating to winding up have been complied with, the scheme would cease to exist. Regulation 42-A stipulates that the units of the mutual funds scheme shall be delisted from the recognised stock exchange in accordance with the guidelines as may be specified by SEBI.

Regulation 18(15)(c), which relates to rights and obligations of the trustees, in simple words requires the trustees to take consent of the unit holders, when they, by majority, decide to wind up or prematurely redeem the units.

Decision of the High Court

The judgment of the Karnataka High Court which was under challenge, interpreted Regulation 18(15)(c) and Regulation 39(2)(a) to hold that the decision of the trustees to wind up a scheme under clause (a) to Regulation 39(2) must muster the consent of the majority of the unit holders as per Regulation 18(15)(c).

The Challenge

Contesting the finding of the High Court, the SEBI, the trustees and the AMC argued that the unit holders do not come into the picture when the trustees and the SEBI, under clauses (a) and (c) respectively of Regulation 39(2), decide to wind up a scheme. Their decision is final and binding on the unit holders. Only when the unit holders want to wind up a scheme, in terms of clause (b), a resolution by 75% of the unit holders is mandated. Thus, they contended that the findings of the High Court to the contrary should be reversed.

Analysis and Decision

(i) Interpretation of the term ‘consent’ in Regulation 18(15)(c)

In its order dated 12-2-2021 (2021 SCC OnLine SC 88), the Supreme Court interpreted Regulation 18(15)(c) and the word ‘consent’ therein. It held that the underlying thrust behind Regulation 18(15)(c) is to inform the unit holders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility.

The Court in the said earlier order had concluded that Regulation 18(15)(c) need not have affirmative consent of majority of all or entire pool of unit holders. The words ‘all’ or ‘entire’ are not incorporated and found in that Regulation.  It was held:

“Thus, consent of the unit holders for the purpose of Regulation 18(15)(c) would mean simple majority of the unit holders present and voting.”

(ii) Trustees are required to seek consent of unit holders

Discussing Regulation 18(15)(c) and Regulations 39 to 42 at length, the Court concluded that Regulation 18(15)(c) mirrored by use of the word ‘shall’ is couched as a command. Regulation 39(2) under clause (a) vests the power of winding up of a scheme with the trustees, and with the unit holders under clause (b) and with the SEBI under clause (c), but under Regulation 18(15)(c), the trustees are required to seek consent of the unit holders, when they by majority decide to wind up a scheme.

The Court was of the opinion that the expression ‘when the majority of the trustees decide to wind up’ in Regulation 18(15)(c) manifestly refers to clause (a) to Regulation 39(2) as this is the only Regulation which entitles the trustees to wind up the scheme. Regulation 18(15)(c), when it refers to trustees’ decision to wind up, it implies the trustees’ opinion to wind up the scheme. It was held:

“Principle of harmonious construction should be applied which, in the context of the Regulations in question, would mean that the opinion of the trustees would stand, but the consent of the unit holders is a pre-requisite for winding up.”

The Court said that such interpretation in no way dilutes or renders clause (b) to Regulation 39(2) meaningless or redundant. That clause applies where the winding up process is initiated at the instance of the unit holders, i.e. upon 75% of unit holders of the scheme passing a resolution for winding up. It was observed:

“Clause (b) does not in any manner reflect that clause (c) to Regulation 18(15) should not be read as it ordains in simple words.”

The Court rejected the argument that the unit holders are lay persons and not well versed with the market conditions. It was noted that investments by the unit holders constitute the corpus of the scheme. To deny the unit holders a say, when Regulation 18(15)(c) requires their consent, debilitates their role and right to participate. It is an in-contestable position that the unit holders exercise informed choice and discretion when they invest or redeem the units. Regulations envision the unit holders not as domain experts, albeit as discerning investors who are perceptive and prudent. The Court observed:

“The unit holders, when in doubt, as prudent investors may be advised to abstain, but they are not placid onlookers, impuissant and helpless when the trustees decide to wind up the scheme in which they have invested. The stature and rights of the unit holders can co-exist with the expertise of the trustees and should not be diluted because the trustees owe a fiduciary duty to them.

Thus, the contention that the trustees being specialists and experts in the field, their decision should be treated as binding and fait accompli has to be rejected not only in view of the specific language of Regulation 18(15)(c), but to be in concinnity with the objective and purpose of the Regulations.”

A hypothetical submission that the unit holders may reject a valid and well-considered opinion of the trustees for winding up, and therefore Regulation 18(15)(c) is directory, was again rejected by the Court. It said that:

“Assumptions cannot be a ground to wrongly interpret Regulation 18(15)(c).”

