Transfer of Winding Up Proceedings under the Insolvency and Bankruptcy Code - Why the Supreme Court needs to rethink its approach

In State Bank of India v. Shakti Bhog Foods, the question, whether IBC proceedings could commence post appointment of the Official Liquidator, is pending decision of the Hon’ble Supreme Court of India. The Supreme Court can use this case to settle the broader question, whether a fresh resolution process in every Saved Petition must be allowed without regard to S.446. Changing the current approach of the Company Courts and the NCLTs towards IBC proceedings in Saved Petitions would not only minimize value destruction, but also accommodate various stakeholder interests involved during winding up. This article establishes the reasons for doing so writes Akshata Singh.


In 2015, with a total of 5,181 cases pending at the stage of liquidation,1 the Bankruptcy Legislative Reforms Committee, noting the value destruction caused by protracted liquidation proceedings, recommended (i) enactment of a creditor driven debt resolution process; and (ii) establishment of ten (10) NCLT benches with supervisory jurisdiction over such resolution processes. The Insolvency and Bankruptcy Code 2016 (IBC) substituted S.434 of the Companies Act 2013 (Companies Act) to enact a transitional regime from winding up to the IBC. The substituted S.434(1)(c) mandated transfer of winding up petitions which were pending at the stage prescribed by Central Government to the NCLT for resolution under the IBC. While this reduced the caseload of pending winding up petitions, the Central Government’s discretionary power to prescribe a cut-off stage for transfer of winding up proceedings, gave it flexibility to facilitate transition from winding up regime to the IBC without overburdening the newly established NCLTs.2 Initially, the winding up petitions at the presentation stage were transferred. The remaining petitions were to be dealt with by the Company Courts under the Companies Act 1956 (Old Companies Act) and applicable rules (such petitions, Saved Petitions).

Eventually, various applications were filed under the IBC, where Saved Petitions were already pending against the corporate debtor. Accordingly, to avoid parallel proceedings, the Insolvency and Bankruptcy (Second Amendment) Act 2018 (IBC Amendment), inserted an additional proviso to S.434 giving any party to any winding up proceeding the option to apply for transfer of such proceedings to the NCLT as an application for reference under the IBC (S.434 Proviso).3

1. Joint Committee on Insolvency and Bankruptcy Code 2015, Sixteenth Lok Sabha, Report on the Insolvency and Bankruptcy Code 2015, First Report, 77 (April 2016, available at <> (Last accessed on 14 April 2020).
2. Ibid.
3. Cl.39, the Insolvency and Bankruptcy Code (Second Amendment) Act 2018. (‘IBC Amendment’)


As S.434 Proviso has been at the center of a prolonged debate, it would be instructive to set out its legislative intent and judicial interpretation.


The Insolvency Law Committee (Committee) was set up with the task of examining the shortcomings in the IBC. The Committee Report, which formed the basis for the IBC Amendment, acknowledged the confusion arising out of applicability of the IBC on Saved Petitions and examined the approach adopted by various High Courts in cases pertaining to the S.434 Proviso.4 The Committee highlighted the Bombay High Court ruling in Jotun India Private Limited v PSL Limited5 (Jotun India) which had held that a pending Saved Petition was no bar on initiation of resolution process of the company. The Supreme Court approved of this position of law in Forech India Limited v. Edelweiss Asset Reconstruction Company Limited (Forech India).6

4. Insolvency Law Committee, Report of the Insolvency Law Committee, 25 (26 March 2018). (‘Committee Report’)
5. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom).
6. (2019) SCC OnLineSC 87.

