# ACTION ISPAT AND POWER PVT. LTD v. SHYAM METALICS AND ENERGY LTD

- **Citation:** [2020] 13 S.C.R. 783
- **Court:** Supreme Court of India
- **Decided:** 2020-12-15
- **Case number:** Civil Appeal No. 4041 of 2020
- **Bench:** Rohinton Fali Nariman, K.M. Joseph, Krishna Murari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/action-ispat-and-power-pvt-ltd-v-shyam-metalics-and-energy-ltd-34374
- **Pages:** 29

## Headnote

Companies Act, 2013: s.434(1)(c), fifth proviso; s.290 -
Transfer of winding up proceedings from Company Court to NCLT
- Permissibility of, at the stage of post admission of winding up
petition - Held: In a winding up proceeding where the petition has
not been served in terms of r.26 of the Rules, 1959 at a pre-admission
stage, given the beneficial result of the application of the Code,
such winding up proceeding is compulsorily transferable to the
NCLT to be resolved under the Code - Even post issue of notice
and pre admission, the same result would ensue - However, post
admission of a winding up petition and after the assets of the
company sought to be wound up become in custodia legis and are
taken over by the Company Liquidator, s.290 of the Act, 2013 would
indicate that the Company Liquidator may carry on the business of
the company, so far as may be necessary, for the beneficial winding
up of the company, and may even sell the company as a going
concern - 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
- 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 - In the
instant case, the concurrent finding of the Company Judge and the
Division Bench is that despite the fact that the liquidator has taken
possession and control of the registered office of the appellant
company and its factory premises and records and books, no
irreversible steps towards winding up of the appellant company have
otherwise taken place - This being so, Company Court correctly
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exercised discretion vested in it by the 5th proviso to s.434(1)(c)
and transferred the winding up petition to NCLT - Companies
(Transfer of Pending Proceedings) Rules, 2016 - Insolvency and
Bankruptcy Code, 2016 - s.7 - Company (Court) Rules, 1959 -
r.26.
Dismissing the appeals, the Court
HELD: 1. So far as transfer of winding up proceedings is
concerned, the Code began tentatively by leaving proceedings
relating to winding up of companies to be transferred to NCLT at
a stage as may be prescribed by the Central Government. This
was done by the Transfer Rules, 2016 which came into force with
effect from 15.12.2016. Rules 5 and 6 referred to three types of
proceedings. Only those proceedings which are at the stage of
pre-service of notice of the winding up petition stand compulsorily
transferred to the NCLT. The result therefore was that post notice
and pre admission of winding up petitions, parallel proceedings
would continue under both statutes, leading to a most
unsatisfactory state of affairs. This led to the introduction of the
5th proviso to section 434(1)(c) which, as has been correctly
pointed out in *Kaledonia, is not restricted to any particular stage
of a winding up proceeding. Therefore, what follows as a matter
of law is that even post admission of a winding up petition, and
after the appointment of a Company Liquidator to take over the
assets of a company sought to be wound up, discretion is vested
in the Company Court to transfer such petition to the NCLT.
[Para 11][804-A-E]
*M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis
Nirman & Industries Ltd. & Ors., 2020 SCC OnLine
SC 943 - relied on
2. When a petition to wind up a company is presented before
the Tribunal, the Tribunal is given the power under Section 273
to dismiss it; to make any interim order as it thinks fit; to appoint
a provisional liquidator of the company till the making of a winding
up order; to make an order for the winding up of the company; or
to pass any o

## Text

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ACTION ISPAT AND POWER PVT. LTD.
v.
SHYAM METALICS AND ENERGY LTD.
(Civil Appeal No. 4041 of 2020)
DECEMBER 15, 2020
[ROHINTON FALI NARIMAN, K.M. JOSEPH AND
KRISHNA MURARI, JJ.]
