INTRODUCTION
In the intricate world of corporate law, the concepts of liquidation and winding up are pivotal in determining the fate of a struggling business entity. With the advent of the Insolvency and Bankruptcy Code (IBC) in 2016[1], India witnessed a significant shift in how companies facing financial distress or insolvency were dealt with. This shift not only introduced new terminologies but also raised pertinent questions about the coexistence of these two frameworks – liquidation under the IBC and winding up under the Companies Act 2013[2]. In this blog, we delve into the nuances of these two methods of corporate demise.
CORPORATE DEMISE
Within Schedule XI, encompassing amendments to the 2013 Companies Act, the Insolvency and Bankruptcy Code (IBC) employs the term “liquidation” and outlines the definition of “winding up.”[3] Specifically, “winding up” is elucidated as “winding up as per this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, when applicable,” within clause 94A of section 2 of the 2013 Companies Act.[4]
Both the 1956 Companies Act[5] and the Companies Act of 2013[6] previously incorporated the concept of winding up. However, the Companies Act of 2013 underwent a revision to encompass a definition of “winding up” that encompasses liquidation under the IBC, aligning with the introduction of the IBC.
The 2013 Companies Act continues to address the concept of winding up but now restricts its application to situations where the grounds for winding up differ from those for initiating Corporate Insolvency Resolution Process (CIRP) proceedings under the IBC.[7] Consequently, under the Companies Act of 2013, winding up proceedings cannot be initiated solely due to the inability to meet financial obligations or defaults in debt payments, as these reasons exclusively trigger insolvency proceedings under the IBC.
Moreover, any involved party or parties within ongoing winding-up proceedings of a company, pending before any court, retain the option to submit an application for the transfer of these proceedings to the National Company Law Tribunal (NCLT), where such an application is regarded as an initiation of CIRP proceedings under the IBC, in accordance with Section 434 of the Companies Act of 2013.[8]
Conversely, the proceedings concerning the dissolution of a company that remain within the purview of the Companies Act, 2013, are applicable in situations that include, among other things, “when:[9]
(a) the company has acted against the interests of the sovereignty, integrity, security, etc., of India;
- b) on an application made by the Registrar of Companies, the NCLT is of the opinion that the affairs of the company have been conducted in a fraudulent manner, and also if it is proper that the company be wound up;
(c) the company has made a default in filing its financial statements or annual returns with the Registrar of Companies for the immediately preceding five consecutive financial years; or
(d) the NCLT is of the opinion that it is just and equitable that the company be wound up.”[10]
In the case of Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.[11], the Supreme Court affirmed that the Corporate Insolvency Resolution Process (CIRP) is an autonomous legal procedure governed by the Insolvency and Bankruptcy Code (IBC). This determination was reached when assessing the possibility of continuing the CIRP alongside a pending winding-up petition under section 433(e) of the Companies Act, 2013[12], before the High Court.
The Supreme Court explicitly decided not to overturn the National Company Law Appellate Tribunal’s (NCLAT) ruling to dismiss the appeal. Instead, it granted the appellant permission to make use of the provision in Section 434 of the Companies Act,[13] 2013, to request the transfer of the ongoing winding-up proceedings from the High Court in Delhi to the National Company Law Tribunal (NCLT). This transfer was intended to treat the proceedings as a part of Section 9 of the IBC[14].
Furthermore, as per the Delhi High Court’s judgment in Action Ispat & Power Private Limited v. Shyam Metallics & Energy Limited[15], requests for relocating winding-up proceedings from the High Court to the NCLT are legally permissible and welcomed. The Delhi High Court ruled that even after a winding-up order has been issued, the court possesses the authority not only to transfer such proceedings but also to reconsider and rescind a winding-up order if necessary.
The High Court of Bombay ruled in Jotun India Private Limited vs. PSL Limited[16] that even though notice of winding-up proceedings has been given, the IBC actions are not precluded. It further noted that if such a restriction were to be put in place, it would be the same as treating the IBC as though it had never been passed, depriving people of the advantages of the new legislation.[17]
CONCLUSION
In conclusion, the interplay between liquidation under the IBC and winding up under the Companies Act 2013 has evolved into a legal conundrum that demands careful consideration. While the Companies Act has undergone amendments to accommodate the IBC, distinct grounds and procedures still govern these two modes of corporate dissolution. The Indian judiciary has stepped in to provide clarity, emphasizing the autonomy of the IBC proceedings and the possibility of transferring winding-up cases to the National Company Law Tribunal (NCLT). This adaptability reflects the intent to harness the advantages of the new legislation without undermining the principles of justice and equity.
As India’s corporate landscape continues to transform, the comparison between liquidation under IBC and winding up under the Companies Act 2013 serves as a critical discourse for legal practitioners, entrepreneurs, and stakeholders alike. It highlights the need for a comprehensive understanding of the nuances of these frameworks, as well as the imperative for adaptability in an ever-evolving legal ecosystem. Ultimately, the choice between liquidation and winding up hinges on the specific circumstances of each case, underscoring the importance of legal expertise in navigating the intricate path of corporate dissolution in modern India.
Author(s) Name: Adarsh Anand Amola (Indian Institute of Management, Rohtak)
References:
[1] Insolvency and Bankruptcy Code 2016
[2] The Companies Act 2013
[3] Insolvency and Bankruptcy Code 2016, sch 11
[4] The Companies Act 2013, s 2(94A)
[5] The Companies Act 1956
[6] The Companies Act 2013
[7] Understanding the IBC Key Jurisprudence And Practical Considerations IBBI
[8] The Companies Act 2013, s 434
[9] ibid.
[10] The Companies Act 2013, s 271
[11] Forech India Ltd . Edelweiss Assets Reconstruction Co Ltd [2019] SCC Online SC 87
[12] The Companies Act 2013, s 433(e)
[13] The Companies Act 2013, s 434
[14] Insolvency and Bankruptcy Code 2016, s 9
[15] Action Ispat & Power Private Limited v Shyam Metallics & Energy Limited [2019] SCC Online Del 10424
[16] Jotun India Private Limited vs. PSL Limited [2018] Company Application No 572 of 2017
[17] Jotun India Private Limited v. PSL Limited [2018] SCC Online Bom 1952
