WINDING UP TRANSFER PETITIONS: WHEN TO EXERCISE THE DISCRETION?

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 WINDING UP TRANSFER PETITIONS: WHEN TO EXERCISE THE DISCRETION?

SHUBHAM BUDHIRAJA[1]


A and B enter into a transaction where A has to supply goods and B has to provide payment for same. The part payment provided by B to A and Demand Notice served for remaining amount & cheques issued by B but remain unpaid. Thereafter winding up petition filed by A against B under Section 434 of 1956 Act and same is admitted and OL appointed who took sealed the premises and took over the management of company.  Thereafter SBI filed application u/s 434 seeking transfer of winding up from HC to NCLT because it has already filed Section 7 IBC application. The HC allowed the transfer petition on reason that IBC is a beneficial statute and it would in Interest of equity and Justice to transfer under IBC to NCLT. The same is upheld by division bench. Hence, SLP challenging the transfer order to NCLT. Apex court upheld order of Division bench.

OBSERVATIONS

(i) 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.

(ii) This was done by the Transfer Rules, 2016 (supra) 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.

(iii) 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 (supra), is not restricted to any particular stage of a winding up proceeding.

(iv) 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.

 

THE QUESTION THAT ARISES BEFORE US IN THIS CASE IS HOW IS SUCH DISCRETION TO BE EXERCISED?

SCHEME OF COMPANIES ACT, 2013

The Companies Act, 2013 deals with winding up of companies in a separate chapter, being Chapter XX. 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 – see section 273(1).  Sections 278 and 279 of the Companies Act, 2013. Once a winding up order is made, and a Company Liquidator is appointed, such liquidator 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, which time limit may be revised

Importantly, 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  under 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 proceeding. Section 290 is important because it lays down the powers and duties of the Company Liquidator

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, Where a company has been dissolved, such dissolution may be set aside within a period of two years from the date of such dissolution under section 356 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 preadmission 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 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.

CONCLUSION

1.      Pre Notice- it is mandatory to allow transfer from HC to NCLT

 

2.      Post Notice and Pre admission- It is mandatory to allow transfer from HC to NCLT

 

3.      Post admission and appointment of OL – It is discretionary to allow transfer from HC to NCLT.

 

4.      The gap between discretion and arbitrariness is test of irreversible steps.

 

5.      If proceedings post admission is at such a stage where steps cannot be taken back and clock cannot be set back then it is in equity that transfers not to be allowed and HC must carry on with winding up proceedings.

 

6.       However where proceedings post admission is not at an extreme stage and nothing irreversible though substantial has done then transfer can be allowed from HC to NCLT.

 

This work is a result of skills, labour and creativity of author. Therefore all rights are duly reserved with respect to the ownership of this literary work. Further, this work is meant only for academic purpose and therefore same should by no stretch of imagination be accepted or construed as a legal opinion.

 


[1] Associate Company Secretary & Final year law student from Faculty of Law, University of Delhi

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