The Firm is grateful to Advocate & Solicitor Chirag Sancheti and Advocate Rachita Chatter for their contribution in making of this Research Update.
INTRODUCTION
In the recent case of Jotun India Private Limited (“Jotun”) Vs. PSL Limited (“PSL”), the Honorable Bombay High Court had to deal with an interesting case where on one hand there was a pending winding up petition against the Corporate Debtor in the Bombay High Court (Company Court) and on the other hand, the Corporate Debtor had voluntarily initiated insolvency proceedings before the National Company Law Tribunal (Ahmedabad Bench) (“NCLT”) under the provisions of section 10 of Insolvency and Bankruptcy Code, 2016 (“Code”). The Company Court stayed the insolvency proceedings initiated by the Corporate Debtor before the NCLT.
In this background, the following questions of law came up for consideration before the High Court:
Whether an application under the Code can be made even in cases where a winding up petition has been admitted and is pending before a Company Court and whether such an admission of a winding petition allows the Company Court to injunct proceedings before the NCLT?
The Court held that, – the Company Court did not have the power to injunct the insolvency proceedings pending before the NCLT and accordingly, there was no prohibition / restriction on NCLT from proceeding with the Insolvency Application filed by the Corporate Debtor even though a winding up petition against it remained pending in the Company Court; and an insolvency application would not be permitted, only when a final order of winding-up has been passed under Companies Act, 1956.
FACTS OF THE CASE
Jotun filed a winding-up petition under Sections 433 and 434 of the Companies Act, 1956 for winding-up of PSL due to non payment of dues. The winding up petition was admitted by the Court on 9th March, 2017.
PSL filed an insolvency application before NCLT, Ahmedabad under Section 10 of the Code, for the commencement of the Corporate Insolvency Resolution Process. On July 18, 2017, the insolvency application was taken up for hearing by the NCLT and the secured creditors to whom the notice of the application was given were also heard.
After hearing the parties, the NCLT reserved the matter for orders and directed the same to be listed on 20th July, 2017. On the same date, Jotun filed an application before the Bombay High Court seeking appointment of a provisional liquidator.
The Court passed an order dated July 19, 2017 restraining the NCLT, Ahmedabad from continuing with the Insolvency Application. An appeal was filed by PSL challenging the said order.
On 1st August 2017 order was passed by the Division Bench of the High Court in the said appeal-clarifying that the question whether the Company Court, had the jurisdiction to restrain the NCLT (from hearing the Insolvency Application) would expressly be kept open and left for determination. Upon this express liberty, PSL withdrew the appeal.
On 15th September 2017, PSL filed an application with the High Court for recalling/vacating the order dated 19th July 2017 on the basis that it was in excess of jurisdiction conferred upon a Company Court and hence is liable to be recalled/vacated.
QUESTION TO BE DECIDED BY THE COURT
Whether an application under the Code can be made even in cases where a winding up petition has been admitted and is pending before a Company Court and whether such an admission of a winding petition allows the Company Court to injunct proceedings before the NCLT?
LEGAL BACKGROUND
Central Government vide its notification dated 7th December 2016, issued the Companies (Removal of Difficulties) Fourth Order, 2016 amending Section 434 of the 2013 Act, as per which the proceedings relating to winding up of companies which have not been transferred from the High Courts, shall be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959.
As per Companies (Transfer of Pending Proceedings) Rules 2016, petitions under Section 433(e) of the Companies Act, 1956 filed against the same company, shall not be transferred to the Tribunal, even if the petition has not been served on respondent.
As per section 63 of the Code, no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT or the National Company Law Appellate Tribunal has jurisdiction under this Code.
COURT’S JUDGMENT
The Court held that there was no prohibition / restriction on NCLT, Ahmedabad from proceeding with the Insolvency Application filed by the Corporate Debtor even though a winding up petition against it remained pending against it in the Bombay High Court. The following reasons and observations were given / made by the Court for supporting its aforesaid view.
Admission of a winding up petition does not entail stay of NCLT proceedings and the Company Court does not have jurisdiction to injunct NCLT from proceeding with Insolvency Application
The admission of the winding up petition by the jurisdictional High Court would not mean that NCLT either loses jurisdiction or cannot exercise jurisdiction in case of a petition which is filed by another creditor (financial, operational or voluntarily by the company itself under section 10 of the Code).
The legislature is deemed to be aware of the provisions of an existing law, i.e., the Companies Act, whilst enacting the provisions of the Code as well as the fact that company petitions that may have been filed prior to the Code coming into force may have been admitted and pending final disposal in the jurisdictional High Court. If the legislature intended, that those winding up petitions, of which the jurisdictional high court remain seized, would have primacy over NCLT proceedings which may be filed in respect of the same company by another creditor, the legislature would have said so, either in the Code or in the transfer rules Notification. On the contrary, the provisions of Section 64 (2) of the Code would indicate that the legislature did not intend that the Company Court would have the power to injunct proceedings before NCLT.
While pre-notice winding up proceedings (transferred to NCLT) are governed by the provisions of the Code, post notice winding up proceedings (retained in High Court) are required to be “dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959”. 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 the Codee, and where orders are passed by NCLT, including under Section 14 of CODE, the consequences provided for under the Code will not apply to post notice proceeding, whatever their stage may be.