While acceding to Jotun India, the Committee caveated that S.446 of the Old Companies Act imposed a stay on further proceedings against the company, after appointment of a provisional liquidator or the issuance of a winding up order, and that in such cases, continuation and commencement of insolvency proceedings without the leave of the Company Court in the relevant Saved Petition, would be inapposite.7 Accordingly, it recommended that the Company Courts should have jurisdiction to grant or deny leave to any insolvency applicant under S.446 in an advanced stage winding up proceeding, to avoid parallel or conflicting proceedings under Old Companies Act and IBC.8 However, no steps were taken to implement the recommended amendment to the IBC, Companies Act and the Companies (Transfer of Pending Proceedings) Rules 2016, to bestow express jurisdiction on the Company Courts under S.446 with respect to prospective insolvency applications against companies with Saved Petitions.9 In this regard, it is pertinent to note, that non-implementation of a recommended amendment, does not define or affect court’s interpretation of the provision.10

7. Committee Report, supra note 7, ¶ 25.7.
8. Ibid.
9. Committee Report, supra note 9.
10. Navtej Singh Johar v Union of India, AIR 2018 SC 4321, ¶ 92 (per Nariman, J.).

The dichotomy between time bound resolution of the IBC and conspicuously protracted winding up proceedings, escalated the number of transfer applications under the S.434 Proviso. Such applications were met with objections on four (4) main grounds summarized below.

Firstly, the S.434 Proviso gave the Company Court the discretion to dismiss a transfer application.11

Secondly, transfer of winding up proceedings to the NCLT was not a mere change of hands between High Court and NCLT, it changed the objective, mode and stage of the process. The control of the process shifted from the Company Court to the committee of creditors and the resolution professional. And the winding up proceedings, ongoing for years reverted to the initial hearing stage as insolvency applications.

Thirdly, where the Company Court had ordered winding up or appointed a provisional liquidator to take over company’s assets, transfer of proceedings wasted time and destroyed value, contrary to the intent behind the IBC.

Lastly, those winding up proceedings registered based on a recommendation of the Board for Industrial and Financial Reconstruction (BIFR) under Sick Industrial Companies (Special Provisions) Act 1985 (SICA),12 were saved under the Companies Act, irrespective of their stage,13 and the Company Courts were to continue with them. Based on these grounds, several parties objected to transfer of proceedings and initiation of a resolution process under the IBC.

11. Tata Capital Financial Services Limited v Shree Shyam & Pulp Board Mills Limited, 2018 SCC Online Del 11365; See also Reserve Bank of India v Sahara India Financial Corporation Limited, (2019) 3 ADJ 540.
12. (SICA was enacted to secure a timely detection and take ameliorative measures for sick and potentially sick companies and determination. Under SICA, BIFR had wide powers, including : (i) conducting an inquiry in the working of the company; and (ii) recommending winding up of the company on just and equitable grounds).
13. Rule 5(2), Companies (Transfer of Pending Proceedings) Rules 2016.

These objections were rejected by the Supreme Court in Jaipur Metals Employees Union v Jaipur Metals Private Limited14 (Jaipur Metals) and Forech India. The Supreme Court clarified that, irrespective of whether it was a Saved Petition or a winding up petition under SICA, on an application by any party under the S.434 Proviso, the Company Court must transfer the proceedings, unless a final winding up order had been passed.15 This implied that transfer of proceedings under S.434 Proviso was not discretionary but mandatory, unless a winding up order had been passed.

In Jaipur Metals, the facts involved a company whose reference to BIFR dated back to 1997. The BIFR on 26 September 2002, after finding no likelihood of revival, recommended winding up. While the winding up petition was registered in 2009, an insolvency application under the IBC as well as an application for transfer of winding up proceedings was filed before the NCLT and the Company Court, respectively. The insolvency application was admitted, but the Company Court refused to allow an application for transferring the winding up proceedings and set aside the NCLT admission order. While setting aside the Company Court order, the Supreme Court clarified aspects S.434 of the Companies Act. The Supreme Court, inter alia, held:

