Any creditor of a company can seek transfer of winding up proceeding pending before a High Court to a National Company Law Tribunal

In Kaledonia Jute and Fibres Pvt. Ltd. Vs. Respondent: Axis Nirman and Industries Ltd. and Ors., Girdhar Trading Co., the 2nd Respondent herein, filed a petition in Company Petition before the High Court of Allahabad under Section 433 of the Companies Act, 1956, for the winding 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. Therefore, by an order, 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. 

The Company Court passed an order on 22nd August, 2016 keeping the winding up order dated 10th March, 2016 in abeyance. However, the Company Court directed the Official Liquidator to continue to be in custody of the assets of the Company. 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 (‘IBC, 2016’). Thereafter, the Appellant moved an application in Civil Miscellaneous Application 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 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. The Appellants approached the Supreme Court against this order.

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.

The 5th proviso to Clause (c) of Sub-section (1) of Section 434 uses the words "any party or parties to any proceedings relating to the winding up of companies pending before any Court." 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."

As for the second issue, the Supreme Court observed that 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”. 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 proceedings for winding up of a company are 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 of Act 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. 

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. 

As observed by this Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., 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 of IBC, the entire object of IBC will be thrown to the winds. 

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. 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 of Act. 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.