Updated: Mar 14, 2021
In the Matter of:
Forech India Pvt Ltd ...Appellants
Edelweiss Assets Reconstruction Co. Ltd ...Respondents
The Appellant in this present matter is Forech India Pvt Ltd, an Operational Creditor who had initiated a winding up petition (Company Petition no. 43/2014) under section 433(e) of the Companies Act, 1956, before the Delhi High Court, against the Respondent no. 2, a company, for inability to pay dues (a fact admitted by the Respondent no. 2). While this winding petition was pending before the Hon’ble High Court, another Operational Creditor, namely SKF India Ltd, instituted insolvency proceedings under section 9 of the IBC, which was subsequently withdrawn and eventually filed as a separate Winding Petition, to be heard with Petition no. 42/2014.
Order of NCLT and NCLAT in 2017
Amidst this, a Financial Creditor, the Respondent no. 1 in this case, filed an insolvency proceeding before the NCLT under Section 7 of the code, which was then admitted on 07.08.2017. The present Appellants filed an appeal against the said order of the NCLT, however the NCLAT dismissed the appeal while drawing the attention of the parties to Section 11(d) of the IBC, which inter alia provides that a corporate debtor in respect of whom a liquidation order has been made is not entitled to make an application to initiate corporate insolvency resolution process ("CIRP"). The insolvency Petition filed by the Financial Creditor would be maintainable as no liquidation order had been passed.
The Ld. Counsel for the Appellants challenged the order of the NCLAT in the Supreme Court, and argued that the winding-up petition filed by it would be saved by Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2015 as notice was issued on the winding-up petition much prior to the commencement of the IBC. The purpose behind this was to elucidate the claim that the winding up proceedings pending before the High Court should be given prominence and not proceedings filed by other creditors under the Code
The Ld. Senior Counsel for the Respondents countered the aforesaid arguments by averring that the whole object of the IBC would be frustrated if petitions for winding-up were to continue in the face of insolvency petitions under the IBC. The Sr. Counsel also argued that the objective of the IBC is to infuse life into a corporate debtor who is in the red, and it is only if the CIRP fails to ensure that liquidation takes place that the winding up petition should continue. Furthermore, he asserted that the proceedings under Sections 7 and 9 are independent proceedings and must remain unaffected by any simultaneous winding up petition.
Supreme Court’s View
The Supreme Court was of the view that:
a) Stress must be laid upon section 255 of the IBC, which confers unto itself certain amending powers, in lieu of which it proceeds to amend section 434 of the Companies Act 2013. After multiple amendments, and in pursuance of this section, the final proviso to section 434 of the Act states that
“Provided further that any party or parties to any proceedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (31 of 2016).” 
b) In addition to that, one must consider the notification titled the Companies (Transfer of Pending Proceedings) Second Amendment, Rules, 2017, In which Rule 5 was substituted, which stated that all petitions filed under section 433(e), where the petition hasn’t been served to the Respondent under Rule 26 of the Companies (Court) Rules shall be transferred to a bench of the Tribunal established under section 419 (4) of the Act.
c) Reliance must be placed on Bombay HC’s Judgment in Ashok Commercial Enterprises v Parekh Aluminex Ltd., which clearly stated that Rule 26 was a pre-admission notice and all such winding up petitions where such notice is served must be retained in the HC.
d) Upon a strict perusal of the IBC, it is evident that parallel proceedings in the High Court as well as the Adjudicating Authority as stipulated in the Code would create a state of repugnancy, and thus defeat the purpose of the Code. Furthermore, post the amendment to section 434 in 2018, position now stands clear that winding up petitions where notice has been served and which are pending in the High Courts, any person could apply for transfer of such petitions to the NCLT, which would then have to be transferred by the High Court to the adjudicating authority and treated as an insolvency petition under the Code.
e) Thus, the Supreme Court agreed with the Appellants and declared that the NCLAT’s interpretation of Section 11 is incorrect. It is because section 11(d) merely prevents a corporate debtor from filing for insolvency under section 10 of the Code, but doesn’t indicate or signify that proceedings under section 7 or 9 of the Code may be initiated irrespective of whether the liquidation order has been passed or not.
f) However, despite that, the SC chose to not interfere with the final order of the NCLAT as the Insolvency Petition is clearly an independent proceeding and must be allowed, as stated in paragraph 100 of the judgement delivered by the Bombay HC in PSL Ltd v. Jotun India Pvt Ltd. (2018).
Even though the Court agreed with the final order of the NCLAT, which dismissed the appeal, it granted liberty to the Appellants to file an application to transfer the winding up petition from the HC to NCLT as per the proviso to section 434 of the Act, which shall thereby be treated as proceedings under section 9 of the Code. Appeal disposed.
3. The Insolvency and Bankruptcy Code, 2016
4. The Insolvency and Bankruptcy Code, 2016
5. The Insolvency and Bankruptcy Code, 2016
7. (2017) 4 Bom CR 653
8. The Companies Act 2013
Author - Somya Agarwal
Student at Symbiosis Law School Noida