.

Meaning of winding Up: 

Winding up of a company is defined as a process by which
the life of a company is brought to an end and its property
administered for the benefit of its members and creditors.
The procedures for Winding up of companies are
provided under Chapter XX of the Companies Act, 2013
and Insolvency and Bankruptcy Code of India 2016.
Section (94A) defines Winding up means winding up
under this Act or under IBC, 2016.
“Winding up is a means by which the dissolution of a company is brought about and
its assets are realized and applied in the payment of its debts. After satisfaction of the
debts, the remaining balance, if any, is paid back to the members in proportion to the
contribution made by them to the capital of the company.”
1. “The liquidation or winding up of a company is the process whereby its life is
ended and its property is administered for the benefit of its creditors and members.
An Administrator, called a liquidator, is appointed and he takes control of the
company, collects its assets, pays its debts and finally distributes any surplus among
the members in accordance with their rights.”
 
2. As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding
up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016. 
 
Thus, winding up ultimately leads to the dissolution of the company. In
between winding up and dissolution, the legal entity of the company remains and it
can be sued in a Tribunal of law.

Winding up
By Tribunal under Companies Act
Liquidation under IBC

Winding up by tribunal

Sec 271. (1) A company may, on a petition under section 272, be wound up by the
Tribunal,—
(a) if the company is unable to pay its debts;-Deleted it no longer has a ground
where company can be wind up on ground of non-payment of debt.
(a) if the company has, by special resolution, resolved that the company be
wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States, public order,
decency or morality;
(c) if on an application made by the Registrar or Central Government by notification
under this Act, the Tribunal is of the opinion that the affairs of the company have been
conducted in a fraudulent manner or the company was formed for fraudulent and
unlawful purpose or the persons concerned in the formation or management of its
affairs have been guilty of fraud, misfeasance or misconduct in connection therewith
and that it is proper that the company be wound up;
(d if the company defaults in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound up-

4. Modes of Winding Up of a Company: 

A company may be wound up in any of the following two ways: 

4.1. Compulsory winding up of a company: 

Winding up a company by an order of the Tribunal is known as compulsory

winding up.

Who may file a Petition to the Tribunal?

A petition for compulsory winding up of a company may be filed in the Tribunal

by any of the following persons. (Sec. 272) 

i. Petition by the Company – A company can file a petition to the Tribunal for
its winding up when the members of the company have resolved by passing a
Special Resolution to wind up the affairs of the company. Managing Director or
the directors cannot file such a petition on their own account unless they do it on
behalf of the company and with the proper authority of the members in the
General Meeting.
 
ii. Petition by the Contributories – A contributory shall be entitled to present
a petition for the winding up of the company, notwithstanding that he may be the
holder of fully paid-up shares or that the company may have no assets at all, or
may have no surplus assets left for distribution among the holders after the
satisfaction of its liabilities. It is no more required of a contributory making
petition to have tangible interest in the assets of the company
 
iii. Petition by the Registrar – Registrar may with the previous sanction of the
Central Government make petition to the Tribunal for the winding up the
company only in the following cases: 
     (a) If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial
years; 
 
     (b) If the company has acted against the interests of the sovereignty and
integrity of India the security of the State friendly relations with foreign States,
public order, decency or morality; 
 
     (c) If on an application made by the Registrar or any other person authorized
by the Central Government by notification under this Act, the Tribunal is of the
opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for a fraudulent and unlawful purpose or the
persons concerned in the formation or management of its affairs have been guilty
of fraud, misfeasance or misconduct in connection therewith and that it is proper
that the company be wound up. 
iv. Petition by the Central Government or a State Government on the
ground that company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with foreign States,
public order, decency or morality. 
 
v. Any person authorized by the Central Government in that behalf.
 
4.2. Liquidation under Insolvency and Bankruptcy Code 2016: 

Chapter V of the Insolvency and Bankruptcy Code of India 2016 deals with the
Voluntary Liquidation of Corporate Persons.

Section 275 (1) and (2) of the Companies Act, 2013 provides that for the purposes
of winding up of a company by the Tribunal, the Tribunal at the time of the
passing of the order of winding up, shall appoint a Provisional Liquidator or the
Company Liquidator, as the case may, from amongst the insolvency professionals
registered under the Insolvency and Bankruptcy Code, 2016.