Companies Act, 2013: s.434(1)(c), fifth proviso; s.290 -
Transfer of winding up proceedings from Company Court to NCLT
- Permissibility of, at the stage of post admission of winding up
petition - Held: In a winding up proceeding where the petition has
not been served in terms of r.26 of the Rules, 1959 at a pre-admission
stage, given the beneficial result of the application of the Code,
such winding up proceeding is compulsorily transferable to the
NCLT to be resolved under the Code - Even post issue of notice
and pre admission, the same result would ensue - However, post
admission of a winding up petition and after the assets of the
company sought to be wound up become in custodia legis and are
taken over by the Company Liquidator, s.290 of the Act, 2013 would
indicate that the Company Liquidator may carry on the business of
the company, so far as may be necessary, for the beneficial winding
up of the company, and may even sell the company as a going
concern - 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
- 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 - In the
instant case, the concurrent finding of the Company Judge and the
Division Bench is that despite the fact that the liquidator has taken
possession and control of the registered office of the appellant
company and its factory premises and records and books, no
irreversible steps towards winding up of the appellant company have
otherwise taken place - This being so, Company Court correctly
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exercised discretion vested in it by the 5th proviso to s.434(1)(c)
and transferred the winding up petition to NCLT - Companies
(Transfer of Pending Proceedings) Rules, 2016 - Insolvency and
Bankruptcy Code, 2016 - s.7 - Company (Court) Rules, 1959 -
r.26.
Dismissing the appeals, the Court
HELD: 1. So far as transfer of winding up proceedings is
concerned, the Code began tentatively by leaving proceedings
relating to winding up of companies to be transferred to NCLT at
a stage as may be prescribed by the Central Government. This
was done by the Transfer Rules, 2016 which came into force with
effect from 15.12.2016. Rules 5 and 6 referred to three types of
proceedings. Only those proceedings which are at the stage of
pre-service of notice of the winding up petition stand compulsorily
transferred to the NCLT. The result therefore was that post notice
and pre admission of winding up petitions, parallel proceedings
would continue under both statutes, leading to a most
unsatisfactory state of affairs. This led to the introduction of the
5th proviso to section 434(1)(c) which, as has been correctly
pointed out in *Kaledonia, is not restricted to any particular stage
of a winding up proceeding. Therefore, what follows as a matter
of law is that even post admission of a winding up petition, and
after the appointment of a Company Liquidator to take over the
assets of a company sought to be wound up, discretion is vested
in the Company Court to transfer such petition to the NCLT.
[Para 11][804-A-E]
*M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis
Nirman & Industries Ltd. & Ors., 2020 SCC OnLine
SC 943 - relied on
2. When a petition to wind up a company is presented before
the Tribunal, the Tribunal is given the power under Section 273
to dismiss it; to make any interim order as it thinks fit; to appoint
a provisional liquidator of the company till the making of a winding
up order; to make an order for the winding up of the company; or
to pass any other order as it thinks fit. Once a winding up order
is made, and a Company Liquidator is appointed, such liquidator
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is then to submit a report to the Tribunal under section 281. The
Tribunal is then to consider the aforesaid report and fix a time
limit within which the proceedings shall be completed and the
company dissolved. The company's properties shall, on the order
of the Tribunal, be taken over by the Company Liquidator and be
deemed to be in custodia legis - see section 283(1) and 283(2).
Thereafter, the Tribunal is to settle a list of contributories under
section 285. The Company Liquidator is then to make periodical
reports to the Tribunal with respect to the progress of the winding
up proceedings. [Paras 12, 14-17][804-F-G; 805-C-D; 807-A-C]
3. Under section 292, subject to the provisions of the
Companies Act, 2013, the Company Liquidator shall, in the
administration of the assets of the company and the distribution
thereof among its creditors, have regard to any directions which
may be given by the resolution of the creditors or contributories
at any general meeting. It is only when the affairs of the company
have been completely wound up that an application is to be made
to the Tribunal to dissolve the company under section 302. [Paras
19, 20][809-E-G]
4. Given the aforesaid scheme of winding up under Chapter
XX of the Companies Act, 2013, it is clear that several stages are
contemplated, with the Tribunal retaining the power to control
the proceedings in a winding up petition even after it is admitted.
Thus, in a winding up proceeding where the petition has not been
served in terms of Rule 26 of the Companies (Court) Rules, 1959
at a pre-admission stage, given the beneficial result of the
application of the Code, such winding up proceeding is
compulsorily transferable to the NCLT to be resolved under the
Code. Even post issue of notice and pre admission, the same
result would ensue. However, post admission of a winding up
petition and after the assets of the company sought to be wound
up become in custodia legis and are taken over by the Company
Liquidator, section 290 of the Companies Act, 2013 would indicate
that the Company Liquidator may carry on the business of the
company, so far as may be necessary, for the beneficial winding
up of the company, and may even sell the company as a going
ACTION ISPAT AND POWER PVT. LTD. v. SHYAM METALICS
AND ENERGY LTD.
