Transferability of Winding-Up Proceedings to NCLT After Passing Of Winding-Up Order: Upholding the Objectives of IBC

[By Aditya Suresh]

The author is a third year student of National Law University, Jodhpur.

Introduction

The Insolvency and Bankruptcy Code[i] (“IBC”) intends to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate firms. This Code replaced the erstwhile Part VII of the Companies Act, 1956 (“1956 Act”), under which Sections 433(e) and 434 authorized the High Court to adjudicate upon winding-up petitions brought before it by creditors on account of a company’s inability to pay its debts.[ii] However, under Section 434(1)(c) of the Companies Act, 2013 (“2013 Act”) read with the amendments brought in after the passing of the IBC [such as the modification to the earlier Section 271(1)(a) of the Companies Act, 2013, pending proceedings before the High Courts pertaining to winding-up petitions as a result of inability to pay debts, are to be transferred to the National Company Law Tribunal (“NCLT”).[iii]

The problem however, arises as a result of the first proviso to Section 434(1)(c), which provides that only proceedings which are “at a stage as may be prescribed by the Central Government” may be transferred to the NCLT.[iv] While Parliament passed the Companies (Transfer of Pending Proceedings) Rules in 2016 (“Transfer Rules”), these Rules did not adequately address the question of the stage after which proceedings may not be transferred.[v] Rule 5(1) provided that petitions under Section 433(e) of the 1956 Act where notice had not been served upon the respondent company, were to be transferred to the NCLT.

This was extended by the Supreme Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.[vi](“Forech”), wherein the Court expounded upon the need to have all pending winding-up proceedings before High Courts transferred to the NCLT. In this case, the Court noted that on a conjoint reading of Section 434 of the 2013 Act, the Transfer Rules and the IBC, the legislature intended to have all proceedings transferred to the NCLT in order to further the objectives of the IBC, which were to “resuscitate the corporate debtors who are in the red”.[vii] The Court further observed that keeping this objective in mind, even petitions wherein notice had been served and the matter was lis pendens before the High Court, could be transferred to the NCLT upon an application for the same having been made by the creditors.

Thus, this decision opened a Pandora’s Box of litigation wherein litigants applied for initiation of the CIRP process under the IBC and a transfer of proceedings to the NCLT. This is because corporate creditors wanted to opt for the contemporized rules under the IBC, which looks at resuscitation as the primary option through the appointment of the Resolution Professional, and the submission of resolution plans which would aim at revival of the company.

While expansively dealing with transferability of cases in light of the IBC, the Court in Forech missed answering the important question which has been continually left unaddressed: at what stage in the insolvency process if at all, does such a transfer petition become untransferable? While the Delhi High Court in Tata Capital Financial Services v. Shree Shyam Pulp and Board Mills[viii] addressed this point, the Court here only ruled that the power to transfer is discretionary, and that it is incumbent upon the courts to decide whether transfer is viable at that particular stage in the winding-up process.

However, another recent decision of the Delhi High Court provides more clarity on the Indian position regarding transfers after a winding-up order has been passed by the High Court and an Official Liquidator (“OL”) appointed. This next section analyses this decision of the Court.

The decision in Action Ispat

In Action Ispat and Power Pvt. Ltd. v. Shyam Metallics and Energy Ltd.,[ix] a division bench of the Delhi High Court decided in favour of allowing a transfer of insolvency proceedings to the NCLT even after a winding-up order had been passed by the High Court and an OL had been appointed under Section 448 of the 1956 Act. In this case, wherein the creditors sought transfer of the insolvency petition, the Court delved into an analysis of Section 434 of the 2013 Act, Rule 5(1) of the Transfer Rules as well as the IBC. On a conjoint reading of the aforesaid provisions, the Court found that the power of the Company Court to transfer proceedings to the NCLT is discretionary, and not limited to cases covered by Rule 5(1).

Additionally, the Court found that the scope of proceedings under the High Court vis-à-vis that of the NCLT had to be looked into, and their relative benefits analysed. There was a difference in approach taken by the NCLT as opposed to an OL appointed by the Court. The NCLT, at all stages of the proceedings, looks at revival of the company as a primary option failing which the assets are liquidated. As opposed to that, the OL looks to satisfy creditors in a solely monetary sense, by liquidating the assets and letting each creditor have a proportional share. Relying on the judgment in Sudarshan Chits v. Sukumaran Pillai,[x] the Court herein found that winding-up orders were not irrevocable and that even after the winding-up order is passed, the petition could be transferred. Thus, the Court found that looking into the objectives of the IBC and that of the insolvency resolution process as mentioned in Forech, the will of the creditors in transferring the petition has to be upheld, unless there are compelling and irrevocable circumstances justifying a departure from such a transfer.

