M/S KALEDONIA JUTE AND FIBRES PVT. LTD.  versus M/S AXIS NIRMAN AND INDUSTRIES LTD. & ORS.
[2020] 11 S.C.R. 800, Supreme Court of India, 2020
Outcome: Appeal(s) allowed (Granted)
Segment: Body
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M/S KALEDONIA JUTE AND FIBRES PVT. LTD.
v.
M/S AXIS NIRMAN AND INDUSTRIES LTD. & ORS.
(Civil Appeal No. 3735 of 2020)
NOVEMBER 19, 2020
[S. A. BOBDE, CJI, A. S. BOPANNA AND
V. RAMASUBRAMANIAN, JJ.]
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
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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
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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 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
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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
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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
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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
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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.
Case Law Reference
[2019] 2 SCR 477
relied on
Para 36
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3735
of 2020.
From the Judgment and Order dated 24.02.2020 of the High Court
of Judicature at Allahabad in Civil Miscellaneous Application No. 23 of
2020.
Huzefa Ahmadi, A. Nadkarni, Sr.Advs., Sadapurna Mukherjee,
Rajat Mittal, Preshit Vilas Surshe, Gp. Capt. Karan Singh Bhati,
Ms. Chitrangda Rastravara, Advs. for the appearing parties.
The Judgment of the Court was delivered by
V. RAMASUBRAMANIAN, J.
1. Leave granted.
2. Aggrieved by an order passed by the Company Court (High
Court of Allahabad), refusing to transfer the winding up petition pending
therein, to the National Company Law Tribunal (NCLT for short), a
financial creditor has come up with this appeal.
3. Heard Mr. Huzefa Ahmadi, learned senior counsel appearing
for the appellant, Mr. A.N.S. Nadkarni, learned senior counsel appearing
for the 1st respondent-corporate
debtor and Gp. Capt. Karan Singh Bhati,
learned counsel appearing for the official liquidator.
Background Facts
4. One M/s Girdhar Trading Co., the 2nd respondent herein, filed a
petition in Company Petition No.24 of 2015 before the High Court of
Allahabad under Section 433 of the Companies Act, 1956, for the winding
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up of the first respondent company, on the ground that the Company
was unable to pay its debts. The Company Court ordered notice to the
1st respondent herein, but the 1st respondent failed to appear before the
Company Court.
5. Therefore, by an order dated 08.01.2016 the Company Court
ordered the admission of the Company Petition and also directed
publication of the advertisement of the petition in accordance with Rule
24 of the Companies (Court) Rules, 1959. Pursuant to the said order, the
2nd respondent herein (petitioning creditor) effected a publication of the
advertisement in the Official Gazette in Form No. 48 on 30.01.2016.
Newspaper publications were also made, indicating the date of hearing
of the Company Petition as 29.02.2016.
6. Thereafter, the Company Court passed an order dated
10.03.2016 directing the winding up of the 1st respondent Company on
the ground that the Company has been unable to pay its debts and that it
was just and equitable to wind up the 1st respondent Company.
7. By the aforesaid order dated 10.03.2016, the Company Court
appointed the official liquidator attached to the High Court of Allahabad
as the Liquidator and directed him to take over the assets and books of
accounts of the Company. The order of winding up was also directed to
be advertised in Form 53 in two newspapers, as required under Rule 113
of the Companies (Courts) Rules 1959.
8. Thereafter, the 1st respondent filed an application for recalling
the order of
winding up dated 10.03.2016. The 1st respondent, in order to
prove their bonafides paid the entire amount due to the petitioning creditor
(the second respondent herein) along with costs. Therefore, the petitioning
creditor had no objection to the recall of the order of winding up.
9. But the official liquidator opposed the application for recall on
the ground that the 1st respondent-Company owed money to various
creditors to the tune of Rs.27 Crores and that unless the said amount is
paid, the order of winding up cannot be recalled.  The Official Liquidator
also submitted that he had already taken over charge of the assets of the
Company.