The Code cannot be interpreted to mean that,- there is no right available for any person covered by Section 6 of the Code to file a proceeding under Code, in respect of a Company, against whom a winding up petition is retained in the High Court.
There is express as well as an implied intention on the part of the legislature to (i) take away the right to file winding up petitions under the Companies Act, 1956; and (ii) to apply the provisions of CODE without exception to all proceedings undertaken regarding insolvency resolution and revival of companies. This is also apparent from the peremptory and express language of Sections 14, 63 and 64 (2) of CODE.
It was also clear from the Companies (Removal of Difficulties) Fourth Order that in fact what is saved are only the proceedings of winding up pending before the jurisdictional High Court and not the Company itself in relation to which such proceedings are saved. That is to say, such a Company is still subject to the provisions of CODE, if invoked and only the post notice winding up proceedings, which are retained by the High Court, are saved. This does not mean that CODE is inapplicable to the said Company, if it is invoked.
The winding up petitions retained by the High Court are being decided under the Companies Act, 1956 only as a transitional provision. It only provides that winding up proceedings under Section 433(1)(e) pending in the High Court would continue in the High Court.
The transitional provision cannot in any way affect the remedies available to a person under the Code, vis-à-vis the company against whom a winding up petition is filed and retained in the High Court, as the same would amount to treating the Code as if it did not exist on the statute book and would deprive persons of the benefit of the new legislation. This is contrary to the plain language of the Code. The Code cannot be interpreted to mean that, in respect of companies, where a post notice winding up petition is admitted, or a provisional liquidator appointed, provisions of the Code can never apply to such companies for all times to come.
Even under the 29th June 2017 Notification, it was only those petitions pending in the High Court where a notice may not have been issued which would not get transferred, if a winding up petition against such a company has already been admitted. But even in such a case, there is no express or implied bar from other creditors of such a company or the corporate debtor from filing fresh proceedings under the Code. If at all, such creditors/corporate debtors are barred from approaching the High Court and not NCLT under the Code.
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 CODE in general to proceedings validly instituted under CODE, nor does it mean that such proceeding can be suspended.
The jurisdiction of the Company Court in relation to proceedings under the Code is expressly barred by virtue of section 63 of the Code. Further, by virtue of Section 64(2) of the Code, the Company Court is prohibited from injuncting NCLT from exercising its jurisdiction under the Code.
NCLT is not a court subordinate to the High Court and hence as prohibited by the provisions of Section 41 (b) of the Specific Relief Act, 1963, no injunction can be granted by the High Court against a corporate debtor from institution of proceedings in NCLT.
Apart from there being no provision in the Companies Act, 1956 to injunct proceedings before NCLT instituted under the Code, petitioner cannot take recourse under the inherent powers of the High Court.
Purpose of Insolvency Code
The purpose for which Code has been enacted is to set up an Insolvency and Bankruptcy resolution process, which has to be implemented in a strict time bound manner, by the appointment of an IRP and creation of a creditors Committee. These are powers which can be exercised only by NCLT and not by the Company Court. It is for this reason that pending the Insolvency Resolution Process a moratorium is provided for under Section 14 of Code.
Therefore, the most fundamental distinction between the provision of the Companies Act and the Code is, whereas, under the Companies Act winding up would be a matter for the Court alone to decide, under the Code, there is a paradigm shift in as much as it displaces the management of the company and an IRP is appointed and the Creditors Committee is left to decide the fate of the company.
BROAD CONCLUDING COMMENTS
While the Honorable Bombay High Court has given the provisions of the Code a higher status than winding up provisions under the Companies Act, the Court ought to have considered in detail the consequences which may have followed had the in case simultaneous proceedings of winding up and insolvency were allowed, the following consequences may follow:
Upon admission of the insolvency application, ‘Moratorium’ ordered under the Code would technically result in stay of ongoing winding up proceedings under the Companies Act.
On one hand, the Committee of Creditors under the Insolvency Code would work on formulation of the insolvency resolution plan along with the insolvency resolution professional for revival of the Company, on the other hand, the provisional liquidator would work on ‘liquidation’ of company’s assets.
Conflict of powers between the Insolvency Resolution Professional and Provisional Liquidator.
Duplication of time and efforts of the stakeholders, creditors and professionals involved, because whichever order is passed earlier (winding up or admission of insolvency application), all the work done for the other will be rendered fruitless. The odds favour the insolvency application getting admitted before the winding up proceedings and hence the insolvency resolution process of 180 / 270 days will be expedited.
Tussle of powers of the creditors involved in winding up proceedings and those involved in insolvency proceedings (where the operational creditors cannot be a part of the committee of creditors).
the aforesaid situation may give rise to further litigation (including by way of letters patent appeals and special leave petitions) which would ultimately defeat the purpose of the Code.
Risk of conflict of orders of High Court and the NCLT during the course of winding up and insolvency proceedings respectively.
Considering the aforesaid consequences and in background of the judgment given by the Bombay High Court, a further clarification from the Central Government is required to resolve a seeming lacuna in law and the probable conflicting circumstances.