Completing the interpretation of Regulation 18(15), the Court recorded that clause (a) applies and requires the trustees to obtain consent of the unit holders whenever required by SEBI in the interest of the unit holders. Clause (b) states that the trustees would obtain consent of the unit holders whenever required to do so on the requisition made by three-fourths of the unit holders of any scheme. Accordingly, clause (a) would apply whenever SEBI mandates and clause (b) applies whenever three-fourths of the unit holders of the scheme make a requisition.

(iii) At what stage consent of unit holders is required

Harmoniously interpreting Regulations 39 to 42, the Court opined that the consent of the unit holders, as envisaged under 18(15)(c), is not required before publication of the notices under Regulation 39(3). It was held:

Consent of the unit holders should be sought post-publication of the notice and disclosure of the reasons for winding up under Regulation 39(3).

 (B) Constitutional validity of the Mutual Funds Regulations

One of the appellants raised a challenge to the constitutional validity of the SEBI (Mutual Funds) Regulations, 1996.

The Challenge

Regulation 39(2)(a) was assailed as suffering from the vice of excessive delegation. It gives unbridled power to the trustees to wind up a scheme. It was submitted that Regulation 39(2)(a) suffers from manifest arbitrariness in the absence of any prescription regulating the exercise of the power by the trustees.

It was also submitted that Regulation 39(3) equally suffers from the vice of manifest arbitrariness. Though the trustees are required to give notice disclosing circumstances leading to winding up of the scheme to SEBI, this requirement is meaningless and superficial as SEBI cannot go into the question and circumstances to be satisfied as to existence of an event warranting the extreme action of winding up.

It was further contended that Regulation 41 does not prescribe any mechanism or manner in which the authorised person or the AMC can ascertain the liabilities which are due and payable under the scheme. Lastly, it was contended that Regulation 42 is also manifestly arbitrary as SEBI is to perform only ministerial functions, much less than the functions of a regulator.

Analysis and Decision

(i) Power of SEBI to pass directions in interest of unit holders

After referring to the provisions of the SEBI Act, 1992 and elucidating the powers of SEBI, the Supreme Court expressed its reservations on the High Court’s observation regarding powers of SEBI under 11-B (Power to issue directions and levy penalty). The Supreme Court was of the opinion that if there is a violation of the regulations, i.e. Regulation 39(2)(a), 39(3), 40, 41 or 42 by the trustees or the AMC, it is open to SEBI to proceed in accordance with law and in terms of 11-B of the SEBI Act. The Court said that:

If the trustees have acted for extraneous and irrelevant reasons and considerations, the action would be in violation of clause (a) to Regulation 39(2) and therefore amenable to action under the SEBI Act, including directions under Section 11-B.

 (ii) Power of trustees not unbridled

The Court refused to accept that the trustees under Regulation 39(2)(a) have been given absolute and unbridled power to wind up a scheme. The Court noted that the language of clause (a) states that the trustees must form an opinion on the happening of any event which requires the scheme to be wound up. Further, as per Regulation 39(3), the trustees are bound to give notice disclosing the circumstances leading to the winding up of the scheme. These notices along with the reasons have to be communicated to SEBI and made known to the unit holders by publication in newspapers. The trustees are, therefore, required to come to a conclusion that due to specific circumstances articulated in writing, the scheme is required to be wound up. The Court concluded that:

This is not a case of excessive delegation wherein the legislative function has been abdicated and passed on to the trustees who can act as per their whims and fancies. … There are … sufficient guidance and safeguards in the Regulations itself on the power of the trustees to decide on winding up of the fund.

(iii) Unit holders not creditors

Culling out the distinction between unit holders and creditors drawn from the Mutual Fund Regulations, the Court noted that unit holders are investors who take the risk and, therefore, entitled to profits and gains. Having taken the calculated risk, they must also bear the losses, if any. Unit holders are not entitled to fixed return or even protection of the principal amount. Creditors, on the other hand, are entitled to fixed return as per mutually agreed contracts. Their rate of return is in the nature of interest and not profit or loss. Creditors are not risk takers as is the case with the unit holders. It was the Court’s opinion that:

In this sense, unit holders are somewhat at par with the shareholders of a company.

It was held that the argument that the unit holders should be treated pari passu with the creditors is farfetched. Similarly, the contention that unit holders are identically placed as home buyers under the Insolvency and Bankruptcy Code, was held to be equally frail and a weak argument.

(iv) Manifest arbitrariness and Scope of judicial review

The Court observed that the Mutual Fund Regulations being in the nature of economic regulations, the Court would exercise restrain while exercising power of judicial review unless clear grounds justify interference.

It was noted that the principle of manifest arbitrariness requires something to be done in exercise in the form of delegated legislation which is capricious, irrational or without adequate determining principle. Delegated legislations that are forbiddingly excessive or disproportionate can also be manifestly arbitrary. However, held the Court:

In view of the interpretation placed by us and the discussion above, the Regulations under challenge do not suffer from the vice of manifest arbitrariness.

