India: No Bar To Initiate Proceedings Under IBC Pending Winding Up Proceedings In High Court

Recently, the Hon'ble High court of Bombay in the Company Application1 made in Company Petition No. 434 of 20152 held that application for initiating Corporate Insolvency Resolution Process (CIRP) under Section 7, 9 and 10 of Insolvency and Bankruptcy Code 2016 (I&B Code/the Code) by Financial Creditor, Operational Creditor and Corporate Debtor respectively can still subsist even if the winding up proceedings are pending before Hon'ble High Court.

The Hon'ble High Court have in detail discussed the arguments put forward by all the parties to the Application including the interveners who have filed an application for intervening. The brief facts of the matter which was before the Hon'ble High Court of Bombay was that against the Respondent/Applicant, the Petitioner company had filed a winding up petition before the Hon'ble High Court of Bombay. During the time when the petition was pending, the Respondent Company (Applicant in present Company Application) moved to BIFR under SICA regulations. In December 2016 when I&B Code 2016 came into effect, SICA got repealed and a window of 180 days were given to Companies who have their reference pending before BIFR to make an application under Section 10 of I&B Code 2016 before the Adjucating Authority i.e. NCLT.

The Respondent Company accordingly filed an application under Section 10 of the Code before Hon'ble Adjudicating Authority, NCLT of Ahemdabad. The Petitioner thereafter filed a Company Application before the Hon'ble High Court in the Company Petition already pending to stay the proceedings under I&B Code 2016 filed by the Respondent. The Hon'ble High Court vide its order of July 2016 stayed the said proceedings. Another Company Application in the same Company petition was thereafter filed by the Respondent Company against the stay order of the Hon'ble High Court w.r.t proceedings before NCLT Ahemdabad. The Hon'ble High Court of Bombay vide its order dated 5th January 2018 vacated the stay order earlier passed w.r.t proceedings under I&B Code 2016 pending before Hon'ble Adjudicating Authority, Ahemdabad and allowed the Company Application filed by Respondent/Applicant Company. Some of the issues which were discussed and decided in the said application are been discussed herein after:

a) Background and Object-Purpose of Insolvency Code While relying on the decision of Hon'ble Supreme Court of India in Innoventive Industries Limited V/s ICICI Bank, the Hon'ble High Court held that "it is apparent from a reading of the object and purpose for which the I&B Code 2016 has been enacted is to set up Insolvency and Bankruptcy resolution process, which has to be implemented in a strict time bound manner, by the appointment of an IRP and creation of a creditors Committee. These are powers which can be exercised only by NCLT (Adjuditicating Authority) and not by the Company Court. It is for this reason that pending the Insolvency Resolution Process a moratorium is provided under Section 14 of IBC."

b) Fundamental Distinction between Companies Act and I&B Code 2016

The Hon'ble High Court held that the fundamental distinction between the two is that under the Companies Act winding up would be a matter for the Court alone to decide. On the other hand, in I&B Code 2016, there is a paradigm shift in as much as it displaces the management of the Company and an IRP is appointed and the Creditors Committee is left to decide the fate of the Company.

c) Admission of a winding up petition does not entail stay of NCLT proceedings.

While discussing the fate of proceedings pending if any under the I&B Code 2016 before NCLT (Adjudicating Authority), the Hon'ble High Court observed that admission of the winding up petition by the Jurisdictional High Court would not mean that NCLT either losses jurisdiction or cannot exercise jurisdiction in case of a petition which is filed by another creditor. The Hon'ble Court further observed that the legislature while enacting I&B Code 2016 was well aware of an existing law i.e. the Companies Act, as well as the fact that the Company petitions that may have been filed prior to I&B Code coming into force may have been admitted and pending final disposal in the jurisdictional high Court. In case the intention of legislature was that those winding up petitions which the jurisdictional high court remain seized, would have primacy over NCLT proceedings then the legislature would have clarified so either in I&B Code 2016 or in the transfer rules notification dated 7th December 2016. On the contrary, as per the Hon'ble High Court, the provisions of Section 64(2) of I&B Code 2016 would indicate that the legislature did not intend that the Company Court would have the power to injunct proceedings before NCLT.

