Transfer of Winding up Proceeding Pending Before a High court to NCLT can be Ordered at the Request of any Creditor of a Company: SC

Transfer of winding up proceeding pending before a High court to NCLT can be ordered at the request of any creditor of a company: SC

“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.

The Apex Court had ruled that transfer of winding up proceeding pending before a High court to NCLT (National Company Law Tribunal) can be ordered at the request of any creditor of a company. The Court made this observation while allowing an appeal filed by a Financial Creditor against an order of the High court which refused to transfer the winding-up proceedings from the Company Court to the NCLT.

“The word “party” in the 5th 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 bench noted.

Brief Facts of the Case

  • A winding up petition was filed against M/S Axis Nirman and Industries Limited in 2015 which had sought winding up of Axis on the ground that the company was unable to pay its debts
  • The Company court in March, 2016 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.
  • Though, the order was later kept in reserved after Axis Nirman and Industries Limited filed an application for recall of the order on the ground it has paid the entire amount due to the creditor.
  • Kaledonia Jute and Fibres (a financial creditor) moved an application before the NCLT, Allahabad under Section 7 of the Insolvency and Bankruptcy Code, 2016. The claim of the appellant in this before the NCLT was that Axis was liable to pay a sum of Rs.32 lakhs to Kaledonia. It also seeks for transfer of winding up proceedings against M/S Axis Nirman and Industries Limited pending before the Allahabad High Court (Company Court) to NCLT. However, the application was rejected on the sole ground that the requirement of Rule 24 had already been complied with and that a winding-up order had already been passed.
  • This led to the appeal before the Apex Court.

Issues before the Supreme Court

  • What are the circumstances under which a winding up proceeding pending on the file of a High court could be transferred to the NCLT
  • At whose instance, such transfer could be ordered.

Observation made by the Court

  • Reliance was made to the verdict in Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd that any person could apply for transfer of such petitions to the NCLT under the Code. Referring to this observation, the contention raised was that that “any person” (and not necessarily a party to the proceeding) could apply for transfer.
  • Rejecting this contention, the court noted that, “But we do not think that the decision in Forech India Limited (supra) is an authority for the proposition that the 5th proviso to Clause (c) of Sub­section (1) of Section 434 could be invoked by any person who is not a party to the proceeding for 20 winding up. The 5th proviso which we have already extracted uses the words “any party or parties to any proceedings relating to the winding-up of companies pending before any Court.” In other words, the right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, on a literal interpretation, such a right should be held to be confined only to “the parties to the proceedings.”
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  • The Court subsequently proceeded to scrutinize who are “the parties to” the winding-up proceedings. Examining various provisions of the companies Act, the Court ruled that, “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 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 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 5th proviso to section 434(1)(c), 25 it would be better to recognise the right of such a party to seek transfer directly.. 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 enquiry into the application under Section 7 IBC, the entire object of IBC will be thrown to the winds,” it added.

After Section 434 was substituted by a new provision under Act 31 of 2016 and the 5th 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 judgment said.

  • 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,” held the Court.

Case Name: Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd

 Citation: CIVIL APPEAL NO. 3735 OF 2020

Coram: Chief Justice of India SA Bobde, Justices AS Bopanna and V. Ramasubramanian

Transfer of winding up proceeding pending before a High court to a NCLT can be ordered at the request of any creditor of a company: SC

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