The Insolvency and Bankruptcy Code, 2016 relates to re-organization and

insolvency resolution of companies, partnership firms, and individuals in a time-
bound manner. The Insolvency and Bankruptcy Code, 2016 applies to matters
relating to the insolvency and liquidation of a company where the minimum
amount of the default is Rs. 1 lakh (may be increased up to Rs.1 cr by the
Government, by notification). 

The Code lays down two stages:

1. Insolvency Resolution Process –

It is the stage during which financial creditors assess whether the debtor’s
business is viable to continue and the options for its re-organization and re-
structuring are suggested; and 

2. Liquidation –

In case the insolvency resolution process fails, the liquidation process shall

commence in which the assets of the company are realized to pay off the
creditors.
Voluntary liquidation process
Liquidator shall make public announcement which contains the followings:
1.Liquidation commencement date;
2.Name, Address, Contact number, Registration number of liquidator
3.Mode of submission of claim;
4.Last date of submission of claim;
Appointment of Liquidator:
An insolvency professional shall be eligible to be appointed as a liquidator if he, is
independent of the Company.
The liquidator of corporate person is assigned with the following task:
To verify claims of all the creditors;
To carry on the business of the corporate debtor for its beneficial liquidation as he
considers necessary;
To value, sell, recover and realize all assets of and monies due to such corporate person in
a time bound manner;
To open a bank account for the purpose of receiving all moneys due to the corporate
person;
To pay and settle with the creditors of the corporate person;
To obtain any professional assistance from any person or appoint any professional, in
discharge of his duties, obligations and responsibilities;
To maintain registers specified under regulation 10 of schedule 2;
To distribute proceeds to the stakeholders within a period of 6 (six) months of receipt of
the proceeds; and
To preserve a physical or an electronic copy of the reports, registers and books of account
for at least 8 (eight) years after the dissolution of the corporate person, either with himself
or with an information utility.

The Companies (Winding Up and Miscellaneous Provisions)

(Amendment) Ordinance 2016 (Amendment Ordinance), gazetted on 3
June 2016, will come into effect on a date to be appointed by the
Secretary for Financial Services and the Treasury. It amends the
Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap
32. This article is the first in a series, highlighting the major changes to
be introduced.

Aims of Amendment Ordinance

The Amendment Ordinance aims to: 

 increase creditor protection;

 streamline the winding-up process; and
 strengthen regulation under the winding-up regime.

This article looks at the changes aimed at increasing creditor protection.

Transactions at an undervalue

Currently, the Court does not have power to set aside transactions at an
undervalue entered into by a company that is subsequently wound up,
although such a power exists in relation to such transactions entered
into by bankrupts. Under the Amendment Ordinance, the Court will have
power to set aside transactions at an undervalue, entered into by a
company within 5 years before commencement of its winding-up, on the
condition that at the time of the transaction, the company was unable to
pay its debts or became unable to pay them as a result of the
transaction. Transactions at an undervalue include gifts or transactions
where the company receives no consideration or receives consideration
of a value (in money’s or money’s worth) which is significantly less than
the consideration provided by the company.

Orders which the Court will be able to make to restore the company to
its pre-transaction position will include, for example, orders requiring any
property transferred as part of the transaction to be re-vested in the
company and orders requiring a person who has received benefits as a
result of the transaction to make a payment to the liquidator. The Court
will not make such orders when satisfied that the company entered into
the transaction in good faith for the purpose of carrying on its business
and there were reasonable grounds for believing that the transaction
would benefit the company.