10. In the light of the rival contentions, the Company Court passed
an order on 22.08.2016 keeping the winding up order dated 10.03.2016
in abeyance. However, the Company Court directed the Official
Liquidator to continue to be in custody of the assets of the Company.
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11. While things stood thus, the appellant herein, claiming to be a
creditor of the first respondent herein, moved an application before the
NCLT, Allahabad under Section 7 of the Insolvency and Bankruptcy
Code, 2016 (for short the ‘IBC, 2016’). The claim of the appellant herein
before the NCLT was that the 1st respondent was due and liable to pay
a sum of Rs.32 lakhs and that despite repeated demands, the 1st
respondent failed to pay the said amount.
12. Thereafter, the appellant moved an application in Civil
Miscellaneous Application No. 23 of 2020 before the Company Court
(High court) seeking a transfer of the winding up petition to the NCLT,
Allahabad. This application was rejected by the Company Court by a
cryptic order dated 24.02.2020, on the sole ground that the requirement
of Rule 24 had already been complied with and that a winding up order
had already been passed. It is against this order of the High court, refusing
to transfer the winding up proceedings from the Company Court to the
NCLT that the financial creditor has come up with this civil appeal.
Issues for Consideration
13. The main issues that arise for consideration in this appeal are:
(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.
Discussion
14. Though the Companies Act, 2013 (Act 18 of 2013) received
the assent of the President on 29.08.2013 and it was published in the
Gazette of India dated 30.08.2013 and corrected through corrigenda
published on 01.01.2014, various provisions of the Act came into force
on various dates. While some of the provisions came into force w.e.f.
12.09.2013, some other provisions came into force w.e.f. 01.04.2014.
15. Clauses (a) and (b) of Sub-section (1) of Section 434 as well
as Sub-section (2) of Section 434 came into force w.e.f. 01.06.2016
vide S.O.1934 (E) dated 01.06.2016. Clause (c) of Sub-section (1) of
Section 434 came into force on 15.12.2016 vide S.O. 3677(E) dated
01.12.2016.
16. It may be noted here that Section 434 as it originally stood
when the Companies Act, 2013 was enacted, was different from what it
is today. Section 434 as it was incorporated originally in the Companies
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Act, 2013, was actually substituted by the Insolvency and Bankruptcy
Code, 2016 (Act 31 of 2016), which came into force on 15.11.2016.
17. Section 434 as it stood originally in the Companies Act, 2013
(Act 18 of 2013) and Section 434 as substituted by IBC, 2016 (Act 31 of
2016) together with subsequent amendments thereto, are presented in a
tabular column for easy appreciation.
Sec. 434 as it was originally
drafted in Act 18 of 2013
“434. Transfer of certain
pending proceedings.-(1) On
such date as may be notified by
the Central Government in this
behalf,-
(a) all matters, proceedings or
cases pending before the Board
of Company Law Administration
(herein in this section referred to
as the Company Law Board)
constituted under sub-section (1)
of section 10E of the Companies
Act, 1956 (1 of 1956),
immediately before such date shall
stand transferred to the Tribunal
and the Tribunal shall dispose of
such matters, proceedings or cases
in accordance with the provisions
of this Act;
(b) any person aggrieved by any
decision or order of the Company
Law Board made before such
date may file an appeal to the High
Court within sixty days from the
date of communication of the
decision or order of the Company
Law Board to him on any question
of law arising out of such order;
Sec. 434 as it was substituted
under IBC, Act 31 of 2016
[434. Transfer of certain
pending proceedings.-(1) On
such date as may be notified by
the Central Government in this
behalf,-
(a)  all
matters, proceedings or
cases pending before the Board
of Company Law Administration
(herein in this section referred to
as the Company Law Board)
constituted under sub-section (1)
of section 10E of the Companies
Act, 1956 (1 of 1956)
immediately before such date
shall stand transferred to the
Tribunal and the Tribunal shall
dispose of such matters,
proceedings or cases in
accordance with the provisions
of this Act;
(b) any person aggrieved by any
decision or order of the
Company Law Board made
before such date may file an
