Action Ispat And Power Pvt. Ltd. vs Shyam Metalics And Energy Limited on 15 December, 2020


Try out our Premium Member services: Virtual Legal Assistant, Query Alert Service and an ad-free experience. Free for one month and pay only if you like it.

Supreme Court of India

Action Ispat And Power Pvt. Ltd. vs Shyam Metalics And Energy Limited on 15 December, 2020

Author: Rohinton Fali Nariman

Bench: Rohinton Fali Nariman, Navin Sinha, K.M. Joseph

                                                                        REPORTABLE


                                  IN THE SUPREME COURT OF INDIA

                                   CIVIL APPELLATE JURISDICTION

                                  CIVIL APPEAL NO. 4041 OF 2020
                           (ARISING OUT OF SLP (CIVIL) NO.26415 OF 2019)

                ACTION ISPAT AND POWER PVT. LTD.                      …APPELLANT

                                                VERSUS

                SHYAM METALICS AND ENERGY LTD.                       …RESPONDENT


                                               WITH
                                CIVIL APPEAL Nos. 4042-4043 OF 2020
                         (ARISING OUT OF SLP (CIVIL) NOS.2033-2034 OF 2020)


                                            JUDGMENT

R.F. Nariman, J.

1. Leave granted.

2. These appeals arise out of a judgment of the Division Bench of

the Delhi High Court dated 10.10.2019 by which a Single Judge’s

order dated 14.01.2019 transferring a winding up proceeding pending

before the High Court to the National Company Law Tribunal
Signature Not Verified

Digitally signed by R
Natarajan
Date: 2020.12.15
15:50:23 IST
[“NCLT”] was upheld. The brief facts necessary to appreciate the
Reason:

controversy involved in these appeals are as follows:

1

2.1. A winding up petition under sections 433(e) and (f), 434 and

439 of the Companies Act, 1956, being Co. Pet. No.731 of 2016 was

filed by one Shyam Metalics and Energy Limited (Respondent No.1

herein), 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 the following order in the aforesaid petition on 27.08.2018:

“ORDER
27.08.2018

1. This petition is filed under sections 433(e) and (f), 434
and 439 of the Company Act, 1956 (hereinafter referred
to as ‘the Act’) seeking winding up of the respondent
company.

2. It has been pleaded in the petition that the respondent
company had approached the petitioner company for
supply of Iron Pellets. A specified quantity of
11612.34MTs of the goods was supplied to the
respondent company. After making partial payment, a
sum of Rs.4,55,00,000/- is due and payable by the
respondent company to the petitioner. The respondent
company from time to time issued 17 post-dated cheques.
However, 13 of the cheques when presented with its
bankers, were returned by the bankers unpaid. Statutory
notice was issued on 15.06.2016 but no payments have
been received by the petitioner.

3. No reply has been filed by the respondent. On the last
date of hearing, the learned counsel for the respondent
had taken time to settle the matter with the petitioner.

4. Today, the learned counsel for the respondent company
submits that the respondent is not in a position to settle
the matter on account of the fact that the unit of the
respondent is shut.

5. In these circumstances, the petition is admitted and the

2
Official Liquidator attached to this Court is appointed as
the Liquidator. He is directed to take over all the assets,
books of accounts and records of the respondent-
company forthwith. The citations be published in the Delhi
editions of the newspapers ‘Statesman’ (English) and
‘Veer Arjun’ (Hindi), as well as in the Delhi Gazette, at
least 14 days prior to the next date of hearing. The cost of
publication is to be borne by the petitioner who shall
deposit a sum Rs.75,000/- with the Official Liquidator
within 2 weeks, subject to any further amounts that may
be called for by the liquidator for this purpose, if required.
The Official Liquidator shall also endeavour to prepare a
complete inventory of all the assets of the respondent-
company when the same are taken over; and the
premises in which they are kept shall be sealed by him. At
the same time, he may also seek the assistance of a
valuer to value all assets to facilitate the process of
winding up. It will also be open to the Official Liquidator to
seek police help in the discharge of his duties, if he
considers it appropriate to do so. The Official Liquidator to
take all further steps that may be necessary in this regard
to protect the premises and assets of the respondent-
company.

6. List on 09.01.2019.

7. A copy of this order be given dasti under the signatures
of the court master.”

2.2. An application was then filed before the learned Company

Judge by the State Bank of India [“SBI”] (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 [“Code”] which was pending before the NCLT. By order

dated 14.01.2019, the learned Company Judge transferred the

3
winding up petition as prayed for as follows:

“ORDER
14.01.2019
CA No.1240/2018

1. This application is filed seeking transfer of the present
petition being Co.Pet. No.731/2016 to NCLT. This
application has been filed by State Bank of India stating
that an application under section 7 of the IBC is pending
before NCLT. It has been pleaded that the respondent
company had failed to pay outstanding dues of about
Rs.722 crores to the applicant bank and hence this
proceeding have been initiated before NCLT. The
applicant bank is also a lead bank of the consortium of
banks which have outstanding dues of about Rs.1100
crores.

2. This court had admitted the present winding up petition
on 27.08.2018 and appointed the OL as the provisional
liquidator of the respondent company.