The court further discussed the provisions of SICA wherein in case any reference is pending before BIFR, the proceedings against the Company stays till the said time.

d) Remedy for people under Section 6 of I&B Code 2016

The Hon'ble Court discussed that in case the argument that if one accepts the argument of Petitioners that pending winding up proceedings, the application made under I&B Code 2016 cannot be made or if made will remain stay then it would mean that there is no right available for any person covered under Section 6 of I&B Code 2016 to file a proceedings under I&B Code 2016, in respect of a company, against whom a winding up petitions is retained in the High Court. Such an interpretation is not supported by the language of I&B Code 2016. The court observed that there is express as well as implied intention on the part of the legislature to (i) take away the right to file winding up petitions under Companies Act, 1956; and (ii) to apply the provisions of I&B Code without exception to all proceedings undertaken regarding insolvency resolution and revival of the companies. This language is apparent from the peremptory and express language of Sections 14, 63 and 64(2) of I&B Code 2016.

The Hon'ble High Court further discussed that it is also clear from the Companies (Removal of Difficulties) Fourth Order that in fact what is saved are only the proceedings of winding up pending before the jurisdictional High Court and not the Company itself in relation to which such proceedings are saved. Such a Company is still subject to the provisions of I&B Code 2016, if invoked and only post notice winding up proceedings, which are retained by High Court, are saved. This does not mean that IBC is inapplicable to the said Company, if it is invoked.

The transitional provisions cannot in any way affect the remedies available to a person under I&B Code 2016, vis-à-vis the Company against whom a winding up petition is filed and retained in the High Court, as the same would amount to treating I&B Code as if it did not exist on the statue book and would deprive persons of the benefit of the new legislation. The same is contrary to the plain language of IBC. The High Court made a step ahead and observed that if the contentions of the petitioner were to be accepted, it would mean that in respect of companies, where a post notice winding up petition is admitted or a provisional liquidator appointed, provisions of I&B Code 2016 can never apply to such companies for all times to come. The mere fact that post notice winding up proceedings are to be "dealt with" in accordance with the provisions of the Companies Act, 1956 does not bar the applicability of the provisions of I&B Code 2016 in general to proceedings validly instituted under I&B Code 2016, or does it mean that such proceeding can be suspended.

e) No power to Injunct

The Hon'ble High Court, held that NCLT is not a court subordinate to the High Court and hence as prohibited by the provisions of Section 41(b) of the Specific Relief Act, 1963 no injunction can be granted by the High Court against a Corporate Debtor from institution of proceedings in NCLT. Similarly, under the Companies Act, 1956 there being no provision wherein proceedings under NCLT instituted under I&B Code 2016 can be injuncted. The Court further observed that there is an express bar contained in Section 64(2) of I&B Code which prevents any court, tribunal or authority from granting any injunction in respect of any action taken, or to be taken, in pursuance of any power conferred on NCLT under I&B Code 2016.

It is to be noted that apart from Hon'ble High Court of Bombay, the Ld National Company Appellate Tribunal (NCLAT) also vide its order dated 01.12.2017 in Company Appeal. (AT) (Insolvency) No. 81/20173 held that where if any winding up proceedings has been initiated against the Corporate Debtor by the Hon'ble High Court or Tribunal or Liquidation Order has been passed, in such case the application under Section 10 is not maintainable. However, mere pendency of a petition for winding up, where no order of winding up or order of liquidation has been passed, cannot be ground to reject the application under Section of the I&B Code 2016.

The Ld NCLAT also discussed that the word "Liquidation" under I&B Code 2016 can be considered as Synonymous to the word "winding up" mentioned in Companies Act, 2013. While discussing the same the Appellate Authority observed that in a case where a winding up proceedings has already been initiated against a Corporate Debtor by the Hon'ble High Court or Tribunal or Liquidation order has been passed in respect to the Corporate Debtor, no application under Section 10 can be filed by the Corporate Applicant in view of ineligibility under Section 11(d) of I&B Code 2016 "a Corporate Debtor in respect of whom a liquidation order has been made, is not entitled to make application under I&B Code 2016".

Footnotes

1 Company Application No. 572 of 2017 of High Court of Bombay

2 Jotun India Private Limited V/s PSL Limited

3 Unigreen Global Private Limited V/s Punjab National Bank and others

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