When can a company under winding up be referred to IBC - Delhi HC answers

Aditi Singh October 12 2019
winding up

The Delhi High Court has held that an application for transfer of a case to the National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code (IBC)  is maintainable even after service of notice on company in respect of whom the winding up proceedings are filed.

Other options available, namely to resolve/revive a company, can and should always be explored unless irrevocable steps towards liquidation have already been undertaken, the Court has held.

The judgment was passed by a Division Bench of Justices Vipin Sanghi and Sanjeev Narula in an appeal against an order of transfer to NCLT by the Company Judge of the Court.

A winding-up petition under Sections 433(e) and 433(f) of the Companies Act, 1956 was preferred by Shyam Metalics & Energy Ltd, (Respondent No 1) on the ground of Action Inspat’s Power Ltd’s (Appellant) inability to pay its debts.

In August 2016, a notice of the winding-up petition was duly served on the appellant. Subsequently, in August 2018, the winding-up petition was admitted and Official Liquidator (OL) was appointed for the appellant company and he was directed to take over all the assets, books of accounts and records of the appellant company forthwith.

While the winding-up proceedings were still at an early stage and no direction to liquidate any of the assets of the appellant had been passed, the State Bank of India (SBI), a secured creditor, moved the NCLT under IBC. SBI then also moved an application before the Company Judge for transfer of the winding-up proceedings to the NCLT

In spite of opposition from the ex-management of the Appellant and by the Official Liquidator, the Company Judge revoked the order admitting the winding-up petition and appointing the OL and transferred the matter to NCLT. Aggrieved by the transfer, the Appellant moved in appeal before the Division Bench.

The Appellant argued that after the appointment of the OL and the direction to him to take over all the assets and books/ records of the appellant, the appellant stood wound up and the company petition could not be transferred to the NCLT. It was contended that the winding-up proceedings, necessarily, had to continue before the Company Judge and the OL alone had jurisdiction to liquidate the assets of the appellant company and settle the claims of all the creditors and contributors.

The Appellant further stated that consequent to the passing of the winding-up order, no party, especially the one who is not a party to the winding-up proceedings, has the right to seek transfer of proceedings and all claims ought to be decided by the Liquidator.

SBI, on the other hand, argued that the transfer was fully in compliance with the provisions of law. It was submitted that the object of IBC was aimed towards the protection of interests of the creditors, the corporate debtor and to maximize the value of the assets of the corporate debtor.

Reliance was also placed on Section 434 of the Companies Act, 1956 and Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016 to state that unless an order for dissolution of the company was passed, there was no bar against the proceedings under section 7 of the IBC.

After hearing the parties, the Court, at the outset, expressed its reservation with respect to the locus standi of the Appellant as it remarked that it was the erstwhile management of the Appellant which was masquerading as the company under winding up.

It clarified that when the plea of a secured creditor to transfer the proceedings to the NCLT is pitted against the objections by the ex-management unless very strong reasons for accepting the plea of the ex-management are brought forth, the Company Court would lean in favour of transferring the winding-up proceedings pending before it to the NCLT.

Since the winding-up order had been passed by the learned Company Judge, which would lead to the process of liquidation and dissolution of the appellant company, it was the creditors – more particularly the secured creditors of the appellant company, who had the prerogative of calling the shots, insofar it concerns the manner in which the process of liquidation and/ or revival of the appellant company should be undertaken. The stake of the creditors – more particularly the secured creditors of the appellant company, is much higher and it is their claims which would have to be first met, before turning to the ex-management. More often than not, it is the ex-management of the company under winding up/ liquidation which is responsible for the state of affairs that the company finds itself in..”

The Court then proceeded to analyze the statutory scheme found in Section 434 of the Companies Act, 2013 read with Rule 5 of the Companies (Transfer of Pending Proceedings) Rules and held that the jurisdiction vested in the Company Court to order transfer of the proceedings to the Tribunal was discretionary and was dependent on the best interest of all the creditors .

The Court reiterated that the IBC worked towards the revival of the company which benefited all stakeholders, the creditors as well as the company.

Therefore, it added,

"when a transfer of winding up petition can aid in achieving the aforementioned objective, it ought to be allowed in the interest of justice. The court must be sensitive to the scheme and object of the Code; running of parallel proceedings will indeed be futile, create chaos and confusion..”

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, it said.

The Court thus went on to hold that an order passed by the Company Court admitting the petition and ordering its winding up was not irrevocable in view of Rule 9 of the Company Court Rules, 1959 and various decisions of the Supreme Court.

Winding up of a company is a process, and it is not achieved merely upon order for winding up being passed. When an order is passed by the Company Court directing a company to be wound up, and a liquidator is appointed for that purpose, the Company Court only sets the ball rolling… On the day when the winding up order is passed, the company does not stand dissolved. Such an order of winding up can be re-called by the Company Court in the exercise of the inherent power of the Court recognized in Rule 9 of the Company Court Rules, 1959.”

The Court, therefore, rejected all the objections raised by the Appellants and held that other options to resolve/revive a company before the NCLT can and should always be explored unless irrevocable steps towards liquidation have already been undertaken.

In view of the above, the order of transfer was upheld and the appeal was dismissed.

The Appellant was represented Advocates Maneesha Dhir, Varsha Banerjee, Kund Godhwani, Kunal Godwani.

SBI was represented by Senior Advocates Ramji Srinivasan with Advocates Sylona Mohapatra, RS Lakshman, Sindhu T P, Ashwini Kumar Singh, and PV Dinesh.

Read the Judgment:

Action Ispat vs Shaym Mettalics_watermark