3. The learned counsel appearing for the OL submits that
the OL has already sealed the registered office of the
respondent company at New Delhi and factory premises
at Orissa. He further submits that the OL has incurred
heavy expenses in protecting the factory premises at
Orissa in the given facts and circumstances.

4. The Ex. Management however objects to transfer of
this petition. They have submitted that they have had no
opportunity to defend the proceedings before NCLT.

5. Learned counsel for SBI states that the creditors will
reimburse the expenses of the OL.

6. Section 434 of the Companies Act, 2013 reads as
follows:

“[434. Transfer of certain pending proceedings–(1)
On such date as may be notified by the Central
Government in this behalf,—

(a) all matters, proceedings or cases pending
before the Board of Company Law
Administration (herein in this section referred
to as the Company Law Board) constituted

4
under sub-section (1) of section 10E of the
Companies Act, 1956 (1 of 1956), immediately
before such date shall stand transferred to the
Tribunal and the Tribunal shall dispose of
such matters, proceedings or cases in
accordance with the provisions of this Act;

(b) any person aggrieved by any decision or
order of the Company Law Board made
before such date may file an appeal to the
High Court within sixty days from the date of
communication of the decision or order of the
Company Law Board to him on any question
of law arising out of such order: Provided that
the High Court may if it is satisfied that the
appellant was prevented by sufficient cause
from filing an appeal within the said period,
allow it to be filed within a further period not
exceeding sixty days; and

(c) all proceedings under the Companies Act,
1956 (1 of 1956), including proceedings
relating to arbitration, compromise,
arrangements and reconstruction and winding
up of companies, pending immediately before
such date before any District Court or High
Court, shall stand transferred to the Tribunal
and the Tribunal may proceed to deal with
such proceedings from the stage before their
transfer:

Provided that only such proceedings
relating to the winding up of companies shall
be transferred to the Tribunal that are at a
stage as may be prescribed by the Central
Government.

[Provided further that any party or parties to
any proceedings relating to the winding up of
companies pending before any Court
immediately before the commencement of the
Insolvency and Bankruptcy Code
(Amendment) Ordinance, 2018, may file an
application for transfer of such proceedings
and the Court may by order transfer such
proceedings to the Tribunal and the

5
proceedings so transferred shall be dealt with
by the Tribunal as an application for initiation
of corporate insolvency resolution process
under the Insolvency and Bankruptcy Code,
2016.”

7. This court has already in CP 152/2016 vide decision
dated 27.9.2018 in Rajni Anand vs. Cosmic Structures
Limited held that the power under section 434(1)(c) of the
Companies Act, 2013 for transfer of a petition to NCLT is
discretionary and has to be exercised in the facts and
circumstances of the case so as to expeditiously deal with
the proceedings/winding up.

8. In my opinion, it would be in the interest of justice and
in the interest of the respondent company and the
creditors that the matter be transferred to NCLT in
exercise of the discretionary powers of the court under
section 434 of the Companies Act, 1956. The order
appointing the OL is a recent order and not much time
has elapsed since then. The OL has only taken steps to
seize the office of the respondent company and the
factory premises and further exercise is yet to be carried
out. The application is allowed as above. The present
petition is transferred to NCLT.

CO.PET. 731/2016

9. In view of the above order, the present petition is
transferred to NCLT. All pending applications, if any, stand
disposed of. The order admitting the petition and
appointing the OL as the provisional liquidator dated
27.08.2018 stands revoked.

10. The OL will give details of necessary expenses to SBI.
The costs/expenses will be borne by SBI and also
consortium of banks. The OL will hand over the
possession of the assets as directed by NCLT.

11. Parties to appear before NCLT on 04.02.2019.”

2.3. It is from this order that the appellant company’s appeal to the

Division Bench has been dismissed by the impugned order in which

6
the learned Division Bench held as follows:

“41. The process under IBC is meant to find the best
possible solution in a given case, which is beneficial to
the company concerned as well as its creditors and other
stakeholders. Therefore, in the interest of equity and
justice, and keeping in mind the special nature of the IBC,
if the Learned Company Judge has found it fit to transfer
the winding up petition to NCLT on the application of
respondent No. SBI– who is a secured creditor, this Court
would not ordinarily interfere with the judgment of the
Learned Company Judge, and that too, on the asking of
the erstwhile management. The Learned Company Judge
rightly recalled the order of appointment of Official
Liquidator and admission of petition, since the liquidation
was at its initial stage and the learned Company Judge
was fully competent to do so. After the passing of the
winding up order, the OL had not proceeded to take any
effective or irreversible steps towards liquidation of the
assets of the appellant company. All that he appears to
have done is to take possession and control of the
registered office of the appellant company and its factory
premises and its records and books.

42. Pertinently, the respondent No. 2 has already initiated
proceedings before the NCLT in respect of the appellant
company which, in any event, would continue. The
continuation of the liquidation proceedings at the hands of
the OL in terms of the order passed by this Court would
be incongruous with the proceedings that the NCLT has
undertaken and would undertake under the IBC.
Continuation of two parallel proceedings – one before the
Company Court for liquidation, and the other before the
IBC for resolution/ revival, would serve no useful purpose.
The statutory scheme found in Section 434(1)(c) clearly is
that the proceedings for winding up pending before the
Company Court could be transferred to the NCLT and
there is no provision for transfer of proceedings from the
NCLT to the Company Court.

