Supreme Court clarifies transfer of winding-up proceedings to NCLT under IBC: Action Ispat vs. Shyam Metalics (2020)

Introduction

Date of the Judgment: 15 December 2020
Citation: 2020 INSC 943
Judges: R.F. Nariman, J., K.M. Joseph, J., and Krishna Murari, J.

Can a winding-up proceeding initiated under the Companies Act, 1956 be transferred to the National Company Law Tribunal (NCLT) after the High Court has admitted the petition and appointed a liquidator? The Supreme Court of India addressed this question in a case involving Action Ispat and Power Pvt. Ltd. and Shyam Metalics and Energy Ltd. The Court clarified the scope of the 5th proviso to Section 434(1)(c) of the Companies Act, 2013, concerning the transfer of winding-up proceedings to the NCLT under the Insolvency and Bankruptcy Code, 2016 (IBC).

The core issue was whether a Company Court could transfer a winding-up petition to the NCLT after admitting the petition and appointing a liquidator, or if such transfer was permissible only before these steps were taken. The Supreme Court, in this judgment, delved into the interplay between the Companies Act and the IBC, emphasizing the latter’s objective of corporate revival over liquidation.

The judgment was authored by Justice R.F. Nariman, with Justices K.M. Joseph and Krishna Murari concurring.

Case Background

Shyam Metalics and Energy Limited (Respondent No.1) filed a winding-up petition against Action Ispat and Power Pvt. Ltd. (Appellant) in the High Court of Delhi, claiming a debt of Rs.4.55 crore for goods supplied. The High Court admitted the petition on 27th August 2018, and appointed the Official Liquidator (OL) to take over the company’s assets. Subsequently, the State Bank of India (SBI), a secured creditor of the Appellant, filed an application seeking the transfer of the winding-up petition to the NCLT, as SBI had initiated proceedings against the Appellant under Section 7 of the IBC.

The learned Company Judge of the Delhi High Court, on 14th January 2019, allowed SBI’s application and transferred the winding-up petition to the NCLT. This order was challenged by the Appellant before the Division Bench of the Delhi High Court, which upheld the transfer. The Appellant then approached the Supreme Court.

The Appellant contended that once a winding-up order is passed and the OL has seized the assets, the winding-up proceedings must continue before the High Court, and parallel proceedings under the IBC are not permissible. The Appellant argued that previous Supreme Court judgments only allowed for IBC proceedings before a winding-up order was passed.

Timeline

Legal Framework

The case primarily revolves around Section 434 of the Companies Act, 2013, particularly the 5th proviso to Section 434(1)(c), which was introduced by an amendment on 17th August 2018. This provision allows any party to a winding-up proceeding pending before any court to apply for the transfer of such proceedings to the NCLT. The transferred proceedings are then treated as an application for the initiation of the corporate insolvency resolution process under the IBC. The relevant portion of Section 434(1)(c) of the Companies Act, 2013 is:

“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 any party or parties to any proceedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (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.”

Additionally, Section 238 of the IBC, which has an overriding effect, was also considered. Section 238 of the IBC states:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Other relevant provisions of the Companies Act, 2013 include Section 273 (powers of the Tribunal on hearing a winding up petition), Section 278 (effect of a winding-up order), Section 279 (stay of suits on a winding-up order), Section 281 (submission of a report by the Company Liquidator), Section 282 (consideration of the report), Section 283 (custody of company’s property), Section 285 (settlement of the list of contributories), Section 288 (submission of periodical reports), Section 290 (powers and duties of the Company Liquidator), Section 292 (directions of creditors or contributories) and Section 302 (dissolution of the company). These sections outline the process and implications of a winding-up order under the Companies Act, 2013.

Arguments

Appellant’s Submissions:

• The Appellant argued that once a winding-up order is passed by the Company Judge, and the Official Liquidator (OL) has taken charge of the assets, the winding-up proceedings must continue in the High Court.
• They contended that parallel proceedings under the IBC cannot continue once a winding-up order has been passed.
• The Appellant distinguished previous Supreme Court judgments, stating that those cases dealt with situations where IBC proceedings were initiated before a winding-up order was passed.
• They emphasized that in their case, the OL had already seized the assets, and the process of distribution to creditors had begun, making it irreversible.

Respondent’s Submissions (State Bank of India):

• The Respondent argued that the 5th proviso to Section 434(1)(c) of the Companies Act, 2013, grants the Company Court the discretion to transfer winding-up proceedings to the NCLT at any stage, without reference to the stage of winding-up.
• They submitted that even after the admission of a winding-up petition, if no irreversible steps have been taken, the proceedings can be transferred to the NCLT.
• The Respondent relied on Section 238 of the IBC, which gives the IBC overriding effect over other laws, including the Companies Act, 2013.
• They cited the Supreme Court’s judgment in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17, which emphasizes that winding-up is a last resort after all efforts to revive a company fail.
• The Respondent argued that the Company Court and the Division Bench had correctly exercised their discretion in transferring the proceedings to the NCLT.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether a Company Court can transfer a winding-up petition to the NCLT after admitting the petition and appointing a liquidator, or if such transfer is permissible only before these steps are taken?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227 – Supreme Court of India. The Court discussed the transfer of proceedings under Section 20 of the Sick Industrial Companies (Special Provisions) Act, 1985, to the NCLT.
• Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., 2019 SCCOnLine SC 87 – Supreme Court of India. The Court discussed the applicability of the 5th proviso to Section 434(1)(c) of the Companies Act, 2013, in the context of winding-up petitions.
• M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman & Industries Ltd. & Ors., 2020 SCCOnLine SC 943 – Supreme Court of India. The Court clarified who can apply for transfer of winding-up proceedings under the 5th proviso to Section 434(1)(c).
• Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17 – Supreme Court of India. The Court discussed the objectives of the IBC and emphasized that winding-up is a last resort.