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concern. 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.
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.
Whether this stage is reached would depend upon the facts and
circumstances of each case. [Para 22][810-D-H; 811-A]
5. In the facts of the present case, the concurrent finding of
the Company Judge and the Division Bench is that despite the
fact that the liquidator has taken possession and control of the
registered office of the appellant company and its factory
premises, records and books, no irreversible steps towards
winding up of the appellant company have otherwise taken place.
This being so, the Company Court has correctly exercised the
discretion vested in it by the 5th proviso to section 434(1)(c).
[Para 23][811-B-C]
Jaipur Metals & Electricals Employees Organization v.
Jaipur Metals & Electricals Ltd., (2019) 4 SCC
227: [2018[ 14 SCR 926; Forech India Ltd. v. Edelweiss
Assets Reconstruction Co. Ltd., 2019 SCC OnLine SC
87; Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India &
Ors., (2019) 4 SCC 17: [2019] 3 SCR 535 - relied on
Case Law Reference
[2018[ 14 SCR 926
relied on
Para 3
[2019] 3 SCR 535
relied on
Para 4
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4041
OF 2020
From the Judgment and Order dated 10.10.2019 of the High Court
of Delhi (Division Bench) in Company Appeal No. 11 of 2019.
With
Civil Appeal Nos. 4042-4043 of 2020.
K K Venugopal, AG, Sidharth Luthra, Sr. Adv., Ms. Varsha
Banerjee, Milan Singh Negi, Ms. Garima Bajaj, Sumeer Sodhi, Arjun
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Nanda, Anuj Berry, Ms. Misha, Siddhant Kant, Ms. Anusha Ramesh,
Ms. Prabh Simran Kaur, S. S. Shroff, Abhishek Singh, Jamal Anand,
Ms. Aayushi Mishra, Sarvesh Singh, Ashok Mathur, Anil Kumar Sangal,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J.
1. Leave granted.
2. These appeals arise out of a judgment of the Division Bench of
the Delhi High Court dated 10.10.2019 by which a Single Judge's order
dated 14.01.2019 transferring a winding up proceeding pending before
the High Court to the National Company Law Tribunal ["NCLT"] was
upheld. The brief facts necessary to appreciate the controversy involved
in these appeals are as follows:
2.1. A winding up petition under sections 433(e) and (f), 434 and
439 of the Companies Act, 1956, being Co. Pet. No.731 of 2016 was
filed by one Shyam Metalics and Energy Limited (Respondent No.1
herein), seeking winding up of the appellant company inasmuch as for
goods supplied to the appellant company, a sum of Rs.4.55 crore was
still due. The learned Company Judge in the Delhi High Court passed
the following order in the aforesaid petition on 27.08.2018:
"ORDER
27.08.2018
1. This petition is filed under sections 433(e) and (f), 434 and 439
of the Company Act, 1956 (hereinafter referred to as 'the Act') seeking
winding up of the respondent company.
2. It has been pleaded in the petition that the respondent company
had approached the petitioner company for supply of Iron Pellets. A
specified quantity of 11612.34MTs of the goods was supplied to the
respondent company. After making partial payment, a sum of
Rs.4,55,00,000/- is due and payable by the respondent company to the
petitioner. The respondent company from time to time issued 17 postdated cheques. However, 13 of the cheques when presented with its
bankers, were returned by the bankers unpaid. Statutory notice was
issued on 15.06.2016 but no payments have been received by the
petitioner.
ACTION ISPAT AND POWER PVT. LTD. v. SHYAM METALICS
AND ENERGY LTD.
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3. No reply has been filed by the respondent. On the last date of
hearing, the learned counsel for the respondent had taken time to settle
the matter with the petitioner.
4. Today, the learned counsel for the respondent company submits
that the respondent is not in a position to settle the matter on account of
the fact that the unit of the respondent is shut.