appeal to the High Court within
sixty days from the date of
communication of the decision or
order of the Company Law
Board to him on any question of
law arising out of such order:
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Provided that the High Court may
if it is satisfied that the appellant
was prevented by sufficient cause
from filing an appeal within the
said period, allow it to be filed
within a further period not
exceeding sixty days;
(c) all proceedings under the
Companies Act, 1956 (1 of 1956),
including proceedings relating to
arbitration, 
compromise,
arrangements and reconstruction
and winding up of companies,
pending immediately before such
date before any District Court or
High Court, shall stand transferred
to the Tribunal and the Tribunal
may proceed to deal with such
proceedings from the stage before
their transfer;
(d) any appeal preferred to the
Appellate Authority for Industrial
and Financial Reconstruction or
any reference made or inquiry
pending to or before the Board of
Industrial 
and 
Financial
Reconstruction or any proceeding
of whatever nature pending before
the Appellate Authority for
Industrial 
and 
Financial
Reconstruction or the Board for
Industrial 
and 
Financial
Provided that the High Court
may if it is satisfied that the
appellant was prevented by
sufficient cause from filing an
appeal within the said period,
allow it to be filed within a
further period not exceeding
sixty days; and
(c) all proceedings under the
Companies Act, 1956 (1 of
1956), including proceedings
relating 
to 
arbitration,
compromise, arrangements
and reconstruction and winding
up of companies, pending
immediately before such date
before any District Court or
High Court, shall stand
transferred to the Tribunal and
the Tribunal may proceed to
deal with such proceedings
from the stage before their
transfer:
Provided that only such
proceedings relating to the
winding up of companies shall
be transferred to the Tribunal
that are at a stage as may be
prescribed by the Central
Government:
[Provided further that only such
proceedings relating to cases
other than winding-up, for
which orders for allowing or
otherwise of the proceedings
are not reserved by the High
Court shall be transferred to the
Tribunal:
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Reconstruction under the sick
Industrial Companies (Special
Provisions) Act, 1985 (1 of 1986)
immediately 
before 
the
commencement of this Act shall
stand abated:
Provided that a company in
respect of which such appeal or
reference or inquiry stands
abated under this clause may
make a reference to the Tribunal
under this Act within one hundred
and eighty days from the
commencement of this Act in
accordance with the provisions of
this Act:
Provided further that no fees shall
be payable for making such
reference under this Act by a
company whose appeal or
reference or inquiry stands
abated under this clause.
(2) The Central Government may
make rules consistent with the
provisions of this Act to ensure
timely transfer of all matters,
proceedings or cases pending
before the Company Law Board
or the court, to the Tribunal under
this section.”
[Provided also that-]
(i)
all proceedings under the
Companies Act, 1956
other than the cases
relating to winding-up of
companies 
that 
are
reserved for orders for
allowing or otherwise such
proceedings; or
(ii) the proceedings relating to
winding-up of companies
which have not been
transferred from the High
Courts;
shall be dealt with in accordance
with provisions of the Companies
Act, 1956 and the Companies
(Court) Rules, 1959:]
[Provided also 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.]
[Provided further that any party
or parties to any proceedings
relating to the winding up of
companies pending before the
any Court immediately before the
commencement 
of 
the
Insolvency and Bankruptcy Code
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(Amendment) Ordinance,
2018, may file an application
for 
transfer 
of 
such
proceedings and the Court may
by order transfer such
proceedings to the Tribunal and
the proceedings so transferred
shall be dealt with by the
Tribunal as an application for
initiation 
of 
corporate
insolvency resolution process
under the Insolvency and
Bankruptcy Code, 2016 (31 of
2016).]
(2) The Central Government
may make rules consistent with
the provisions of this Act to
ensure timely transfer of all
matters, proceedings or cases
pending before the Company
Law Board or the courts, to the
Tribunal under this section.]
