2025 (5) TMI 584 - HC - Companies Law

Transfer of winding up petition from the High Court to the National Company Law Tribunal (NCLT) under Section 434(1)(c) of the Companies Act - HELD THAT - As would appear from the substituted sub section 434(1)(c) the original sub section has undergone several changes between 7th December 2016 and 17th August 2018. The first proviso to Section 434(1)(c) after the substitution in 2016 clarified transfer of pending proceedings by the phrase only such proceedings relating to winding up the companies as may be prescribed by the Central Government - The stage at which such pending proceeding relating to the winding up of companies needs to be transferred has been prescribed and laid down by the Companies (Transfer of Pending Proceedings) Rules 2016. The facts in Action Ispat and Power Pvt. Ltd. 2020 (12) TMI 535 - SUPREME COURT were that winding up application was filed under Section 433(e) and (f) 434 and 439 of the Companies Act against the company seeking winding up and it was alleged that for the goods supply Action Ispat had failed to pay a sum of Rs. 4.55 crores. The Company Judge in Delhi High Court passed an order on 27th August 2018 admitting the winding up petition and appointed the official liquidator attached to the Supreme Court as the liquidator of the Company with further direction to take over all the assets books of accounts and records of the Company forthwith. An application was then filed before the Company Judge by SBI being the secured creditor of Action Ispat seeking transfer of the winding up petition to the NCLT in view of the fact that the SBI had filed an application under Section 7 of the IBC Code 2016 which was pending before NCLT. The issue before the Hon ble Supreme Court was whether the discretion exercised by the Company Court in transferring the winding up proceeding to NCLT was liable to be set aside - The Hon ble Supreme Court observed that prime focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting it from its own management and from a corporate death by liquidation. The IBC Code was held to be a beneficial piece of legislation which puts the corporate debtor back on its feet not being a mere recovery legislation for creditors. Adverting to the facts in the present case there is nothing that can be said to have irretrievable in the instant case in the sense mentioned in para 25 of the Action Ispat Judgment wherein it was clarified that So long as no actual sales of the immovable or movable properties had 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 - only where a company is winding up or near corporate death and no transfer or winding up proceedings would then take place to the NCLT to be tried as a proceedings under IBC. Short of an irresistible conclusion that corporate death is inevitable every effort should be made to resuscitate the corporate debtor in the larger public interest which includes not only the workmen of the corporate debtor but also its creditors and the goods it produces in the larger interest of the economy of the country. Conclusion - The Court is convinced that the companies to suffer inevitable corporate death the first choice would be to make an all out attempts to revive the company and this procedure has been elaborately laid in the IBC. The Companies Act 2013 is clearly not suited for such situation and this is clearly reflected in amended and substituted Section 434 of the Act read with Sections 7 and 8 of the IBC and objects and reasons of both the statutes. Moreover there is no conflict between the two proceedings. Appeal dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

1. Whether the order of the learned Company Judge transferring the winding up petition from the High Court to the National Company Law Tribunal (NCLT) under Section 434(1)(c) of the Companies Act is legally sustainable and justified.

2. The scope and exercise of discretion vested in the Company Court under amended Section 434(1)(c) regarding transfer of winding up proceedings to NCLT, particularly in the context of the Insolvency and Bankruptcy Code (IBC), 2016.

3. The applicability and interpretation of the Supreme Court's judgment in Action Ispat and Power Pvt. Ltd. vs. Shyam Metalics and Energy Limited (2021) regarding transfer of winding up proceedings to NCLT.

4. The impact of amendments to Section 434 of the Companies Act and the Companies (Transfer of Pending Proceedings) Rules, 2016 on the transfer of winding up proceedings.

5. Whether the transfer of winding up proceedings to NCLT is mandatory or discretionary, and the criteria for such exercise of discretion.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality and Justification of Transfer of Winding Up Petition to NCLT under Section 434(1)(c)

The legal framework governing transfer of pending proceedings under the Companies Act is Section 434(1)(c), which has undergone multiple amendments between 2013 and 2018. The provision mandates transfer of all pending proceedings under the Companies Act, including winding up petitions, from High Courts and District Courts to the NCLT, subject to prescribed stages and conditions.

The Companies (Transfer of Pending Proceedings) Rules, 2016, specifically Rule 5, prescribe that winding up petitions on the ground of inability to pay debts pending before a High Court, where the petition has not been served on the respondent, shall be transferred to the NCLT to be dealt with under the Insolvency and Bankruptcy Code (IBC), 2016. The provisos to Section 434(1)(c) clarify that only winding up proceedings at prescribed stages are mandatorily transferred, while others may be transferred on application and discretion of the Court.

