Companies (Transfer of Pending Proceedings) Rules 2016: rr.5 and 6 – Application seeking transfer of the winding up petition pending before High Court to the National Company Law Tribunal (NCLT) – Refusal by Company Court (High Court) – Correctness of – Second respondent filed a company petition against the first respondent for winding up on the ground that first respondent was not able to pay its debts – Winding up order – Thereafter first respondent sought for recalling the order of winding up and in order to prove bonafides paid the entire amount due to the petitioning creditor (second respondent) – Petitioning creditor had no objection to recall the order – But the official liquidator opposed to recall the order on the ground that the first respondent owed money to various other creditors to the tune of Rs.27 Crores and that unless the said amount was paid, the order of winding up could not be recalled – The Official Liquidator also submitted that he had already taken over charge of the assets of the Company – Company Court passed an order keeping the winding up in abeyance, however, directed the Official Liquidator to continue to be in custody of the assets of the Company – Appellant claiming to be a creditor of the first respondent moved an application before the NCLT under s.7 of the IBC, 2016 on the ground that the first respondent was due and liable to pay a sum of Rs.32 lakhs and that it failed to pay despite repeated demands – Thereafter, the appellant moved an application before the Company Court seeking transfer of the winding up petition to the NCLT – Company Court refused transfer on the sole ground that the requirement of r.24 had already been complied with and that a winding up order had already been passed – Instant appeal filed by appellant-financial creditor – The main issues that arose for consideration were: (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 – Held: If the winding up petition has already been served on the respondent in terms of r.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 r.26 had not been completed, such winding up proceedings, whether they are under Clause (c) of s.433 or under Clauses (a) and (f) of s.433, shall peremptorily be transferred to the NCLT – In other words, rr.5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under r.26, as the stage at which a winding up proceeding can be transferred – This is because the first proviso under Clause (c) of Sub-section (1) of s.434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and sub-section (2) of s.434 confers rule making power on the Central Government – As regards the second question as to who are the parties to the winding up proceedings, 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 – The word “party” appearing in the fifth proviso to Clause (c) of Sub-section (1) of s.434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator and would take within its fold any creditor of the company in liquidation – Therefore, appellant will come within the definition of the expression “party” appearing in the 5th proviso to Clause (c) of Sub-section (1) of s.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 – Thus, proceedings for winding up pending before the Company Court against the first respondent is ordered to be transferred to the NCLT, to be taken up along with the application of the appellant under s.7 of the IBC – Companies (Court) Rules, 1959 – r.26 – Companies Act, 2013 – s.434(1)(c), fifth proviso, s.447.
Allowing the appeal, the Court
HELD: 1. The first proviso to Clause (c) of Section 434 restricts the transferability of proceedings for winding up from the High Court to the tribunal, 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. Sub-section (2) of Section 434 empowers the Central Government to make Rules consistent with the provisions of the Act, to ensure timely transfer of all matters pending before the Company Law Board or the Courts, to the Tribunal. Therefore, in exercise of the power conferred by Sub-section (2) of Section
434 of the Companies Act, 2013 read with Sub-section (1) of Section 239 of the IBC, 2016, the Central Government issued a set of Rules known as ‘The Companies (Transfer of Pending Proceedings) Rules, 2016. [Paras 21, 22][813-D-G]
2. For the purpose of transfer, winding up proceedings pending before the High Courts, are classified by Section 434 into two categories namely:- 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 before 01.04.2017; and other types of winding up proceedings. The first of the above 2 categories of cases are covered by the fourth proviso under Clause
(c) of Sub-section (1) of Section 434, which states that proceedings relating to cases of voluntary winding up of a company where notice of the resolution by advertisement has been given under sub-section (1) of section 485 of the Companies Act, 1956 but the company has not been dissolved before the 1st April, 2017 shall continue to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959. Such cases of voluntary winding up covered by the above proviso shall continue to be dealt with by the High court. It is only (i) cases of voluntary winding up falling outside the scope of the 4th Proviso and (ii) other types of winding up proceedings, that can be transferred by the High Courts to the Tribunal, subject however to the Rules made by the Central Government under Section 434 (2). The transferability, by operation of law, of winding up proceedings, other than those covered by the 4 th Proviso, depends upon the stage at which they are pending before the Company Court. But this is left by the law makers to be determined through subordinate legislation, in the form of Rules. [Paras 23, 24, 25][813-G-H; 814-A-F]
