Transfer of Winding-up Proceedings Allowed Under S. 434, Restrictions Under 2016 Rules To Not Apply: Allahabad High Court

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This appeal relates to the question of transfer of winding-up proceeding from the High Court (Company Court) to the NCLT. 

Facts

M/s. Girdhar Trading Company, 2nd Respondent (Petitioning creditor) filed a petition before the Allahabad High Court for the winding-up of the first respondent company, under Sec. 433 of the Companies Act, 1956, as it was unable to pay its debt. The company court allowed the winding-up of the 1st Respondent company on 10.3.2016 and appointed an official liquidator attached to the High Court, Allahabad to take over the assets and books of the company. Subsequently, the 1st Respondent filed an application for recalling the winding-up order and paid the entire dues towards the Petitioning creditor (the second respondent) to prove their bonafide nature. Thus, the second Respondent did not object to the recalling of winding-up, but the official liquidator opposed it, as the Respondent owed an approximate amount of 27 crores to various other creditors. The Company Court held the order of winding-up in abeyance. Looking at the scenario, the Appellant, herein, claiming to be creditor filed an application under Section 7 of IBC before the NCLT, as the 1st Respondent had not paid ₹ 32 lakhs and further, moved another application before the High Court (Company Court) to transfer the winding-up petition to the NCLT, Allahabad. However, the High Court refused the application to transfer, therefore, the financial creditors filed this appeal. 

Observation by Court 

The Court observed the changes in Sec. 434, which was originally drafted in Act 18 of 2013, when it was substituted under IBC, Act 31 of 2016. It was pointed out that clause (b) of sub-section (1) dealing with the right of appeal before the High Court against any decision of the Company Law Board does not fit in the scheme of Sec. 434 because the provision as a whole provides for the transfer of proceedings pending either before Board of Company Law Administration or before the Company Court (the High Court or the District Court). 

The clause (c) of Section 434 mainly talks of transfer of proceedings to the Tribunal according to Companies Act 1956, pending either before the District Court or High Court. Clause (c), further, specifies about proceedings relating to arbitration, compromise, arrangements and reconstruction and winding-up. However, clause (c) is not constrained because of the words “All proceedings……. including” being used in the same. 

The first proviso to clause (c) was introduced under IBC Act and before that, it did not exist in the original Section 434, which was substituted. The first proviso to clause (c) circumscribes the transfer of proceedings for winding-up, from High Court to the Tribunal by stipulating that only such proceedings for winding-up which are at a stage prescribed by the Central Government, will be transferred to the Tribunal. 

Section 434 classifies the winding-up proceeding before the High Court in two categories, i.e., Proceeding for voluntary winding-up but the company not dissolved before 01.04.2017 and other types of winding-up proceedings. Both these categories are included in 4th proviso of clause (c) of sub-section (1) of Section 434. These cases of voluntary winding-up constituted in the fourth proviso will be handled by the High Court. It is only the cases of voluntary winding-up falling outside the ambit of 4th proviso and other types of winding-up proceedings, that can be transferred to the Tribunal, as per the rules made by Central Government under Sec, 434(2). 

The fifth proviso to clause (c) of Sec. 434 gives a choice to the parties to proceeding to seek transfer of winding-up proceedings to NCLT. This proviso specifies that “any party or parties to any proceedings relating to the winding-up of companies pending before any court”. However, the expression “parties to the proceedings” has neither been defined in Companies Acts and rules and nor in IBC, 2016. But, the provision of Companies Act, 1956, provides the clue to define who may fall within the ambit of the aforesaid expression. Section 447 of Companies Act, 1956, equivalent to Sec. 278 of Companies Act, 2013, state that “ an order for winding-up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory”

The Court concluded that the winding-up proceedings are proceeding in rem to which the entire body of creditors is a party. Even though the proceedings were initiated by one or two creditors, by a deemed fiction, the petition is treated as a joint petition. The official liquidator acts on behalf of the entire body of creditors. 

Under the power conferred by Sec. 434(2) of the Companies Act, 2013 read with Sec. 239 of IBC, 2016, the Central Government issued “The Companies (Transfer of Proceedings) Rules, 2016. Rule 5 and Rule 6 deal with the transfer of winding-up proceedings on the grounds of inability to pay debts and other than the inability to pay debts respectively. The Court observed that Rule 5 and rule 6 fixes the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which proceedings can be transferred. These restrictions under Rule 5 and 6 have no application to the fifth proviso of 434(1)(c). 

Decision of the Court

The Court allowed the application and set aside the impugned order, allowing the winding-up proceedings against the 1st Respondent to be transferred by the Allahabad High Court (Company Court) to the NCLT to be taken-up along with the Appellant’s application under Sec. 7 of the IBC. There was no order as to costs. 

Click here for the judgement in Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd.


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