(C) Grey Area ─ Regulation 53

Referring to issue related to the interpretation of Regulation 53 (Despatch of warrants and proceeds) of the Mutual Fund Regulations, the Court said that it is a grey area which the Court would not like to decide at this stage, till it has full facts and decision in the pending adjudication proceedings. Clause (b) to Regulation 53 requires that the AMC shall despatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase.

Issue in question would arise whether the AMC or the trustees are bound to honour and pay the redemption or repurchase proceeds for requests received before the date of publication of notice in terms of Regulation 39(3).

The High Court has held the expression ‘business’ in clause (a) of Regulation 40 refers to business activity and, therefore, would include payment of redemption proceeds to the unit holders, which would include the request for redemption received prior to the date of publication under Regulation 39(3). The case set up by some parties was at variance with the dictum pronounced by the High Court.

The Court said that before it can answer this aspect, it would like to have greater clarity on the factual matrix, which would be possible once the pending proceedings are concluded.

(D) Closing and Clarification

The Court refrained from referring and commenting on facts and left several issues open at this stage. Nevertheless, it clarified that the observations in the instant Order and the earlier Order dated 12-2-2021 (2021 SCC OnLine SC 88) should not be read as binding factual findings or conclusions on any disputed facts. Of course, the legal interpretation of Regulation 18(15)(c) and Regulations 39 to 42 are conclusive and binding. It was also clarified that any finding given by the High Court on facts or even on legal issues not subject matter of the instant Order or the earlier Order dated 12-2-2021 (2021 SCC OnLine SC 88) would not be treated as conclusive and binding as the findings are sub-judice and pending before the Supreme Court on interpretation as well as merits. [Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 464,   decided on 14-7-2021]


[1] ‘Trustees’ has been defined in Regulation 2(y) to mean the board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unit holders.

[2] ‘Unit holder’ has been defined in Regulation 2(z)(i) to mean a person holding a unit in the scheme of a mutual fund. It may be understood as akin to shareholder in a company.

[3] The AMC is a company, approved by SEBI under Regulation 21(2), which undertakes business activities in the nature of management and advisory services provided to the pooled assets.


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Rohinton Fali Nariman* and B.R. Gavai, JJ., addressed the instant appeal involving the question that whether an insolvency proceedings could be initiated after the winding up application had been admitted under the Companies Act. The Bench stated,

“…every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country.”

The Appellant was an operational creditor of Respondent 2, Shree Ram Urban Infrastructure Limited (SRUIL). A winding up petition was filed by the respondent 3 herein, Action Barter Pvt. Ltd. against SRUIL, stood admitted on 05.10.2016, due to failure of SRUIL and subsequently, the physical possession of the assets of the company was taken over by the provisional liquidator.

Meanwhile, Indiabulls, a secured creditor of the company, filed an application to realise its security outside such winding up proceeding, which had been allowed by the Company judge and the Provisional Liquidator was directed to handover possession of the Mortgaged Property of the company to Indiabulls. Though, it had been directed that Indiabulls should conduct the sale of the property in consultation with the Official Liquidator. The property was sold and the said sale was challenged by the provisional liquidator in the Bombay High Court, alleging that the conditions of the order were flouted, and that what was sold was much more than what was mortgaged to the secured creditor, and that too at a gross undervalue.  The said representation by the provisional liquidator is still pending in the Court.

Additionally, the respondent 1, SREI Equipment Finance Ltd. (SREI) filed a petition under Section 7 of the IBC before the NCLT, which petition was admitted by the NCLT. In the instant case the appellant was contesting that the petition under Section 7 of the IBC would have to be held to be non-maintainable that no suit or other legal proceeding can be initiated once there is admission of a winding up petition. The appellant argued that post admission of a winding up petition; no petition under Section 7 of the IBC could be filed. It was also contended that the fact that the company was under winding up had been suppressed in the petition filed under Section 7 of the IBC.

In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held that, “the IBC is a special statute dealing with revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail. Vis-à-vis the Companies Act, which is a general statute dealing with companies, including companies that are in the red, the IBC is not only a special statute which must prevail in the event of conflict, but has a non-obstante clause contained in Section 238, which makes it even clearer that in case of conflict, the provisions of the IBC will prevail.”

Relying on the decision in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549, the Bench stated, in a situation in which notice had been issued in a winding up petition the said petition could be transferred to the NCLT, wherein it would be treated as a proceeding under the IBC. The Bench stated, a conspectus of the aforesaid authorities would show that a petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company.

Given the object sought to be achieved by the IBC, it is clear that only where a company in winding up is near corporate death that no transfer of the winding up proceeding would then take place to the NCLT to be tried as a proceeding under the IBC.

The Bench stated, it is settled law that a secured creditor stands outside the winding up and can realise its security dehors winding up proceedings. Relying on S. 230(1) of the Companies Act, 2013, the Bench expressed that a compromise or arrangement is admissible in law in an IBC proceeding if liquidation is ordered.

