IBC Laws - Transfer of Winding Up Proceedings to NCLT-Resolution of Cobweb and Enigma

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**Shri Sanjiv M Shah, B.COM, CA, CS, ICWA, LLB-Advocate**

Transfer of Winding Up Proceedings to NCLT-Resolution of Cobweb and Enigma

In Action Ispat And Power Pvt. Ltd. Vs. Shyam Metalics And Energy Ltd. dated 15.12.2020 (2020) ibclaw.in 42 SC, Supreme Court following its earlier judicial precedents exhaustively reviewed entire gamut regarding transfer of winding up Petitions of Companies pending before High Court to National Company Law Tribunal [NCLT] which is expounded infra with minute analysis.
Insolvency and Bankruptcy Code, 2016 [IBC] is single consolidated and integrated legislation of diverse laws governing insolvency and bankruptcy law applicable to companies, firms and individuals for maximization of value of their assets within a time bound frame separating commercial and judicial dimensions [M/S. Innoventive Industries Ltd. Vs. ICICI Bank & Anr. (2018) 1 SCC 407, 421, 422, Paragraph 12] without referring to liquidation which can also be achieved by selling business as a going concern [Arcelormittal India Private Limited Vs. Satish Kumar Gupta & Ors. (2019) 2 SCC 1, Paragraph 83, Foot Note-3]. Ultimate end and intent is to resurrect and sustain the corporate debtor precluding its corporate burial and consequently, IBC is a positive law protecting all stakeholders interests without reducing itself to a mere recovery statute for creditors [Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. (2019) 4 SCC 17, Paragraph 28].
Sections 255 and 239 of IBC read with Section 434 of Companies Act, 2013 and Companies (Transfer of Pending proceedings) Rules, 2016 posit that all proceedings inter alia in respect of winding up, arbitration, compromise, arrangement and reconstruction of companies pending immediately before such date as may be notified by Central Government shall be transferred to NCLT at such stage as may be prescribed as amended from time to time.
In Jaipur Metals & Electricals Employees Organization Vs. Jaipur Metals & Electricals Ltd. [2018] ibclaw.in 34 SC two vexed controversies projected in (a) and (b) below were decided:-
1. companies facing winding up proceedings in High Court under Section 20 of Sick Industries Companies (Special Provisions) Act, 1985 [SICA] are not dictated by Rule 6, but by clear language of Rule 5(2) of Companies (Transfer of Pending proceedings) Rules, 2016 inasmuch SICA cases are specially provided for in Rule 5(2) mandating that all pending proceedings will be continued to be dealt with by High Court as hitherto, whereas Rule 6 refers to instances of companies wound up under Section 433(f) of Companies Act, 1956 on just and equitable grounds although reference under Section 20 of SICA is also on same premise as Section 433(f) and hence reliance on omission of Rule 5(2) to fall back upon Rule 5 to reinforce argument that pending proceedings should be transmitted to NCLT cannot be sustained because such a deletion does not automatically transfer cases to NCLT in absence of incorporation of a specific rule to that effect and with the repeal of SICA with effect from 15.12.1996 there is was no juncture for BIFR to form contemplated opinion under Section 20 rendering existence of Rule 5(2) itself as on 15.12.2016 and after 29.06.2017 unnecessary more particularly, since fifth proviso to Section 434(1)(c) postulates with effect from 17.08.2018 that any party to the winding pending proceedings may apply to the High Court for transfer of such proceedings to NCLT, but until then jurisdiction will continue with High Court evidently correcting but upholding High Court’s judgment on this point which relied on Rule 6 instead of Rule 5(2) to support its conclusion of negativing plea of transfer of proceedings to NCLT;
2. despite pendency of winding up proceedings in Rajasthan High Court in pursuance of reference made under Section 20 of SICA, financial creditor’s Petition under Section 7 of IBC was admitted which was not approved by High Court and when matter travelled to Supreme Court, latter reversing decision of High Court held that Section 238 of IBC overrides all other laws which are inconsistent therewith such being effect of non-obstante clause engrafted therein and course of Section 7 of IBC adopted by financial creditor is independent and nothing to do with aforementioned winding up proceedings; and
3. in the premises, NCLT proceedings in present case will continue from the stage it was stopped and as a result, company petition pending before High Court cannot be proceeded with in the light of overwhelming effect of Section 238 of IBC and Writ Petitions pending in the High Court will have to be disposed of since proceedings before NCLT will see their logical conclusion.
