In a recent judgment1, the Supreme Court of India ("Supreme Court") held that even after admission of a winding up petition, and after appointment of an official liquidator, discretion rests with the Company Court to transfer the petition to NCLT under Section 434 of the Companies Act 2013 ("2013 Act"). The appeals arose out of a division bench judgment of Delhi High Court by which a single judge's order transferring a winding up petition to NCLT was upheld.
A winding up petition under Sections 433(e) and (f), Section 434 and Section 439 of the Companies Act, 1956 was filed by Shyam Metalics and Energy Limited, seeking winding up of Action Ispat and Power Pvt. Ltd. ("Appellant Company") Pursuant to filing of the winding up petition, the Company Judge in the Delhi High Court appointed the Official Liquidator. An application was then filed before the Company Court by State Bank of India ("SBI") seeking transfer of the winding up petition to NCLT in view of the fact that SBI had filed an application before the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("Code").
Company Court Order
The Company Court observed that the Delhi High Court2 has already held that the power under Section 434(1)(c) of the 2013 Act, for transfer of a petition to NCLT is discretionary and has to be exercised basis the facts and circumstances of each case, so as to expeditiously deal with the winding up proceedings. The order observed that the Official Liquidator has only taken steps to seize the office of the Appellant Company and the factory premises, and all further exercises are still to be carried out. Thus, in the interest of justice and the interest of the Appellant Company, the Company Court transferred the winding up petition to the NCLT.
Division Bench Order
The Appellant Company appealed before the Division Bench. The Division Bench dismissed the appeal and held that the process under the Code is to find the most beneficial solution to the concerned company and its creditors/stakeholders. It was further held that in the interest of equity and justice and keeping in mind the special nature of the Code, if the Company Judge has found it appropriate to transfer the petition to NCLT, then the Division Bench would not ordinarily interfere with the transfer order. The Division Bench observed that the Official Liquidator had not proceeded to take any effective or irreversible steps towards liquidation of the assets of the Appellant Company. As per the Division Bench, continuation of two parallel proceedings, one before the Company Court for liquidation and the other before the Code for resolution/revival, would serve no useful purpose.
Supreme Court Judgment
The Supreme Court relied upon its own observations in the Swiss Ribbons3 judgment which dealt with the 'raison d'etre' for the enactment of the Code to draw an analogy that winding up proceedings similar to liquidation, must only be availed as the last resort. The relevant portion from Swiss Ribbons is as below:
"...maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. The Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. The primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation."
Further, the Supreme Court analyzed its judgments in Jaipur Metals4, Forech5 and Kaledonia6 and summarized its observation as under:
- 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 Companies (Transfer of Pending Proceedings) Rules, 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.
- 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 Section 434(1)(c) of the 2013 Act.
- In Kaledonia, the Supreme Court in particular considered the 5th proviso to Section 434(1)(c) of the 2013 Act, and held that the same is not restricted to any particular stage of a winding up proceeding, and thus the Company Court is vested with the discretion to transfer such petitions to the NCLT at any stage.
- Thus, as a matter of law, even post admission of a winding up petition, and after the appointment of the Official Liquidator to take over assets of a company sought to be wound up, the Company Court can exercise its discretion to transfer such a petition to the NCLT. However, the important question that needs to be answered is to determine as to how such a discretion is to be exercised?
To answer the aforesaid question, the Supreme Court analyzed various stages of winding up proceedings under the 2013 Act. It was observed that several stages are contemplated under the 2013 Act, 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 a 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 the admission of a winding up petition and after the assets of the company sought to be wound up become custodia legis and are taken over by the Official Liquidator, Section 290 of the 2013 Act would indicate that the Official Liquidator may carry on the business of the company, if necessary, for the beneficial winding up of the company, and may even sell the company as a 'going concern'. So long as no actual sales of the immovable or movable properties have taken place, nothing irreversible is done which would warrant a Company Court staying its hands on a transfer application.
The Supreme Court held that 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. In the present matter, since no irreversible steps towards winding up of the Appellant Company having taken place, it was held that the Company Court correctly exercised its discretion vested under the 5th proviso to Section 434(1)(c) of the 2013 Act and transferred the matter to the NCLT.
1 Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Limited Civil Appeal No. 4041 of 2020 with Civil Appeal Nos. 4042-4043 of 2020.
2 Rajni Anand v. Cosmic Structures Limited CP 152/2016
3 (2019) 4 SCC 17
4 (2019) 4 SCC 227
5 2019 SCC OnLine SC 87
6 2020 SCC OnLine SC 943
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