SC: If Winding-Up Process Is Reversible, Can Transfer Proceedings to NCLT

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This case concerns the stage at which winding-up proceedings can be transferred from the High Court to the NCLT.

Brief Facts of the Case

The Winding-up petition under sections 433(e) and (f), 434 and 439 of the Companies Act, 2013 was filed by Shyam Metalics and Energy Limited (Respondent No. 1), seeking winding up of the Appellant company. The Company Judge in the Delhi High Court passed an order on 27.08.2018, directing the official liquidator to take over all the assets, books of accounts, and records of the company, prepare the complete inventory of assets, and also value the assets. 

An application was then filed before the Company Judge by the State Bank of India (SBI) (Respondent No. 2), being a secured creditor of the Appellant company, seeking the transfer of winding up petition to NCLT, as SBI had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code), pending before the NCLT. By order dated 14.01.2019, the petition was transferred. The appeal to the Division Bench was also dismissed by the impugned order. Thus, the Appellant had appealed to the Supreme Court

Appellant’s Argument

The Counsel for the Appellant referred to the judgments of Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., and M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman & Industries Ltd. & Ors. According to him, none of these judgments applies to the facts of the given case. Given the facts of this case, winding up proceedings before the High Court alone can continue, and parallel proceedings under the Code cannot continue.

It had been argued that Jaipur Metals clarifies that independent proceedings under the code can continue only when the stage is before a winding-up order is passed, which was the case on the facts before the Court. Similarly, in Forech, the stage of winding up proceeding was after the service of notice of winding up petition and before a winding-up order was passed, thus, 5th proviso to Sec. 434(1)(c) of the Companies Act, 2013, was applied. Likewise, in Kaledonia, the winding-up order passed on the facts of the case had been kept in abeyance. 

These three cases are completely distinguishable and would have no application to the circumstances in which the winding order had been passed and the Official Liquidator had seized the assets and begun the process of distribution to creditors and others which would result in the dissolution of the company.

Respondent’s Argument

 The Counsel had submitted that the 5th proviso to the Sec. 434(1)(c) of the Companies Act, 2013, provides that discretion transfer winding up proceedings to NCLT, without referring to the stage of winding up, vests in the Company Court. 

Even post-admission, if no irreversible steps have been taken, then a joint reading of 5th proviso to Sec. 434(1)(c) and Sec. 238 of the Code, would lead to the transfer of winding up proceedings to the NCLT, as not only is the Code a special enactment with a non-obstante clause which would, in case of conflicts to do away with the Companies Act, 2013, but also that the judgment given in Swiss Ribbons, held that winding up is the last resort after all efforts to revive a company failed. 

The discretion exercised by the Company Court and Division Bench had been judiciously and correctly exercised. 

Observation by the Court

The Court observed that the code tentatively began to transfer winding up proceedings to the NCLT, at a stage as may be prescribed by the Central Government. This was done by the Transfer Rules, 2016, and only those proceedings which are at a stage of pre-service notice of the winding-up petition stand compulsorily transferred to NCLT. 

The result, therefore, was that the post notice and pre-admission of winding up petitions, parallel proceedings would continue under both statutes, leading to an unsatisfactory state of affairs. This led to the introduction of the 5th proviso to Sec. 434(1)(c), which is not restricted to any particular stage of winding up proceedings, as pointed out in Kaledonia. 

Even post admission of winding up petition, and after the appointment of a company liquidator to take over the assets of a company sought to be wound up, it is the discretion of the Company Court to transfer such petition to the NCLT. 

In a winding-up proceeding, where petition had not been served in terms of Rule 26 of the Companies (Court) Rules, 1956 at a pre-admission stage, given the application of the Code, the winding-up proceeding is compulsorily transferable to the NCLT. Even post-issue of notice and pre-admission, the same result would ensue. 

If no irreversible steps had been taken by the Company Court, then it has to transfer the proceedings to NCLT. However, if the winding-up proceeding has reached a stage where it would be irreversible, to set the clock back, then the Company Court must proceed with the winding up. 

The findings of the Company Judge and Division Bench, that despite the possession and control of records and assets being taken by the liquidator, no irreversible steps have otherwise taken place. The Company Court rightly exercised discretion vested in it. 

The Decision of the Court

The Matter had been transferred by the High Court to the NCLT and do not find reasons to interfere with the aforesaid orders. 

The Appeals were therefore dismissed. 

Click here to view the original judgment


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