Bombay HC starts a race between winding-up and insolvency proceedings

Frivolous

By Varun Marwah & Zacarias Kanjirath Joseph

Introduction

In yet another landmark judgment for the bankruptcy regime in India, the Bombay High Court has ruled that an Application under the Insolvency and Bankruptcy Code, 2016 (IBC) may be made even in cases where a Winding-Up petition has been admitted by a Company Court. Such an Application under the IBC, would not be permitted, only in the event that a final order of Winding-Up is passed under Section 481 of the Companies Act, 1956.

The Corporate Debtor in this case, PSL Limited (PSL), filed an application with the Bombay High Court, seeking the recall of an earlier order passed on 19 July, 2017, which prohibited the NCLT, Ahmedabad Bench, from proceeding with an insolvency application filed before it under Section 10 of the IBC.

Prologue

Prior to the enactment of the IBC, Jotun India Pvt Ltd. (Jotun), an Operational Creditor, had on 10 March 2015 filed a Company Petition under Sections 433 and 434 of the Companies Act, 1956, claiming an outstanding sum of Rs. 7.25 crore with interest in respect of unpaid invoices for goods supplied, and thereby sought a Winding-Up of PSL. This Company Petition was admitted on 9 March 2017. However, an Official Liquidator wasn’t appointed since all assets were secured and the Court said it would appoint one at a later stage if the need arose.

On 19th June 2015, during the pendency of the Winding-Up however, PSL had made a reference to BIFR   under   Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Upon enactment of the IBC, SICA was repealed and all matters pending before the BIFR stood abated. However, liberty was granted to applicant companies, to file cases afresh under the IBC. Accordingly, PSL filed an application before NCLT, Ahmedabad under section 10 of IBC, i.e., seeking the initiation of the Corporate Insolvency Resolution Process on itself, within the prescribed window of 180 days on 29 March 2017.

This Section 10 Application, was reserved for orders on 18th July 2017. The NCLT directed the same to be listed on 20th July, 2017

On the same day i.e. 18 July, Jotun was quick to file a Company Application in the Bombay High Court seeking the appointment of a Provisional Liquidator. After hearing the counsels, a single Judge of the Bombay High Court (Gadkari, J.) passed an order restraining NCLT, Ahmedabad, from continuing with IBC Application filed by PSL. It is this Order that was sought to be recalled in the present case.

The controversy

On 7 December, 2016 the Central Government issued the Companies (Transfer of Pending Proceedings) Rules 2016 (Transfer Rules), which were subsequently amended on 29 June 2017 by the Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017 (Amendment Transfer Rules). The sum and substance of both these Rules classified Winding-Up petitions into the following two categories:

(i) the Saved Petitions, i.e., petitions pending in the High Court where a copy of the Petition was served on respondent and all other petitions pending against the same company in the High Court despite a copy of the petition not being served on respondent. The Saved Petitions were not transferred to the NCLT, and were to be treated as Winding-Up petitions, under the Companies Act. (emphasis supplied)

(ii) all petitions not saved, i.e., petitions that may have been filed in the High Court, but not served on respondent, except as provided in (i) above.

The   issue   which   arose before the High Court in this case   was whether it (or any Company Court for that matter) has  jurisdiction to stay  proceedings  filed  by   a   Corporate   Debtor   before   the NCLT,   even   though   a previously instituted   Company   Petition   was admitted,  but where a Provisional Liquidator had not been appointed.

Reasoning

To gain insights into why the IBC was implemented, the Court referred to the Bankruptcy Law Reforms Committee (BLRC) report and in doing so, the Court observed the most fundamental distinction between the provision of the Companies Act and IBC: that is, while under the Companies Act Winding-Up would be a matter for the Court alone to decide, under IBC, Creditors Committee is left to decide the fate of the company.

As regards the power of a Company Court to injunct proceedings before the NCLT, the Bench observed the Supreme Court judgment in the case of Madura Coats Ltd., where even during the regime of SICA, SICA was held to have primacy over the provisions of the Companies Act, with a similar moratorium provision under section 22. It also referred to the case of M/s. Rishabh Agro Industries Ltd. where it was held that even after a Winding-Up order is passed, the provisions of Section 22 of SICA apply and the Court under the Companies Act, 1956 would have no power to injunct proceedings before BIFR in view of Section 22 of SICA.

Therefore, the Court ruled, since SICA is repealed and replaced by IBC (S. 252 read with VIII Schedule of IBC), the provisions of IBC should prevail over the provisions of the Companies Act, 2013 insofar as IBC is admittedly a successor statute to SICA. Further, section 64 (2) of IBC being pari materia to Section 22 of SICA, the argument that the Company Court has the power to injunct proceedings before NCLT in cases of pending winding up was held to be entirely misplaced and contrary to legislative intent.

As for the substantive issue in hand, the Transfer Rules (as amended) unambiguously provide that pre-notice Winding-Up proceedings will be governed by the IBC and post notice Winding-Up proceedings are required to be “dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959.” This, however, ruled the Bombay High Court, does not pre-empt a new proceeding from being filed under IBC for a postnotice Winding-Up petition.

In its judgment, the Court held,

winding up petitions retained by the High Court are being decided under the Companies Act, 1956 only as a transitional provision. Furthermore, this transitional provision cannot in any way affect the remedies available to a person under IBC vis-­à-­vis the company against whom a petition is filed and retained in the High Court, as the same would amount to treating IBC as if it did not exist on the statute book and would deprive persons of the benefit of the new legislation. But even in such a case, there is no express or implied bar from other creditors of such company or the corporate debtor from filing fresh proceedings under IBC.” 

Some practical considerations

While this ruling rightly re-affirms the supremacy of the IBC, it throws up a number of policy considerations. The Court rejects the contention that a company subject to Winding-Up jurisdiction (under the Saved Petitions), formed a separate class of cases. It further negatives the argument that such a company ought to be subject, exclusively to the Winding-Up regime under the Companies Act, 1956. As noted above, it holds that the Transfer Rules and the Amendment Transfer Rules do not restrict the initiation of fresh insolvency applications in respect of such a company. However, if the intention of the legislature was indeed to permit the initiation of fresh insolvency application in respect of such a company, it begs the question of the purpose of retaining the Saved Petitions with the High Court, to begin with.

Secondly, the consequence of this interpretation is cumbersome for the Petitioners under the Saved Petitions. The considerable amount of time and resources spent by petitioners in pursuing these Saved Petitions, is to no avail. With this ruling, these petitioners are back to proving their claims, in this instance, before the Interim Insolvency Resolution Professional. Operational Creditors, such as Jotun, are left to the mercy of the Committee of Creditors.

Importantly, the practical consequence of the judgment is that the fate of the Saved Petitions, is subject to a race between two forums. That is, a race between admitting an Insolvency Application before the NCLT, versus an Order of final Winding-Up under Section 481 of the Companies Act, 1956.

Lastly, the fate of the Saved Petitions and the claims made thereunder, after the lifting of the moratorium under Section 14 (4) of the IBC, remains to be seen. However, the possibility of a petitioner under a Saved Petition pursuing the petition after the lifting of the moratorium is remote.

The Lawyers

Senior Counsel Janak Dwarkadas argued on behalf of PSL, briefed by The Law Point whereas Zal Andhyarujina argued on behalf of Jotun, brief by Trilegal.

Varun Marwah and Zacarias Kanjirath Joseph are both graduates of ILS Law College. Varun writes for Bar & Bench and is a Research Consultant at the Finance Research Group, IGIDR; Zacarias presently works with a law firm in Mumbai.

(Read the judgment)

Judgment dated 05.01.2017