"The restriction under Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016 relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of subsection (1) of Section 434. Therefore, the impugned order of the High court rejecting the petition for transfer based on Rule 26 of the Companies (Court) Rules, 1959 is flawed."( Para 46)
M/S Kaledonia Jute and Fibres Pvt.Ltd v. M/S Axis Nirman and Industries Ltd. and Ors.
Civil Appeal No. 3735 Of 2020 (Arising out of Special Leave Petition (Civil) No.5452 OF 2020)
19th November, 2020.
Counsel for Appellant: Mr. Huzefa Ahmadi
Counsel for Respondents: Mr. A.N.S. Nadkarni, Gp. Capt. Karan Singh Bhati.
The Hon’ble Supreme Court Bench comprising of Justice V. Ramasubramanian, Justice A.S. Bopanna, and Chief Justice S.A. Bobde held that the impugned order of the High court rejecting the petition for transfer based on Rule 26 of the Companies (Court) Rules, 1959 is flawed.
The 2nd Respondent herein filed a petition before the High Court of Allahabad under Section 433 of the Companies Act, 1956, for the winding up of the first respondent company, on the ground that the Company was unable to pay its debts. Since the 1st respondent did not appear before the company court, the court ordered the admission of the Company Petition and also directed the publication of the advertisement of the petition. Thereafter, the Company Court passed an order directing the winding up of the 1st respondent Company on the ground that the Company has been unable to pay its debts and that it was just and equitable to wind up the Company. By the aforesaid order, the Company Court appointed a Liquidator and directed him to take over the assets and books of accounts of the Company. The petitioning creditor had no objection to the 1st respondent's recall of the order of winding up since the 1st respondent, to prove their bonafides paid the entire amount due to the petitioning creditor along with costs. But the official liquidator opposed the application for recall on the ground that the 1st respondent Company owed money to various creditors and that unless the amount is paid, the order of winding up cannot be recalled. The Company Court passed an order to keep the winding-up order in abeyance but directed the Official Liquidator to continue to be in the custody of the assets of the Company.
The appellant herein, claiming to be a creditor of the first respondent, moved an application before the NCLT, Allahabad claiming that the 1st respondent was due and liable to pay a sum and that despite repeated demands, the 1st respondent failed to pay the amount. Thereafter, the appellant moved an application before the High Court seeking a transfer of the winding-up petition to the NCLT, Allahabad. This application was rejected by the Company Court on the ground that the requirement of Rule 24 had already been complied with and that a winding-up order had already been passed. The financial creditor has appealed against the said order.
The main issues that arise for consideration in this appeal are:
(i) What are the circumstances under which a winding-up proceeding pending on the file of a High court could be transferred to the NCLT? and
(ii) At whose instance, such transfer could be ordered?
Section 434 as it was incorporated originally in the Companies Act, 2013, was substituted by the Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016). Sec. 434 in entirety purports to deal with the transfer of proceedings pending either before the Board of Company Law Administration or before the Company Court. Clause (b) of Subsection (1) deals with the right of appeal to the High Court against any decision of the Company Law Board and hence Clause (b) is a misfit in the scheme of Section 434. Clause (c) of subsection (1) is not limited in its application to proceedings relating to arbitration, compromise, arrangements, and reconstruction and winding up, due to the usage of the words “All proceedings......including” in Clause (c). The first proviso to Clause (c) which was inserted only under the IBC Act of 2016 when Section 434 was substituted, restricts the transferability of proceedings for winding up from the High Court to the tribunal, by stipulating that only such proceedings for winding up which are at a stage as may be prescribed by the Central Government, be transferred to the Tribunal.
The transferability of a winding-up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding-up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. If the winding-up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding-up petition on the respondent in terms of Rule 26 had not been completed, such winding-up proceedings, whether they are under Clause (c) of Section 433 or Clauses (a)and (f) of Section 433, shall peremptorily be transferred to the NCLT. (Para 32)
This court relying upon Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd. (2019) 2 SCR 477, held that Rules 26 and 27 refer to a preadmission scenario. After Section 434 was substituted by a new provision under Act 31 of 2016, there was a change of position and the transfer of the winding-up proceedings, even at the instance of the party or parties to the proceedings became permissible. Taking advantage of this court's judgment in the Forech case (Supra), it is contended by the counsel for the petitioner that “any person” (and not necessarily a party to the proceeding) could apply for transfer. The right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, such a right should be held to be confined only to “the parties to the proceedings.”
The proceedings for winding up of a company are proceedings in rem to which the entire body of creditors is a party. The official liquidator acts for and on behalf of the entire body of creditors. The words “party or parties” appearing in the 5th proviso to Clause (c) of Subsection (1) of Section 434 would take within its fold any creditor of the company in liquidation. As observed by this Court in Forech India Limited (supra), the object of IBC will be stultified if parallel proceedings are allowed to go on in different fora. Therefore, the court is of the considered view that the petitioner herein will come within the definition of the expression “party” appearing in the 5th proviso to Clause (c) of Subsection (1) of Section 434 of the Companies Act, 2013 and that the petitioner is entitled to seek a transfer of the pending winding-up proceedings against the first respondent, to the NCLT.
The court observed that
"The restriction under Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016 relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of subsection (1) of Section 434. Therefore, the impugned order of the High court rejecting the petition for transfer based on Rule 26 of the Companies (Court) Rules, 1959 is flawed."( Para 46)
Hence, the appeal stands allowed.
View/Download Judgment: M/S Kaledonia Jute and Fibres Pvt.Ltd v. M/S Axis Nirman and Industries Ltd. and Ors.
M. Maheswari