In Forech India Ltd. Vs. Edelweiss Assets Reconstruction Co. Ltd. [2019] ibclaw.in 20 SC, the Highest Court of the land in an appeal from order of Appellate Tribunal seeking continuation of winding up proceedings in High Court propagated that such proceedings under Section 433(e) of Companies Act, 1956 awaiting disposal in the Delhi High Court in relation to which prescribed notice in Form no 6 under Rule 27 of Companies (Court) Rules, 1959 read with Rule 5 of Companies (Transfer of Pending proceedings) Rules, 2016 was served cannot be transmitted to NCLT despite admission of financial creditor’s application under Section 7 of IBC by NCLT which is an independent proceeding since Rules 26 and 27 of Companies (Court) Rules, 1959 unambiguously advert to pre-admission scenario and not post-admission whilst confirming view taken one by Bombay High Court in Ashok Commercial Enterprises v. Parekh Aluminex Limited [2017] 202 COMP CASES 148 (BOM);(2017) 4 CR 653 and upsetting contrary view held by Madras High Court M K and Sons Engineering v. Eason Revrolle Limited IN CP/364/2016 relying on expression “was admitted” in Form no 6 overlooking wording “fixed for hearing before the company judge” and granted liberty to Appellant herein to invoke remedy engrafted in fifth proviso to Section 434(1)(c) conferring right to apply to High Court to transfer winding up proceedings to NCLT which on being allowed can then be treated as a proceeding under Section 9 of IBC.
In M/S Kaledonia Jute and Fibres Pvt. Ltd. Vs. M/S Axis Nirman and Industries Ltd. & Ors. (2020) ibclaw.in 39 SC, while ex-parte winding order was passed apropos Respondent-company under Section 433(e) of Companies Act, 1956 against which Respondent-company lodged application for recall of such order, but to no avail, another financial creditor instituted application under Section 7 of IBC to NCLT as also moved civil application before High Court in aforestated winding up proceedings praying for transmitting such proceedings to NCLT which was refuted and on appeal to Top Court, High Court’s order was not countenanced advocating that:-
1. first bone of contention as to when winding up proceedings can be transferred from file of High Court to NCLT is settled by its own ruling which propounded that if service of petition is completed in conformity with Rule 5 of Companies (Transfer of Pending proceedings) Rules, 2016 read with Rule 26 and 27 of Companies (Court) Rules, 1959 such a transmission cannot take place;
2. presence of expression “”any person could apply for transfer of such petitions to the NCLT under the Code” in paragraph 17 of judgment in Forech India Ltd. Vs. Edelweiss Assets Reconstruction Co. Ltd. [2019] ibclaw.in 20 SC cannot convert that precedent as an authority to contend that any person who is not party to the winding up proceedings can apply under 5th proviso to Section 434(1)(c) when its literal interpretation reveals that such a prerogative is circumscribed only to “any party or parties to any proceedings relating to the winding up of companies pending before the any Court”;
3. on a survey and inspection of various relevant sections of Companies Act, 1956 and 2013 respectively phrase “any party or parties” is not limited to any single creditor who actually petitions or company or liquidator, but encompasses entire body of creditors of company inasmuch as action initiated by a sole creditor are actually proceedings in rem inuring to joint benefit of all creditors. Foregoing issue can also be viewed in a converse way, in that, each creditor of Company can appeal to Company Court if he is distressed by any decision of Official Liquidator and in that event, it is undeniable that he would certainly be considered as a party to the proceedings and hence instead he espousing this circular route it would be in fitness of things to straightway reckon him as a party to such proceedings;
4. restrictions enshrined in Rules 26 and 27 of Companies (Court) Rules, 1959 and Rule 5 of Companies (Transfer of Pending proceedings) Rules, 2016 relating to stage at which application is to be lodged cannot be brought into play while availing fifth proviso to Section 434(1)(c) [PARAGRAPH 46 OF MANU/SC/0876/2020]; and
5. in the result, financial creditor is entitled seek transfer of winding up proceedings from file of High Court to NCLT by virtue of fifth proviso to Section 434(1)(c) and consequently, ordered that proceedings be transmitted to NCLT to be heard along with pending application of the same creditor under 7 of IBC although High Court did not adjudicate on the controversy appertaining to fifth proviso to Section 434(1)(c).
After applying ratio of earlier rulings of Apex Court alluded to in serial numbers (4) to (6) supra and thoroughly examining provisions of Chapter XX of Companies Act, 2013 concerning winding up of companies, Supreme Court in Action Ispat And Power Pvt. Ltd. Vs. Shyam Metalics And Energy Ltd. dated 15.12.2020 (2020) ibclaw.in 42 SC which was directly a case under fifth proviso to Section 434(1)(c) concluded that:-
1. at pre-admission stage, where notice is not issued under Rule 26 of Companies (Court) Rules, 1959, proceedings are peremptorily transferable to NCLT for resolution under IBC;
2. if notice is served, but case is at pre-admission level and application is made under 5th proviso of Section 434(1)(c) which can be made at any stage as held in M/S Kaledonia Jute and Fibres Pvt. Ltd. Vs. M/S Axis Nirman and Industries Ltd. & Ors. (2020) ibclaw.in 39 SC, winding up proceedings can be transmitted to NCLT at High Court’s discretion inasmuch as prior to insertion of 5th proviso both proceedings would continue simultaneously which resulted in most undesirable and unsatisfactory state of affairs; and
3. in post admission cases but on an application under fifth proviso to Section 434(1)(c), where the liquidator has taken custody, control and possession of assets, records, accounts etc of company, but actually not sold any movable or immovable property implying that situation is not irretrievable and irreversible, High Court can transfer pending proceedings to NCLT inasmuch as under such circumstances there no room for an occasion of impossibility of setting the clock backwards.