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A recent order of the Madras High Court serves to add to the law regarding whether applications filed under the Insolvency and Bankruptcy Code (IBC), 2016 to initiate corporate insolvency can be entertained by the NCLT when the High Court has already issued notice in pending pleas to wind up the company under the erstwhile provisions of the Companies Act, 1956.
The Bench of Justices S Manikumar and Subramonium Prasad summed up the legal position on this aspect as follows,
“…once a petition under … the IBC is filed by a financial creditor is admitted, then all the proceedings under the IBC must apply to that company. There cannot be two parallel proceedings, one under the IBC and the other under the Companies Act. The matters which are not transferred by the High Court will be proceeded with, under the Companies Act, 1956 but, if a fresh petition under…the IBC is filed then the Company will have to be governed under the IBC.”
However, the Bench reiterated that this would be the position only if the High Court proceedings have not reached a stage where a winding-up order has already been passed. If the High Court has already ordered the winding up of the company and an official liquidator has been appointed to that end, then the provisions of the IBC cannot be thereafter invoked. As noted in the order dated October 5, 2019,
“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 favour 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.”
In 2015, several pleas were filed to wind up Vasan Health Care Private Limited before the Madras High Court, invoking Sections 433(2) and 433(f) read with Sections 434 and 439(1) of the Companies Act, 1956, for non-payment of dues.
The High Court eventually appointed a provisional liquidator to take charge of Vasan’s assets in August 2015 in CP 267 of 2015. However, Vasan eventually arrived at a compromise and the matter was disposed of. At the time, the High Court had also added that the petition to wind up the company would be revived if Vasan defaulted on payments successively.
In the meanwhile, more pleas were filed before the High Court to wind up Vasan. However, in 2016 the IBC was introduced, leading to the deletion of provisions in the Companies Act concerning the winding up of companies.
While this was the case, another creditor, M/s.Alcon Laboratories (India) Private Limited, approached the Chennai NCLT with a fresh plea against Vasan under the IBC. Vasan objected to the maintainability of this plea in the NCLT on the ground that the Madras High Court was already seized of the matter.
However, in April 2017, the NCLT rejected Vasan’s objection. Inter alia, the NCLT opined that the pendency of the winding up petition before the High Court cannot be a bar to approach the NCLT under the IBC because the High Court had not passed any order of winding up of the corporate debtor and no Official Liquidator has been appointed. This order was challenged by Vasan before the NCLAT.
In the meanwhile, Vasan filed applications before the High Court so that the pleas pending before NCLT may be heard along with other pleas before the Court and the Madras High Court stayed the proceedings initiated by Alcon by an order passed in May 2017.
When the NCLAT was informed of these developments, it noted that the IBC has a overriding effect under Section 238. It directed that the High Court be appraised of this position. Further, it observed that if the High Court does not vacate its stay on the IBC proceedings, the Appellate Tribunal will go ahead with the matter.
Companies Act versus IBC
Prior to the introduction of the IBC, the High Court could be approached to wind up a company (the debtor) by its creditors for failure to pay its dues under Section 433 of the Companies Act, 1956.
Following the introduction of the IBC, the creditors were required to approach the NCLT in order to trigger a corporate insolvency resolution process. However, a question arose as to whether winding up pleas already pending before the High Courts would also stand transferred to NCLTs.
The question was eventually settled by the Supreme Court this year in Forech India Ltd. Vs. Edelweiss Assets Reconstruction Co. Ltd, wherein it agreed with the position that all winding up petitions, where pre admission notice was issued and served on the respondents, would be retained by High Court.
In this regard, the Court agreed with the stance adopted by the Bombay High Court in two cases. West Hills Realty Pvt. Ltd., v. Neelkamal Realtors Tower Pvt. Ltd. and Mr. Ashok Commercial Enterprises v. Parekh Aluminex Limited. The position had also been endorsed by the Delhi High Court. The relevant provisions in this regard were laid down in the Companies (Transfer of Pending Proceedings) Rules, 2016 and the Companies (Removal of Difficulties) Fourth Order, 2016.