5. In these circumstances, the petition is admitted and the Official
Liquidator attached to this Court is appointed as the Liquidator. He is
directed to take over all the assets, books of accounts and records of the
respondent-company forthwith. The citations be published in the Delhi
editions of the newspapers 'Statesman' (English) and 'Veer Arjun' (Hindi),
as well as in the Delhi Gazette, at least 14 days prior to the next date of
hearing. The cost of publication is to be borne by the petitioner who shall
deposit a sum Rs.75,000/- with the Official Liquidator within 2 weeks,
subject to any further amounts that may be called for by the liquidator
for this purpose, if required. The Official Liquidator shall also endeavour
to prepare a complete inventory of all the assets of the respondentcompany when the same are taken over; and the premises in which they
are kept shall be sealed by him. At the same time, he may also seek the
assistance of a valuer to value all assets to facilitate the process of
winding up. It will also be open to the Official Liquidator to seek police
help in the discharge of his duties, if he considers it appropriate to do so.
The Official Liquidator to take all further steps that may be necessary in
this regard to protect the premises and assets of the respondent-company.
6. List on 09.01.2019.
7. A copy of this order be given dasti under the signatures of the
court master."
2.2. An application was then filed before the learned Company
Judge by the State Bank of India ["SBI"] (Respondent No. 2 herein),
being a secured creditor of the appellant company, seeking transfer of
the winding up petition to the NCLT in view of the fact that SBI had
filed an application under section 7 of the Insolvency and Bankruptcy
Code, 2016 ["Code"] which was pending before the NCLT. By order
dated 14.01.2019, the learned Company Judge transferred the winding
up petition as prayed for as follows:
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"ORDER
14.01.2019
CA No.1240/2018
1. This application is filed seeking transfer of the present petition
being Co.Pet. No.731/2016 to NCLT. This application has been filed by
State Bank of India stating that an application under section 7 of the
IBC is pending before NCLT. It has been pleaded that the respondent
company had failed to pay outstanding dues of about Rs.722 crores to
the applicant bank and hence this proceeding have been initiated before
NCLT. The applicant bank is also a lead bank of the consortium of
banks which have outstanding dues of about Rs.1100 crores.
2. This court had admitted the present winding up petition on
27.08.2018 and appointed the OL as the provisional liquidator of the
respondent company.
3. The learned counsel appearing for the OL submits that the OL
has already sealed the registered office of the respondent company at
New Delhi and factory premises at Orissa. He further submits that the
OL has incurred heavy expenses in protecting the factory premises at
Orissa in the given facts and circumstances.
4. The Ex. Management however objects to transfer of this
petition. They have submitted that they have had no opportunity to defend
the proceedings before NCLT.
5. Learned counsel for SBI states that the creditors will reimburse
the expenses of the OL.
6. Section 434 of the Companies Act, 2013 reads as follows:
"[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;
ACTION ISPAT AND POWER PVT. LTD. v. SHYAM METALICS
AND ENERGY LTD. [R. F. NARIMAN, J.]
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(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:
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 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."
7. This court has already in CP 152/2016 vide decision dated
27.9.2018 in Rajni Anand vs. Cosmic Structures Limited held
that the power under section 434(1)(c) of the Companies Act,
2013 for transfer of a petition to NCLT is discretionary and
has to be exercised in the facts and circumstances of the case
so as to expeditiously deal with the proceedings/winding up.
8. In my opinion, it would be in the interest of justice and in the
interest of the respondent company and the creditors that the
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matter be transferred to NCLT in exercise of the discretionary
powers of the court under section 434 of the Companies Act,
1956. The order appointing the OL is a recent order and not
much time has elapsed since then. The OL has only taken
steps to seize the office of the respondent company and the
factory premises and further exercise is yet to be carried out.
The application is allowed as above. The present petition is
transferred to NCLT.
CO.PET. 731/2016
9. In view of the above order, the present petition is transferred
to NCLT. All pending applications, if any, stand disposed of.
The order admitting the petition and appointing the OL as the
provisional liquidator dated 27.08.2018 stands revoked.
10. The OL will give details of necessary expenses to SBI.
The costs/expenses will be borne by SBI and also consortium
of banks. The OL will hand over the possession of the assets
as directed by NCLT.
