Saturday, 9 January 2021

Action Ispat and Power Pvt. Ltd. Vs Shyam Metalics and Energy Ltd. - Transfer of Winding up petition by Company Court to NCLT under the Code.

 SCI (15.12.2020) in Action Ispat and Power Pvt. Ltd. Vs Shyam Metalics and Energy Ltd. [Civil Appeal No. 4041,4042 & 4043 of 2020] held that; 

  • Thus, in a winding up proceeding where the petition has not been served in terms of Rule 26 of the Companies (Court) Rules, 1959 at a pre admission stage, given the beneficial result of the application of the Code, such winding up proceeding is compulsorily transferable to the NCLT to be resolved under the Code.

  • 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. Whether this stage is reached would depend upon the facts and circumstances of each case.


Excerpts of the order;

# 2. These appeals arise out of a judgment of the Division Bench of the Delhi High Court dated 10.10.2019 by which a Single Judge’s order dated 14.01.2019 transferring a winding up proceeding pending before the High Court to the National Company Law Tribunal [“NCLT”] was upheld. The brief facts necessary to appreciate the controversy involved in these appeals are as follows:


# 2.1. A winding up petition under sections 433(e) and (f), 434 and 439 of the Companies Act, 1956, being Co. Pet. No.731 of 2016 was filed by one Shyam Metalics and Energy Limited (Respondent No.1 herein), seeking winding up of the appellant company inasmuch as for goods supplied to the appellant company, a sum of Rs.4.55 crore was still due.The learned Company Judge in the Delhi High Court passed the following order in the aforesaid petition on 27.08.2018:

  • ORDER

27.08.2018

5. In these circumstances, the petition is admitted and the Official Liquidator attached to this Court is appointed as the Liquidator. He is directed to take over all the assets, books of accounts and records of the respondent company forthwith.


# 2.2. An application was then filed before the learned Company Judge by the State Bank of India [“SBI”] (Respondent No. 2 herein), being a secured creditor of the appellant company, seeking transfer of the winding up petition to the NCLT in view of the fact that SBI had filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 [“Code”] which was pending before the NCLT. By order dated 14.01.2019, the learned Company Judge transferred the winding up petition as prayed for as follows:

  • “ORDER

14.01.2019

8. In my opinion, it would be in the interest of justice and in the interest of the respondent company and the creditors that the matter be transferred to NCLT in exercise of the discretionary powers of the court under section 434 of the Companies Act, 1956. The order appointing the OL is a recent order and not much time has elapsed since then. The OL has only taken steps to seize the office of the respondent company and the factory premises and further exercise is yet to be carried out. The application is allowed as above. The present petition is transferred to NCLT.


# 2.3. It is from this order that the appellant company’s appeal to the Division Bench has been dismissed by the impugned order in which the learned Division Bench held as follows:

  • 43. We, thus uphold the impugned order passed by the Ld. Company Judge in C.A. No. 1240/2018, dated 14.01.2019 and dismiss the appeal.”


# 4. Shri K.K. Venugopal, learned Attorney General for India appearing on behalf of SBI, countered all these submissions. According to him, this Court has unequivocally laid down that the 5thproviso to section 434(1)(c) of the Companies Act, 2013 now makes it clear that a discretion is vested in the Company Court to transfer winding up proceedings to the NCLT without reference to the stage of winding up. Even post admission, according to the learned Attorney General, if no irreversible steps have been taken, then a combined reading of the 5th proviso to section 434(1)(c) and section 238 of the Code would lead to the result that the winding up proceeding be transferred to the NCLT, as not only is the Code a special enactment with a non-obstante clause which would, in cases of conflict, do away with the Companies Act, 2013, but also that, given the judgment of this Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17 [“Swiss Ribbons”], winding up is a last resort after all efforts to revive a company fail. According to him, the discretion exercised by the Company Court and the Division Bench has been judiciously and correctly exercised, warranting no interference at our hands.


# 11. What becomes clear upon a reading of the three judgments of this Court is the following:

  • (i) So far as transfer of winding up proceedings is concerned, the Code began tentatively by leaving proceedings relating to winding up of companies to be transferred to NCLT at a stage as may be prescribed by the Central Government.

  • (ii) This was done by the Transfer Rules, 2016 (supra) which came into force with effect from 15.12.2016. Rules 5 and 6 referred to three types of proceedings. Only those proceedings which are at the stage of pre-service of notice of the winding up petition stand compulsorily transferred to the NCLT.

  • (iii) The result therefore was that post notice and pre admission of winding up petitions, parallel proceedings would continue under both statutes, leading to a most unsatisfactory state of affairs. This led to the introduction of the 5th proviso to section 434(1)(c) which, as has been correctly pointed out in Kaledonia (supra), is not restricted to any particular stage of a winding up proceeding. 

  • (iv) Therefore, what follows as a matter of law is that even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT. The question that arises before us in this case is how is such discretion to be exercised?


# 22. Given the aforesaid scheme of winding up under Chapter XX of the Companies Act, 2013, it is clear that several stages are contemplated, with the Tribunal retaining the power to control the proceedings in a winding up petition even after it is admitted. Thus, in a winding up proceeding where the petition has not been served in terms of Rule 26 of the Companies (Court) Rules, 1959 at a pre admission stage, given the beneficial result of the application of the Code, such winding up proceeding is compulsorily transferable to the NCLT to be resolved under the Code. Even post issue of notice and pre admission, the same result would ensue. However, post admission of a winding up petition and after the assets of the company sought to be wound up become in custodia legis and are taken over by the Company Liquidator, section 290 of the Companies Act, 2013 would indicate that the Company Liquidator may carry on the business of the company, so far as may be necessary, for the beneficial winding up of the company, and may even sell the company as a going concern. 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. Whether this stage is reached would depend upon the facts and circumstances of each case.


# 23. In the facts of the present case, the concurrent finding of the Company Judge and the Division Bench is that despite the fact that the liquidator has taken possession and control of the registered office of the appellant company and its factory premises, records and books, no irreversible steps towards winding up of the appellant company have otherwise taken place. This being so, the Company Court has correctly exercised the discretion vested in it by the 5th proviso to section 434(1)(c). Resultantly, civil appeal arising out of SLP (Civil) No.26415 of 2019 stands dismissed.


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.