Company Court’s Discretion in Transferring Winding-up Proceedings

*Bhavya Solanki

Section 434(1)(c) of the Companies Act 2013 deals with the transfer of pending winding up proceedings from any District Court or High Court to the National Company Law Tribunal(“NCLT”). In 2018, the famous 5th proviso was added to Clause c. A recent case of Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd. has comprehensively analyzed the proviso. The current post attempts to analyze the judgment and also sum up the emerging legal position in light of some previous cases.

Facts

Action Ispat and Power Pvt. Ltd. was the debtor, and Shyam Metalics and Energy ltd. and SBI were the creditors. Shyam Metalics sought winding up of Action Ispat. It filed a winding up petition and the HC Company Judge passed an order (“Order 1”) admitting the petition and appointing the Official Liquidator (“OL”).

Subsequently, SBI filed an application before the Company Judge to transfer the winding-up petition to NCLT as it had already filed an application under Section 7 of Insolvency and Bankruptcy Code 2016 (“IBC”)before the NCLT. As per another order (“Order 2”), the company judge transferred the petition. It was noted that since the OL had only been recently appointed, and had only seized the office and factory premises with other things yet to be done, transfer could be made. Therefore, the admission of petition and the appointment of OL through Order 1 stood revoked.

Action Ispat appealed against Order 2 to the division bench. The division bench noted that if the company judge has deemed the transfer to NCLT to be fit in the interest of equity and justice, the court would not ordinarily interfere with it, especially since no irreversible steps were taken by the OL. Further, if the liquidation proceedings were to continue, they would run parallel to the NCLT proceedings initiated by SBI which would serve no purpose. Action Ispat appealed against this judgment.

Issues

1. At what stage of the pending winding-up proceedings can they be transferred under Section 434?

2. How is the Company Court to exercise its discretion under the 5th proviso of Section 434?

Analysis

The analysis covered three judgments namely, Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd. (Jaipur Metals), Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.(Forech), and M/s Kaledonia Jute &Fibres Pvt. Ltd. v. M/s Axis Nirman& Industries Ltd.(Kaledonia).

The court prefaced its analysis with its observations in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India that the primary focus of IBC is the revival of debtor and liquidation (or winding up) is only available as a last resort. To provide a brief of the three cases:

1. Jaipur Metals case

A reference was made to Board for Industrial and Financial Reconstruction (“BIFR”)under Sick Industrial Companies Act 1986 by 1stcreditor. BIFR gave its opinion to HC that the company should wind up. Subsequently,2ndcreditor applied under Section 7 to NCLT for some debt owed to it. NCLT observed that since no liquidation order had been passed in the winding up proceedings pending before HC, and in light of the non obstante clause in Section 238 of IBC, the conditions of Section 7 are fulfilled so the application should be admitted. However, HC then passed a judgment in which it set aside the NCLT order, and also refused to transfer the winding-up proceedings pending before it to NCLT. Appeal lay against this judgment.

It was seen that as per the first proviso to Section 434(1)(c), the stage at which the winding up proceedings can be transferred is to be prescribed by the central government. This has been done by the Companies (Transfer of Pending Proceedings) Rules 2016(“Transfer Rules 2016”).  Rules 5 and 6 compulsorily transferred all winding up proceedings to NCLT which were at the stage of pre-service of notice of winding up petition. Only Rule 5(2) was relevant for the Jaipur Metals case. As per it, wherein the BIFR has forwarded its opinion to HC to wind up a company under Section 20 of The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), irrespective of the stage, the proceedings will continue to be dealt with by the HC. However, it was omitted in 2017. The court observed that the result of omission was not to automatically transfer the cases to NCLT. The newly added 5th proviso to Section 434(1)(c) further clarified it by stating that any party to a winding-up proceeding can file an application to transfer it and the court may transfer it to NCLT. Therefore, all proceedings under Section 20 pending before the HC are to continue until a party applies to transfer it.

However, it was observed that the Section 7 application by creditor 2 was an independent proceeding. It was within her right to apply at any time before a winding-up order is passed. As per Section 238 of IBC, on any inconsistency between Section 434 and the provisions of IBC, the latter will prevail. Resultantly, though the HC judgment was correct in refusing the transfer from HC to NCLT, it was incorrect in setting aside the NCLT order. 

2. Forech case

A winding up petition was filed before the HC by 1stcreditor. Notice in this petition had been served. Then, 2ndcreditormoved to NCLT, and her application was admitted. 1stCreditorappealed against this but the appellant tribunal maintained 2ndcreditor’spetition. 1stCreditorappealed again.

The court observed that when IBC was newly enacted, winding-up petitions where no notice of petition was served were to compulsorily be transferred to NCLT. However, the government soon realized that this was problematic because it resulted in parallel proceedings. Then, the 5th proviso was added and it stated that even in cases of winding-up petitions pending before the HC wherein the notice has been served, any party can apply for transfer of such petitions to NCLT.

So, in this case again, it was seen that 2ndcreditor’sapplication was an independent proceeding so it can continue. However, 1stcreditor could apply under Section 434, 5th proviso to transfer the pending winding-up proceedings from HC to NCLT.

3. Kaledonia case

In this case, it was seen that Rules 5 and 6 which restricted the stage of transfer to pre-service of notice, do not apply to the 5th proviso.

Reading together the three judgements, the position that emerges is:

• Initially, winding up proceedings were to be transferred to NCLT at a stage prescribed by the central govt.

• In pursuance of this, Transfer Rules 2016 were enacted. As per Rules 5 and 6, only those proceedings which were at the stage of pre-service of notice of the winding up petition stood transferred to NCLT. However, this resulted in complications as, if someone approached NCLT when the HC proceedings were at the post-serving of notice but pre-admission of winding up petition stage, the proceedings would run parallel under both statutes.

• To rectify this, 5th proviso was added to Section 434(1)(c). In Kaledonia, it was seen that the proviso was not restricted to any stage of winding up proceeding.

• Resultantly, even post admission of a winding up petition and the appointment of a company liquidator to take over the assets of the company, transfer from HC to NCLT can be effected on the discretion of the company court.

With regard to how this discretion is to be exercised, it is observed that:

• When the stage is pre-service of notice and pre-admission of petition, the winding up proceedings stand compulsorily transferred to NCLT.

• When the stage is post-issue of notice and pre-admission of petition, parties can apply for transfer under the 5th proviso, as seen in Forech.

• When the stage is post-admission and the assets have been taken over by the company liquidator, as long as the properties have not been actually sold off, and nothing irreversible has been done, the company court could transfer the proceedings under the 5th proviso. This transfer is discretional and should not be allowed when the proceedings have reached an irreversible stage.

Applying this to the facts of the present case, the stage is post-admission but no irreversible steps have been taken, as was observed by the Company Judge and the Division Bench. Therefore, the company court had appositely exercised its discretion under the 5th proviso to go ahead with the transfer. 

Conclusion

Jaipur Metals dealt with a special case. The discussion in Forech was limited to the stage of post service of notice but pre-winding up order. In Kaledonia, though the winding up order had been passed, it was kept in abeyance. Consequently, the instant judgment is unlike other previous judgments in so far as it extends the application of the 5th proviso to the post-admission stage till no irreversible steps have been taken. It sets a good precedent as it encourages the transfer of pending proceedings. Transfer to NCLT completely shifts the focus from liquidation to revival of the company and also results in a speedier resolution.

*The author is a fourth-year student at Maharashtra National Law University, Mumbai.