11. Parties to appear before NCLT on 04.02.2019."
2.3. It is from this order that the appellant company's appeal to
the Division Bench has been dismissed by the impugned order in which
the learned Division Bench held as follows:
"41. The process under IBC is meant to find the best possible
solution in a given case, which is beneficial to the company
concerned as well as its creditors and other stakeholders.
Therefore, in the interest of equity and justice, and keeping in
mind the special nature of the IBC, if the Learned Company Judge
has found it fit to transfer the winding up petition to NCLT on the
application of respondent No. SBI- who is a secured creditor,
this Court would not ordinarily interfere with the judgment of the
Learned Company Judge, and that too, on the asking of the
erstwhile management. The Learned Company Judge rightly
recalled the order of appointment of Official Liquidator and
admission of petition, since the liquidation was at its initial stage
and the learned Company Judge was fully competent to do so.
After the passing of the winding up order, the OL had not
proceeded to take any effective or irreversible steps towards
liquidation of the assets of the appellant company. All that he
ACTION ISPAT AND POWER PVT. LTD. v. SHYAM METALICS
AND ENERGY LTD. [R. F. NARIMAN, J.]
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appears to have done is to take possession and control of the
registered office of the appellant company and its factory premises
and its records and books.
42. Pertinently, the respondent No. 2 has already initiated
proceedings before the NCLT in respect of the appellant company
which, in any event, would continue. The continuation of the
liquidation proceedings at the hands of the OL in terms of the
order passed by this Court would be incongruous with the
proceedings that the NCLT has undertaken and would undertake
under the IBC. Continuation of two parallel proceedings - one
before the Company Court for liquidation, and the other before
the IBC for resolution/ revival, would serve no useful purpose.
The statutory scheme found in Section 434(1)(c) clearly is that
the proceedings for winding up pending before the Company Court
could be transferred to the NCLT and there is no provision for
transfer of proceedings from the NCLT to the Company Court.
43. We, thus uphold the impugned order passed by the Ld.
Company Judge in C.A. No. 1240/2018, dated 14.01.2019 and
dismiss the appeal."
3. Shri Sidharth Luthra, learned Senior Advocate appearing on
behalf of the appellant company, referred to three judgments of this
Court, namely, Jaipur Metals & Electricals Employees
Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC
227 ["Jaipur Metals"], Forech India Ltd. v. Edelweiss Assets
Reconstruction Co. Ltd., 2019 SCCOnLine SC 87 ["Forech"], and
M/s Kaledonia Jute & Fibres Pvt. Ltd. v. M/s Axis Nirman &
Industries Ltd. & Ors., 2020 SCCOnLine SC 943 ["Kaledonia"].
According to him, none of the judgments apply to the facts of the present
case inasmuch as, on the facts in the present case, once a winding up
order has been passed by the Company Judge, winding up proceedings
alone must continue before the High Court and parallel proceedings under
the Code cannot continue. He argued that Jaipur Metals (supra) makes
it clear that even independent proceedings under the Code can only
continue when the stage is before a winding up order is passed, which
was the case on the facts before the Court. Likewise, in Forech (supra)
also, 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. Likewise, in Kaledonia (supra), though a winding
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up order had been passed on the facts of that case, the aforesaid order
had been kept in abeyance. On facts therefore, these three cases are
entirely distinguishable and would have no application to a scenario in
which a winding up order has been passed and the Official Liquidator
has in fact seized the assets of the company in order to begin the process
of distribution to creditors and others which would ultimately result in
dissolution of the company.
4. Shri K.K. Venugopal, learned Attorney General for India
appearing on behalf of SBI, countered all these submissions. According
to him, this Court has unequivocally laid down that the 5th proviso to
section 434(1)(c) of the Companies Act, 2013 now makes it clear that a
discretion is vested in the Company Court to transfer winding up
proceedings to the NCLT without reference to the stage of winding up.
Even post admission, according to the learned Attorney General, if no
irreversible steps have been taken, then a combined reading of the 5th
proviso to section 434(1)(c) and section 238 of the Code would lead to
the result that the winding up proceeding be transferred to the NCLT, as
not only is the Code a special enactment with a non-obstante clause
which would, in cases of conflict, do away with the Companies Act,
2013, but also that, given the judgment of this Court in Swiss Ribbons
Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17 ["Swiss
Ribbons"], winding up is a last resort after all efforts to revive a company
fail. According to him, the discretion exercised by the Company Court
and the Division Bench has been judiciously and correctly exercised,
warranting no interference at our hands.