  • the Company Court must transfer proceedings, once an application was made under S.434 Proviso;16
  • As proceedings under the IBC17 were independent of winding up, a creditor could file an insolvency application before a final winding up order was passed;18
  • in view of the non-obstante clause under S.238 of the IBC19 (Non-Obstante Provision), winding up proceedings could not proceed until the resolution process under the IBC had run its entire course;20 and
  • winding up proceedings filed pursuant to recommendation under SICA, were to continue with only until a party files an application for transfer.21
14. Jaipur Metals Employees Union v. Jaipur Metals Private Limited [2019] 213CompCas25(SC).
15. Jaipur Metals Employees Union v. Jaipur Metals Private Limited [2019] 213CompCas25(SC), ¶15.
16. Ibid.
17. (Under the IBC, proceedings for debt resolution of a company can be initiated : (i) by a financial creditor as defined under S. 5(8) of the IBC; (ii) by an operational creditor as defined under S. 5(21); or (iii) by the Company itself after its shareholders have passed a special resolution to this effect).
18. Jaipur Metals Employees Union v. Jaipur Metals Private Limited [2019] 213CompCas25(SC), ¶ 17.
19. See S.238, Insolvency and Bankruptcy Code 2016, (238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.)
20. Jaipur Metals Employees Union v. Jaipur Metals Private Limited [2019] 213CompCas25(SC), ¶18.
21. Ibid, ¶ 15.

However, Jaipur Metals did not deal with the important aspect of position of S.446 of the Old Companies Act viś-à-viś the Non-Obstante Provision. While the Bombay High Court in Jotun India dealt with primacy of IBC over the Companies Act, it did not rely on the Non- Obstante Provision.

Forech India also related to admission of an insolvency application during the pendency of a corresponding Saved Petition. The impugned NCLAT order had dismissed an appeal against the admission order under IBC, holding that initiation of winding up was not a bar against IBC proceedings until a winding up order had been passed, but left the question whether a resolution process could be initiated after the Company Court had passed the final winding up order, open. The Supreme Court did not intervene with the NCLAT order, and expressed its approval of the Jotun India ruling. To outline the implication of such approval, the law declared by Jotun India is set out below:

  • IBC was applicable to all companies which came within the definition of corporate person,22 including companies with Saved Petitions;23
  • The moratorium under the IBC would apply to a post notice winding up petition,24 including cases where S.446 was applicable;25
  • The Supreme Court in Madura Coats v Modi Rubber Limited26 held that SICA would prevail over the Companies Act, and by virtue of replacement of SICA by the IBC (Section 252 read with Schedule VIII of the IBC), IBC would override the Companies Act;27
  • The NCLT was not subordinate to a High Court acting as Company Court.28 Hence, S.41(b) of the Specific Relief Act, 1963 and S.64(2) of the IBC barred the Company Court from suspending NCLT proceedings,29 notwithstanding an admitted winding up petition pending as on the date of filing the insolvency application.
22. See S.3(7) Insolvency and Bankruptcy Code 2016, ( defines a ‘corporate person’).
23. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶69.
24. Ibid, ¶ 67.
25. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶ 71.
26. Madura Coats v. Modi Rubber Limited, (2016) 7 SCC 603.
27. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom) ¶ 62.
28. Ibid, ¶ 77.
29. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶ 85.
II.B.1. Generality v Exception: Distinguishing Jotun India from Saved Petitions

In Jotun India, the Bombay High Court relied on the SICA and IBC, to rule that S.446 of the Old Companies Act was not a bar to an application under the IBC. However, several important factual distinctions exist between Jotun India and general Saved Petitions.

Firstly, S.446 was inapplicable in Jotun India, as no provisional liquidator had been appointed in the relevant winding up proceedings, at the time of admission of the insolvency application.30 Thus, the question of primacy of IBC over S.446 was not material to the decision of the court. This makes the Bombay High Court’s view on applicability of S.446 on IBC proceedings obiter dictum of the court.