43. We, thus uphold the impugned order passed by the
Ld. Company Judge in C.A. No. 1240/2018, dated
14.01.2019 and dismiss the appeal.”

7

3. Shri Sidharth Luthra, learned Senior Advocate appearing on

behalf of the appellant company, referred to three judgments of this

Court, namely, Jaipur Metals & Electricals Employees

Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227

[“Jaipur Metals”], Forech India Ltd. v. Edelweiss Assets

Reconstruction Co. Ltd., 2019 SCCOnLine SC 87 [“Forech”], and

M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman &

Industries Ltd. & Ors., 2020 SCCOnLine SC 943 [“Kaledonia”].

According to him, none of the judgments apply to the facts of the

present case inasmuch as, on the facts in the present case, 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. He argued that

Jaipur Metals (supra) makes it clear that even independent

proceedings under the Code can only continue when the stage is

before a winding up order is passed, which was the case on the facts

before the Court. Likewise, in Forech (supra) also, the stage of the

winding up proceeding was post service of notice of the winding up

petition and before a winding up order was passed, as a result of

which the 5th proviso to section 434(1)(c) of the Companies Act, 2013

was applied. Likewise, in Kaledonia (supra), though a winding up

8
order had been passed on the facts of that case, the aforesaid order

had been kept in abeyance. On facts therefore, these three cases are

entirely distinguishable and would have no application to a scenario

in which a winding up order has been passed and the Official

Liquidator has in fact seized the assets of the company in order to

begin the process of distribution to creditors and others which would

ultimately result in dissolution of the company.

4. Shri K.K. Venugopal, learned Attorney General for India

appearing on behalf of SBI, countered all these submissions.

According to him, this Court has unequivocally laid down that the 5 th

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. Even post admission, according to the learned Attorney

General, if no irreversible steps have been taken, then a combined

reading of the 5th proviso to section 434(1)(c) and section 238 of the

Code would lead to the result that the winding up proceeding be

transferred to the NCLT, as not only is the Code a special enactment

with a non-obstante clause which would, in cases of conflict, do away

with the Companies Act, 2013, but also that, given the judgment of

this Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India &

9
Ors
., (2019) 4 SCC 17 [“Swiss Ribbons”], winding up is a last resort

after all efforts to revive a company fail. According to him, the

discretion exercised by the Company Court and the Division Bench

has been judiciously and correctly exercised, warranting no

interference at our hands.

5. In Swiss Ribbons (supra), this Court had occasion to deal with

the raison d’être for the enactment of the Code. The judgment of this

Court referred to the Statement of Objects and Reasons for the Code

as follows:

“25. The Statement of Objects and Reasons for the Code
have been referred to in Innoventive Industries
[Innoventive Industries Ltd. v. ICICI Bank
, (2018) 1 SCC
407 : (2018) 1 SCC (Civ) 356] which states: (SCC pp.
421-22, para 12)
“12. … The Statement of Objects and Reasons
of the Code reads as under:

‘Statement of Objects and Reasons.—There is
no single law in India that deals with insolvency and
bankruptcy. Provisions relating to insolvency and
bankruptcy for companies can be found in the Sick
Industrial Companies (Special Provisions) Act
,
1985, the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, the Securitisation
and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 and the
Companies Act, 2013. These statutes provide for
creation of multiple fora such as Board of Industrial
and Financial Reconstruction (BIFR), Debts
Recovery Tribunal (DRT) and National Company
Law Tribunal (NCLT) and their respective Appellate
Tribunals. Liquidation of companies is handled by
the High Courts. Individual bankruptcy and
10
insolvency is dealt with under the Presidency Towns
Insolvency Act
, 1909, and the Provincial Insolvency
Act
, 1920 and is dealt with by the courts. The
existing framework for insolvency and bankruptcy is
inadequate, ineffective and results in undue delays
in resolution, therefore, the proposed legislation.

2.The objective of the Insolvency and
Bankruptcy Code, 2015 is to consolidate and
amend the laws relating to reorganisation and
insolvency resolution of corporate persons,
partnership firms and individuals in a time-bound
manner for maximisation of value of assets of such
persons, to promote entrepreneurship, availability of
credit and balance the interests of all the
stakeholders including alteration in the priority of
payment of government dues and to establish an
Insolvency and Bankruptcy Fund, and matters
connected therewith or incidental thereto. An
effective legal framework for timely resolution of
insolvency and bankruptcy would support
development of credit markets and encourage
entrepreneurship. It would also improve Ease of
Doing Business, and facilitate more investments
leading to higher economic growth and
development.

3. The Code seeks to provide for designating
NCLT and DRT as the adjudicating authorities for
corporate persons and firms and individuals,
respectively, for resolution of insolvency, liquidation
and bankruptcy. The Code separates commercial
aspects of insolvency and bankruptcy proceedings
from judicial aspects. The Code also seeks to
provide for establishment of the Insolvency and
Bankruptcy Board of India (Board) for regulation of
insolvency professionals, insolvency professional
agencies and information utilities. Till the Board is
established, the Central Government shall exercise
all powers of the Board or designate any financial
sector regulator to exercise the powers and
functions of the Board. Insolvency professionals will
assist in completion of insolvency resolution,
liquidation and bankruptcy proceedings envisaged

11
in the Code. Information Utilities would collect,
collate, authenticate and disseminate financial
information to facilitate such proceedings. The Code
also proposes to establish a fund to be called the
Insolvency and Bankruptcy Fund of India for the
purposes specified in the Code.

