Winding up Proceedings will not create any bar for initiation of the Insolvency Proceedings

initiation-of-the-insolvency-proceedings-in-india

Status as on- 12/10/2020

The Supreme Court in its 2 recent Judgments have laid down the that the provisions of I&B Code shall prevail over Section 434 of Companies Act if there is arises inconsistency between them:

  1. Jaipur Metals and Electricals Employees Organization Vs. Jaipur Metals and Electricals Ltd. (Civil Appeal No. 12023 of 2018)

QUESTION OF LAW INVOLVED

In the case of Jaipur Metals and Electricals Employees Organization Vs. Jaipur Metals and Electricals Ltd. (Civil Appeal No. 12023 of 2018), the appeal before the Apex Court was filed by the bunch of employee’s union against the impugned judgment of the Rajasthan High Court whereby, the High Court refused to transfer the winding up proceedings before the NCLT, and further set aside an order passed by the NCLT initiating the CIRP application by virtue of section 7 application filed by the Financial Creditor. The pertinent question before the Apex court was whether the RHC was right in its approach in refusing to transfer the winding up petition to the NCLT and also in setting aside the section 7 application admitted by the NCLT.

FACTS OF THE CASE

Since the company’s net worth was running into negatives, the company became a non-performing asset. The Rajasthan High Court after making several attempts to revive the company as an ongoing concern directed the company to be sent into liquidation thereby appointing the Official Liquidator to conduct the evaluation of the goods and materials of the company. During the pendency of the winding up proceedings before the Rajasthan High Court, the Financial Creditor filed an application under section 7 of the Code for the initiation of the insolvency proceedings owing to a debt of 356 crores. The NCLT whilst referring to the non-obstante clause contained in section 238 of the code, admitted the application of the Financial Creditor against the Corporate Debtor.  Meanwhile, an SLP before the Rajasthan High Court was filed by the union of employees against the collective Writ Petitions filed by them in which the RHC refused to grant them the remedies. Thereafter, the RHC passed an impugned order refusing to transfer the winding up proceedings pending before it and further set aside the NCLT order wherein, the application was admitted for the initiation of CIRP.

SUPREME COURT’S OBSERVATION

The Supreme Court while referring to the rules 5 and 6 of the Companies Rules stated that by virtue of the omission dated June 29, 2017, rule 5(2) of the Companies Rules have become redundant and therefore would be unnecessary to apply. Giving its interpretation of the status of Rule 5(2), the Court held:

“However, though the language of Rule 5(2) is plain enough, it has been argued before us that Rule 5 was substituted on 29.06.2017, as a result of which, Rule 5(2) has been omitted. The effect of the omission of Rule 5(2) is not to automatically transfer all cases under Section 20 of the SIC Act to the NCLT, as otherwise, a specific rule would have to be framed transferring such cases to the NCLT, as has been done in Rule 5(1). The real reason for omission of Rule 5(2) in the substituted Rule 5 is because it is necessary to state, only once, on the repeal of the SIC Act, that proceedings under Section 20 of the SIC Act shall continue to be dealt with by the High Court.”

Furthermore, the Apex Court held that by virtue of the amendment in section 434 (1)(c), all the proceedings under the Companies Act, 2013, relating to the winding up of the entities would be eligible to be transferred to the NCLT. The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. It was also observed that if there is any inconsistency between Section 434 of the Act and the provisions of the Code, the latter would prevail, as per Section 238 of the Code. 

The Supreme Court also held that, “…all proceedings under Section 20 of the SIC Act pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post 17.08.2018. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.” 

HELD

The Hon’ble Supreme Court, therefore, held that proceedings in the NCLT will continue from they left off, and that the petition pending before the High Court cannot be proceeded with, on account of Section 238. With this direction, the Bench set aside the impugned judgment of the Rajasthan High Court.

  • Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (Civil Appeal No. 818 Of 2018)

QUESTION OF LAW

In the matter of Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (Civil Appeal No. 818 Of 2018) a very pertinent question arose whether the application for corporate insolvency resolution process (CIRP) under the Code is an independent proceeding as against winding up under section 433 of the Companies Act, 2013.

FACTS OF THE CASE

An application by the Financial Creditor i.e. Edelweiss Assets Reconstruction Company Ltd. under section 7 of the Insolvency and Bankruptcy Code, 2016 was filed against the Corporate Debtor i.e. ‘Tecpro Systems Ltd.’ for initiating the CIRP process, against whom the proceedings of Winding Up were initiated by the Forech India Ltd. in the Delhi High Court owing to its inability to pay its dues. The section 7 application was subsequently appealed before the National Company Law Appellate Tribunal by Forech India Ltd., whereby the NCLAT upheld the NCLT order stating that the CIRP application was maintainable. Aggrieved by the NCLAT order, Forech approached the Supreme Court.

SUPREME COURT’S OBSERVATION

The Hon’ble Apex Court observed that the legislative scheme of the Section 434 of the Companies Act, 2013 was amended by adding a proviso which stipulated that the winding up petitions pending before the High Court even at post-admission stage could be transferred to the NCLT and shall be treated as an insolvency petition under the Code. In this regard, the Apex Court took a reference of its own decision in Jaipur Metals & Electricals Employees Organization through General Secretary Mr. Tej Ram Meena v. Jaipur Metals & Electricals Ltd. through its Managing Director and Ors. (2018 SCC OnLine SC 2801), where the Court held that if there arises any inconsistency with regard to the application of Section 434 of the Companies Act and the requisite provisions of the IB, Code, 2016, the latter shall prevail as per section 7 read with section 238 of the Code which provides the over-riding effect over any other statute. The Supreme Court further apprised itself with the view taken in the matter of PSL Limited v. Jotun India Private Limited [(2018) 2 AIR Bom R 350] delivered by the Bombay High Court which stated that the section 434 of the Company Act does not bar or suspend the applicability of the IB Code, 2016 by virtue of its not withstanding clause under section 238 of the Code.

HELD

On the other hand, the Apex Court held that the interpretation of the section 11 of the IB, Code relied by the NCLAT seems to be erroneous in as much as it only bars the Corporate Debtor from initiating a petition under section 10 of the Code. However, the final order of the NCLAT was not interfered with and the Apex Court held that the Financial Creditor’s application as admitted by the NCLT is clearly an independent proceeding which must be decided in accordance with the provisions of the Code. 

FINAL CONCLUSION

These two judgements would be of great importance because they have paved a way for the transfer of post-notice winding up petitions pending before the different High Courts. In effect, this would ultimately lead to a situation where the winding up and the CIRP applications will be heard in the same forum and will thus serve as a relief to the creditors as well as the Corporate Debtors. It has been emphasized that liquidation shall be an option of the last resort and can only be resorted to upon the failure of the CIRP. This will effectively ensure that more efforts are taken for the revival of Corporate Debtors in most cases.

DisclaimerThe above article is based on the interpretation of the related laws and judicial pronouncements. The readers are expected to take legal advice before relying on this article. The author can be reached at support@centrik.in

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