5. In Swiss Ribbons (supra), this Court had occasion to deal
with the raison d'être for the enactment of the Code. The judgment of
this Court referred to the Statement of Objects and Reasons for the
Code as follows:
"25. The Statement of Objects and Reasons for the Code have
been referred to in Innoventive Industries [Innoventive
Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 : (2018) 1 SCC
(Civ) 356] which states: (SCC pp. 421-22, para 12)
"12. ... The Statement of Objects and Reasons of the Code
reads as under:
'Statement of Objects and Reasons.-There is no single
law in India that deals with insolvency and bankruptcy. Provisions
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AND ENERGY LTD. [R. F. NARIMAN, J.]
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relating to insolvency and bankruptcy for companies can be found
in the Sick Industrial Companies (Special Provisions) Act, 1985,
the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 and the Companies
Act, 2013. These statutes provide for creation of multiple fora
such as Board of Industrial and Financial Reconstruction (BIFR),
Debts Recovery Tribunal (DRT) and National Company Law
Tribunal (NCLT) and their respective Appellate Tribunals.
Liquidation of companies is handled by the High Courts. Individual
bankruptcy and insolvency is dealt with under the Presidency
Towns Insolvency Act, 1909, and the Provincial Insolvency Act,
1920 and is dealt with by the courts. The existing framework
for insolvency and bankruptcy is inadequate, ineffective and
results in undue delays in resolution, therefore, the proposed
legislation.
2.The objective of the Insolvency and Bankruptcy Code,
2015 is to consolidate and amend the laws relating to
reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals in a time-bound manner
for maximisation of value of assets of such persons, to promote
entrepreneurship, availability of credit and balance the
interests of all the stakeholders including alteration in the
priority of payment of government dues and to establish an
Insolvency and Bankruptcy Fund, and matters connected
therewith or incidental thereto. An effective legal framework
for timely resolution of insolvency and bankruptcy would
support development of credit markets and encourage
entrepreneurship. It would also improve Ease of Doing
Business, and facilitate more investments leading to higher
economic growth and development.
3. The Code seeks to provide for designating NCLT and
DRT as the adjudicating authorities for corporate persons and
firms and individuals, respectively, for resolution of insolvency,
liquidation and bankruptcy. The Code separates commercial
aspects of insolvency and bankruptcy proceedings from judicial
aspects. The Code also seeks to provide for establishment of the
Insolvency and Bankruptcy Board of India (Board) for regulation
of insolvency professionals, insolvency professional agencies and
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information utilities. Till the Board is established, the Central
Government shall exercise all powers of the Board or designate
any financial sector regulator to exercise the powers and functions
of the Board. Insolvency professionals will assist in completion of
insolvency resolution, liquidation and bankruptcy proceedings
envisaged in the Code. Information Utilities would collect, collate,
authenticate and disseminate financial information to facilitate such
proceedings. The Code also proposes to establish a fund to be
called the Insolvency and Bankruptcy Fund of India for the
purposes specified in the Code.
4. The Code seeks to provide for amendments in the Indian
Partnership Act, 1932, the Central Excise Act, 1944, Customs
Act, 1962, the Income Tax Act, 1961, the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993, the Finance
Act, 1994, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, the Sick Industrial
Companies (Special Provisions) Repeal Act, 2003, the Payment
and Settlement Systems Act, 2007, the Limited Liability Partnership
Act, 2008, and the Companies Act, 2013.
5. The Code seeks to achieve the above objectives.'"
(emphasis in original)
The Court then went on to state:
"27. As is discernible, the Preamble gives an insight into what is
sought to be achieved by the Code. The Code is first and foremost,
a Code for reorganisation and insolvency resolution of corporate
debtors. Unless such reorganisation is effected in a time-bound
manner, the value of the assets of such persons will deplete.