4. The Code seeks to provide for amendments in
the Indian Partnership Act, 1932, the Central Excise
Act
, 1944, Customs Act, 1962, the Income Tax Act,
1961, the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, the Finance Act,
1994, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act
, 2002, the Sick Industrial Companies
(Special Provisions) Repeal Act
, 2003, the Payment
and Settlement Systems Act, 2007, the Limited
Liability Partnership Act
, 2008, and the Companies
Act
, 2013.

5. The Code seeks to achieve the above
objectives.’”
(emphasis in original)

The Court then went on to state:

“27. As is discernible, the Preamble gives an insight into
what is sought to be achieved by the Code. The Code is
first and foremost, a Code for reorganisation and
insolvency resolution of corporate debtors. Unless such
reorganisation is effected in a time-bound manner, the
value of the assets of such persons will deplete.

Therefore, 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. When, therefore, a resolution
plan takes off and the corporate debtor is brought back
into the economic mainstream, it is able to repay its
debts, which, in turn, enhances the viability of credit in the
hands of banks and financial institutions. Above all,
ultimately, the interests of all stakeholders are looked after

12
as the corporate debtor itself becomes a beneficiary of
the resolution scheme—workers are paid, the creditors in
the long run will be repaid in full, and
shareholders/investors are able to maximise their
investment. Timely resolution of a corporate debtor who is
in the red, by an effective legal framework, would go a
long way to support the development of credit markets.
Since more investment can be made with funds that have
come back into the economy, business then eases up,
which leads, overall, to higher economic growth and
development of the Indian economy. What is interesting to
note is that the Preamble does not, in any manner, refer
to liquidation, which is only availed of as a last resort if
there is either no resolution plan or the resolution plans
submitted are not up to the mark. Even in liquidation, the
liquidator can sell the business of the corporate debtor as
a going concern. (See ArcelorMittal [ArcelorMittal (India)
(P) Ltd. v. Satish Kumar Gupta
, (2019) 2 SCC 1] at para
83, fn 3).

28. It can thus be seen that 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. The Code is thus a beneficial legislation which
puts the corporate debtor back on its feet, not being a
mere recovery legislation for creditors. The interests of
the corporate debtor have, therefore, been bifurcated and
separated from that of its promoters/those who are in
management. Thus, the resolution process is not
adversarial to the corporate debtor but, in fact, protective
of its interests. The moratorium imposed by Section 14 is
in the interest of the corporate debtor itself, thereby
preserving the assets of the corporate debtor during the
resolution process. The timelines within which the
resolution process is to take place again protects the
corporate debtor’s assets from further dilution, and also
protects all its creditors and workers by seeing that the
resolution process goes through as fast as possible so
that another management can, through its entrepreneurial
skills, resuscitate the corporate debtor to achieve all these
ends.”

13
Having so held, the Court ended stating:

“Epilogue

120. The Insolvency Code is a legislation which deals
with economic matters and, in the larger sense, deals with
the economy of the country as a whole. Earlier
experiments, as we have seen, in terms of legislations
having failed, “trial” having led to repeated “errors”,
ultimately led to the enactment of the Code. The
experiment contained in the Code, judged by the
generality of its provisions and not by so-called crudities
and inequities that have been pointed out by the
petitioners, passes constitutional muster. To stay
experimentation in things economic is a grave
responsibility, and denial of the right to experiment is
fraught with serious consequences to the nation. We have
also seen that the working of the Code is being monitored
by the Central Government by Expert Committees that
have been set up in this behalf. Amendments have been
made in the short period in which the Code has operated,
both to the Code itself as well as to subordinate
legislation made under it. This process is an ongoing
process which involves all stakeholders, including the
petitioners.

121. We are happy to note that in the working of the
Code, the flow of financial resource to the commercial
sector in India has increased exponentially as a result of
financial debts being repaid. Approximately 3300 cases
have been disposed of by the adjudicating authority
based on out-of-court settlements between corporate
debtors and creditors which themselves involved claims
amounting to over INR 1,20,390 crores. Eighty cases
have since been resolved by resolution plans being
accepted. Of these eighty cases, the liquidation value of
sixty-three such cases is INR 29,788.07 crores. However,
the amount realised from the resolution process is in the
region of INR 60,000 crores, which is over 202% of the
liquidation value. As a result of this, Reserve Bank of
India has come out with figures which reflect these
results. Thus, credit that has been given by banks and
financial institutions to the commercial sector (other than

14
food) has jumped up from INR 4952.24 crores in 2016-

2017, to INR 9161.09 crores in 2017-2018, and to INR
13,195.20 crores for the first six months of 2018-2019.
Equally, credit flow from non-banks has gone up from INR
6819.93 crores in 2016-2017, to INR 4718 crores for the
first six months of 2018-2019. Ultimately, the total flow of
resources to the commercial sector in India, both bank
and non-bank, and domestic and foreign (relatable to the
non-food sector) has gone up from a total of INR
14,530.47 crores in 2016-2017, to INR 18,469.25 crores
in 2017-2018, and to INR 18,798.20 crores in the first six
months of 2018-2019. These figures show that the
experiment conducted in enacting the Code is proving to
be largely successful. The defaulter’s paradise is lost. In
its place, the economy’s rightful position has been
regained. The result is that all the petitions will now be
disposed of in terms of this judgment. There will be no
order as to costs.”