Unfair Preferences

Currently, the Court’s power to set aside unfair preferences is provided

by reference to unfair preference provisions in the Bankruptcy
Ordinance. The Amendment Ordinance introduces its own stand-alone
provisions, which removes certain anomalies arising out of the reliance
on bankruptcy legislation. An unfair preference will arise where the
company does anything which has the effect of putting a person (a
creditor of the company or surety/guarantor for any of the company’s
debts or liabilities), in the event of the company’s insolvent liquidation, in
a better position than he would have been in had that thing not been
done. The Court will have power to set aside an unfair preference (which
is not a transaction at an undervalue) given to a person who is
connected to the company (otherwise than being its employee), if given
within 2 years before commencement of the winding-up. In any other
case of an unfair preference (where the transaction is not one at an
undervalue), the Court will have power to set aside where it was entered
into within 6 months before commencement of the winding up. A pre-
requisite to the setting aside is that at the time the unfair preference was
given, the company was unable to pay its debts or became unable to pay
them as a result of the unfair preference. The Court can make various
types of orders to restore the company to the position it would have
been in had the unfair preference not been made.
Floating Charges

Currently, a floating charge created on an undertaking or property of a

company within 12 months of commencement of its winding up is
invalid, unless it is proved that the company was solvent immediately
after the charge was created. There is an exemption for “new money”, i.e.
any cash paid to the company at the time of or subsequent to the
creation of, and in consideration for the charge. Under the Amendment
Ordinance, the 12 month time period is changed so that a floating
charge created by the company “at a relevant time” will be invalid.
“Relevant time” will depend upon whether the person in favour of whom
the floating charge is created is connected with the company or not. For
persons connected with the company, the relevant time has been
extended to 2 years before commencement of the winding up. For
persons other than those connected with the company, the period
remains as within 12 months before commencement of the winding-up.
The exemption referred to above is extended to property and services
supplied to the company, as well as cash.

Redemption or buy-back of company’s shares out of capital

Under a new provision, directors (who signed the solvency statement in

relation to the payment out of capital) and past shareholders will be
jointly and severally liable to contribute to the assets of a company
which has made payment out of its capital in respect of the redemption
or buy-back of any of its own shares, in cases where the company is
wound up within one year of the relevant payment out of capital. It will
be a defence for a director to show that he had reasonable grounds for
believing his opinion expressed in the solvency statement.

Director-initiated creditors’ voluntary winding-up

Currently, if the directors of a company (or majority of directors, where

the company has more than two directors) have formed the opinion that
the company cannot by reason of its liabilities continue its business, they
may resolve at a meeting of directors to wind-up the company and
deliver a winding-up statement to the Registrar of Companies certifying
that such a resolution has been passed. The winding-up of the company
commences when the winding-up statement is so delivered and no
members’ meeting is required to have been summoned before that.
Under a revised procedure, additional safeguards are introduced,
namely:

 A meeting of the company must have been summoned and a

provisional liquidator appointed before commencement of the
winding-up (i.e. before delivery of the winding-up statement to the
Registrar).

 The winding-up statement must be in a specified form and certify

that:-

i)           A resolution has been passed to wind up the company;

ii)         A meeting of the company has been summoned for a date and
time stated in the winding-up statement; and

iii)        A provisional liquidator (with name and address stated) has been
appointed with effect from commencement of the winding-up.

 A new provision restricts the powers of the Provisional Liquidator

(with a few specified exceptions, e.g. disposal of perishable goods
of the company and actions to protect company assets), so that he
may only exercise powers conferred on a liquidator after obtaining
the Court’s sanction.

 The Provisional Liquidator must attend the first creditors’ meeting

and report on any exercise of his powers.

 If a director or the appointed provisional liquidator fails to comply

with the above requirements without reasonable excuse, he will be
liable on conviction to a fine.

Creditors’ voluntary winding-up and calling of first creditors’

meeting

Currently, a company is only required to convene the first creditors’

meeting on the same day as, or the next following day after, the
company’s meeting at which the resolution for voluntary winding-up is
to be proposed and there is no minimum period of notice required for
calling the first creditors’ meeting. Under the Amendment Ordinance, a
minimum notice period of 7 days for calling the first creditors’ meeting is
required, and the meeting must be held within 14 days after the
company meeting at which the resolution for voluntary winding-up was
proposed. This is to ensure that creditors have sufficient time to prepare
for the first creditors’ meeting and to make informed decisions.

Safeguards are also introduced for the period before the first creditor’s
meeting. Save for certain specified exceptions, there will be restrictions
on the powers of the members-nominated liquidator, in that he cannot
exercise them without the Court’s sanction.