In Food Controller v. Cork, (1923) A.C. 647, it had been explained that;

“The phrase ‘outside the winding up’ is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say “the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgage is in winding up or not. I remain outside the winding up” and shall enforce my rights as mortgagee. This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say ‘I will prove in respect of my debt’. If so, he comes into the winding up”.

The Bench expressed, that corporate death is inevitable, every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country.

Once a winding up petition is admitted, the winding up petition should not trump any subsequent attempt at revival of the company through a Section 7 or Section 9 petition filed under the IBC.

Consequently, though no application for transfer of the winding up proceeding pending in the Bombay High Court has been filed, the High Court had itself, directed the provisional liquidator to hand over the records and assets of SRUIL to the resolution professional (IRP) in the Section 7 proceeding that is pending before the NCLT.

In the light of above, the Bench held that any “suppression” of the winding up proceeding would, therefore, not be of any effect in deciding a Section 7 petition on the basis of the provisions contained in the IBC. Hence, the appeal was dismissed.

[A. Navinchandra Steels (P) Ltd. v. SREI Equipment Finance Ltd., 2021 SCC OnLine SC 149, decided on 01-03-2021]


Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice Rohinton Fali Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearance before the Court:

For the appellant: Sr. Adv. Abhishek Manu Singhvi and Sr. Adv. Ranjit Kumar,

For SREI: Adv. Abhijeet Sinha,

Case BriefsSupreme Court

Supreme Court: In the case relating to winding up of six schemes of the Franklin Templeton Mutual Fund, the bench of SA Nazeer and Sanjiv Khanna*, JJ has, rejecting the objections to poll results, held that the unitholders of the six schemes have given their consent by majority to windup the six schemes.

It held that for the purpose of clause (c) to Regulation 18(15) of the Mutual Fund Regulations, consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme.


Key takeaways from the judgment


  • Clause (c) to sub-regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the unitholders of a scheme can pass a resolution that the scheme be wound up.
  • When there is choice between two interpretations, we would avoid a ‘construction’ which would reduce the legislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. We must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences. We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences.
  • Reading prescription of a quorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Consent of majority of all unitholders of the scheme with further prescription that ‘fifty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise.
  • In the case of unitholders, the number is fluctuating and ever changing and, therefore, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), we would not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in support or to reject the proposal to wind up the mutual fund scheme.
  • The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up.
  • Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, a ‘construction’ which would lead to commercial chaos and deadlock cannot be accepted. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal.
  • The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility.
  • The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation 18 would mean simple majority of the unitholders present and voting.
  • Regulation 18(15)(c) mandates and requires consent of the unitholders for winding up, but does not prescribe any mode or manner for taking consent. Therefore, by implication, the Regulation gives option of holding a physical meeting, postal poll or e-poll.
  • The objectors to the e-voting results are sixteen in number and, as per details, they hold 20,02,114.041 units in the six schemes of value of Rs. 8,69,28,507.62. In percentage terms, the share of objectors in the total units is merely 0.024% and their share in the total AUM is 0.033%.
  • The unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had participated. This cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes.
  • It is but obvious that the trustees had already taken a decision to wind up the six schemes. Regulation 39(3) requires the trustees to disclose the circumstances leading to winding up of the schemes. The trustees accordingly, in the notice for e-voting and meeting of the unitholders, had furnished their explanation and reason for winding up of the six schemes.
  • The unitholders were aware and conscious of the litigation against the winding up, including the procedure. At the same time, many in the general public may not be fully aware of the commercial considerations and niceties relating to mutual funds and debt securities market.
  • The notice had also informed the investors that there would be suspension of subscription and redemption post the cut-off time from 23rd April, 2020. All Systematic Investment Plans, Systematic Transfer Plans and Systematic Withdrawal Plans into and from the abovementioned funds stood cancelled post the cut off time from 23rd April, 2020.
  • The notice had also furnished information and clarification regarding distribution of monies from the Fund Assets, inter alia stating that following the decision to wind up the six schemes, the trustees would proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the ‘unprecedented circumstances’. Hence, the notice for e-voting and the contents would not justify annulling the consent given by the unitholders for the winding up of the six schemes.

[Franklin Templeton Trustee Services Private Limited v. Amruta Garg, 2021 SCC OnLine SC 88, decided on 12.02.2021]

Op EdsOP. ED.

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…

*                                    *                       *

  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…

                                    *                              *                      *

  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]…

                                           *                                      *                                  *

  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:

                           *                         *                        *

  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:

    *                                                 *                                            *

  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]

      *                                          *                                                      *

  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…

*                                                       *                                                                       *

  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.

*                                                    *                                                                  *

  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.

 *                                                 *                                  *

  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

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian*, JJ has held that the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party and the words “party  or parties” appearing in the 5th proviso to Clause (c) of Sub-section(1) of Section 434 the Companies Act, 2013 would take within its fold any creditor of the company in liquidation.