Analysing the Decision of the Court: Objectives of the Insolvency Process

Given the expansive analysis given by the Delhi High Court on the objectives of the IBC and the larger purpose of the insolvency resolution process, this decision merits some discussion. The author believes that the Delhi High Court rightly distinguished between the NCLT and the OL with respect to the functions and powers exercised. Section 457 of the Companies Act, 1956, which dealt with the powers of the OL, primarily allowed him to inter alia, carry out the business insofar as the beneficial winding-up may be necessary, to sell the movable and immovable property of the company and to do all other things as may be necessary for winding up the affairs of the company and distributing its assets.[xi]

Per contra, the IBC intends to provide a mechanism which balances the interests of all the stakeholders, which includes the company undergoing the insolvency resolution process. Accordingly, the author believes that the Delhi High Court rightly followed the verdict in Forech, and upheld the function of the IBC as a resuscitation mechanism. By distinguishing between the stages of “winding-up” and “dissolution”, the Court adequately found that the winding-up of operations did not imply that the company’s existence had to be concluded. This is consistent with the stance of the Karnataka High Court in Government of Karnataka v. NGEF Ltd.,[xii] wherein the Court stated that if only a partial sale of assets can pay off the company liabilities, the winding-up order can be recalled and revival of the company sought. Thus, the Court was of the opinion that revival or resuscitation of the company must be left open as an option even at this stage, subject to the will of the Committee of Creditors (“CoC”). By providing for a mechanism which keeps revival as an option open at all stages of insolvency resolution, the CIRP presents an adequate and efficient alternative to the erstwhile liquidation process under the Companies Act, 1956, through the appointment of a trained resolution professional, whose primary task is to take steps to revive the company via the submission of resolution plans. Only upon the rejection of such plans, can the company proceed for liquidation under the Code.

Additionally, the NCLT faces a smaller backlog of cases as compared to the High Court, given the relative difference in the scope of cases before them. Therefore, transfer of proceedings would in fact ensure speedier resolution of insolvency petitions, while also allowing for a more technical consideration of issues. This is because the NCLT, apart from being less myopic than the OL or the High Court in its functioning, allows for the CoC to be the active and final determinants of how the insolvency resolution process is to take place. This was also highlighted in the Bankruptcy Law Reforms Committee Report, which sought that the final agreement be among the “creditors who are the financiers willing to bear the loss in the insolvency”.[xiii] Thus, in upcoming judgments, the view of the Delhi High Court acts as good precedent.

Conclusion

The issue of transferability even after winding-up is presently lis pendens before the Supreme Court in SBI v. Shakti Bhog Foods Ltd.[xiv] Upon an analysis of the judgment in Action Ispat, the Supreme Court should rule in favour of allowing such a transfer. Given the objectives of the insolvency resolution process as has been identified in Forech, such a viewpoint would adequately preserve the objectives of the IBC, while upholding a more holistic and contemporary viewpoint on the corporate insolvency resolution process in India.

End Notes

[i] The Insolvency and Bankruptcy Code, No. 31 of 2016, Preamble.

[ii] Companies Act, No. 1 of 1956, §§433, 434.

[iii] See, The Companies Act, No. 18 of 2013, §434(c); The Insolvency and Bankruptcy Code, No. 31 of 2016, §255, Sch. XI, ¶10.

[iv] The Companies Act, No. 18 of 2013, §434(c) Proviso I.

[v] The Companies (Transfer of Pending Proceedings) Rules, Notification G.S.R. 1119E (Dec. 7, 2016), Rule 5(1).

[vi] Forech India Ltd v. Edelweiss Reconstruction Co. Ltd., Civil Appeal No. 818 of 2018.

[vii] Id., ¶17.

[viii] Tata Capital Financial Services v. Shree Shyam Pulp and Board Mills, 2018 SCC OnLine Del 11365.

[ix] Action Ispat and Power Pvt. Ltd. v. Shyam Metallics and Energy Ltd., 2019 SCC OnLine Del 10424.

[x] Sudarshan Chits v. Sukumaran Pillai, (1984) 4 SCC 657.

[xi] See, The Companies Act, No. 1 of 1956, §457(b), (c), (e).

[xii] Government of Karnataka v. NGEF Ltd. (In Liquidation), 2017 SCC OnLine Kar 4817.

[xiii] The Report of the Bankruptcy Law Reforms Committee, Volume I: Rationale and Design (Nov. 4, 2015), ¶3.4.2(I)(1), available at http://ibbi.gov.in/BLRCReportVol1_04112015.pdf.

[xiv] State Bank of India v. Shakti Bhog Foods Ltd., Civil Appeal No. 4536 of 2018.

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