Similarly, in respect of a members’ voluntary winding-up, there will be

restrictions on the powers of the directors during the period between the
members’ meeting and nomination or appointment of a liquidator, in
that they can only exercise their powers with the Court’s sanction.

Liquidators or directors failing to comply with the relevant requirements

will be liable on conviction to a fine.

The above new or revised provisions are aimed at increasing the pool of
an insolvent company’s remaining assets and ensuring that they are
preserved as far as possible and distributed fairly to its creditors. Our
next article in the series, will looks at changes introduced to streamline
the winding up process including, for example, court free procedures
and improvements to the proceedings of Committees of Inspection.

 highlighting the changes to be brought in by the Companies (Winding

Up and Miscellaneous Provisions) (Amendment) Ordinance 2016
(Amendment Ordinance), which was gazetted on 3 June 2016 and will
come into effect on a date to be appointed by the Secretary for Financial
Services and the Treasury. Our first article looked at the changes aimed
at increasing creditor protection. This article looks at the changes aimed
at streamlining the winding up process, which mainly relate to changes
to the proceedings of Committees of Inspection.
Committees of Inspection

A Committee of Inspection (COI) may be appointed in a court or

creditors’ voluntary winding up to represent the creditors and
contributories of the company and to supervise and give directions to
the liquidator. The Amendment Ordinance introduces a number of
changes aimed at simplifying the proceedings of COIs and promoting
court-free procedures, thereby reducing the time and costs involved in
the winding up process. The changes include the following:-

 Maximum and minimum number of COI members

prescribed: A new section prescribes the minimum and
maximum numbers of COI members. The minimum is 3 and
maximum is 7, although the liquidator can apply to court to vary
those numbers.
 Body corporates will be able to be members of a COI
 COIs will no longer be required to meet every month: Meetings
are to be held as and when determined by the liquidator. The
liquidator must summon the first COI meeting within 6 weeks from
the date of his appointment or the appointment of the COI,
whichever is the later.
 A COI member can be represented (in relation to COI business)
by another person authorised for that purpose by general
power of attorney or letter of authority. A COI member cannot
be represented by a body corporate, undischarged bankrupt or
person subject to a voluntary arrangement with his creditors.
 COI members can attend COI meetings remotely, with the use
of technology. This will allow COI members to attend meetings
from different places, thereby saving the time and costs involved in
holding and attending such meetings. If the liquidator decides to
hold a meeting with remote attendance, he will be required to
give10 days’ written notice of the date, time and place of meeting
to all COI members. COI members may then choose to go to the
meeting at the place specified or join the meeting remotely.
 Bills of costs or charges of persons employed by the Official
Receiver or Liquidator in a court winding up (e.g. solicitors and
accountants) which exceed HK$3000 will no longer be
 required to be taxed by the court, if they have been approved
by the COI. This aims to provide a court-free procedure, which in
turn will save the time and costs involved in administering winding
up cases. Where the COI does not agree the proposed costs or
charges, they would be taxed by the court, as under the current
regime.

Appointment of solicitor by liquidator

Currently, in a court winding up, the sanction of the court or COI is

required for the liquidator to exercise his power to appoint a solicitor to
assist him in the performance of his duties. Under the Amendment
Ordinance, that still applies, but as an alternative, the liquidator will be
able to exercise such power without court or COI sanction, if he has
given at least 7 days’ notice of his intention to exercise such power to
the COI members (or to the creditors, if there is no COI).

New Form 1A –Statutory Demand

Another new feature under the Amendment Ordinance is a new

prescribed form of statutory demand, which should help streamline
procedures by reducing disputes in respect of the validity of statutory
demands. The usual ground for a winding up petition is that the
company is unable to pay its debts, which is shown by its failure to
comply with a statutory demand for payment. Currently, the statutory
demand does not have to be in any prescribed form, which often leads
to disputes regarding its validity where, for example, it omits certain
required information. Under the new rules, the statutory demand will be
a prescribed form (Form 1A), which clearly specifies what information
must be included. This is the third in a series of articles highlighting the
changes to be brought in by the Companies (Winding Up and
Miscellaneous Provisions) (Amendment) Ordinance 2016 (Amendment
Ordinance). Since our last article, 13 February 2017 has been announced
as the date when the Amendment Ordinance will come into effect. The
Amendment Ordinance makes amendments to the Companies (Winding
Up and Miscellaneous Provisions) Ordinance (CWUMPO) and the
Companies (Winding Up) Rules (CWUR). Our first article looked at the
changes aimed at increasing creditor protection and our second article
looked at the changes aimed at streamlining the winding up process.
This article looks at the changes aimed at strengthening regulation
under the winding up regime.