6. Viewed in this backdrop, let us now examine some of the

judgments of this Court dealing with transfer of winding up petitions

from the Company Court to be tried by the NCLT under the Code.

7. Section 255 of the Code reads as follows:

“255. Amendments of Act 18 of 2013.—The Companies
Act
, 2013 shall be amended in the manner specified in
the Eleventh Schedule.”

In pursuance of this section, the Eleventh Schedule to the Code

made various amendments to the Companies Act, 2013. They have

been set out in detail in Jaipur Metals (supra) in paragraphs 10 and

11. Suffice it to say that the first step to transferring winding up

proceedings to the NCLT was taken by the Companies (Transfer of

15
Pending Proceedings) Rules, 2016 [“Transfer Rules, 2016”], which

compulsorily transferred all winding up proceedings pending before

High Courts to the NCLT at a stage prior to the service of the petition

in terms of Rule 26 of the Companies (Court) Rules, 1959. By an

amendment made on 17.08.2018, the 5 th proviso to section 434(1)(c)

was added which states as follows:

“434. Transfer of certain pending proceedings.—(1)
On such date as may be notified by the Central
Government in this behalf,—

(a) xxx xxx xxx

(b) xxx xxx xxx

(c) all proceedings under the Companies Act, 1956,
including proceedings relating to arbitration, compromise,
arrangements and reconstruction and winding up of
companies, pending immediately before such date before
any District Court or High Court, shall stand transferred to
the Tribunal and the Tribunal may proceed to deal with
such proceedings from the stage before their transfer:
xxx xxx xxx
Provided further that any party or parties to any
proceedings relating to the winding up of companies
pending before any Court immediately before the
commencement of the Insolvency and Bankruptcy Code
(Amendment) Ordinance, 2018, may file an application for
transfer of such proceedings and the Court may by order
transfer such proceedings to the Tribunal and the
proceedings so transferred shall be dealt with by the
Tribunal as an application for initiation of corporate
insolvency resolution process under the Insolvency and
Bankruptcy Code, 2016 (31 of 2016).”

8. The Court in Jaipur Metals (supra) was directly concerned with

a special category of cases dealt with by Rule 5(2) of the aforesaid

16
Transfer Rules which was omitted later on. Despite the omission, the

Court applied this Rule, read with the amendment made to section

434 of the Companies Act, 2013 on 17.08.2018, stating:

“17. However, though the language of Rule 5(2) is plain
enough, it has been argued before us that Rule 5 was
substituted on 29-6-2017, as a result of which, Rule 5(2)
has been omitted. The effect of the omission of Rule 5(2)
is not to automatically transfer all cases under Section 20
of the SIC Act to NCLT, as otherwise, a specific rule would
have to be framed transferring such cases to NCLT, as
has been done in Rule 5(1). The real reason for omission
of Rule 5(2) in the substituted Rule 5 is because it is
necessary to state, only once, on the repeal of the SIC
Act, that proceedings under Section 20 of the SIC Act
shall continue to be dealt with by the High Court. It was
unnecessary to continue Rule 5(2) even after 29-6-2017
as on 15-12-2016, all pending cases under Section 20 of
the SIC Act were to continue to be dealt with by the High
Court before which such cases were pending. Since there
could be no opinion by the BIFR under Section 20 of the
SIC Act after 1-12-2016, when the SIC Act was repealed,
it was unnecessary to continue Rule 5(2) as, on 15-12-
2016, all pending proceedings under Section 20 of the
SIC Act were to continue with the High Court and would
continue even thereafter. This is further made clear by the
amendment to Section 434(1)(c), with effect from 17-8-
2018, where any party to a winding-up proceeding
pending before a court immediately before this date may
file an application for transfer of such proceedings, and
the Court, at that stage, may, by order, transfer such
proceedings to NCLT. The proceedings so transferred
would then be dealt with by NCLT as an application for
initiation of the corporate insolvency resolution process
under the Code. It is thus clear that under the scheme of
Section 434 (as amended) and Rule 5 of the 2016
Transfer Rules, all proceedings under Section 20 of the
SIC Act pending before the High Court are to continue as
such until a party files an application before the High
Court for transfer of such proceedings post 17-8-2018.

17

Once this is done, the High Court must transfer such
proceedings to NCLT which will then deal with such
proceedings as an application for initiation of the
corporate insolvency resolution process under the Code.

18. The High Court judgment, therefore, though incorrect
in applying Rule 6 of the 2016 Transfer Rules, can still be
supported on this aspect with a reference to Rule 5(2)
read with Section 434 of the Companies Act, 2013, as
amended, with effect from 17-8-2018.”