The Court noted that the learned Company Judge's order was based on the amended statutory framework and Rules, and the transfer was in consonance with the legislative intent to consolidate insolvency and winding up proceedings before the NCLT to avoid multiplicity and conflicting adjudications.

Key findings include that the petition was at a stage where transfer was permissible and that no irreversible steps in the winding up process had been taken, such as sale of assets, which would preclude transfer.

Issue 2: Scope and Exercise of Discretion under Section 434(1)(c) in Context of IBC

The Court examined the discretion vested in the Company Court to transfer winding up proceedings to the NCLT post-admission of the petition. The Supreme Court in Action Ispat clarified that while pre-service stage winding up petitions are compulsorily transferred, even post-admission and appointment of a liquidator, discretion lies with the Company Court to transfer proceedings to NCLT unless the winding up has reached an irreversible stage.

The Court emphasized that the discretion must be exercised judiciously, considering whether the company is near corporate death or whether revival under the IBC is feasible and desirable in the public interest. The Court rejected the appellant's argument that the discretion was exercised mechanically, holding that the learned Company Judge applied the correct legal principles and carefully considered the stage of proceedings.

The Court also highlighted that the IBC is a beneficial legislation aimed at revival of corporate debtors, and the Companies Act winding up provisions are not suited to such revival efforts. Thus, transfer to NCLT under IBC is preferred to prevent parallel proceedings and to enable the corporate insolvency resolution process.

Issue 3: Applicability and Interpretation of Action Ispat and Power Judgment

The Court analyzed the Supreme Court's decision in Action Ispat, which arose in the context of parallel proceedings under the Companies Act and IBC. The Supreme Court held that the IBC's objective of revival and continuation of corporate debtors takes precedence over winding up proceedings, and transfer to NCLT is warranted in appropriate cases.

The appellant contended that Action Ispat was limited to cases with parallel proceedings before IBC and Company Courts, but the Court rejected this narrow interpretation. It noted that subsequent Supreme Court authority in A. Navinchandra Steels Pvt. Ltd. confirmed the principle that winding up and IBC proceedings are independent and that efforts must be made to revive companies unless corporate death is inevitable.

The Court relied on the principle that unless the winding up has reached an irreversible stage, transfer to NCLT for resolution under IBC is appropriate and consistent with legislative intent and judicial precedent.

Issue 4: Impact of Amendments to Section 434 and Transfer Rules

The Court traced the evolution of Section 434, noting amendments in 2013, 2016, 2017, and 2018, which progressively expanded and clarified the scope of transfer of pending proceedings to NCLT. The 2016 Transfer Rules prescribed stages at which winding up petitions must be transferred, with emphasis on pre-service stage.

The 2018 amendment introduced a proviso allowing transfer of winding up proceedings pending before courts to NCLT as applications for initiation of corporate insolvency resolution process under IBC, to avoid conflicting proceedings. The Court held that these legislative changes reflect a clear policy to centralize insolvency and winding up matters before NCLT and to harmonize the Companies Act with the IBC.

Issue 5: Nature of Discretion to Transfer and Criteria for Exercise

The Court acknowledged that the discretion to transfer winding up proceedings is not absolute or mechanical but must be exercised based on the stage of the proceedings and the facts of each case. The key criterion is whether the winding up has reached an irreversible stage making transfer impracticable.

Where no irreversible steps such as sale of assets have occurred, and the company is not near corporate death, the Court should ordinarily transfer the proceedings to NCLT to facilitate revival under IBC. Conversely, if the company is effectively beyond revival, the Court may decline transfer and proceed with winding up.

The Court found that in the present case, no irreversible steps had been taken and the transfer was warranted and consistent with the statutory scheme and judicial pronouncements.

SIGNIFICANT HOLDINGS

"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."

"Short of an irresistible conclusion that corporate death is inevitable, every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country."

"A petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company. Given the object sought to be achieved by the IBC, it is clear that only where a company in winding up is near corporate death that no transfer of the winding up proceeding would then take place to the NCLT to be tried as a proceeding under the IBC."

"The IBC Code was held to be a beneficial piece of legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors."

"The discretion vested in the Company Court to transfer such petition to the NCLT must be exercised judiciously and not mechanically, taking into account the stage of the winding up proceedings and the possibility of revival under the IBC."

Final determination: The Court upheld the transfer of the winding up petition to the NCLT, finding no error or perversity in the learned Company Judge's order. The appeal was dismissed accordingly.