2020 (12) TMI 535 - SC - Companies Law

Company Courts have discretion under section 434(1)(c) to transfer winding up petitions to NCLT even after liquidator appointment

ACTION ISPAT AND POWER PVT. LTD. Versus SHYAM METALICS AND ENERGY LTD.

The SC dismissed an appeal regarding transfer of winding up petitions from Company Court to NCLT. The Court held that the 5th proviso to section 434(1)(c) ... Winding up of Appellant Company - Transfer of winding up petitions from the Company Court to be tried by the NCLT - Applicability and interpretation of 5th proviso to section 434(1)(c) of the Companies Act, 2013 - HELD THAT:- The Code began tentatively by leaving proceedings relating to winding up of companies to be transferred to NCLT at a stage as may be prescribed by the Central Government - This was done by the Transfer Rules, 2016 (supra) which came into force with effect from 15.12.2016. Rules 5 and 6 referred to three types of proceedings. Only those proceedings which are at the stage of pre-service of notice of the winding up petition stand compulsorily transferred to the NCLT. The result therefore was that post notice and pre admission of winding up petitions, parallel proceedings would continue under both statutes, leading to a most unsatisfactory state of affairs. This led to the introduction of the 5th proviso to section 434(1)(c) which, as has been correctly pointed out in M/S KALEDONIA JUTE AND FIBRES PVT. LTD. VERSUS M/S AXIS NIRMAN AND INDUSTRIES LTD. & ORS. [2020 (11) TMI 587 - SUPREME COURT], is not restricted to any particular stage of a winding up proceeding - Therefore, what follows as a matter of law is that even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT. The question that arises before us in this case is how is such discretion to be exercised? The Companies Act, 2013 deals with winding up of companies in a separate chapter, being Chapter XX. When a petition to wind up a company is presented before the Tribunal, the Tribunal is given the power under Section 273 to dismiss it; to make any interim order as it thinks fit; to appoint a provisional liquidator of the company till the making of a winding up order; to make an order for the winding up of the company; or to pass any other order as it thinks fit [section 273(1)] - The Companies Act, 2013 deals with winding up of companies in a separate chapter, being Chapter XX. When a petition to wind up a company is presented before the Tribunal, the Tribunal is given the power under Section 273 to dismiss it; to make any interim order as it thinks fit; to appoint a provisional liquidator of the company till the making of a winding up order; to make an order for the winding up of the company; or to pass any other order as it thinks fit [section 273(1)]. Under section 292, subject to the provisions of the Companies Act, 2013, the Company Liquidator shall, in the administration of the assets of the company and the distribution thereof among its creditors, have regard to any directions which may be given by the resolution of the creditors or contributories at any general meeting [section 292(1)]. Thus, several stages are contemplated, with the Tribunal retaining the power to control the proceedings in a winding up petition even after it is admitted. Thus, in a winding up proceeding where the petition has not been served in terms of Rule 26 of the Companies (Court) Rules, 1959 at a pre- admission stage, given the beneficial result of the application of the Code, such winding up proceeding is compulsorily transferable to the NCLT to be resolved under the Code. Even post issue of notice and pre admission, the same result would ensue. However, post admission of a winding up petition and after the assets of the company sought to be wound up become in custodia legis and are taken over by the Company Liquidator, section 290 of the Companies Act, 2013 would indicate that the Company Liquidator may carry on the business of the company, so far as may be necessary, for the beneficial winding up of the company, and may even sell the company as a going concern - It is only where the winding up proceedings have reached a stage where it would be irreversible, making it impossible to set the clock back that the Company Court must proceed with the winding up, instead of transferring the proceedings to the NCLT to now be decided in accordance with the provisions of the Code. Whether this stage is reached would depend upon the facts and circumstances of each case. Despite the fact that the liquidator has taken possession and control of the registered office of the appellant company and its factory premises, records and books, no irreversible steps towards winding up of the appellant company have otherwise taken place. This being so, the Company Court has correctly exercised the discretion vested in it by the 5th proviso to section 434(1)(c) - Appeal dismissed. Issues Involved:1. Transfer of winding up proceedings from High Court to the National Company Law Tribunal (NCLT).2. Applicability and interpretation of Section 434 of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 (IBC).3. Discretionary power of the Company Court in transferring winding up proceedings to NCLT.4. Impact of the stage of winding up proceedings on transfer to NCLT.5. Jurisdictional conflict between High Courts and NCLT under the IBC.Detailed Analysis:1. Transfer of Winding Up Proceedings:The appeals arose from a judgment by the Division Bench of the Delhi High Court, which upheld the Single Judge’s order transferring a winding up proceeding pending before the High Court to the NCLT. The winding up petition was initially filed under sections 433(e) and (f), 434, and 439 of the Companies Act, 1956, seeking the winding up of the appellant company due to unpaid dues. The Company Judge admitted the petition and appointed the Official Liquidator (OL) to take over the company's assets. Subsequently, SBI, a secured creditor, filed an application to transfer the winding up petition to NCLT, which was granted by the Company Judge and upheld by the Division Bench.2. Applicability and Interpretation of Section 434 and IBC:The legal framework for transferring winding up proceedings is governed by Section 434 of the Companies Act, 2013, as amended, and the IBC. The 5th proviso to Section 434(1)(c) allows for the transfer of pending winding up proceedings to NCLT to be treated as an application for initiation of corporate insolvency resolution process under the IBC. The Supreme Court emphasized that the Code aims to ensure the revival and continuation of the corporate debtor by protecting it from its own management and from liquidation, which is a last resort.3. Discretionary Power of the Company Court:The Company Court has discretionary power under Section 434(1)(c) to transfer winding up proceedings to NCLT. This discretion must be exercised judiciously, considering the facts and circumstances of each case. The Court highlighted that the purpose of the IBC is to find the best possible solution beneficial to the company and its creditors, and parallel proceedings in different fora would stultify the objective of the Code.4. Impact of the Stage of Winding Up Proceedings:The Supreme Court clarified that even post-admission of a winding up petition and after the appointment of a Company Liquidator, the Company Court retains the discretion to transfer the proceedings to NCLT. The Court must assess whether irreversible steps towards winding up have been taken. If no irreversible steps, such as the sale of assets, have occurred, the proceedings can be transferred to NCLT. In this case, the liquidator had taken possession of the company's assets but had not taken irreversible steps, justifying the transfer to NCLT.5. Jurisdictional Conflict:The Supreme Court addressed the jurisdictional conflict between High Courts and NCLT. It emphasized that the IBC, being a special enactment with a non-obstante clause, overrides the Companies Act, 2013, in case of conflict. The Court reiterated that the Code is a beneficial legislation aimed at reviving the corporate debtor and should be given precedence. The Court referred to previous judgments, including Jaipur Metals, Forech, and Kaledonia, to support its conclusion that the transfer of proceedings to NCLT is permissible and aligns with the objectives of the IBC.Conclusion:The Supreme Court upheld the transfer of the winding up proceedings to NCLT, affirming the discretionary power of the Company Court under Section 434(1)(c) of the Companies Act, 2013. The Court emphasized that the IBC aims to revive and continue the corporate debtor's business, and parallel proceedings would undermine this objective. The appeals were dismissed, reinforcing the precedence of the IBC in resolving insolvency and bankruptcy matters.