At what stage can Winding Up proceedings be transferred to NCLT? The dichotomy in contradictions

At what stage can Winding Up proceedings be transferred to NCLT? The dichotomy in contradictions

Malak Bhatt and Atreyo Banerjee

The Supreme Court has on multiple occasions clarified (and in fact encouraged) the transfer of winding up proceedings initiated under the Companies Act, 1956 to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (Code).

While interpreting Section 434 of the Companies Act, 2013 (the provision which dealt with the transfer of proceedings to the NCLT) and the Companies (Transfer of Pending Proceedings) Rules, 2016, the Apex Court has given an almost clear mandate that the High Court ought to transfer proceedings to the NCLT such that all such proceedings would then be governed by the Code.

In this regard, the Supreme Court in Jaipur Metals & Electricals Employees Organization v. Jaipur Metals Electricals, while interpreting the Rules and Section 434 of the 2013 Act held that:

“…Once this is done, the High Court must transfer such proceedings as an application for initiation of corporate insolvency resolution process under the Code.”

While the Court was dealing with the issue of transfer of proceedings pending before the High Court under Section 20 of the Sick Industrial Companies Act, it categorically insisted on transferring proceedings.

Similarly, in Forech India Ltd v. Edelweiss Assets Reconstruction Co. Ltd, the Court highlighted that the amended proviso to Section 434 of the 2013 Act stated that even in winding up petitions where notice has been served and which are pending in the high courts, any person could apply for transfer of such petitions to the NCLT under the Code. When such an application is made, the Court should transfer the proceedings. In the said judgment, the Court held as follows:

“The resultant position in law is that, as a first step, when the Code was enacted, only winding up petitions, where no notice under Rule 26 of the Companies (Court) Rules was served, were to be transferred to the NCLT and treated as petitions under the Code. However, on working of the Code, the Government realized those parallel proceedings in the High Courts as well as before the adjudicating authority in the Code would stultify the objective sought to be achieved by the Code, which is to resuscitate the corporate debtors who are in the red.

In accordance with this objective, the Rules kept being amended, until finally Section 434 was itself substituted in 2018, in which a proviso was added by which even in winding up petitions where notice has been served and which are pending in the High Courts, any person could apply for transfer of such petitions to the NCLT under the Code, which would then have to be transferred by the High Court to the adjudicating authority and treated as an insolvency petition under the Code.”

After holding the above, the Court also granted liberty to the appellant in the said case to seek transfer of the winding up proceedings pending before the Delhi High Court to the NCLT, and the matter would then be treated as a proceeding under the Code.

The idea behind these judgments was to encourage transfer to the NCLT and for petitions to be dealt with under the Code keeping in mind the purpose and objectives of the Code.

Recent contradictions

However, recently, there have been two contradictory decisions on whether the proceedings can be transferred to the NCLT once a winding up order has been passed. While the said issue never came up before the Supreme Court, it is pertinent to bear in mind that in Forech (supra), the Court dealt with a situation where winding up proceedings are pending before the High Court without a winding up order being passed.

First, in Action Ispat & Power Pvt Ltd v. Shyam Metalics & Energy Limited, the Delhi High Court held that applications seeking transfer of proceedings from the High Court to the NCLT operating under the Code are not only maintainable but also encouraged. Interestingly, this judgment distinguished between a court acting under the 1956 Act and the NCLT acting under the Code by highlighting the nature of both the proceedings. The Court explained how the Code operates under broader solution-oriented principles of reorganization and insolvency resolution of corporate debtors. Accordingly, proceedings under the Code are geared towards finding the best possible situation that is not only beneficial to the existing creditors and shareholders, but also possesses the strength to try and infuse life into a failing corporate debtor. 

In this case, pursuant to a winding up petition filed under Section 433 of the 1956 Act, a winding up order was passed, followed by the appointment of an Official Liquidator. During the proceedings, State Bank of India filed a petition under Section 7 of the Code and filed an application to the Company Judge, praying for a transfer of the pending winding proceedings to the NCLT. The Company Judge rightfully allowed this transfer, and accordingly, an appeal was preferred before a Division Bench of the Delhi High Court. 