In a significant passage, the Court then went on to hold:

“19. However, this does not end the matter. It is clear that
Respondent 3 has filed a Section 7 application under the
Code on 11-1-2018, on which an order has been passed
admitting such application by NCLT on 13-4-2018. This
proceeding is an independent proceeding which has
nothing to do with the transfer of pending winding-up
proceedings before the High Court. It was open for
Respondent 3 at any time before a winding-up order is
passed to apply under Section 7 of the Code. This is clear
from a reading of Section 7 together with Section 238 of
the Code which reads as follows:

“238. Provisions of this Code to override
other laws.—The provisions of this Code shall have
effect, notwithstanding anything inconsistent
therewith contained in any other law for the time
being in force or any instrument having effect by
virtue of any such law.”

The Court therefore finally held:

“20. … We are of the view that NCLT was absolutely
correct in applying Section 238 of the Code to an
independent proceeding instituted by a secured financial
creditor, namely, the Alchemist Asset Reconstruction
Company Ltd. This being the case, it is difficult to
comprehend how the High Court could have held that the
proceedings before NCLT were without jurisdiction. On
this score, therefore, the High Court judgment has to be
set aside. NCLT proceedings will now continue from the

18
stage at which they have been left off. Obviously, the
company petition pending before the High Court cannot
be proceeded with further in view of Section 238 of the
Code. The writ petitions that are pending before the High
Court have also to be disposed of in light of the fact that
proceedings under the Code must run their entire course.
We, therefore, allow the appeal and set aside the High
Court’s judgment [Jaipur Metals and Electricals Ltd., In re,
2018 SCC OnLine Raj 1472].”

9. In Forech (supra), this Court, after setting out the aforesaid

Rules and the 5th proviso to section 434(1)(c), then held:

“16. We are of the view that Rules 26 and 27 clearly refer
to a pre-admission scenario as is clear from a plain
reading of Rules 26 and 27, which make it clear that the
notice contained in Form No. 6 has to be served in not
less than 14 days before the date of hearing. Hence, the
expression “was admitted” in Form No. 6 only means that
notice has been issued in the winding up petition which is
then “fixed for hearing before the Company Judge” on a
certain day. Thus, the Madras High Court view is plainly
incorrect whereas the Bombay High Court view is correct
in law.

17. The resultant position in law is that, as a first step,
when the Code was enacted, only winding up petitions,
where no notice under Rule 26 of the Companies (Court)
Rules was served, were to be transferred to the NCLT
and treated as petitions under the Code. However, on a
working of the Code, the Government realized that
parallel proceedings in the High Courts as well as before
the adjudicating authority in the Code would stultify the
objective sought to be achieved by the Code, which is to
resuscitate the corporate debtors who are in the red. In
accordance with this objective, the Rules kept being
amended, until finally Section 434 was itself substituted in
2018, in which a proviso was added by which even in
winding up petitions where notice has been served and
which are pending in the High Courts, any person could
apply for transfer of such petitions to the NCLT under the

19
Code, which would then have to be transferred by the
High Court to the adjudicating authority and treated as an
insolvency petition under the Code. This statutory scheme
has been referred to, albeit in the context of Section 20 of
the SICA, in our judgment which is contained in Jaipur
Metals & Electricals Employees Organization Through
General Secretary Mr. Tej Ram Meena v. Jaipur Metals &
Electricals Ltd. Through
its Managing Director, being a
judgment by a Division Bench of this Court dated
12.12.2018.”

Resultantly, the Court thereafter held:

“22. This Section is of limited application and only bars a
corporate debtor from initiating a petition under Section
10 of the Code in respect of whom a liquidation order has
been made. From a reading of this Section, it does not
follow that until a liquidation order has been made against
the corporate debtor, an Insolvency Petition may be filed
under Section 7 or Section 9 as the case may be, as has
been held by the Appellate Tribunal. Hence, any
reference to Section 11 in the context of the problem
before us is wholly irrelevant. However, we decline to
interfere with the ultimate order passed by the Appellate
Tribunal because it is clear that the financial creditor’s
application which has been admitted by the Tribunal is
clearly an independent proceeding which must be
decided in accordance with the provisions of the Code.

23. Though, we are not interfering with the Appellate
Tribunal’s order dismissing the appeal, we grant liberty to
the appellant before us to apply under the proviso to
Section 434 of the Companies Act (added in 2018), to
transfer the winding up proceeding pending before the
High Court of Delhi to the NCLT, which can then be
treated as a proceeding under Section 9 of the Code.”

10. In Kaledonia (supra), the question which arose before the

Court arose after a winding up order had been passed, but which had

20
been kept in abeyance by the Company Court. The vexed question

before the Court was whether the expression “any person could apply

for transfer …” contained in paragraph 17 of the judgment of this

Court in Forech (supra) would refer to persons who are not parties to

the proceeding. This Court, after setting out section 278 of the

Companies Act, 2013, then held:

“44. Thus, the proceedings for winding up of a company
are actually proceedings in rem to which the entire body
of creditors is a party. 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 official
liquidator acts for and on behalf of the entire body of
creditors. Therefore, the word “party” appearing in the
5th proviso to Clause (c) of Sub-section (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 Sub-section (1) of Section 434 would take
within its fold any creditor of the company in liquidation.