Secondly, a reference under SICA in relation to the corporate debtor, was pending when SICA was repealed.31 The corporate debtor had availed its right under S.4(b) of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (Repeal of SICA Act) , which expressly enabled companies with pending SICA references at the time of its repeal, to apply for voluntary resolution under the IBC, within 180 days from 1 December 2016.32 Since the case involved a right to apply under the IBC under a special statute, the tenability of providing every creditor with the right to apply directly apply under the IBC in Saved Petitions was obviated. 33

Thirdly, winding up proceedings against PSL Limited were at a standstill due to a SICA enabled moratorium,34 and any injunction against SICA proceedings by the Company Court was barred.35

30. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶2.1.
31. Ibid, ¶52.
32. S.4(b) Repeal of SICA Act.
33. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶52.
34. S.22, Sick Industrial Companies (Special Provisions) Act, 1985. (‘SICA’)
35. M/S Rishabh Agro Industries Ltd v. PNB Capital Services Ltd, (2000) 5 SCC 515.

Lastly, the Supreme Court in Bank of New York Mellon v Zenith Infotech36 had already held that companies with a BIFR reference pending at the time of operationalization of the IBC had, by virtue of S.252, a remedy under the IBC, even in cases where a final winding up order had been passed.37 Thus, the insolvency application in Jotun India, was the result of an express statutory right to apply under the IBC, despite a final winding up order under the Companies Act, which is not the case with S.434 Proviso or a parallel insolvency application in Saved Petitions. Accordingly, before treating Jotun India, and its approval by the Supreme Court, as a precedent on the question of interplay between the IBC and S.446, the exceptional facts in Jotun India must be acknowledged.

II.B.2. IBC v Companies Act: The Question of Primacy

In Jotun India, Court’s inference of IBC’s prevalence over S.446 was based on, (i) the primacy of SICA over the Companies Act; and (ii) the replacement of SICA by the IBC. The Bombay High Court’s assumption that the replacement of SICA by the IBC would ipso facto vest the IBC with primacy over the Companies Act38, is flawed in its reasoning.

Firstly, if the intent was to give all parties the equal right to apply under the IBC, even in cases of Saved Petitions, the legislature would not have substituted S.4(1)(b) of the Repeal of SICA Act through the IBC, to expressly provide companies pending resolution under SICA at the time of repeal, the benefit to apply under the IBC notwithstanding a winding up order.

Secondly, the legislative intent behind Saved Petitions, as indicated by the Committee Report, was that the relevant Company Court was the appropriate forum for granting or denying leave to initiate IBC proceedings, owing advanced stage of the winding up proceedings.39 The unilateral prevalence of the Non-Obstante Provision over the discretionary power of the Company Courts under S.446, negates this intent.

Lastly, there are key differences between operation of SICA and the IBC. SICA and the Companies Act had mutually exclusive jurisdictions. A reference under SICA and the proceedings before the BIFR, concluded before winding up. The seminal jurisprudence on this as laid down in Tata Motors Limited v Pharmaceutical Products of India Limited40, is that the jurisdiction of Company Courts was not concurrent with that of the BIFR and therefore, the Company Court could not exercise its jurisdiction during proceedings under SICA. In stark contrast to this, the IBC and winding up have concurrent jurisdiction, as the IBC governs both resolution and liquidation of a Company. On juxtaposing SICA with the IBC viś-à-viś the Old Companies Act, we find that the former preceded liquidation and winding up, while the later replaces winding up, and for this purpose the legislature has enacted a transitional regime between the IBC and Companies Act. Therefore, inventing a separate premise to govern the relationship between IBC and the Companies Act by virtue of SICA is unjustified.

36. Bank of New York Mellon v. Zenith Infotech, 2017 (5) SCC 1.
37. Ibid, ¶ 19.
38. Jotun India Private Limited v. PSL Limited, [2018]142C LA290(Bom), ¶ 62.
39. Committee Report, supra note 9.
40. Tata Motors Limited v. Pharmaceutical Products of India Limited , (2008) 7 SCC 619.

