In an important decision passed last year1, a single Judge of the Calcutta High Court ("High Court") held that if a high court retains a pending winding up petition of a company as per the Companies (Transfer of Pending Proceedings) Rules, 2016 ("Transfer Rules") and upon the National Company Law Tribunal ("NCLT") initiating corporate insolvency resolution process ("CIRP") under the Insolvency and Bankruptcy Code, 2016 ("IBC") against the same company, the winding up proceedings shall automatically be stayed until the approval or rejection of a resolution plan under Section 31 of the IBC. The High Court further held that on the failure of the CIRP, the liquidation proceedings can be conducted before the high court (which had retained the winding up petition) under the provisions of the Companies Act, 1956 ("1956 Act") or the Companies Act, 2013 ("2013 Act"), as may be applicable.
The present decision also helps serve as a useful reminder of the pre-existing position vis-à-vis simultaneous winding up petitions filed against the same corporate debtor under the 1956 Act. In such cases, upon admission of a petition and the appointment of a provisional liquidator, all remaining petitions would stand automatically dismissed, and such petitioner-creditors would be granted liberty to file their claims with the provisional liquidator so appointed by the court.
By an order dated December 1, 2017, the High Court admitted a winding up petition filed under Section 433(e) of the 1956 Act against Avani Projects & Infrastructure Limited ("Company"). Thereafter, by an order dated September 7, 2018, the Official Liquidator of the High Court was appointed as the Provisional Liquidator of the Company under Section 450 of the 1956 Act.
Meanwhile, Devi Trading & Holding Private Limited ("Devi Trading") filed an application under Section 7 of the IBC against the Company before the NCLT ("IBC Application"). The IBC Application was admitted by an order dated March 13, 2019 ("Admission Order") and an interim resolution professional ("IRP") was appointed for the Company.
The IRP filed an application before the High Court seeking a stay of the pending winding up proceedings and a transfer of the same to the NCLT Kolkata.
The IRP argued that since the IBC was enacted later and in view of the non-obstante nature of Section 238 of the IBC, the provisions of the IBC would prevail over the 1956 Act and the 2013 Act.
It was further argued that since there was no embargo on filing of an application under Section 7 of the IBC during the pendency of winding up proceeding, the Admission Order passed by the NCLT Kolkata could not be considered as ultra-vires.
The decision of the Division Bench of the High Court in Impex Ferro Tech Limited v. Auroma Coke Ltd.2 was relied upon to argue that due to the moratorium imposed under Section 14 of the IBC, a high court would cease to exercise jurisdiction over any pending winding up proceedings and the same would be transferred to the NCLT.
On the other hand, the creditors opposing the stay and transfer of the winding up petition argued that since the pending proceedings did not fall under Rule 5(1) or Rule 6 of the Transfer Rules, the same were not required to be either stayed or transferred to the NCLT Kolkata. It was further argued that as such, Devi Trading and any of the other creditors of the Company ought to file their claims before the Provisional Liquidator. In support of their contentions, the creditors primarily relied upon the decisions of the Supreme Court of India in Rajasthan State Financial Corporation & Anr. v. Official Liquidator & Anr3 and the Bombay High Court in Jotun India P. Ltd. v. PSL Ltd4, respectively.
The Supreme Court of India in Rajasthan State Financial held that the once a winding up proceeding had commenced and a liquidator was put in-charge of the assets of a company, the distribution of proceeds of the sale of any of its assets under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, could only be conducted with the association of the liquidator and under the supervision of the relevant high court.
Similarly, the Bombay High Court in Jotun India held that the pendency of a winding up petition before a high court would not bar the NCLT from proceeding with an application filed for initiating CIRP against the same corporate debtor. In such a scenario, the relevant high court had no jurisdiction to stay the proceedings before the NCLT and that on the contrary, the winding up proceedings would remain suspended during the pendency of the NCLT proceedings.
The High Court held that since the winding up petition had already been filed, served and affidavits exchanged before the cut-off date of December 7, 2016, under section 434(1) of the 2013 Act and Rules 5 and 6 of the Transfer Rules, the winding up petition was required to be retained by the High Court and not transferred to the NCLT Kolkata.
The High Court also referred to the decisions in Rajasthan State Financial and Jotun India respectively, and observed that in the present case, the pending CIRP would have to necessarily be completed first and that during such time, the winding up proceedings shall remain suspended and the petitioner-creditor would be at liberty to file its claim before the IRP
The High Court further held that if the Company's revival under the IBC failed, the winding up proceedings, previously stayed, could thereafter be resumed accordingly. It was further held that if and when the CIRP of the Company was successfully concluded, the approved resolution plan would have already taken into account all claims filed by creditors of the Company and in accordance with the provisions of the IBC.
Accordingly, the High Court stayed the winding up proceedings and directed the NCLT Kolkata to complete the CIRP of the Company. The IRP was also granted liberty to inspect and seek all necessary information from the Provisional Liquidator of the Company, so as to ensure proper completion of the CIRP proceedings under the provisions of the IBC.
The decision provides clarity in dealing with the concurrent jurisdictions when it comes to winding up and insolvency proceedings. When caught between CIRP and winding up proceedings, it would ordinarily be in the best interest of the company/corporate debtor in question to pursue CIRP first. It is truly inspiring to see courts respect the true intent and purpose of statutes and apply them in a manner that gives full effect to the same. This decision reaffirms the primary objective of the IBC, which is to keep a corporate debtor as a going concern, as opposed to the adversarial nature of winding up proceedings under the 1956 Act and the 2013 Act.
1. Avani Projects & Infrastructures Limited v. Ornate Tradcom Pvt. Ltd. [CA No. 92 of 2019 in CP 1 of 2016 decided on December 12, 2019]
2. APO No. 273 of 2018
3. 2005 (8) SCC 190
4.  213 Comp Cas 61 (Bom)
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