Regulatory Measures for Liquidators and Provisional Liquidators

The Amendment Ordinance introduces new or revised regulatory

measures for liquidators and provisional liquidators, with the aim of
enhancing the integrity of the winding up process. These include the
following.

Duties, basis for determining remuneration and tenure of office of a

provisional liquidator in a winding up by the court

Sections 193, 194 and 196 of the CWUMPO are amended to set out
more clearly the duties, basis for determining remuneration and tenure
of office of a provisional liquidator in a winding up by the court.

Powers of provisional liquidators and liquidators in a winding up by

the court

Revised section 199 and new sections 199A and 199B and Schedule 25
set out the powers of different kinds of provisional liquidators and
liquidators in a winding up by the court and the restrictions and
exceptions in the exercise of such powers. Of note under section 199 is
that in a winding up by the court, the liquidator will have power to
directly appoint a solicitor to assist him in the performance of his duties
by giving 7 days’ advance notice to the Committee of Inspection (COI)
or, where there is no COI, to the creditors. Currently, the liquidator has to
obtain the sanction of the court or COI before exercising such power.

Prohibition of touting for appointment as provisional liquidator,

liquidator, receiver or manager

The offence under section 278A is extended to prohibit the giving,

agreeing or offering to give to any person (instead of only to a member
or creditor of the company under the existing section 278A) valuable
consideration with a view to securing his own appointment or securing
or preventing the nomination of some other person as provisional
liquidator or liquidator of a company (instead of only as liquidator under
the existing section 278A). A new section 297B creates a like offence in
respect of the appointment or nomination of a person as a receiver or
manager of the property of a company.

Liquidators’ liabilities for misfeasance, breach of duty or trust

despite release. 

Section 276 is revised to provide that a liquidator will not be absolved

from liabilities arising from his misfeasance, breach of duty or breach of
trust notwithstanding that he has obtained a court order under section
205 releasing him from the position of liquidator after completion of the
winding up or when he resigns or is removed as liquidator. Creditors or
other interested parties will be able to apply to court for leave to take
legal action against the liquidator after his release. To protect liquidators
from unreasonable or frivolous litigation against them, a new provision
states that such legal action can only be taken with leave of the court.

Private and Public Examination Procedures

New sections of the CWUMPO and new rules in the CWUR will be
introduced, with the aim of improving public examination procedures.

Power to order public examination of promoters, directors etc.

Currently, under section 222 of the CWUMPO, when the court has made
an order for the winding up of a company and the Official receiver or
liquidator reports that in his opinion a fraud has been committed by any
person in the promotion or formation of the company or by any officer
in relation to the company since its formation, the court may direct a
person (examinee) to attend a public examination by the court. The
examinee is provided with a copy of the report prior to the examination.
Under a new section 286A and Rule 51A, there will be no requirement to
provide the examinee with the report before he attends the examination.

Currently, under section 168IA(1) of the CWUMPO, the Official Receiver

can apply to court for a public examination by a report stating that in his
opinion a prima facie case exists against any person that would render
that person liable to a disqualification order under Part IVA of the
CWUMPO. Section 168IA(7) currently provides that the examinee has a
right to be provided with a copy of the report before attending the
examination, but under the Amendment Ordinance, section 168IA(7) is
amended to remove that right.

The rationale for not providing the examinee with a copy of the report
prior to the examination is that it may contain information which, if
disclosed to the examinee, may adversely affect the effectiveness of the
order being sought or even frustrate its purpose, as the examinee may
be minded to conceal, dissipate or destroy relevant information or
materials which may tend to incriminate him.