The Delhi High Court, while dismissing the appeal, held that the court not only has the power to recall order of winding up, but can also transfer the proceedings even when such an order has been passed. Interestingly, the court distinguished the stage of winding up from the stage of liquidation and held that when an order of winding up is passed, the proceedings not having reached an advance stage would further mandate that proceedings be transferred to NCLT. 

“Thus, the proceedings under IBC are independent and have an object different from the one envisaged under the scheme of liquidation provided in the Company Law. The former aims resolution by way of revival in a manner that benefits all stakeholders, the creditors as well as the company. Thus, the scope of the proceedings before the NCLT is wider – with the object of preserving the company and its business/ commercial activities. When transfer of winding up petition can aid in achieving the aforementioned objective, it ought to be allowed in the interest of justice. The court must be sensitive to the scheme and object of the Code; running of parallel proceedings will indeed be futile, create chaos and confusion as held in Jotun (supra)…

…Winding up of company is a process, and it is not achieved merely upon an order for winding up being passed. When an order is passed by the Company Court directing a company to be wound up, and a liquidator is appointed for that purpose, the Company Court only sets the ball rolling…

…The other options available, namely to resolve/ revive the appellant company can and should always be explored for which purpose the NCLT is invested with jurisdiction, unless irrevocable steps towards liquidation have already been undertaken.”

On the other hand, the Madras High Court, in the case of Vasan Health Care Private Limited, has taken a contrary view on the stage at which such proceedings can be transferred and whether such transfer can be permitted once a winding up order has been passed. While in consonance with Forech (supra) and Action Ispat (supra), the Madras High Court held that proceedings under the Code would prevail over pending proceedings before the High Court under the 1956 Act. It took a view contrary to Action Ispat (supra) on whether the proceedings can be transferred after a winding up order has been passed. The Court held as follows:

“…However, once a winding up order is passed by the High Court under the Companies Act and an official liquidator is appointed, who takes charge of the company’s assets for the purpose of liquidation, then no proceedings can be filed under the IBC, for the reason that winding up order has been passed. Section 447 of the Companies Act, 1956 states that an order of winding up of a company shall operate in favor of all the creditors and of all the contributories of the company as if it has been made out on the joint petition of a creditor and of a contributory.

In such a case, a financial creditor cannot file a petition under the IBC before the NCLT. This Court is of the opinion that till a winding up order, by which the Official Liquidator takes charge of all the assets is passed, the NCLT will have the jurisdiction to entertain an application under the IBC…”

Concluding Remarks

On one hand, the manner in which the jurisprudence of insolvency resolution is being developed is welcome and it is encouraging to see the proactive stance of various courts in upholding the spirit of the Code. However, the development seems to have hit a roadblock of contrary judgments as to whether proceedings can be transferred once a winding up order has been passed and an official liquidator has been appointed.

Both the Delhi High Court and the Madras High Court have gone ahead to further the purpose of the Code by allowing the transfer of proceedings when winding up proceedings are pending and a fresh proceeding under the Code has been initiated before the NCLT. However, these High Courts have pronounced contradictory views about the correct procedure of the law to be followed when an official liquidator has been appointed in furtherance of a winding up petition under the 1956 Companies Act. 

It appears that the decision of the Delhi High Court in Action Ispat (supra) is in consonance with the law laid down by the Supreme Court in Forech (supra) i.e. that the appointment of a provisional liquidator is not antithetical to seeking remedies under the Code. Seen in this light, the Madras High Court has given prominence to the appointment of an official liquidator as an embargo on any further proceedings against the corporate debtor under the Code. Thus, in light of the contrary dicta pronounced by two High Courts, it remains to be seen as to which way the Supreme Court will take this forward. 

The authors are advocates practicing at the Supreme Court of India.

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