45. The above conclusion can be reached through
another method of deductive logic also. If any creditor is
aggrieved by any decision of the official liquidator, he is
entitled under the 1956 Act to challenge the same before
the Company Court. Once he does that, he becomes a
party to the proceeding, even by the plain language of the
section. Instead of asking a party to adopt such a
circuitous route and then take recourse to the 5 th proviso
to section 434(1)(c), it would be better to recognise the
right of such a party to seek transfer directly.

46. 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. If the
Allahabad High Court is allowed to proceed with the
winding up and NCLT is allowed to proceed with an

21
enquiry into the application under Section 7 IBC, the
entire object of IBC will be thrown to the winds.

47. Therefore, we are 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 Sub-section (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. It is important to note
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 sub-section
(1) of Section 434. Therefore, the impugned order of the
High court rejecting the petition for transfer on the basis of
Rule 26 of the Companies (Court) Rules, 1959 is flawed.”
(emphasis in original)

11. 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.

22

(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?

12. The Companies Act, 2013 deals with winding up of companies

in a separate chapter, being Chapter XX. When a petition to wind up

a company is presented before the Tribunal, the Tribunal is given the

power under Section 273 to dismiss it; to make any interim order as it

thinks fit; to appoint a provisional liquidator of the company till the

making of a winding up order; to make an order for the winding up of

the company; or to pass any other order as it thinks fit – see section

273(1).

13. Sections 278 and 279 of the Companies Act, 2013 then follow,

23
which state:

“278. Effect of winding-up order.—The order for the
winding-up of a company shall operate in favour of all the
creditors and all contributories of the company as if it had
been made out on the joint petition of creditors and
contributories.”

“279. Stay of suits, etc., on winding-up order.—(1)
When a winding-up order has been passed or a
provisional liquidator has been appointed, no suit or other
legal proceeding shall be commenced, or if pending at the
date of the winding-up order, shall be proceeded with, by
or against the company, except with the leave of the
Tribunal and subject to such terms as the Tribunal may
impose:

Provided that any application to the Tribunal seeking
leave under this section shall be disposed of by the
Tribunal within sixty days.

(2) Nothing in sub-section (1) shall apply to any
proceeding pending in appeal before the Supreme Court
or a High Court.”

14. Once a winding up order is made, and a Company Liquidator is

appointed, such liquidator is then to submit a report to the Tribunal

under section 281 as follows:

“281. Submission of report by Company Liquidator.—
(1) Where the Tribunal has made a winding-up order or
appointed a Company Liquidator, such liquidator shall,
within sixty days from the order, submit to the Tribunal, a
report containing the following particulars, namely:—

(a) the nature and details of the assets of the
company including their location and value,
stating separately the cash balance in hand and
in the bank, if any, and the negotiable securities,
if any, held by the company:

24

Provided that the valuation of the assets shall be
obtained from registered valuers for this purpose;

(b) amount of capital issued, subscribed and paid-

up;

(c) the existing and contingent liabilities of the
company including names, addresses and
occupations of its creditors, stating separately
the amount of secured and unsecured debts, and
in the case of secured debts, particulars of the
securities given, whether by the company or an
officer thereof, their value and the dates on which
they were given;

(d) the debts due to the company and the names,
addresses and occupations of the persons from
whom they are due and the amount likely to be
realised on account thereof;

(e) guarantees, if any, extended by the company;

(f) list of contributories and dues, if any, payable by
them and details of any unpaid call;

(g) details of trademarks and intellectual properties,
if any, owned by the company;

(h) details of subsisting contracts, joint ventures and
collaborations, if any;

(i) details of holding and subsidiary companies, if
any;

(j) details of legal cases filed by or against the
company; and

(k) any other information which the Tribunal may
direct or the Company Liquidator may consider
necessary to include.

(2) The Company Liquidator shall include in his report the
manner in which the company was promoted or formed
and whether in his opinion any fraud has been committed
by any person in its promotion or formation or by any
officer of the company in relation to the company since
the formation thereof and any other matters which, in his
opinion, it is desirable to bring to the notice of the
Tribunal.

(3) The Company Liquidator shall also make a report on
the viability of the business of the company or the steps

25
which, in his opinion, are necessary for maximising the
value of the assets of the company.

(4) The Company Liquidator may also, if he thinks fit,
make any further report or reports.

(5) Any person describing himself in writing to be a
creditor or a contributory of the company shall be entitled
by himself or by his agent at all reasonable times to
inspect the report submitted in accordance with this
section and take copies thereof or extracts therefrom on
payment of the prescribed fees.”

15. The Tribunal is then to consider the aforesaid report and fix a

time limit within which the proceedings shall be completed and the

company dissolved, which time limit may be revised – see section

282(1).

16. Importantly, the company’s properties shall, on the order of the

Tribunal, be taken over by the Company Liquidator and be deemed to

be in custodia legis – see section 283(1) and 283(2).

17. Thereafter, the Tribunal is to settle a list of contributories under

section 285. The Company Liquidator is then to make periodical

reports to the Tribunal with respect to the progress of the winding up

proceedings as follows:

“288. Submission of periodical reports to Tribunal.—
(1) The Company Liquidator shall make periodical reports
to the Tribunal and in any case make a report at the end
of each quarter with respect to the progress of the

26
winding-up of the company in such form and manner as
may be prescribed.

