The CC can continue without transferring to NCLT only when winding up has become irreversible: SC

Only when the winding up proceeding stage has become irreversible, can the Company Court proceed without transferring to NCLT: SC

Action ISPAT And Power Pvt. Ltd. v. Shyam Metalics Ans Energy Ltd.

Civil Appeal No. 4041 Of 2020 (Arising out of SLP (Civil) No.26415 Of 2019)

15 December, 2020.

Counsel for the Appellants: learned Senior Advocate, Sidharth Luthra.

Counsel for the Respondents: learned Attorney General for India, K.K. Venugopal.

The Hon’ble Supreme Court comprising of Justice Rohintan Rali Nariman, Justice K.M.Joseph and Justice Krishna Murari held in a case that it is only where the winding up proceedings have reached a stage where it would be irreversible that the Company Court must proceed with the winding up, instead of transferring the proceedings to the NCLT.

A winding up petition under sections 433(e) and (f), 434 and 439 of the Companies Act, 1956 was filed by one Shyam Metalics and Energy Limited, seeking winding up of the appellant company inasmuch as for goods supplied to the appellant company, a sum of Rs.4.55 crore was still due. The learned Company Judge in the Delhi High Court passed an order thereby appointing an Official Liquidator who sealed the registered office of the respondent company at New Delhi and factory premises at Orissa.

An application was then filed before the learned Company Judge by the State Bank of India (Respondent No. 2 herein), being a secured creditor of the appellant company, seeking transfer of the winding up petition to the NCLT in view of the fact that SBI had filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 which was pending before the NCLT. By order dated 14.01.2019, the learned Company Judge transferred the winding up petition as prayed for. An appeal was preferred before the division bench of the Delhi High Court, which was dismissed. It is against the dismissal by the High Court bench the present appeal is preferred.

Learned counsel for the Petitioners cited three judgments of the Supreme Court namely, Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227, Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., 2019 SCCOnLine SC 87 and M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman & Industries Ltd. & Ors., 2020 SCCOnLine SC 943. (i) Distinguishing the present case the counsel contended that unlike the three cases, in the present case a winding up order has been passed and the Official Liquidator has in fact seized the assets of the company. (ii) Hence, none of the judgments apply to the facts of the present case inasmuch as once a winding up order has been passed by the Company Judge, winding up proceedings alone must continue before the High Court and parallel proceedings under the Code cannot continue.

Relying on the judgment of the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17 Shri K.K. Venugopal, learned Attorney General for India appearing on behalf of SBI contended that (i) the 5th proviso to section 434(1)(c) of the Companies Act, 2013 now makes it clear that a discretion is vested in the Company Court to transfer winding up proceedings to the NCLT without reference to the stage of winding up. (ii) The discretion exercised by the Company Court and the Division Bench has been judiciously and correctly exercised, warranting no interference at our hands

Referring in detail to the cases cited by both the parties to the case, the Court held the following with regard to the position of law in transferring cases from High Courts to National Company Law Tribunal:

What becomes clear upon a reading of the three judgments of this Court is the following:

(i) So far as transfer of winding up proceedings is concerned, 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.

(ii) This was done by the Transfer Rules, 2016 (supra) which came into force with effect from 15.12.2016. 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.

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

(iv) Therefore, what follows as a matter of law is that even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT. The question that arises before us in this case is how is such discretion to be exercised? (Para 11)

Then, the Court went too cite relevant provisions regarding winding up and dissolution under Part XX of the Companies Act, 2013. With regard to that, the Court observed the following:

Given the aforesaid scheme of winding up under Chapter XX of the Companies Act, 2013, it is clear that several stages are contemplated, 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 preadmission stage, given the beneficial result of the application of the Code, such 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 admission of a winding up petition and after the assets of the company sought to be wound up become in custodia legis and are taken over by the Company Liquidator, section 290 of the Companies Act, 2013 would indicate that the Company Liquidator may carry on the business of the company, so far as may be 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 made to it by a creditor or any party to the proceedings. 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 to now be decided in accordance with the provisions of the Code. Whether this stage is reached would depend upon the facts and circumstances of each case. (Para 22)

Applying the above to the facts of the present case, the Court observed the following:

In the facts of the present case, the concurrent finding of the Company Judge and the Division Bench is that despite the fact that the liquidator has taken possession and control of the registered office of the appellant company and its factory premises, records and books, no irreversible steps towards winding up of the appellant company have otherwise taken place. This being so, the Company Court has correctly exercised the discretion vested in it by the 5th proviso to section 434(1)(c). Resultantly, civil appeal arising out of SLP (Civil) No.26415 of 2019 stands dismissed. (Para 23)

Consequently, the appeal was dismissed.

View/Download Judgment: Action ISPAT And Power Pvt. Ltd. v. Shyam Metalics Ans Energy Ltd.

Kalidharun K M