Even if one concedes to the corollary derived from IBC’s replacement of the SICA, the occupied field for SICA was only debt resolution, while IBC governs both debt resolution and winding up as defined under S.2(94A) of the Companies Act. Hence, the IBC can only prevail over Companies Act to the extent it replaces SICA, that is, for debt resolution and not when the winding up proceedings are at the liquidation stage.


The Delhi High Court, in its recent division bench judgment, Action Ispat & Power Private Limited v Shyam Metallics & Energy Limited & Others41 (Action Ispat), held that a winding up order sets the ball rolling and is not final until the Court passes a dissolution order.42 The case involved an application under S.434 Proviso after a winding up order had been passed. The Court held that unless an irrevocable step was taken towards liquidation of the company, such as disposal of assets, revival must be explored, and cited its inherent power under Rule 9 of the Company Court Rules 1959 to recall the winding up order,43 while allowing the transfer of winding up proceedings to the NCLT. The Delhi High Court’s detour from the legal position laid down in Forech India, by removal of the winding up order as the longstop for initiation of resolution process caused NCLTs to follow by admitting insolvency applications against companies which were being wound up, which can be problematic for the company’s assets and stakeholders. This section addresses such stakeholder interests that are adversely affected by IBC proceedings. While a last gasp try towards debt resolution could be considered laudable, on looking closely, the pitfalls become obvious. The cases discussed below highlight the practical reality of belated switch between winding up and the IBC, which, contrary to general belief among Courts, is leading to further protraction and value destruction.

41. Action Ispat & Power Private Limited v. Shyam Metallics & Energy Limited, [2019]217CompCas 356(Delhi). (‘Action Ispat’)
42. Ibid,¶37.
43. Action Ispat, supra note 45.

Generally, the end result of winding up proceedings is liquidation but, in certain cases, a court supervised settlement between creditors and the promoters or new buyers may also be a possible outcome. Under S.394 of the Old Companies Act, the Company Court could approve a settlement between the company and its creditors as a scheme under the Old Companies Act, on approval of such scheme by the requisite majority of creditors. Unlike the resolution process under the IBC, which requires approval of 66% of the voting share of the committee of creditors, a settlement under S.391 of the Old Companies Act, requires only the approval of the requisite majority of relevant class of creditors and if the scheme is approved, it is binding on all creditors of such class. The first problem that arises in allowing IBC proceedings in Saved Petitions, is that IBC proceedings may provide a competing forum to dissenting creditors to disrupt scheme proceedings where the scheme of compromise has already undergone creditor voting, and is at the final stage of approval before the Company Court. Any dissenting creditor to an approved scheme, may apply under Ss. 7 or 9 of the IBC or under S.434 Proviso to evade adherence to the terms of the scheme. The judicial approach to instantly allow or admit IBC proceedings without regard to factors other than debt and default practically guarantees derailment of settlement proceedings under Companies Act.

In Sunil Kumar Dahiya v Union of India & Ors44, the promoter of the corporate debtor challenged the IBC admission order in a writ petition. In this case, the NCLT had disregarded the court supervised settlement proceedings between promoters and creditors under the Old Companies Act. Several home buyers had explored resolution of disputes through mediation, and on 4 December 2017 the parties reached a settlement under aegis of the Delhi High Court Mediation Centre. This settlement, approved by 80% of the company’s creditors, was placed before the Company Court and the matter was reserved for judgment on 13 May 2019. Even so, on 10 October 2019, the NCLT admitted an insolvency application. In view of the IBC moratorium, scheme proceedings were rendered ineffective, right before the scheme was to take effect. The Single Judge bench, while admitting the writ petition and granting stay on the NCLT admission order, observed two downsides to the NCLT admission order, namely: (i) the Company Court was already seized of revival of the corporate debtor and had reserved judgment in that regard; and (ii) the settlement was an outcome of more than five (5) years of deliberation and such time and effort could not be wasted.

