Winding Up – Legal position under Companies Act, 2013 vis-à-vis Insolvency and Bankruptcy Code, 2016

Preamble

 Prior to November 15, 2016, the term “winding-up” was neither defined under the Companies Act, 1956 (“1956 Act”) nor under the Companies Act, 2013 (“2013 Act”).

Section 255 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) has been notified with effect from November 15, 2016 and by virtue of Section 255, the 2013 Act stands amended in accordance with Schedule XI of the Code. The aforesaid Schedule XI now defines the term “winding up” by introducing a new Section 2(94A) to the 2013 Act as “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.” On a bare reading of the definition, it shall be safe to conclude that winding up proceedings will now be governed by the provisions of 2013 Act as well as the Code. The other significant changes introduced by the Code to the 2013 Act include removal of provisions of ‘voluntary winding up’ and winding up on the ground of ‘inability to pay debts’ from the 2013 Act as the proceedings relating to these now find place under the Code. 

Subsequent to the notification of Section 255 of the Code, the Ministry of Corporate Affairs (“MCA”), through its Notification dated December 07, 2016, has notified the provisions of Chapter XX of the 2013 Act with effect from December 15, 2016. These provisions relate to winding up of companies on any ground other than inability to pay debts i.e. on any of the circumstances mentioned under Section 271(a) to (e) of the 2013 Act (as discussed hereunder). 

This article summarizes the current legal position for different modes of winding up of a company pursuant to the notifications pertaining to enforcement of provisions of Section 255 of the Code and Chapter XX of the 2013 Act, dated November 15, 2016 and December 07, 2016, respectively.

Position prior to November 15, 2016

The provisions for winding up provided in Chapter XX of the 2013 Act are divided into four parts:

• Part I dealing with the provisions for winding up by the National Company Law Tribunal (“Tribunal”);
• Part II (Sections 304-323) dealing with the provisions for voluntary winding up;
• Part III dealing with provisions applicable to every mode of winding up; and
• Part IV dealing with appointment of official liquidator.

The abovementioned provisions, although provided in the 2013 Act, were never notified. Therefore, prior to November 15, 2016, winding up through any mode, i.e. voluntary winding up and winding up by Tribunal, was governed by the provisions of 1956 Act.

Position after November 15, 2016

• Winding up on inability to pay debts

Section 271(1)(a) of 2013 Act which dealt with the winding up by Tribunal on account of inability to pay debts has been omitted by Section 255 of the Code. The same is now dealt with in accordance with the provisions of Sections 7 to 9 of the Code, being initiation of corporate insolvency resolution process by financial and operational creditors.

An application to the adjudicating authority (being the Tribunal) for initiation of corporate insolvency resolution process can be made only when there is a “default” in payment of debt by a corporate person. In this regard, it is to be noted that the term “default” has been defined in the Code to mean non-repayment of a debt, whether whole or in part, which has become due and payable by a corporate person. This would imply that, now under the Code, insolvency resolution proceedings can be initiated even against a financially solvent company having made a default in payment of its debts, since the same would fall within the purview of “default” under the Code. Once the application for initiation of corporate insolvency resolution process is made and the same is accepted by the Tribunal, an insolvency professional is appointed for conducting the corporate insolvency resolution process. The process is required to be completed within 180 days from the date of admission of application by the Tribunal, on failure of which, Tribunal may pass an order for liquidation of the corporate person in relation to whom the application was made.

Under the erstwhile regime, winding up applications could be made on account of “inability to pay debts”. The expression “inability to pay debts” has been interpreted by Andhra Pradesh High Court in the case of Reliance Infocomm Limited v. Sheetal Refineries Private Limited [See End Note 1], to mean a situation where a company is commercially insolvent, i.e. the existing and provable assets would be insufficient to meet the existing liabilities.

Therefore, a remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the earlier regime. However, this is now feasible under the Code.

• Winding up on grounds other than inability to pay debts

The circumstances under which a company can be wound up by  Tribunal have been clearly enlisted in Section 271 as follows :  (a) passing of special resolution to that effect; (b) acting against the sovereignty and integrity of India, security of state, friendly relations with foreign states, public order, decency or morality; (c) conducting affairs in a fraudulent manner; (d) default in filing of financial statements or annual returns with the Registrar for immediately preceding five financial years; and (e) on just and equitable grounds in the opinion of Tribunal.

The above sub-section (d) relating to winding up on non-filing of financial statements and annual returns of preceding five years has been introduced in the 2013 Act and was not provided in the 1956 Act. Earlier, the remedy available with the Registrar for non-filing of financial statements and annual return by a company was to declare such company as a defunct company and strike off the name of such company from the register of companies. Now, the same has also been introduced in the 2013 Act as a ground for winding up.

The aforesaid provisions stand notified with effect from December 15, 2016, therefore the winding up applications on any of the grounds specified above will be made to the Tribunal in accordance with the provisions of 2013 Act.