3. Apart from providing for the transfer of certain types of winding up proceedings by operation of law, Section 434 (1)(c) also gives a choice to the parties to those proceedings to seek a transfer of such proceedings to the NCLT. This is under the fifth proviso to Clause (c). The Companies (Transfer of Pending Proceedings) Rule, 2016 issued in exercise of the powers conferred by Section 434 (2) read with Section 239(1) of IBC, 2016 categorise the pending proceedings for winding up into three types namely (i) proceedings for voluntary winding up covered by the fourth proviso to Clause (c) of Sub-section (1) of Section 434, which shall continue to be dealt with in accordance with the provisions of the 1956 Act; (ii) proceedings for winding up on the ground of inability to pay debts; and (iii) proceedings for winding up on grounds other than inability to pay debts. Rule 5 of the aforesaid Rules provides for transfer of proceedings for winding up on the ground of inability to pay debts. Rule 6 of the aforesaid Rules deals with transfer of proceedings for winding up, on grounds other than inability to pay debts. The transferability of a winding up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. 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, whether they are under Clause (c) of Section 433 or under Clauses (a) and (f) of Section 433, shall peremptorily be transferred to the NCLT. [Paras 26, 27, 28, 30, 31, 32][814-F-H; 815-A-C; 816-A-B; 816-D-E]
4. Who are “the parties to” the winding up proceedings. The Companies Act, 1956 does not define the expression “party”. The Companies (Court) Rules, 1959 also does not define the expression “party”. The Companies Act 2013 and the Companies (Transfer of pending proceedings) Rules, 2016 also does not define the expression “party”. Even the IBC, 2016 does not define the expression “party”. But there are certain clues inherently available in the Companies Act, 1956, to indicate the persons who may come within the meaning of the expression “party to the proceedings”. The provisions which contain such clues are as follows: (i) Section 447 of the Companies Act, 1956, which is equivalent to Section 278 of the Companies Act, 2013 states that an order for winding up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory. There is a small change between the wording of Section 278 of the 2013 Act and the wording of Section 447 of the 1956 Act. Section 278 of the 2013 Act shows that any petition by a single creditor or contributory is actually treated as a joint petition of creditors and contributories, so that the order of winding up operates in favour of all the creditors and all the contributories. (ii) Under Section 454 (6) of the 1956 Act, any person stating himself in writing to be a creditor shall be entitled to inspect the statement of affairs submitted to the official liquidator. If the claim of such a person to be a creditor turns out to be untrue, such a person is liable to be punished under Section 454(7) of the 1956 Act. (iii) The powers of the liquidator are enumerated in Section 457 of the 1956 Act. Section 457 actually divides the powers of a liquidator into two categories namely (i) those available with the sanction of the Tribunal and (ii) those generally available to the liquidator. But Section 290 of the 2013 Act has done away with such a distinction. However, the 1956 Act, as well as 2013 Act make the exercise of the powers by the liquidator, subject to the overall control of the Tribunal. This is made clear by Section 457(3) of the 1956 Act and Section 290(2) of the 2013 Act. Additionally, Section 457(3) of the 1956 Act enables any creditor or contributory to apply to the Court with respect to the exercise by the Liquidator, of any of the powers conferred by Section 457. (iv) Section 460 of the 1956 Act and Section 292 of the 2013 Act make it clear that in the administration of the assets of the Company and the distribution thereof among its creditors, the liquidator should have regard to any directions given by resolution of creditors at any general meeting. If the liquidator does something, in exercise of his powers, any person aggrieved by such Act or decision of the liquidator, is entitled to apply to the Company Court, under Section 460(6) of the 1956 Act and Section 292(4) of the 2013 Act. (v) Section 466(1) of the 1956 Act enables any creditor to apply for stay of all proceedings in relation to the winding up. This right can be exercised by any creditor at any time after the making of a winding up order. 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. [Paras 41, 42, 43][818-B-H; 819-A-H; 820-A]
5. 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), it would be better to recognise the right of such a party to seek transfer directly. [Para 44][820-B-C]
6. The object of IBC will be stultified if parallel proceedings are allowed to go on in different fora. If the 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. Therefore, the petitioner 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 order of the High court rejecting the petition for transfer on the basis of Rule 26 of the Companies (Court) Rules, 1959 is flawed. [Paras 45, 46][820-C-F]
Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd. [2019] 2 SCR 477 – relied on.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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