In certain Saved Petitions, Company Courts have proceeded under S.394 of the Old Companies Act to resolve debt of particular classes of creditors. While the IBC allows a similar scheme of compromise proceedings under S. 230 of the Companies Act, it is only at the stage of liquidation, after the 180 days resolution process has run its course.45 Therefore, direct initiation of IBC proceedings where scheme proceedings in Saved Petitions are underway, would not only render the Company Court’s powers under S.394 nugatory, but also defeat the objective of the IBC by causing further delay in settlement of debt. This is not to say, that if scheme proceedings are underway, creditors of other classes do not have the option to initiate a resolution process that resolves the consolidated debt of the Company, but this is a matter solely for adjudication by the Company Court supervising the scheme proceedings.

44. Sunil Kumar Dahiya v. Union of India & Ors, MANU/DE/3849/2019.
45. Regulation 2B, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.

Saved Petitions where winding up proceedings involve fraud investigation by way of a forensic audit or even an investigation by Serious Fraud Investigation Office (SFIO) are another category of cases for which inapplicability of S.446 may be problematic. In Ganesh Jain v Vasan Healthcare46, NCLT Chennai rejected objections based on ongoing conduct of a forensic audit ordered by the Company Court, and admitted the insolvency application. In cases of fraud, owing to their wider powers, the Company Courts retain jurisdiction over the company and its office holders, in order to facilitate the prosecution and any ameliorative measures which may be taken to compensate the defrauded parties. However, the IBC admission process shows lack of consideration for such factors by the NCLT which further demonstrates the need for giving effect to S.446.

In Rajni Anand v Cosmic Structures Ltd47, the Company Court rejected an application for transfer of winding up proceedings before the NCLT while observing that it had ordered investigation by SFIO into the affairs of Cosmic Structures Ltd and the liquidation proceedings were at an advanced stage. Accordingly, before delving into the question of debt and default, to save time and litigation costs the NCLT must defer to the Company Court’s opinion. The Company Courts, in cases involving complex issues of fraud are abreast of all the developments in the investigation and will be the appropriate forum to decide whether a fresh resolution process should be allowed.

46. Ganesh Jain v. Vasan Healthcare, MANU/TN/7512/2019.
47. Rajni Anand v. Cosmic Structures Ltd, [2019]213CompCas147(Delhi).

In Nitya Kukreja v ABW Infrastructure, on account of the forensic audit indicating serious fraud, the Company Court took several protective measures such as freezing bank accounts of the company, directing banks to produce statements of last three (3) years of the company, and directing issuance of production warrant against the accused officials of the company.48 However, the NCLT subsequently admitted an insolvency application,49 Making the status of protective orders passed by the Company Court, and the Company Court’s jurisdiction ambiguous. As jurisdiction of Company Courts in winding up cases does not relate only to debt resolution, initiation of IBC proceedings should be mindfully withheld where Saved Petitions require such wider jurisdiction.


During winding up proceedings, apart from financial creditors, there are several other stakeholders of the company, including: (i) service providers or customers of the company; and (ii) court appointed service providers during winding up or liquidation.

Under the first category, several stakeholders apply to the Company Court for declaratory orders against the company. For instance, in Avani Projects & Infrastructure Limited v The Official Liquidator,50 as the corporate debtor was a real estate developer, several homebuyers had filed an application in the Company Court for specific performance through transfer of possession or execution of agreement to sell. While these proceedings were ongoing, the NCLT admitted an insolvency application. Post admission under the IBC, the Calcutta High Court held that cases where the Company Court was required to pass declaratory orders after hearing the parties cannot be within the jurisdiction of NCLT. While the High Court’s order was a saving grace for several stakeholders, in many other cases, where the NCLT orders initiation of a resolution process without leave of the Company Court, the homebuyers and similar stakeholders are rendered remedy less. Due to the moratorium, a declaratory order against the company would not be enforceable, and even as members to the committee of creditors, it would be difficult for individual homebuyers to safeguard their interests without effective remedy.

