Insolvency: Why pending winding-up cases are causing ambiguity in the Code

Issues came to light after Union Bank of India's application to initiate insolvency proceedings

The Reserve Bank of India’s (RBI’s) direction to banks to commence insolvency proceedings against 12 big-ticket corporate defaulters (with a combined value of Rs  1,75,000 crore in non-performing assets) has raised concerns over the ability of the National Company Law Tribunal (NCLT) to begin the recovery process in the light of the existing winding-up cases pending against  some of these companies.

The issue came to light after Union Bank of India’s recent application to initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code 2016 (the Code) against Era Infra Engineering, one of the 12 companies shortlisted by the central bank. The tribunal, while considering the application, questioned the bank if such an action could be maintained after taking note of around 18 pending winding-up petitions (for which notices had been issued) against the company in the Delhi High Court. Considering the position of the high court and its supervisory powers under Article 227 of the Constitution, the NCLT questioned whether a stay could be ordered on all pending legal proceedings, as required by the Code for the insolvency process to begin.

To tackle the issue of pending cases, the government had introduced the Companies (Transfer of Pending Proceedings) Rules in December 2016. Rule 5 had contemplated all winding-up petitions filed under the erstwhile Companies Act, 1956, on grounds of inability to pay debts where no notice had been issued, to be transferred to the respective NCLT. However, the rule did not contemplate any transfer of after-notice winding-up matters to the tribunal. According to Satyajit Gupta, principal, Advaita Legal, certain issues over transfers of cases to the NCLT and the interplay of pending proceedings exist. “From a reading of Rule 5, it appears that where a petition for winding-up has been served on a company, such petition shall continue to be adjudged by the high court,” says Gupta.

To complicate matters further, an amendment to the Rules in June 2017 introduced a proviso to Rule 5. It says that the parties to the petitions shall be eligible to file fresh insolvency applications under the Code. However, it does not clarify whether this only applied to the winding-up petitions transferred to the NCLT under the Rule or includes petitions that remain with the high courts.

According to Manoj K Singh, founding partner, Singh & Associates, and counsel for Era Infra, the issue remains one of legal interpretation. Gupta adds that the issue at hand must be determined conclusively by the principal bench. However, Divyanshu Pandey, partner, J Sagar Associates, says that the new proviso must be read alongside the original Rule and should apply only to petitions that have been transferred to the NCLT. He adds that such an interpretation by the tribunal would be helpful in ensuring that the vision of the Code and the amendments are advanced.

Other experts also agree that any other approach would cause a lot of litigation over the same pool of assets and increase the complexity of the insolvency process. The issue may need further clarifications by the government since the tribunals cannot admit applications that are beyond its statutory powers, notes Pandey.

Considering the fact that there are currently around 5,200 pending winding-up petitions in various high courts, a satisfactory solution is a must to achieve the vision of the Code in a time-bound manner.