Scheme of Section 434

  • For the purpose of transfer, Section 434 classifies the winding up proceedings pending before the High Courts into two categories namely:

(a)Proceedings for voluntary winding up where notice of resolution by advertisement has been given under Section 485(1) of the Companies Act, 1956, but the company has not been dissolved before 01.04.2017; and

(b) Other types of winding up proceedings.

  • The first of the above 2 categories of cases are covered by the fourth proviso under Clause (c) of Sub­section (1) of Section 434, which states:

“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 subsection (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”.

  • Such cases of voluntary winding up covered by the above proviso shall continue to be dealt with by the High court. It is only (i) cases of voluntary winding up falling outside the scope of the 4th Proviso and (ii) other types of winding up proceedings, that can be transferred by the High Courts to the Tribunal, subject however to the Rules made by the Central Government under Section 434 (2).
  • The transferability, by operation of law, of winding up proceedings, other than those covered by the 4th Proviso, depends upon the stage at which they are pending before the Company Court. But this is left by the law makers to be determined through subordinate legislation, in the form of Rules.
  • Apart from providing for the transfer of certain types of winding up proceedings by operation of law, Section 434 (1)(c) also gives a choice to the parties to those proceedings to seek a transfer of such proceedings to the NCLT. This is under the fifth proviso to Clause (c).
  • The 5th proviso uses the words “any party or parties to any proceedings relating to the winding up of companies pending before any Court. Hence, the right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, on a literal interpretation, such a right should be held to be confined only to “the parties to the proceedings.”

Scheme of Companies (Transfer of Pending Proceedings) Rules, 2016

The pending proceedings for winding up are classified into three types namely:

  • proceedings for voluntary winding up covered by the fourth proviso to Clause (c) of Subsection (1) of Section 434, which shall continue to be dealt with in accordance with the provisions of the 1956 Act;
  • proceedings for winding up on the ground of inability to pay debts; and
  • proceedings for winding up on grounds other than inability to pay debts.

The transferability of a winding up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. The normal requirement of Rule 26 is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition, unless otherwise ordered. The notice of the petition, required under Rule 26 to be served along with the copy of the petition, should be in Form No.6, due to the mandate of Rule 27.

If the winding up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding up petition on the respondent in terms of Rule 26 had not been completed, such winding up proceedings, whether they are under Clause (c) of Section 433 or under Clauses (a) and (f) of Section 433, shall peremptorily be transferred to the NCLT.

“Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which a winding up proceeding can be transferred. This is because the first proviso under Clause (c) of Sub-section (1) of Section 434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and subsection (2) of section 434 confers rule making power on the Central Government.”

Further, the restriction under Rules 5 and 6 of the 2016 Rules relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of sub-section (1) of Section  434.

Who can be a “party to the proceedings”?

There are certain clues inherently available in the Companies Act, 1956, to indicate who can be a “party to the proceedings”. The provisions which contain such clues are as follows:

(i) Section 447 of the Companies Act, 1956, which is equivalent to Section 278 of the Companies Act, 2013 states that an order for winding up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory. There is a small change between the wording of Section 278 of the 2013 Act and the wording of Section 447 of the 1956 Act. Section 278 of the 2013 Act shows that any petition by a single creditor or contributory is actually treated as a joint petition of creditors and contributories, so that the order of winding up operates in favour of all the creditors and all the contributories.

(ii) Under Section 454(6) of the 1956 Act, any person stating himself in writing to be a creditor shall be entitled to inspect the statement of affairs submitted to the official liquidator. If the claim of such a person to be a creditor turns out to be untrue, such a person is liable to be punished under Section 454(7) of the 1956 Act.

(iii) The powers of the liquidator are enumerated in Section 457 of the 1956 Act. Section 457 actually divides the powers of a liquidator into two categories namely (i) those available with the sanction of the Tribunal and (ii) those generally available to the liquidator. But Section 290 of the 2013 Act has done away with such a distinction. However, the 1956 Act, as well as 2013 Act make the exercise of the powers by the liquidator, subject to the overall control of the Tribunal. This is made clear by Section 457(3) of the 1956 Act and Section 290(2) of the 2013 Act. Additionally, Section 457(3) of the 1956 Act enables any creditor or contributory to apply to the Court with respect to the exercise by the Liquidator, of any of the powers conferred by Section 457.

(iv) Section 460 of the 1956 Act and Section 292 of the 2013 Act make it clear that in the administration of the assets of the   Company   and   the   distribution   thereof   among   its creditors, the liquidator should have regard to any directions given by resolution of creditors at any general meeting. If the liquidator does something, in exercise of his powers, any person aggrieved by such Act or decision of the liquidator, is entitled to apply to the Company Court, under Section 460(6) of the 1956 Act and Section 292(4) of the 2013 Act.

