SC: Any creditor can seek transfer of winding up proceedings

The Hon’ble Supreme Court, on 19th November 2020, in the matter of M/s Kaledonia Jute and Fibres Pvt. Ltd. v. M/s Axis Nirman and Industries Ltd. & Ors. pronounced that 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. Every creditor has a right to seek transfer.

Question before the Hon’ble 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 and at whose instance, such transfer could be ordered.

The Hon’ble Supreme Court observed that:

(Para 23) For the purpose of transfer, winding up proceedings pending before the High Courts, are classified by Section 434 of Companies Act, 2013 into two categories namely:

(a)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

(b) 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 Sub­section (1) of Section 434. 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). (Para 24)

The transferability, by operation of law, of winding up proceedings, other than those covered by the 4th 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. (Para 25)

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). (Para 26)

The Companies (Transfer of Pending Proceedings) Rule, 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. (Para 28)

Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which a winding up proceeding can be transferred. This is because the first proviso under Clause (c) of Sub­section (1) of Section 434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and sub­ section (2) of section 434 confers rule making power on the Central Government.  (Para 33)

The normal requirement of Rule 26, as seen from its last limb is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition, unless otherwise ordered. The notice of the petition, required under Rule 26 to be served along with the copy of the petition, should be in Form No.6, due to the mandate of Rule 27. (Para 35)

The decisions in Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd. (2019 (2) SCR 477) 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 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.”

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.”(Para 40)

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 does not define the expression “party”. 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”. (Para 41)

(Para 42) 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 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. (Para 43)

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)

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 sub­section (1) of Section 434. (Para 46)

Copy of judgement: Judgement_19-Nov-2020

-Adv. Tushar Kaushik

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