Jury is out on aspects of winding up and insolvency

Winding up proceedings were earlier initiated and conducted under the Companies Act, 1956. However, with the coming into force of the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016 (IBC), the process underwent a change. The 1956 act provided a statutory right to file a winding up petition on the ground of inability to pay debts. The 2013 act does not provide a similar right as insolvency proceedings now can be initiated only under the IBC on account of default of either a financial or operational debt.

Section 434 of the 2013 act provides for transfer of proceedings pending under the 1956 act. Section 434 read with subsequent notifications issued by the central government led to ambiguity as far as initiation of proceedings under the IBC was concerned. The National Company Law Tribunal (NCLT) primarily admitted proceedings under the IBC in cases where no order of winding up had been passed by a high court and proceedings were merely pending.

The National Company Law Appellate Tribunal (NCLAT) recently settled the ambiguity, in an order in Forech India Pvt Ltd v Edelweiss Asset Reconstruction Company Ltd & Anr dated 23 November 2017, and an order in Unigreen Global Pvt Ltd v Punjab National Bank & Ors dated 1 December 2017. The NCLAT held that where winding up proceedings stand initiated by the high court, application under the IBC is not maintainable on account of the bar under section 11(d) of the IBC. The NCLAT concluded that “winding up” under the 2013 act is synonymous with “liquidation” under the IBC. Thus, a winding up order passed under the 1956 act has been equated with a liquidation order under the IBC and accordingly the bar under section 11(d) of the IBC was held to be applicable in such cases.

Dhir & Dhir Associates is a leading full-service law firm in India. Varsha Banerjee is an associate partner at Dhir & Dhir Associates.