48. Nitya Kukreja v. ABW Infrastructure, Co. Petition 449/2016 (Delhi HC, 13/09/2019).
49. M/S Bipin Industries (P) Ltd. v. M/S ABW Infrastructure (P) Ltd, MANU/NC/6124/2019.
50. Avani Projects & Infrastructure Limited v. The Official Liquidator, MANU/WB/2907/2019.

In Bipin Industries Limited v ABW Infrastructure51, an insolvency application against a real estate company was admitted by the NCLT after the Company Court had passed the final winding up order. Before admission of the insolvency application, the Company Court vide orders dated 13 September 201952 and 23 September 201953, had allowed applications for specific performance for execution of sale deed between a homebuyer and the real estate company. In a separate project which had neared completion, the Company Court had also supervised a scheme of compromise between homebuyers in a project and the respondent company. The scheme contemplated that the landowners, who were a third party, would take over the project from the respondent company to complete the project from the financial resources provided by the homebuyers and handover possession to homebuyers after completion.54 However, initiation of resolution process frustrated the ongoing proceedings, leading to further delay in delivery of possession to the homebuyers and confusion regarding their status vis â vis the company. Eventually, the NCLT vide order dated 12 March 2020, extended the resolution process by 90 days and directed the resolution professional to obtain ‘appropriate orders’ from the Company Court with respect to winding up proceedings.55

51. M/S Bipin Industries (P) Ltd. v. M/S ABW Infrastructure (P) Ltd, IA 1789(PB)/2020 in CP No. (IB)-375(PB) /2018 (NCLT, Principal Bench, 12/03/ 2019).
52. Nitya Kukreja v. ABW Infrastructure Limited, Co. Appl. 952/2019 in Co.Pet.449/2016 (Del HC, 23/09/2019).
53. Ibid.
54. Nitya Kukreja v. ABW Infrastructure, Co. Appl. 343/2019 in Co. Pet 449/2016 (Del HC, 23/05/2019).
55. Supra note 55.

The abovementioned instances demonstrate that before initiation of resolution process individual application pursued by stakeholders must be considered before initiating parallel proceedings under the IBC. Without leave of the Company Court, IBC proceedings can be counterproductive, and cause further delay in obtainment of an effective remedy for the stakeholders and realization of proceeds from the company’s assets.

The second category of stakeholders, that is, the court appointed service providers such as forensic auditors, valuers, security agency. Under the Companies Rules, the expenses incurred in preserving, realizing or getting the assets are to be paid in priority over all other winding up costs.56 Furthermore, the contract between the liquidator and the service provider captures liquidator’s obligation to pay the service providers in priority. However, once a winding up petition is transferred to the NCLT, and the NCLT proceeds with the resolution process, the property of the company does not vest with the Official Liquidator. In this scenario, the right of service providers to be paid in priority to any other creditor becomes ambiguous. One of the most recent examples of this situation was in Punjab National Bank v Hanung Toys & Textiles Limited and Action Ispat. In both cases, the Official Liquidator had appointed security agencies to secure premises of the respective companies. As per the standard contract between the Official Liquidator and the agencies, the concerned agency was to be paid before all other dues of the company or from the common pool fund of the Official Liquidator. When the Delhi High Court allowed transfer of winding up proceedings to the NCLT under the IBC, security agencies raised their concerns regarding priority of payment. The Delhi High Court transferred the proceedings to the NCLT,57 and observed that it did not have the jurisdiction to make appropriate orders and directed the agencies to approach the NCLT with the same prayer.58

56. Rule 338, Companies (Court) Rules, 1959.
57. Action Ispat, supra note 45, ¶ 45.
58. Punjab National Bank v. Hanung Toys & Textiles Limited Co. Appl. 24/2019 (Del HC, 27/11/2019).