Therefore, maximisation of value of the assets of such persons so
that they are efficiently run as going concerns is another very
important objective of the Code. This, in turn, will promote
entrepreneurship as the persons in management of the corporate
debtor are removed and replaced by entrepreneurs. When,
therefore, a resolution plan takes off and the corporate debtor is
brought back into the economic mainstream, it is able to repay its
debts, which, in turn, enhances the viability of credit in the hands
of banks and financial institutions. Above all, ultimately, the
interests of all stakeholders are looked after as the corporate debtor
itself becomes a beneficiary of the resolution scheme-workers
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are paid, the creditors in the long run will be repaid in full, and
shareholders/investors are able to maximise their investment.
Timely resolution of a corporate debtor who is in the red, by an
effective legal framework, would go a long way to support the
development of credit markets. Since more investment can be
made with funds that have come back into the economy, business
then eases up, which leads, overall, to higher economic growth
and development of the Indian economy. What is interesting to
note is that the Preamble does not, in any manner, refer to
liquidation, which is only availed of as a last resort if there is
either no resolution plan or the resolution plans submitted are not
up to the mark. Even in liquidation, the liquidator can sell the
business of the corporate debtor as a going concern. (See
ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar
Gupta, (2019) 2 SCC 1] at para 83, fn 3).
28. It can thus be seen that the primary focus of the legislation is
to ensure revival and continuation of the corporate debtor by
protecting the corporate debtor from its own management and
from a corporate death by liquidation. The Code is thus a beneficial
legislation which puts the corporate debtor back on its feet, not
being a mere recovery legislation for creditors. The interests of
the corporate debtor have, therefore, been bifurcated and
separated from that of its promoters/those who are in management.
Thus, the resolution process is not adversarial to the corporate
debtor but, in fact, protective of its interests. The moratorium
imposed by Section 14 is in the interest of the corporate debtor
itself, thereby preserving the assets of the corporate debtor during
the resolution process. The timelines within which the resolution
process is to take place again protects the corporate debtor's
assets from further dilution, and also protects all its creditors and
workers by seeing that the resolution process goes through as
fast as possible so that another management can, through its
entrepreneurial skills, resuscitate the corporate debtor to achieve
all these ends."
Having so held, the Court ended stating:
"Epilogue
120. The Insolvency Code is a legislation which deals with
economic matters and, in the larger sense, deals with the economy
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of the country as a whole. Earlier experiments, as we have seen,
in terms of legislations having failed, "trial" having led to repeated
"errors", ultimately led to the enactment of the Code. The
experiment contained in the Code, judged by the generality of its
provisions and not by so-called crudities and inequities that have
been pointed out by the petitioners, passes constitutional muster.
To stay experimentation in things economic is a grave responsibility,
and denial of the right to experiment is fraught with serious
consequences to the nation. We have also seen that the working
of the Code is being monitored by the Central Government by
Expert Committees that have been set up in this behalf.
Amendments have been made in the short period in which the
Code has operated, both to the Code itself as well as to subordinate
legislation made under it. This process is an ongoing process which
involves all stakeholders, including the petitioners.
121. We are happy to note that in the working of the Code, the
flow of financial resource to the commercial sector in India has
increased exponentially as a result of financial debts being repaid.
Approximately 3300 cases have been disposed of by the
adjudicating authority based on out-of-court settlements between
corporate debtors and creditors which themselves involved claims
amounting to over INR 1,20,390 crores. Eighty cases have since
been resolved by resolution plans being accepted. Of these eighty
cases, the liquidation value of sixty-three such cases is INR
29,788.07 crores. However, the amount realised from the
resolution process is in the region of INR 60,000 crores, which is
over 202% of the liquidation value. As a result of this, Reserve
Bank of India has come out with figures which reflect these results.
Thus, credit that has been given by banks and financial institutions
to the commercial sector (other than food) has jumped up from
INR 4952.24 crores in 2016-2017, to INR 9161.09 crores in 20172018, and to INR 13,195.20 crores for the first six months of
2018-2019. Equally, credit flow from non-banks has gone up from
INR 6819.93 crores in 2016-2017, to INR 4718 crores for the
first six months of 2018-2019. Ultimately, the total flow of
resources to the commercial sector in India, both bank and nonbank, and domestic and foreign (relatable to the non-food sector)
has gone up from a total of INR 14,530.47 crores in 2016-2017, to
INR 18,469.25 crores in 2017-2018, and to INR 18,798.20 crores
in the first six months of 2018-2019. These figures show that the
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experiment conducted in enacting the Code is proving to be largely
successful. The defaulter's paradise is lost. In its place, the
economy's rightful position has been regained. The result is that
all the petitions will now be disposed of in terms of this judgment.