A new Rule 51A(2) of the CWUR provides that the examinee may apply
to court to see the report if he satisfies the court that it would be unfair
for him not to be allowed to see it. In addition, protection given to the
examinee under the existing Rule 54 of the CWUR will remain: the
Official Receiver or liquidator is required to give the examinee a “Notice
to Attend Public Examination”, which sets out the matters to be
examined during the examination, for example, their conduct or dealings
in relation to the company, thereby giving the examinee an opportunity
to seek legal advice on those matters prior to the examination.

New sections 168IB and 286D will also safeguard the examinee’s
interests, in that any answers or affidavits given by him during the public
examination which might tend to incriminate him will not be admissible
in evidence against him in criminal proceedings.

Removal of Liquidator

A new Section 244A in the Amendment Ordinance and new CWURs

154A and 154B set out the procedures for resignation and removal of a
liquidator or former liquidator in a voluntary winding up (in addition to
the procedures for removal of a liquidator in a winding up by the court
currently provided in the CWUMPO).

Transitional and saving Provisions

Reference should be made to Schedule 26 of the Amendment Ordinance

for details of the applicability of the Amendment Ordinance to certain
events which take place before the 13 February 2017 commencement
date. For example, if a statutory demand was served under the former
s.178 (1)(a) before 13 February 2017, the demand continues to have
effect.

3
The Insolvency and Bankruptcy Code, 2016 (IBC) has impacted companies and assets
across various industries and has thrown up a range of opportunities for potential investors.
In order to promote investment activity and ensure effective revival of stressed assets, it is
critical for the legal framework to be unambiguous and practically workable. While the IBC
framework has largely been considered effective so far, there remains a lack of clarity on
certain issues that could have practical implications for potential investors and resolution
applicants.

This article addresses one such issue – the fate of winding up proceedings pending before
High Courts, once an IBC proceeding is subsequently admitted by the National Company
Law Tribunal (NCLT).

The New Regime

The IBC introduces the 'corporate insolvency resolution process' (CIRP), an entirely new
mechanism that permits defaulting debtors a moratorium period in which to revive their
financial woes, under a creditor-in-control approach. The IBC overhauls the regime under
the Companies Act, 1956 (1956 Act), which provided for winding-up of a company on
grounds of its 'inability to pay debts'. The winding-up regime was adjudicated before High
Courts, while NCLTs are the adjudicating authority under the IBC.

Transition
The Central Government framed rules (Transfer Rules)1 to determine how pending winding
up matters would be dealt with once the IBC comes into force.

The Transfer Rules provided that if a winding up petition had been served on the
respondent, the petition would continue before the High Courts under the old regime. If a
petition had not been served, it would be transferred to the IBC regime before the NCLTs,
subject to the petitioner submitting additional documents. The period for this transition is now
over2. As on date, matters pending before the High Courts should be those that were
required to continue before the High Courts under the Transfer Rules3.

Maintainability of an IBC Action in the face of Winding Up Proceedings

The Transfer Rules did not clarify if fresh proceedings could be initiated under the IBC even
where there were pending winding up proceedings for the same debtor company which were
being heard by the High Courts (i.e., winding up proceedings which were not transferred
pursuant to the Transfer Rules).

In this regard, a 3-member bench of the NCLT, Principal Bench, New Delhi4, has recently
held that there is no bar imposed on NCLTs to admit an IBC petition despite pendency of a
winding up petition, unless an official liquidator has been appointed and a winding up order
has been passed. By implication, where the preceding two conditions are met, an IBC
petition would not be maintainable.

The 3-member bench did not clarify what would be the fate of such a pending winding up
proceeding, if a subsequent IBC action is admitted.

Moratorium under the IBC

Section 14 of the IBC provides that upon admission of an IBC petition, there would be a
moratorium on institution or continuation of pending suits or proceedings against the debtor,
including execution proceedings in any court of law, tribunal, arbitration panel or other
authority. Section 14 appears to be wide enough to cover pending winding up proceedings
and a bare reading of the section suggests that the moratorium would apply to such winding
up proceedings. However, Section 14 uses the words "suits or proceedings" and it could be
argued that the moratorium under this section was intended to apply only to proceedings that
are in the nature of suits.