18. It is important to note that what is extracted in the right hand
side column of the above Table includes, apart from what was substituted
by Act 31 of 2016, a couple of amendments made to Section 434. Those
amendments were made under:-
(i)
The Companies (Removal of Difficulties) Fourth Order, 2016
published on 07.12.2016, which came into effect on
15.12.2016;
(ii) The Companies (Removal of Difficulties) Order, 2017
published on 29.06.2017 which came into effect on the same
date; and
(iii) The Insolvency and Bankruptcy Code (Second Amendment)
Act, 2018 namely 26 of 2018, which came into force w.e.f.
06.06.2018.
19. A careful look at Section 434 as it stands today would show
that Clause (b) of Sub-section(1) of Section 434 has nothing to do with
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what Section 434 in entirety purports to deal with. Section 434 in entirety
purports to deal with the transfer of proceedings pending either before
the Board of Company Law Administration or before the Company Court
(the High Court or the District Court). Clause (b) of Sub-section (1)
deals with the right of appeal to the High Court against any decision of
the Company Law Board and hence Clause (b) is actually a misfit in the
scheme of Section 434.
20. Be that as it may, clause (c) of Sub-section (1) is the provision
that actually provides for the transfer of all the proceedings under the
Companies Act, 1956 pending before any District Court or High Court,
to the Tribunal. Broadly Clause (c) makes a mention about proceedings
relating to arbitration, compromise, arrangements and reconstruction and
winding up. But Clause (c) is not limited in its application to proceedings
relating to arbitration, compromise, arrangements and reconstruction and
winding up.This is due to the usage of the words “All
proceedings......including” in Clause (c).
21. However, the first proviso to Clause (c) which was not there
in the original Section 434, but which was inserted only under IBC Act
of 2016 when Section 434 was substituted, circumscribes what is
contained in the main part of Clause (c). The first proviso to Clause (c)
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.
22. 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.
23. Before we have a look at the Rules it is necessary to note that
for the purpose of transfer, winding up proceedings pending before the
High Courts, are classified by Section 434 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
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Companies Act, 1956, but the company has not been dissolved
before 01.04.2017; and
(b) Other types of winding up proceedings.
24. 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:
“Provided also 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).
25. 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.
26. 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).
27. Keeping in mind the above scheme of Section 434, let us now
turn to the Rules. As stated earlier, The Companies (Transfer of Pending
Proceedings) Rule, 2016 were issued in exercise of the powers conferred
by Section 434 (2) read with Section 239(1) of IBC, 2016.
28. The aforesaid Rules 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
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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.
29. Rule 4 of the aforesaid Rules deals with cases of voluntary
winding up covered by the fourth proviso to Section 434(1)(c). We are
not concerned in this case with such types of cases.
30. Rule 5 of the aforesaid Rules provides for transfer of
proceedings for winding up on the ground of inability to pay debts.  It
reads as follows:
“5. Transfer of pending proceedings of Winding up on the
ground of inability to pay debts.—(1) All petitions relating to
winding up of a company under clause (c) of section 433 of
the Act on the ground of inability to pay its debts pending
before a High Court, and, where the petition has not been
served on the respondent under Rule 26 of the Companies
(Court) Rules, 1959 shall be transferred to the Bench of the
Tribunal established under sub-section (4) of section 419 of
the Companies Act, 2013 exercising territorial jurisdiction to
be dealt with in accordance with Part II of the Code:
Provided that the petitioner shall submit all information, other
than information forming part of the records transferred in
accordance with Rule 7, required for admission of the petition
under sections 7, 8 or 9 of the Code, as the case may be,
including details of the proposed insolvency professional to
the Tribunal upto 15th day of July, 2017, failing which the
petition shall stand abated.
Provided further that any party or parties to the petitions
shall, after the 1st day of July, 2017, be eligible to file fresh
applications under Sections 7 or 8 or 9 of the Code, as the
case may be in accordance with the provisions of the Code:
Provided also that where a petition relating to winding up of
a company is not transferred to the Tribunal under this Rule
and remains in the High Court and where there is another
petition under Clause (e) of Section 433 of the Act for winding
up against the same company pending as on 15th December,
2016, such other petition shall not be transferred to the
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Tribunal, even if the petition has not been served on the
respondent.”