(v) Section 466(1) of the 1956 Act enables any creditor to apply for stay of all proceedings in relation to the winding up. This right can be exercised by any creditor at any time after the making of a winding up order.

Hence, the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party. Such proceeding might have been initiated by one or more creditors, but by a deeming fiction the petition is treated as a joint petition. The official liquidator acts for and on behalf of the entire body of creditors. Therefore, the word “party” appearing in the 5th proviso to Clause (c) of Sub-section (1) of section 434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator.

Hence,

“If any creditor is aggrieved by any decision of the official liquidator, he is entitled under the 1956 Act to challenge the same before the Company Court. Once he does that, he becomes a party to the proceeding, even by the plain language of the section. Instead of asking a party to adopt such a circuitous route and then take recourse to the 5th proviso to section 434(1)(c), it would be better to recognise the right of such a party to seek transfer directly.”

[Kaledonia Jute and Fibres Pvt. Ltd v. Axis Nirman and Industries Ltd, 2020 SCC OnLine SC 943, decided on 19.11.2020]


*V. Ramasubramanian has penned this judgment

Advocates who appeared in the matter

For appellant: Senior Advocate Huzefa Ahmadi,

For 1st respondent: Senior Advocate A.N.S. Nadkarni

For Official Liquidator: Advocate-on-Record Gp. Capt. Karan Singh Bhati

OP. ED.SCC Journal Section Archives

Introduction

Much like sovereign democracy, corporate democracy plays to the will of the majority. The majority rule enforces a contractual bargain among shareholders that puts collective decision-making ahead of individual interests. By placing business decisions in the hands of the Board of Directors, it introduces an element of efficiency. However, what is to prevent a tyranny of the majority that steamrolls minority shareholders? Here, company law intervenes to moderate the behaviour of dominant shareholders to ensure they do not adversely affect the interests of the minority. Minority shareholders can resort to various remedies under company law, such as oppression, prejudice and mismanagement, to restore the balance of power.

While Indian company law has incorporated versions of shareholder remedies since the mid-20th century, the design of the remedies as they currently operate finds place in Sections 241 and 242 of the Companies Act, 2013 (“the 2013 Act”). No sooner than these provisions took effect,[1] they faced a litmus test in one of India’s fiercest corporate battles in recent times. On 24-10-2016, the Board of Tata Sons Ltd., the holding company of the revered Tata group of companies, ousted its Executive Chairman, Mr Cyrus Mistry, from the position. The Shapoorji Pallonji group, of which Mr Mistry is a part, is a minority shareholder in Tata Sons. The group promptly initiated action under Sections 241 and 242 of the 2013 Act against Tata Sons and its controlling shareholders, being two Tata trusts.

The Shapoorji Pallonji group challenged various decisions taken by Tata Sons. These included several business decisions taken in various Tata group companies (referred to as “legacy issues”), the amendments to the articles of association of the holding company Tata Sons to enhance the powers of the Tata shareholders and ultimately the removal of Mr Mistry as the Executive Chairman and thereafter as a Director of Tata Sons. While the dispute was pending adjudication, Tata Sons converted itself from a public company into a private one, a matter also contested legally. After marathon hearings, the Mumbai Bench of the National Company Law Tribunal (“NCLT”) issued a 368-page ruling[2] declining to grant any relief to the minority shareholders.

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†  Associate Professor, Faculty of Law, National University of Singapore. I would like to thank Souryaditya Sen for research assistance. Errors or omissions remain mine.

** This Article was first published in Supreme Court Cases. It has been reproduced with the kind permission of Eastern Book Company

[1]  Ministry of Corporate Affairs, Government of India, Notification S.O. 1934(E) dated 1-6-2016 (being also the effective date).

Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs notifies — Companies (Winding-Up) Rules, 2020 through Notification No. G.S.R. 46(E).

The notification has been divided into 6 Parts, which comprises of the procedure of winding up in detail.

These rules shall apply to winding up under of Companies Act 2013.

These rules will come into force from 01-04-2020.

Winding Up: The process by which an insolvent estate is distributed, as far as it will go, amongst the persons having claims upon it. The term is most frequently applied to the winding-up of joint-stock companies.

*Please click on the link for detailed notification: Companies (Winding Up) Rules, 2020


Ministry of Corporate Affairs

[Notification dt. 24-01-2020]

Hot Off The PressNews

The Central Registrar of Cooperative Societies, Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry of Agriculture and Farmers’ Welfare, Government of India has passed an Order for winding up the Adarsh Credit Cooperative Society Ltd., Ahmedabad and has appointed a Liquidator for the purpose under the provisions of the MSCS Act, 2002 (& Rules made thereunder) today.

The Adarsh Credit Cooperative Society Ltd., Ahmedabad, Gujarat has been found to indulge in misusing the funds of the members/ depositors for personal gains, indulged in gross irregularities and has violated Cooperative Principles.


