Supreme Court Rules on ‘Transfer of Winding Up Proceedings’

[Aditya Rajagopal is a graduate of NUJS, Kolkata (Batch of 2020) and is currently an associate at Shardul Amarchand Mangaldas & Co]

One of the contentious issues after the enactment of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) has been regarding the transfer of pending ‘winding up’ proceedings to the National Company Law Tribunal (‘NCLT’). Section 434 of the Companies Act, 2013 (‘Act’) delineates the mechanism of transferring such proceedings from the district court or high court to the NCLT. This section came into force in 2016 and has undergone a host of amendments, the latest being the insertion of the fifth proviso to section 434(1)(c) of the Act, through the IBC (Second Amendment) Act, 2018. Recently, in the case of Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd., a three-judge bench of the Supreme Courtdelivered a definitive judgment with respect to the application of the fifth proviso of section 434(1)(c). In this post, the author seeks to analyze this judgment and the impact it will have on the parties involved in an insolvency process.

Factual Background

Girdhar Trading Co. (the second respondent) filed a petition before the Allahabad High Court under section 433(e) of the Companies Act, 1956 against Axis Nirman which was unable to repay its debts. The petition was admitted and the High Court ordered the winding up of the company and appointed a liquidator for taking over the assets and book of accounts of the company as well. Axis Nirman applied for a recall of the order. To prove its bona fides, it paid the entire amount due to Girdhar Trading, along with the costs as well. Consequently, the High Court stayed the operation of the earlier winding up order, but directed the liquidator to be in custody over the assets. Amidst this, Kaledonia Ltd, a financial creditor of Axis Nirman, moved an application under section 7 of the IBC claiming that the company has failed to pay Rs.32 lakhs due to it. Further, Kaledonia moved an application before the Allahabad High Court for transferring the winding up petition of Axis Nirman to the NCLT, Allahabad. The transfer request was rejected on the sole ground that a winding up order had already been passed, after complying with the requirement under the Companies (Court) Rules, 1959. It is against this order that an appeal was filed before the Supreme Court.

Issues before the Supreme Court

The issues for consideration before the Supreme Court were:

Firstly, whether the pending winding up proceedings against Axis Nirman could be transferred from the high court to the NCLT; and

Secondly, at whose instance such proceedings could be transferred.

Judgment and Analysis

Before delving into the issues, the Court considered the framework of section 434 of the Act. The Court stated that section 434(1)(c) of the Act governs the transfer of pending winding up proceedings, amongst other types of proceedings as well. The Court further stated that the sub-clause is inclusive in character and not exhaustive in its application since it contains the words “all proceedings under the Companies Act, 1956 including proceedings related to….”, thereby not limiting its application to the proceedings mentioned in the sub-section.

With regard to the aspect of winding up, the first proviso to section 434(1)(c) clearly stipulates that the transfer of such proceedings shall be made at the stage as prescribed by the Central Government while section 434(2) of the Act empowers the Central Government to make rules governing such transfers. In exercise of this power, the Central Government has issued the Companies (Transfer of Pending Proceedings) Rules, 2016.

These rules regulate the transfer of winding up proceedings and other forms of proceedings mentioned in section 434(1)(c) of the Act. Rule 5 deals with the transfer of pending winding up proceedings on the ground of inability to pay debts. As per rule 5, pending winding up proceedings could be transferred from the high court to the NCLT, only when the petition has not been served on the respondent under rule 26 of the Companies (Court) Rules, 1959. The Supreme Court referred to its earlier judgment in the case of Forech India v. Edelweiss Assets Reconstruction, in which it clearly stated that the petition under rules 26 and 27 of the Companies (Court) Rules, 1959 referred to the same made in the pre-admission scenario. Thus, it was clear that a pending winding up proceeding before a high court could not be transferred to the NCLT if a pre-admission petition was already served to the respondent.

However, the fifth proviso to section 434(1)(c) was inserted on August 17, 2018, which permitted a transfer of winding up proceedings to the NCLT “pending immediately before any court immediately before the IBC (Amendment) Ordinance, 2018,” regardless of the stage of such proceedings. This proviso enables ‘any party or parties’ related to the winding up proceedings to transfer such proceedings to the NCLT and treat the same as an application for initiation of corporate insolvency process under the IBC. This change in position was also recognized by the Supreme Court in Forech India. However, in the present case, the Supreme Court went a step further and explicitly stated that that the rules stipulated in the Companies (Transfer of Pending Proceedings) Rules, 2016 would not apply to a transfer covered under the fifth proviso to section 434(1)(c) (at paragraph 46). Thus, the only question remaining before the court was whether Kaledonia’s request for transfer fell under the ambit of the fifth proviso to section 434(1)(c).

To reiterate, Kaledonia was not a petitioning creditor with respect to the winding up proceedings initiated against Axis Nirman by Girdhar Trading in the Allahabad High Court. Kaledonia moved a separate application under section 7 of the IBC for their claim before the NCLT, Allahabad. Therefore, the court had to consider whether it could order a transfer of the winding up petition at the instance of a non-petitioning creditor.

The Supreme Court considered the text of the fifth proviso and stated that only party or parties related to the winding up proceeding could move an application for transfer of such proceedings. The word ‘party’ is however not defined in either of the Companies Acts, Companies Rules. or any other such allied rules. The court therefore adopted a purposive approach and analyzed various provisions of both the present and the erstwhile Companies Act to arrive at its result. As per section 278 of the Act (section 447 of the erstwhile Companies Act, 1956), a winding up order operates against all the creditors and contributories of the company, as if it has been made on a joint petition. Besides this, the court also noted that under section 292 of the Act (section 460 of the erstwhile Companies Act, 1956), the liquidator is required to consider the directions given by the resolution of the creditors. In addition, section 292(4) also empowers any person aggrieved by the decision of the liquidator to apply to the NCLT.

After analysing these provisions, the court came to the conclusion that winding up proceedings are actually proceedings in rem, in which the entire body of creditors is a party. Thus, the court concluded that the term ‘party’ in the fifth proviso to section 434(1)(c) is not limited to a petitioning creditor but rather includes the entire body of creditors. The Court accepted the contention of the appellant and permitted the transfer of the winding up proceedings of Axis Nirman to the NCLT, Allahabad.

Conclusion

This decision is a step in the right direction since it recognizes the right of a non-petitioning creditor to apply for a transfer of the winding up proceedings. It ensures that a creditor is not deprived of their right solely on account of their non-participation in the original winding up proceedings against a corporate debtor. Besides this, transferring the winding up proceedings under the fifth proviso ensures that parallel proceedings are not pursued in both the forums. It would be against the very object of the IBC if parallel proceedings were to take place against a corporate debtor and finally, it is an icing on the cake that the Supreme Court clarified the scope of this provision in its clear and concise 26-page judgment.

– Aditya Rajagopal

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