31. Rule 6 of the aforesaid Rules deals with transfer of proceedings
for winding up, on grounds other than inability to pay debts. It reads as
follows:-
“6. Transfer of pending proceedings of Winding up matters
on the grounds other than inability to pay debts.—All petitions
filed under clauses (a) and (f) of section 433 of the Companies
Act, 1956 pending before a High Court and where the petition
has not been served on the respondent as required under rule
26 of the Companies (Court) Rules, 1959 shall be transferred
to the Bench of the Tribunal exercising territorial jurisdiction
and such petitions shall be treated as petitions under the
provisions of the Companies Act, 2013 (18 of 2013).”
32. 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.
33. In other
words, 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 Sub-section (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.
34. Rule 26 of the Companies (Court) Rules, 1959 reads as follows:
“Service of petition- Every petition shall be served on the
respondent, if any, named in the petition and on such other
persons as the Act or these rules may require or as the Judge
or the Registrar may direct. Unless otherwise ordered, a copy
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of the petition shall be served along with the notice of the
petition.”
35. 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.
36. Due to the usage of the words “was admitted” in Form No.6,
there was a confusion as to whether the service referred to in Rule 26,
is of a pre-admission notice or post-admission notice, in a winding up
proceeding. Different High Courts took different views. Eventually, this
Court settled the position in Forech India Ltd. vs. Edelweiss Assets
Reconstruction Co. Ltd.1 by holding “that Rules 26 and 27 clearly
refer to a pre-admission scenario.”
37. After so interpreting Rules 26 and 27 of the Companies (Court)
Rules, 1959, this Court pointed out in Forech India Ltd.(supra) that
“when the Code was enacted, only winding up petitions where no
notice under Rule 26 was served, were to be transferred to NCLT
and treated as petitions under the Code”. However, after Section
434 was substituted by a new provision under Act 31 of 2016 and the 5th
proviso was inserted by Act 26 of 2018, the transfer of the winding up
proceedings, even at the instance of the party or parties to the proceedings
became permissible. This change of
position was also noted by this Court
in Forech India Limited (supra).
38. But while noting the change of position after the insertion of
the 5th proviso through Act 26 of 2018, this Court indicated in para 17 of
the Judgment as though “any person could apply for transfer of such
petitions to the NCLT under the Code”. Taking advantage of this, it is
contended by the learned senior counsel for the petitioner that “any
person” (and not necessarily a party to the proceeding) could apply for
transfer.
39. But we do not think that the decision in Forech India Limited
(supra) is an authority for the proposition that the 5th proviso to Clause
(c) of Sub-section (1) of Section 434 could be invoked by any person
who is not a party to the proceeding for winding up. The 5th proviso
M/S KALEDONIA JUTE AND FIBRES PVT. LTD. v. M/S AXIS
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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.”
40. In other words, 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.”
41. That takes us to the next question as to 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”.
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. This change
may be appreciated, if both these provisions are presented
simultaneously in a tabular column:
Section 278 of the 2013 Act shows that any petition by a single
creditor or contributory is actually treated as a joint petition of
Section 447 of 1956 Act 
Section 278 of 2013 Act 
Effect of winding up order.- An order for 
winding up a company 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. 
Effect of winding up order. - The order 
for the winding up of a company shall 
operate in favour of all the creditors and 
all contributories of the company as if it 
had been made out on the joint petition of 
creditors and contributories.
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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.
43. 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
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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.
44. 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.
45. As observed by this Court in Forech India Limited (supra),
the object of IBC will be stultified if parallel proceedings are allowed to
go on in different fora. If the Allahabad 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.
46. Therefore, we are of the considered view that the petitioner-
herein 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 impugned
order of the High court rejecting the petition for transfer on the basis of
Rule 26 of the Companies (Court) Rules, 1959 is flawed.
47. Therefore, the appeal is allowed, the impugned order is set
side and the proceedings for winding up pending before the Company
Court (Allahabad High Court) against the first respondent herein, is
ordered to be transferred to the NCLT, to be taken up along with the
application of the appellant-herein under Section 7 of the IBC. There
will be no order as to costs.
Devika Gujral
Appeal allowed.