Ministry of Agriculture & Farmers Welfare

[Press Release dt. 29-11-2019]

[Source: PIB]

Case BriefsSupreme Court

Supreme Court: In a case dealing with companies defaulting a loan of Rs. 48 Crores including interest from Kotak Mahindra Bank, the question relating to the right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal [DRT] and a recovery certificate based thereon arose before the bench of RF Nariman and Navin Sinha, JJ. On the issue, the bench said:

“cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same.”

The Court said that when it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar to jurisdiction contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956. It further added:

“As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.”

Citing Lord Atkin’s judgment in Lissenden v. C.A.V. Bosch, Ltd., [1940] 1 All E.R. 425 at 436-437, where he said that one has not lost one’s right to a second helping because one has taken the first, the Court said that the Bank cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously, in fact:

“When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter.”

[Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., 2019 SCC OnLine SC 92, decided on 29.01.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) allowed an appeal filed against an order of National Company Law Tribunal (Mumbai).

The respondent preferred an application under Sections 433 and 434 of the Companies Act, 1956 before the Bombay High Court for winding up of the Corporate Debtor pertaining to a debt of Rs 21,63,359. The case was transferred pursuant to Rule 5 of the Companies (Transfer of Pending Proceedings) Rule, 2016 before National Company Law Tribunal (Mumbai). The respondent therein filed Form 5 to treat the same as an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. By the order impugned, NCLT admitted the application, passed an order of moratorium and appointed Interim Resolution Professional. The appellant – Director of the Corporate Debtor, challenged the order on the ground that notice under Section 8(1) was issued on the same date when Form 5 was filed.

The Appellate Tribunal perused Section 9 of the I&B Code and observed that an application under Section 9 preferred before the completion of 10 days from the giving of notice under Section 8(1) cannot be entertained and admitted by the Adjudicating Authority. Holding the application under Section  9 as not maintainable on the date on which it was filed, the High Court set aside the order impugned. Resultantly, the order passed by NCLT appointing Interim Resolution Professional, declaring moratorium, freezing of account, etc. were declared illegal. The appeal was, thus, allowed. [Jaya Patel v. Gas Jeans (P) Ltd., 2018 SCC OnLine NCLAT 783, dated 08-10-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): The whole time member of SEBI,  G.Mahalingam in accordance to the interim order given earlier issued directions under Section 19 of the Securities and Exchange Board of India Act, 1992 and Sections 11(1), 11(B) and 11(4) thereof and regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999  to NICL India Ltd. for engaging in Collective Investment Schemes without ‘certificate of  registration’ from SEBI.

NICL  India Ltd. was involved in illegal mobilization of funds from the public through ‘Collective Investment Schemes’, without obtaining the certificate of registration resulting in the contravention of Section 12(1B) of the SEBI Act, 1992 with Section 11 AA and Regulation 3 of CIS Regulations. It has also been stated that NICL was alleged of contravention of Regulation 4(2)(t) of ‘Prohibition of Fraudulent & Unfair Trade Practice Relating to Securities Market Regulations, 2003.

The interim order that had been said to be passed carried certain directions towards the NICL directors and further in reference to that,  they were asked to file reply, if any.  NICL through the further correspondence of letters kept asking for the extension of time to refund the investor’s money.

SEBI received complaints subsequently in which one was from RBI as well, in regard to the ‘mobilization of public fund’, after NICL had claimed to adhered all the stated directives in the interim order.

Therefore, it was noted by the board that, after providing opportunity of personal hearing and absenteeism in that, SEBI had to conclude by stating that ‘Noticees’ that were engaged in the Collective investment scheme had failed to address prima facie conclusions in the interim order, for which the directors of NICL would be liable which further lead SEBI for the issuance of certain directions that involved the winding up of the NICL’s Collective Investment Scheme and certain other directives for refund of the invested funds. [NICL India Ltd., In Re,2018 SCC OnLine SEBI 128, order decided on 21-06-2018]

Case BriefsHigh Courts

Hyderabad High Court: While deciding the instant appeal under Section 483 of the Companies Act, 1956 read with Clause 15 of the Letters Patent against the admission of Company Petition No. 231 of 2015, filed for its winding-up under Section 433(e) read with Sections 434(1)(a) and 439 of the Companies Act, 1956, the Division Bench of Sanjay Kumar and Uma Devi, JJ., observed that it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. Thus no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages.

