Transfer of winding up proceedings from Company Court to NCLT can be ordered at the instance of creditor who is not a party: Supreme Court

Transfer of winding up proceedings of company from a High Court (Company Court) to National Company Law Tribunal (NCLT) can be ordered at the instance of a creditor who is not a party to the proceeding, the Supreme Court ruled on Thursday ( Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd).

. A three-judge Bench headed by Chief Justice of India SA Bobde held that proceedings of winding up of a company are proceedings in rem to which the entire body of creditors is a party.

. Therefore, the word party or parties appearing in 5 th proviso to Section 434(1)(c) of the Companies Act, 2013 would include all the creditors of the company in liquidation.

. Hence, though the proceeding might have been initiated by one or more creditors, but by a deeming fiction the petition is treated as a joint petition, the bench which also comprised Justices AS Bopanna and V Ramasubramanian held.

. "The official liquidator acts for and on behalf of the entire body of creditors. If any creditor is aggrieved by any decision of the official liquidator, he is entitled to challenge the same before the Company Court. Once he does that, he becomes a party to the proceeding,” the Court ruled. . In doing so the Court made pertinent observations on the ambit of the term “party” appearing in 5 th proviso to Section 434(1)(c)

. “The word “party” in the 5 th proviso to Clause (c) of Subsection (1) of section 434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator. 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,” the judgment said. . Background

The judgment was rendered in a plea by one of the creditors, Kaledonia Jute and Fibres seeking transfer of winding up proceedings against M/S Axis Nirman and Industries Limited pending before the Allahabad High Court (Company Court) to NCLT.

. The winding up petition was filed in Allahabad High Court in 2015 by another creditor which had sought winding up of Axis on the ground that the company was unable to pay its debts

. In March 2016, the Company court ordered the winding up of Axis and an official liquidator was also appointed to take over the assets and books of accounts of the Company. However, the order was later kept in abeyance after Axis filed an application for recall of the order on the ground it has paid the entire amount due to the creditor.

. When things stood thus, Kaledonia moved an application before the NCLT, Allahabad under Section 7 of the Insolvency and Bankruptcy Code, 2016. The claim of the appellant herein before the NCLT was that Axis was liable to pay a sum of Rs.32 lakhs to Kaledonia.

. Thereafter, Kaledonia filed an application before the Company court (High court) seeking a transfer of the winding up petition to the NCLT, Allahabad. This was rejected by the Company Court on the ground that a winding up order had already been passed.

This led to the appeal before Supreme Court.

. Issues

The apex court considered the following two issues in its judgment:

. (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.

. Law

In order to answer the above questions, the court traversed through a maze of provisions both under the Companies Act of 2013 as well as Companies (Transfer of Pending Proceedings) Rules, 2016 (2016 Rules).

. The first crucial provision examined in this regard was Section 434(1)(c ) and three crucial provisos of the said Section – 1 st , 4 th and 5 th .

Section 434 provides for the transfer of all the proceedings under the Companies Act, 1956 pending before any District Court or High Court to NCLT.

. The 1 st proviso restricts the transferability of proceedings for winding up from the High Court to the NCLT, 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 4 th proviso covers proceedings for voluntary winding up where notice of resolution by advertisement has been given under Section 485(1) of the Companies Act, 1956, but the company has not been dissolved.

The 5 th proviso covers all other kinds of winding up proceedings.

. Section 434(2) states that such transfer would, however, be subject to the Rules made by the Central government. The 2016 Rules were issued by the Central government in exercise of the powers under Section 434(2).

Rule 5 of the aforesaid Rules provides for transfer of proceedings for winding up on the ground of inability to pay debts.

. Judgment

The Court ruled that the transferability, by operation of law, of winding up proceedings, other than those covered by the 4th Proviso, will depend upon the stage at which they are pending before the Company Court. But this, the court said, is left by the law makers to be determined through subordinate legislation, in the form of Rules.

. The present case of winding up on account of inability to pay debts was covered by Rule 5 of 2016 Rules, the court noted.

As per Rule 5, the transferability of a winding up proceeding is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959, it added.

. “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, shall peremptorily be transferred to the NCLT,” the court said.

. Thus, the normal requirement of Rule 26, is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition.

However, the court adverted to the changes made to Section 434 in 2018 by which the crucial 5 th proviso was added. As per the same transfer of proceedings at the instance of parties to the case became permissible.

. “After Section 434 was substituted by a new provision under Act 31 of 2016 and the 5 th proviso was inserted by Act 26 of 2018, the transfer of the winding up proceedings, even at the instance of the party or parties to the proceedings became permissible,” the court noted. . This led the court to the question of whether any of the creditors would be considered a “party to the proceedings.”

This was answered in affirmative by placing reliance on a plethora of provisions in the Companies Act of 1956 and 2013. This included Sections 278 and 292 of the 2013 Act, Sections 447, 454(6, 457 and 460 of the 1956 Act.

. Based on the above, the court concluded that Kaledonia will come within the definition of the expression “party” appearing in the 5th proviso to Section 434(1)(c) of the Companies Act, 2013 and is entitled to seek transfer of proceedings to NCLT.

“Therefore, the appeal is allowed, the impugned order is set aside and the proceedings for winding up pending before the Company Court (Allahabad High Court) against the first respondent herein, is ordered to be transferred to the NCLT, entitled to seek a transfer of the pending winding up proceedings against the first respondent, to the NCLT,” the court ruled.

. [Read Judgment]

Transfer of winding up proceedings from Company Court to NCLT can be ordered at the instance of creditor who is not a party: Supreme Court

Murali Krishnan

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