To Transfer or Not to Transfer: An analysis of the Supreme Court’s decision in Action Ispat and Power Pvt Ltd v. Shyam Metallics and Energy Ltd

By Rukmini Mukherjee, lawyer based out of New Delhi and currently pursuing her LLM from Jindal Global Law School

The legal conundrum governing the position of at what stage winding up petitions pending before the High Courts (“ Company Court”) are to be transferred to the National Company Law Tribunals (“NCLTs”) have undergone various judicial pronouncements, debates and legislative amendments. The question of at what stage can a winding up petition be transferred has been recently dealt with by the Hon’ble Supreme Court in Action Ispat And Power Pvt. Ltd. Versus Shyam Metalics And Energy Ltd. This post will analyze this judgment in light of the provisions relating to winding up under the Companies Act 2013 to highlight how the same does not quite fit in within that framework.

Factual background

Shyam Metalics had filed a winding up petition against Action Ispat for money due on sale of certain goods. The winding up petition was admitted and the Official Liquidator (“OL”) was appointed as the Liquidator ( and not a Provisional Liquidator) by the Hon’ble Single Judge of the Delhi High Court vide order dated 27.08.2018. Subsequently, an application seeking transfer of winding up proceedings from the Company Law Board to the NCLT was filed by State Bank of India (“SBI”) SBI, a secured creditor of Action Ispat before the High Court of Delhi. Before filing the application before the High Court, SBI had already filed an application under Section 7 of the Code before the NCLT. The High Court allowed the transfer application and transferred the proceedings to the NCLT vide order dated 14.01.2019. The Court reasoned that since the winding up order was recent and the OL had only recently taken possession of the factories and offices of the company, no substantial steps had been taken towards winding up of the company and hence the case was fit to be transferred to the NCLT. This order was appealed to the Division Bench of the High Court. The Division Bench of the High Court upheld the order of the Hon’ble Single judge by adopting the same reasoning by stating that the discretion was correctly exercised by the Company Court as no irreversible steps had been taken towards liquidation. The Division Bench further stated that parallel proceedings in the High Court and before the NCLT would not serve any purpose. This order was again appealed before the Supreme Court. It was argued by Action Ispat that since a winding up order had already been passed by the Company Court , no other proceedings before the NCLT could continue, as that would amount to turning the clock back. It was further argued that even independent proceedings under the Code could only exist before passing of a winding up order. It was however argued by SBI that the discretion under the 5th proviso to Section 434 (1) ( c) could be exercised even after the appointment of the liquidator, if no irreversible steps had been taken towards winding up of a company.

Issue

The issue before the Supreme Court was to determine how and at what stage the discretion of the Company Court has to be exercised when transferring winding up petitions to the NCLT under the 5th proviso of Section 434.

Decision

The Supreme Court proceeded to adjudicate the issue by referring to one of its judgment of Swiss Ribbons Pvt Ltd and Anr v. Union of India as a backdrop to shed light on the objects, preamble and the working of the Insolvency and Bankruptcy Code (“Code”). Thereafter the Court noted the amendments that had been made to the Companies Act 2013 in furtherance of Section 255 of the Code. It referred to its judgment of Jaipur Metals and Electricals Employees Organization v. Jaipur Metals and Electricals Ltdwhere it had specifically held that proceedings before the NCLT were separate proceedings, independent of the winding up proceedings pending before a High Court. It then went on to restate its judgment of Forech India Ltd v. Edelweiss Assets Reconstruction Co. Ltd where it was held that a reading of Section 434 did not state that an Insolvency Petition can be filed under Section 7 or 9 of the Code only until a liquidation order has been passed.

The Supreme Court thereafter delved into the scheme and procedure for winding up of companies as laid down under Chapter XX of the Companies Act 2013, specifically the powers of the Tribunal as per Section 273, the effect of a winding up order and stay of proceedings under Section 278 and 279, the scheme of winding up as laid down from Section 281 to 285, the powers and duties of the liquidator and its exercise and control as laid down under Sections 290 and 292 and finally the dissolution of a company under Section 302.

By looking at the various stages of winding up that is present under Chapter XX, the Bench reasoned that even after a winding up petition is admitted, the Court retains its power to control and oversee the winding up proceedings. Thus it held that so long as nothing irreversible is done by the Liquidator, the Company Court has to transfer the winding up petition to the NCLT. The court thus stated that this discretion is to only be used if “ the winding up proceedings have reached a stage where it would be irreversible, making it impossible to set the clock back”. The Supreme Court thus, cast a duty upon the Company Court to decide whether this stage has been reached or not, depending on the facts and circumstances of each case. An example of an action that was noted to be irreversible by the Court was the setting up of actual sales of the movable or immovable properties of the company undergoing winding up proceedings.

Analysis and Conclusion

This judgment has clarified the grey area that had been surrounding the question of how discretion was to be used by the Company court in matters of transfer of proceedings. The Company Court has now been given the power to decide the stage of winding up proceedings on a case by case basis and exercise its discretion accordingly.

However, the moot question of whether a company against whom a winding up order has already been passed, which has no chance of being revived, can be subjected to a resolution process on the insistence of any one creditor or contributory, has remained unanswered.  In fact, Section 357 of the Act specifically states that a winding up of the company is deemed to commence at the time the petition is presented before the Court and thus the same relates back to the date of presenting the petition. Seen in this light, the entire proceedings can be construed to be “irreversible”, where considerable judicial time has already been taken up in passing of the winding up order.

Further, the timelines referred to under Sections 281-282 of the Act has been rendered non-est.

As per Section 281 of the Act, the Company Liquidator has to submit a comprehensive report within 60 days’ of its appointment detailing the particulars of the company including the viability of the business and whether any fraud has been committed in its promotion. This seems to be purposeless now, as submission of a comprehensive report, though an important step in the winding up process, will not be considered as an “irreversible” step towards winding up of the company. Similarly fixing of timelines by the Company Court for winding up of the company or its dissolution under Section 282, based on the report of the Liquidator under Section 281, also seems purposeless. Further, the settlement of the list of contributors under Section 285 can often be cumbersome in the case of a large company, which may yet not be seen as an “irreversible” step.

Thus even though the said judgment has clarified the legal position regarding how discretion under the 5th proviso is to be exercised, this test of discretion to be based only on assessing whether any irreversible steps have taken place or not does not seem to fit into the overall scheme of winding up proceedings under the Companies Act 2013.

[Civil Appeal No. 4041 of 2020 (Arising out of SLP (Civil) No. 26415 of 2019) and Civil Appeal Nos. 4042-4043 of 2020 (Arising out of SLP (Civil) Nos. 2033-2034 of 2020)]

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