Such an approach not only reduces the credibility of essential service contracts with the Official Liquidator, but also puts emergency service providers at the risk of being treated as operational creditors. On initiation of resolution process, the status of payment of these service providers becomes unclear as their fee would neither reflect as financial debt nor as the insolvency resolution process costs. In other words, such service providers could end up at the sole mercy of the committee of creditors and the interim resolution professional which is diametrically opposite to the priority guaranteed under the Companies Act and the contract. The only surety towards payment to services providers who assist the liquidator during winding up proceedings, is payment in priority to all other dues. Transfer of proceedings to the NCLT, could cause the payment of these service providers to be treated as operational debt, and would reverse the basis of underlying contract with the Official Liquidator. The property of a company vests with the Official Liquidator for the benefit of all the creditors, accordingly, the financial creditors should be estopped from a pay-out in priority to service providers. Further the payment of these service providers as operational creditors, would also amount to unjust enrichment on part of the committee of creditors. This is fixable by both the NCLT and the committee of creditors, but the lack of any express protective orders by the Company Court shows the need for more consideration by the Company Court before winding up proceedings are taken over by the NCLT.


The issue discussed in this paper, in its simplest form, is a question of the appropriate forum for deciding whether IBC proceedings would be viable solution for a financially distressed or insolvent company. While deciding this question, the Court cannot take a call based on a literal reading of the law. The tenability of NCLT assuming jurisdiction, in advanced winding up proceedings, is a separate question, which needs to be considered while keeping in mind that it will be decisive for the fate of various stakeholders and the protective and substantive orders, passed during the winding up proceedings. It is imperative that the Supreme Court acknowledges this in deciding whether a resolution process would be the best way forward.

Recently, the Company Courts, NCLTs, and NCLATs have relied on Forech India to hold that they do not have any discretion in an application for transfer of winding up proceedings, and to dismiss objections to insolvency application regarding advanced winding up proceedings. However, the rationale behind S.446 is to safeguard the assets of the company from wasteful litigation in relation to matters that the Company Court could decide more expeditiously. S.446 does not annul proceedings which are initiated without leave of the Company Court, but only provides the Company Court the sole discretion to grant leave for pursuing any claims against the company. Due to a lack of provision for annulment of proceedings for non-compliance of S.446, it becomes the joint responsibility of the Company Courts and the NCLTs to give effect to S.446. This course of action will ensure that the Company Court considers the spectrum of stakeholder interests involved in the winding up petition. While IBC proceedings are aimed at debt resolution by putting the banks and other financial creditors in charge, a winding up petition deals with a large stakeholder base, including service providers before and during the winding up proceedings, incoming buyers and statutory authorities investigating possible fraudulent activities. The presence of these stakeholders warrants a deeper inquiry into the current status of winding up proceedings before allowing initiation of a fresh resolution process. Jurisdiction under the IBC to find debt and default is insufficient for such inquiry. S.446, on the other hand, strikes a balance between stakeholder interests and debt resolution by giving the Company Court the discretion to allow IBC proceedings with or without additional conditions, and to consider whether the Company Court would be a more appropriate forum to adjudicate claims in certain cases. This will save unnecessary delay, further costs of the resolution process and preserve the value of the company’s assets.

In Forech India, the impugned NCLAT order, expressly acknowledged that an argument against initiation of fresh resolution process in Saved Petitions could be considered in a subsequent case. Thus, the Supreme Court in Shakti Bhog Foods v State Bank of India (CA No.4536/2018) must seize this opportunity to set an important precedent by acknowledging the importance of the Company Court’s view on initiation of resolution process in winding up cases. If all the relevant factors that are at play in the transfer of jurisdiction from a Company Court to the NCLT are considered, S.446 becomes an indispensable legal provision to protect the company’s stakeholders and the value of the company’s assets.

AKSHATA SINGH is an Advocate practising at Sultanpur, Uttar Pradesh and can be reached at