(2) The Tribunal may, on an application by the Company
Liquidator, review the orders made by it and make such
modifications as it thinks fit.”

18. Section 290 is important because it lays down the powers and

duties of the Company Liquidator as follows:

“290. Powers and duties of Company Liquidator.—(1)
Subject to directions by the Tribunal, if any, in this regard,
the Company Liquidator, in a winding-up of a company by
the Tribunal, shall have the power—

(a) to carry on the business of the company so far as
may be necessary for the beneficial winding-up
of the company;

(b) to do all acts and to execute, in the name and on
behalf of the company, all deeds, receipts and
other documents, and for that purpose, to use,
when necessary, the company’s seal;

(c) to sell the immovable and movable property and
actionable claims of the company by public
auction or private contract, with power to transfer
such property to any person or body corporate,
or to sell the same in parcels;

(d) to sell the whole of the undertaking of the
company as a going concern;

(e) to raise any money required on the security of
the assets of the company;

(f) to institute or defend any suit, prosecution or
other legal proceeding, civil or criminal, in the
name and on behalf of the company;

(g) to invite and settle claim of creditors, employees
or any other claimant and distribute sale
proceeds in accordance with priorities
established under this Act;

(h) to inspect the records and returns of the
company on the files of the Registrar or any
other authority;

27

(i) to prove rank and claim in the insolvency of any
contributory for any balance against his estate,
and to receive dividends in the insolvency, in
respect of that balance, as a separate debt due
from the insolvent, and rateably with the other
separate creditors;

(j) to draw, accept, make and endorse any
negotiable instruments including cheque, bill of
exchange, hundi or promissory note in the name
and on behalf of the company, with the same
effect with respect to the liability of the company
as if such instruments had been drawn,
accepted, made or endorsed by or on behalf of
the company in the course of its business;

(k) to take out, in his official name, letters of
administration to any deceased contributory, and
to do in his official name any other act necessary
for obtaining payment of any money due from a
contributory or his estate which cannot be
conveniently done in the name of the company,
and in all such cases, the money due shall, for
the purpose of enabling the Company Liquidator
to take out the letters of administration or recover
the money, be deemed to be due to the
Company Liquidator himself;

(l) to obtain any professional assistance from any
person or appoint any professional, in discharge
of his duties, obligations and responsibilities and
for protection of the assets of the company,
appoint an agent to do any business which the
Company Liquidator is unable to do himself;

(m) to take all such actions, steps, or to sign, execute
and verify any paper, deed, document,
application, petition, affidavit, bond or instrument
as may be necessary,—

(i) for winding-up of the company;

(ii) for distribution of assets;

(iii) in discharge of his duties and obligations
and functions as Company Liquidator;

and

28

(n) to apply to the Tribunal for such orders or
directions as may be necessary for the winding-
up of the company.

(2) The exercise of powers by the Company Liquidator
under sub-section (1) shall be subject to the overall
control of the Tribunal.

(3) Notwithstanding the provisions of sub-section (1), the
Company Liquidator shall perform such other duties as
the Tribunal may specify in this behalf.”

19. Under section 292, subject to the provisions of the Companies

Act, 2013, the Company Liquidator shall, in the administration of the

assets of the company and the distribution thereof among its

creditors, have regard to any directions which may be given by the

resolution of the creditors or contributories at any general meeting –

see section 292(1).

20. It is only when the affairs of the company have been completely

wound up that an application is to be made to the Tribunal to dissolve

the company under section 302, which is set out hereinbelow:

“302. Dissolution of company by Tribunal.—(1) When
the affairs of a company have been completely wound up,
the Company Liquidator shall make an application to the
Tribunal for dissolution of such company.
(2) The Tribunal shall on an application filed by the
Company Liquidator under sub-section (1) or when the
Tribunal is of the opinion that it is just and reasonable in
the circumstances of the case that an order for the
dissolution of the company should be made, make an
order that the company be dissolved from the date of the
order, and the company shall be dissolved accordingly.

(3) The Tribunal shall, within a period of thirty days from
the date of the order,—
29

(a) forward a copy of the order to the Registrar who
shall record in the register relating to the
company a minute of the dissolution of the
company; and

(b) direct the Company Liquidator to forward a copy
of the order to the Registrar who shall record in
the register relating to the company a minute of
the dissolution of the company. ”

21. Where a company has been dissolved, such dissolution may be

set aside within a period of two years from the date of such

dissolution under section 356 of the Companies Act, 2013.

22. 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 pre-

admission 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

30
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.

23. 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 5 th

31
proviso to section 434(1)(c). Resultantly, civil appeal arising out of

SLP (Civil) No.26415 of 2019 stands dismissed.

Civil Appeal Nos. 4042-4043 of 2020 (arising out of SLP (Civil)
Nos. 2033-2034 of 2020):

Given the fact that the matter has been transferred by the High Court

to the NCLT to verify the necessary facts and circumstances of the

case, after which relief can be given to the appellant herein, we do

not find any reason to interfere with the aforesaid order. The appeals

are therefore dismissed.

…………………………………….. J.

(ROHINTON FALI NARIMAN)

…………………………………….. J.

(K.M. JOSEPH)

…………………………………….. J.

(KRISHNA MURARI)
New Delhi;

December 15, 2020.

32



Source link