• Voluntary winding up

The provisions of voluntary winding up provided under the 2013 Act presently stands omitted due to the notification of Section 255 of the Code. However, these provisions now fall within the purview of Section 59 of the Code which deals with the voluntary liquidation of corporate persons – this Section is yet to be notified.

Therefore, in view of non-notification of the provisions of voluntary liquidation under the Code, the question which arises is regarding provisions which will be applicable for voluntary winding up of companies and the manner in which the same will be dealt with.

The answer to the above can be derived from Section 468(3) of the 2013 Act which provides that with respect to winding up, any rules framed by the Hon’ble Supreme Court at any time before the commencement of 2013 Act shall continue to be in force till the time new rules are framed to that effect by the Central Government and any reference to the High Court in those rules shall be construed as the reference to the Tribunal.

The Tribunal shall not have the authority to entertain applications with respect to voluntary winding up till the notification of provisions of voluntary winding up under the Code. Therefore, till the time such provisions are notified and corresponding Rules are prescribed by the Central Government, the procedure laid down under the Companies (Court) Rules, 1959 (“Court Rules”), being the rules framed by Hon’ble Supreme Court, will be applicable and consequently to the extent Court Rules refer to the provisions of 1956 Act, such provisions will be applicable to the applications of voluntary winding up. Therefore, as on date, all the applications or petitions pertaining to the voluntary winding up shall continue to be made to the High Court of competent jurisdiction.

Transfer of winding up proceedings from High Court to Tribunal

Along with the Notification dated December 07, 2016, MCA on the same date issued the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Rules”) for clarifying the ambiguities relating to transfer of pending proceedings from a High Court to the Tribunal. The same can be summarized in the following manner:

• Winding up proceedings pending before High Court on ground of inability to pay debts

All the proceedings pending before the High Courts on December 15, 2016, and the notice of which have not been served on the respondent, shall be transferred to the respective Bench of the Tribunal exercising territorial jurisdiction over the concerned State and shall be dealt in accordance with the provisions of the Code. 

• Winding up proceedings pending before High Court on grounds other than inability to pay debts

All the proceedings pending before the High Courts on December 15, 2016 and the notice of which have not been served on the respondent, shall be transferred to the respective bench of the Tribunal exercising territorial jurisdiction over the concerned State and shall be dealt in accordance with the provisions of 2013 Act.

• Winding up proceedings pending before High Court relating to voluntary winding up

All the proceedings pending before the High Courts till April 1, 2017, shall continue to be dealt with by the High Courts in accordance with the provisions of 1956 Act.

The Hon’ble Bombay High Court, in the case of West Hills Realty Private Ltd. and Ors v. Neelkamal Realtors Tower Private Limited [See End note 2], has further clarified that only the petitions which are at a pre-admission stage and have not been served on the respondent, will be transferred to the Tribunal. Petitions for which only the notice of hearing of the petition before the Court has not been served, will not be transferred to the Tribunal. Therefore, such petitions will continue to be dealt with by the High Courts.  

In light of the aforesaid, it can be concluded that pending proceedings for both winding up on inability to pay debts and winding up on grounds other than inability to pay debts will be transferred to Tribunal. Although the former category will be governed by the provisions of the Code, the latter category will be governed by the provisions of 2013 Act. Pending proceedings for voluntary winding up will continue to be dealt by the High Courts in accordance with the provisions of 1956 Act and the procedure prescribed under the Court Rules.

Conclusion

Though the much-awaited sections of the 2013 Act pertaining to winding up of companies on grounds other than inability to pay debts were made effective from December 15, 2016, the final Rules for the same are yet to be notified. Therefore, in view of provisions of Section 468(3) of the 2013 Act pertaining to applicability of the Court Rules, till the time Rules are prescribed by the Central Government, under the current scenario, an application for winding up on these grounds will be made before the Tribunal and the same will be dealt with in accordance with the procedure prescribed under the Court Rules.

The fresh applications for initiation of corporate insolvency resolution process on grounds of “default” under the Code shall be made before the Tribunal in accordance with the procedure prescribed under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, notified with effect from December 01, 2016.

In view of the above, the current position with respect to different modes of winding up can be summarized as under:

There is a possibility that disposal of winding up applications, on account of inability to pay debts made to the High Courts before December 15, 2016 and transferred to the Tribunal, under the Code can be a more time consuming process as no company can be directly wound up under the Code, i.e. every proceeding has to go through the corporate insolvency resolution process and consequent liquidation on failure of insolvency resolution process.

While, MCA seems to be in a hurry to shift the burden of corporate litigation from High Courts to the Tribunal, the same is not without hurdles. Another concern is the overburdening of the Tribunal due to existing litigations under 2013 Act, transfer of pending cases from the earlier authorities such as Company Law Board and the Board for Industrial and Financial Reconstruction. Therefore, in view of the above, it will be interesting to see how the Tribunal deals with fresh applications under the 2013 Act and the Code, pending [See End Note 3] cases transferred from High Courts, Company Law Board and Board for Industrial and Financial Reconstruction. 

[The author is an Associate in Corporate Practice, Lakshmikumaran & Sridharan, Gurgaon]

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