The appellant company was awarded a contract by Surana Ventures Limited to set up a 35 MW per annum capacity photo-voltaic cell manufacturing plant at Fab City, Hyderabad. In turn, the appellant company engaged services of several sub-contractors and suppliers for discharging this contractual obligation. The respondent company was one of the sub contractors upon whom a Purchase Order dated 15.04.2011 was placed by the appellant company to manufacture and supply of certain water and waste-water plant components for use in the proposed manufacturing plant. The Purchase Order contained the terms and conditions of the contract as it contemplated that time was the essence of the work and all deliveries/works had to be completed. However Surana Ventures shelved the project in August, 2011 and the contract was frustrated thereafter. As a result the appellant company claimed that it could not proceed further thereafter, in so far as Purchase Order. The respondent company stated that it had invested its entire monies into the project and kept the plant ready and was at the disposal of the appellant company and thus requested them to pay the balance amount. With the appellant denying the liability to pay, the company petition for winding-up the appellant company was presented by the respondent on 01.05.2015. The Company Judge admitted the winding up petition stating that the appellant company’s defense of Surana Ventures shelving the project is unsustainable and did not make any observation on the issue as to whether there was breach of contract by the appellant company in respect of its obligation under the Purchase Order.

The Court observed that the Company Judge lost sight of such an important issue as to the presence of a breach of contract by the appellant company as this was a crucial aspect which was raised by way of a bonafide dispute by the appellant company and required to be addressed at the threshold to assess as to whether the respondent made out a prima facie case for admission of the winding-up petition. The Court also observed that when damages are assessed the Court in the firstly must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant. Noticing the existence of several debatable issues raised by the appellant which were ignored by the Company Judge, the Court thus set aside the order of admission dated 25.10.2017 and dismissed Company Petition No. 231 of 2015. [MW High Tech Projects India Pvt. Ltd. v. M/s. Grauer & Weil (India) Ltd., 2017 SCC OnLine Hyd 409, decided on 06.12.2017]

Case BriefsHigh Courts

Bombay High Court: In a case dealing with petitions pending admission before the High Court filed under the Companies Act, 1956 where winding up of a company was sought, the Single Bench of S.C. Gupte, J held that every winding up petition under clause (e) of Section 433 which is pending before the High Court and which is not served by the petitioner on the respondent company shall stand transferred to NCLT under Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016.

The petitioners in the present case contended that the petitions having been served on the respondent as required by Rule 26 of the Companies (Court) Rules, 1959, the transfer notification does not apply to them and accordingly, this court retains its jurisdiction over them. It is the case of the respondent that these petitions stand transferred to NCLT as they are covered in the mandate of the notification which confers powers on the Central Government to constitute NCLT and NCLAT for transfer of various proceedings pending before the High Courts to NCLT.

Analysing the submissions put forward by the counsel, the Bench considered the relevant provisions of the Act in light of the facts of the case and held that Rule 26 has no reference to the order of admission of the petition. It further said that if such pending petition is served by the petitioner on the respondent, the petition will continue to be dealt with by this court and the applicable provisions will be the provisions of 1956 Act. Accordingly, the petitions in this case were not transferred to NCLT. Conversely, it implied that unserved pending petitions are to be transferred to NCLT to be governed by the Companies Act, 2013. [West Hills Realty Private Ltd. v. Neelkamal Realtors Tower Pvt. Ltd., 2016 SCC OnLine Bom 10038 , decided on 23.12.2016]

Case BriefsSupreme Court

Supreme Court : While dealing with the issue relating to jurisdiction of BIFR in winding up proceedings, the Court held that winding up proceedings before the Company Court cannot continue after a reference has been registered by the BIFR and an enquiry has been initiated under Section 16 of the SICA

In the present case, the appellants Madura Coats had filed a petition in the Company Court for winding up of Modi Rubbers on the allegation that Modi Rubbers was unable to pay its huge undisputed debts. The Company Court passed an order for winding up of the Company. Modi Rubbers appealed before the Divisional bench of the High Court which had set-aside the order of the Company Court on the pretext that Modi Rubbers had made an application to BIFR- Board of Industrial & Financial Reconstruction under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and hence should be entitled to the benefits of the provisions of Section 22 of the SICA. The  Court discovered that Modi Rubbers was willing to pay the dues to Madhura Coats in terms of the rehabilitation scheme passed by BIFR. The Court also based it’s reliance on Real Value Appliances Ltd. v. Canara Bank, (1998) 5 SCC 554, where the question was raised that whether on the registration of a reference, the Division Bench of the High Court could pass orders in an appeal against an interim order passed by the Company Court , to which the Court had replied that the SICA is intended to revive and rehabilitate a sick industry before it can be wound up under the Companies Act. The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by the BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante.

The bench comprising of Madan B. Lokur J., finally concluded that the Company Court and the BIFR do not exercise concurrent jurisdiction. Till the company remains a sick company having regard to the provisions of sub-section (4) of Section 20 [of the SICA], BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a Company Court and hence set aside the order passed by the Company Court and upheld the order passed by the Divisional bench of High Court. [Madura Coats Limited v. Modi Rubber Ltd., 2016 SCC OnLine SC 626, decided on 29.06.2016]