There will be no order as to costs."
6. Viewed in this backdrop, let us now examine some of the
judgments of this Court dealing with transfer of winding up petitions
from the Company Court to be tried by the NCLT under the Code.
7. Section 255 of the Code reads as follows:
"255. Amendments of Act 18 of 2013.-The Companies
Act, 2013 shall be amended in the manner specified in the Eleventh
Schedule."
In pursuance of this section, the Eleventh Schedule to the Code
made various amendments to the Companies Act, 2013. They have been
set out in detail in Jaipur Metals (supra) in paragraphs 10 and 11.
Suffice it to say that the first step to transferring winding up proceedings
to the NCLT was taken by the Companies (Transfer of Pending
Proceedings) Rules, 2016 ["Transfer Rules, 2016"], which compulsorily
transferred all winding up proceedings pending before High Courts to
the NCLT at a stage prior to the service of the petition in terms of Rule
26 of the Companies (Court) Rules, 1959. By an amendment made on
17.08.2018, the 5th proviso to section 434(1)(c) was added which states
as follows:
"434. Transfer of certain pending proceedings.-(1) On such
date as may be notified by the Central Government in this behalf,-
(a) xxx xxx xxx
(b) xxx xxx xxx
(c) all proceedings under the Companies Act, 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:
xxx xxx xxx
Provided further that any party or parties to any proceedings
relating to the winding up of companies pending before any Court
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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
(31 of 2016)."
8. The Court in Jaipur Metals (supra) was directly concerned
with a special category of cases dealt with by Rule 5(2) of the aforesaid
Transfer Rules which was omitted later on. Despite the omission, the
Court applied this Rule, read with the amendment made to section 434
of the Companies Act, 2013 on 17.08.2018, stating:
"17. However, though the language of Rule 5(2) is plain enough,
it has been argued before us that Rule 5 was substituted on 29-62017, as a result of which, Rule 5(2) has been omitted. The effect
of the omission of Rule 5(2) is not to automatically transfer all
cases under Section 20 of the SIC Act to NCLT, as otherwise, a
specific rule would have to be framed transferring such cases to
NCLT, as has been done in Rule 5(1). The real reason for omission
of Rule 5(2) in the substituted Rule 5 is because it is necessary to
state, only once, on the repeal of the SIC Act, that proceedings
under Section 20 of the SIC Act shall continue to be dealt with by
the High Court. It was unnecessary to continue Rule 5(2) even
after 29-6-2017 as on 15-12-2016, all pending cases under Section
20 of the SIC Act were to continue to be dealt with by the High
Court before which such cases were pending. Since there could
be no opinion by the BIFR under Section 20 of the SIC Act after
1-12-2016, when the SIC Act was repealed, it was unnecessary
to continue Rule 5(2) as, on 15-12-2016, all pending proceedings
under Section 20 of the SIC Act were to continue with the High
Court and would continue even thereafter. This is further made
clear by the amendment to Section 434(1)(c), with effect from
17-8-2018, where any party to a winding-up proceeding pending
before a court immediately before this date may file an application
for transfer of such proceedings, and the Court, at that stage,
may, by order, transfer such proceedings to NCLT. The proceedings
so transferred would then be dealt with by NCLT as an application
for initiation of the corporate insolvency resolution process under
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the Code. It is thus clear that under the scheme of Section 434
(as amended) and Rule 5 of the 2016 Transfer Rules, all
proceedings under Section 20 of the SIC Act pending before the
High Court are to continue as such until a party files an application
before the High Court for transfer of such proceedings post 17-82018. Once this is done, the High Court must transfer such
proceedings to NCLT which will then deal with such proceedings
as an application for initiation of the corporate insolvency resolution
process under the Code.
18. The High Court judgment, therefore, though incorrect in
applying Rule 6 of the 2016 Transfer Rules, can still be supported
on this aspect with a reference to Rule 5(2) read with Section 434
of the Companies Act, 2013, as amended, with effect from 17-82018."
In a significant passage, the Court then went on to hold:
"19. However, this does not end the matter.