Legal Provisions:

• Section 434(1)(c) of the Companies Act, 2013 – This section deals with the transfer of pending proceedings, including winding-up proceedings, to the NCLT.
• 5th proviso to Section 434(1)(c) of the Companies Act, 2013 – This proviso allows any party to a winding-up proceeding to apply for transfer to the NCLT.
• Section 238 of the Insolvency and Bankruptcy Code, 2016 – This section gives the IBC overriding effect over other laws.
• Sections 273, 278, 279, 281, 282, 283, 285, 288, 290, 292 and 302 of the Companies Act, 2013 – These sections outline the process and implications of a winding-up order under the Companies Act, 2013.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227, stating that it made it clear that even independent proceedings under the Code can only continue when the stage is before a winding up order is passed.
• The Court followed Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., 2019 SCCOnLine SC 87, stating that the stage of the winding up proceeding was post service of notice of the winding up petition and before a winding up order was passed, as a result of which the 5th proviso to section 434(1)(c) of the Companies Act, 2013 was applied.
• The Court followed M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman & Industries Ltd. & Ors., 2020 SCCOnLine SC 943, stating that though a winding up order had been passed on the facts of that case, the aforesaid order had been kept in abeyance.
• The Court relied on Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17, stating that winding up is a last resort after all efforts to revive a company fail and that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor.
• The Court interpreted Section 434(1)(c) of the Companies Act, 2013 to mean that all proceedings under the Companies Act, 1956, including winding up, can be transferred to the Tribunal.
• The Court interpreted the 5th proviso to Section 434(1)(c) of the Companies Act, 2013 to mean that any party can apply for transfer of winding-up proceedings to the NCLT, and the Court has the discretion to order such transfer.
• The Court relied on Section 238 of the Insolvency and Bankruptcy Code, 2016 to emphasize that the IBC has an overriding effect over other laws.
• The Court referred to Sections 273, 278, 279, 281, 282, 283, 285, 288, 290, 292 and 302 of the Companies Act, 2013 to explain the process and implications of a winding-up order under the Companies Act, 2013, and to highlight the various stages of the winding-up process, indicating that the Tribunal retains control over the proceedings.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the Insolvency and Bankruptcy Code, 2016, which prioritizes the revival of corporate debtors over liquidation. The Court emphasized that the 5th proviso to Section 434(1)(c) of the Companies Act, 2013, was introduced to ensure that winding-up proceedings could be transferred to the NCLT, allowing for a resolution process under the IBC. The Court also considered that the assets of the company were not yet sold or irreversibly dealt with, making the transfer feasible.

Fact:Law Ratio

Logical Reasoning:

The Court considered the alternative interpretation that once a winding-up order is passed and a liquidator is appointed, the proceedings should continue under the Companies Act, 2013. However, this interpretation was rejected as it would undermine the objectives of the IBC and the 5th proviso to Section 434(1)(c), which was specifically introduced to allow for the transfer of winding-up proceedings to the NCLT. The Court reasoned that the IBC’s goal of corporate revival should take precedence over liquidation, and that the transfer of proceedings would allow for a resolution process under the IBC.

The Court held that the Company Court has the discretion to transfer a winding-up petition to the NCLT even after admitting the petition and appointing a liquidator, provided no irreversible steps have been taken towards the winding up of the company. The Court emphasized that the legislative intent behind the IBC is to prioritize the revival of corporate debtors over liquidation.

The Court stated:
“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.”

The Court further stated:
“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.”

The Court also stated:
“The question that arises before us in this case is how is such discretion to be exercised?”

There were no minority opinions in this case, as all three judges concurred with the judgment.

Key Takeaways

✓ Company Courts have the discretion to transfer winding-up proceedings to the NCLT even after admitting the petition and appointing a liquidator.
✓ This discretion is to be exercised based on whether irreversible steps have been taken in the winding-up process.
✓ The Insolvency and Bankruptcy Code, 2016, prioritizes the revival of corporate debtors over liquidation.
✓ The 5th proviso to Section 434(1)(c) of the Companies Act, 2013, allows for the transfer of winding-up proceedings to the NCLT at any stage, provided no irreversible steps have been taken.
✓ The IBC has an overriding effect over other laws, including the Companies Act, 2013, as per Section 238 of the IBC.

This judgment clarifies that the NCLT is the preferred forum for resolving corporate insolvency issues, even if winding-up proceedings have been initiated in the High Court. It reinforces the IBC’s objective of corporate revival and ensures that companies are given a chance to be rescued before being liquidated.

Directions

The Supreme Court did not give any specific directions in this case, as the appeals were dismissed and the orders of the HighCourt were upheld. The Court affirmed the transfer of the winding-up proceedings to the NCLT, allowing the insolvency resolution process to proceed under the IBC.

Conclusion

The Supreme Court’s judgment in Action Ispat and Power Pvt. Ltd. vs. Shyam Metalics and Energy Ltd. (2020) provides significant clarity on the transfer of winding-up proceedings to the NCLT under the IBC. The Court emphasized the importance of the 5th proviso to Section 434(1)(c) of the Companies Act, 2013, and the overriding effect of the IBC. This judgment ensures that the NCLT is the preferred forum for resolving corporate insolvency issues, even if winding-up proceedings have been initiated in the High Court. It reinforces the IBC’s objective of corporate revival and ensures that companies are given a chance to be rescued before being liquidated. The ruling provides a clear framework for Company Courts to exercise their discretion in transferring winding-up proceedings to the NCLT, ensuring that the objectives of the IBC are met.