High Courts appear to have taken conflicting views on the issue. The High Court of
Judicature at Hyderabad5 has held that an inferior/subordinate tribunal like NCLT, which is
constituted under the Companies Act, 2013, cannot grant an injunction on
institution/prosecution of proceedings in superior courts like High Courts6, which are
constituted under the Constitution.

There could be arguments in counter to the above decision. For instance, it can be argued
that the High Courts, while adjudicating on winding up matters, are exercising their
jurisdiction as a company court under the 1956 Act. Additionally, the IBC provides that it
overrides all other laws7 and it could be argued that the moratorium under Section 14 should
prevail over a pending winding up proceeding under the 1956 Act.

The Bombay High Court, in a later decision, has taken a contrary view and held that the
NCLT is not subordinate to the High Court. The Bombay High Court8 observed that post-
notice winding up petitions (i.e., petitions which have been served on the respondent) are to
continue before the High Courts, but this did not bar a new proceeding from being filed under
IBC and also indicated that a moratorium order passed by NCLT under Section 14 would
apply to such post-notice winding up petitions.

What it Means for Investors and Resolution Applicants

Both the High Court decisions discussed above are in appeal. Until the issue is resolved, it
seems that there will be some uncertainty in IBC processes involving corporate debtors who
are faced with prior winding up actions. This lack of certainty is far from ideal for a potential
investor or resolution applicant looking to acquire targets or assets that are subject to the
IBC processes.

Another potential implication is that even after a resolution plan is approved and IBC
proceedings end, a pending winding up proceeding that predates the IBC action, could
potentially revive. The Section 14 moratorium remains in force until a resolution plan is
approved or a liquidation order is passed by the NCLT. Therefore, theoretically speaking, a
winding up proceeding that predates an IBC action, may potentially revive once the
resolution plan is approved.

This poses another cause of concern for investors or resolution applicants, who may need to
account for the risk of defending previous winding up proceedings while assessing
investments in assets and targets that are subject to IBC processes. There could, of course,
be practical considerations involved in such a scenario. For instance, if the winding up
petitioner has submitted a proof of claim for its debt to the resolution professional (RP) under
the IBC process, and such debt is provided for under the resolution plan, the cause of action
for the winding up proceedings would cease.

Insolvency Law Committee and IBC Ordinance

In November 2017, the Insolvency Law Committee (Committee) was constituted to make
recommendations on issues arising from the implementation of the IBC and the Committee
recently gave its report9. In the report, the Committee recognised the need to avoid multiple
and possibly conflicting orders in winding up/liquidation proceedings of the same corporate
debtor.

Pursuant to the Committee's recommendations, the Insolvency and Bankruptcy

(Amendment) Ordinance, 2018 was brought into force and Section 434 of IBC was amended
to permit parties to approach the High Court and request for transfer of a pending winding up
proceeding to the NCLT under the IBC regime. As per the amendment, once the transfer is
granted, the winding up petition would be treated as an application for initiation of CIRP, or,
in other words, an IBC petition.

Conclusion: Towards Resolution

While the intent of the amendment seems to avoid conflicting proceedings, it does not
appear to provide a workable solution to the problem. The amendment mentions that a
winding up petition can be transferred to NCLT and treated as an IBC petition. Accordingly,
the amendment proceeds on the basis that a winding up petitioner would apply for a transfer
to the IBC regime only where a fresh IBC petition is maintainable, but not where an IBC
petition is already admitted. In the latter situation, another IBC petition would not be
maintainable and any creditor that wants its debt to be covered in the resolution plan, would
need to submit a proof of claim before the RP. Had the amendment clarified that a pending
winding up petition can be withdrawn and used as a basis for submitting a proof of claim,
perhaps the intent would have been clearer.

Having said that, it is encouraging to see that legislative cognizance is being taken of the
ambiguities in the IBC and there appears to be an intent to iron out practical glitches in
implementing the intent of the law. Given the pace at which the law is evolving and the
volume of IBC cases which are potential sources of precedent, one can be hopeful that the
interplay between winding up and the IBC regime will be settled soon.