The question in the instant case was, however, whether the NCLT could entertain an application to initiate the corporate resolution process under the IBC even if the High Court has issued notice in winding up pleas in the matter.
High Court/Company Court cannot restrain the NCLT from proceeding with an IBC Application regardless of whether notice was issued in plea to wind up the company
To resolve the dispute, the Madras High Court relied on judgments of the Bombay High Court and the Supreme Court.
While the matter was being heard by the Madras High Court, a single judge of the Bombay High Court held that the admission of winding up petition by the jurisdictional High Court, does not mean that the NCLT either loses jurisdiction or cannot exercise jurisdiction in case of a petition which is filed by another creditor (financial, operational or the company itself under Section 10 of IBC).
Inter alia, the Bombay High Court single judge held the legislature had not intended for the company courts to have the power to injunct NCLT proceedings.
In this regard, reliance was placed on Section 64 (2) of the IBC, which lays down that no other forum can injunct the NCLT or NCLAT from proceeding under the Code. Reference was also made to Section 14 (declaration of moratorium to prohibit institution/continuation of suits in corporate insolvency matters before any other forum), Section 63 (Civil court not to have jurisdiction), Section 231 (bar on jurisdiction of forums other than NCLT/NCLAT in insolvency matters) and, particularly, Section 238 (overriding effect of IBC over other inconsistent laws).
This stance was affirmed by a Division Bench of the Bombay High Court in Jotun India Private Limited v. PSL Limited, which held that,
“Company Court while dealing with the winding up petitions (saved petitions) shall have no jurisdiction to stay the proceedings before the NCLT in respect of revival or resolution issue.
… the Company Judge, in saved petitions, would exercise jurisdiction in case revival efforts by NCLT fails.”
This position was further endorsed by the Supreme Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd, which quoted the following observations of the Bombay High Court single judge (in PSL Limited v Jotun India Private Limited) with approval,
“The fact that post notice winding up petitions continue to be governed by the Companies Act, 1956, only means – that to those proceedings it will be the Companies Act, 1956 which will apply. It does not, however, mean that if, in a post-notice winding up petition a new proceeding is filed under IBC, and where orders are passed by NCLT, including under Section 14 of IBC, the consequences provided for under IBC will not apply to post notice proceeding, whatever their stage may be …
… 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 IBC in general to proceedings validly instituted under IBC, [nor] does it mean that such proceeding can be suspended.”
In view of these observations, the Madras High Court in the instant case went on to explain further,
“The Companies (Removal of Difficulties) Fourth Order, 2016, only deals with matters which are retained by the High Courts and the law has to be applied by the High Court while dealing with such proceedings, which are pending in the High Court and which have not been transferred to the NCLT.
This does not deal with a fresh petition filed in the NCLT by another financial/operational creditor. If a fresh petition is filed by the financial/operational creditor in case of a company that is yet not ordered to be wound up, the NCLT has jurisdiction to deal with such cases and NCLT has to proceed in the manner as laid in IBC. The NCLT cannot apply the provisions of Companies Act, 1956. It is governed by IBC.“
The Madras High Court proceeded to hold,
“Mr. Murari, learned senior counsel appearing for M/s.Alcon Laboratories (India) Private Limited would contend that a combined reading of all the provisions would show that once the proceedings have been commenced under the NCLT, then NCLT only will have the jurisdiction to continue with the process and the High Court while dealing with winding up petitions under Section 433 (1)(e) of the Companies Act, which have not been transferred to NCLT, cannot proceed further. According to the learned senior counsel, any other interpretation would not be consistent with the legislative intent to bring out the IBC. We agree with the submission.“
On the facts of the case, the Bench held,
“In the present case, the appointment of a provisional liquidator has been stayed by the Court. NCLT can, therefore, continue with the proceedings. The mere fact that the post notice winding up proceedings, have to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959, do not bar the NCLT to proceed ahead with the proceedings validly instituted under IBC, and such proceeding validly instituted before the NCLT, cannot be suspended. The process of liquidation of the company will be governed by the IBC.“
The High Court, therefore, vacated stay issued by it on the IBC proceedings in April 2017.
[Read the judgment]