Proceedings for winding up pending before the Company Court could be transferred to the NCLT and not from NCLT to Company Court: Delhi HC
Justices Vipin Sanghi and Sanjeev Narula of the Delhi High Court ruled that in case of winding up of a company, the stake of the secured creditors is higher and their claims should be first met, before turning to the ex-management. Moreover, proceedings for winding up pending before the Company Court could be transferred to the National Company Law Tribunal (NCLT) and not from NCLT to...
Justices Vipin Sanghi and Sanjeev Narula of the Delhi High Court ruled that in case of winding up of a company, the stake of the secured creditors is higher and their claims should be first met, before turning to the ex-management. Moreover, proceedings for winding up pending before the Company Court could be transferred to the National Company Law Tribunal (NCLT) and not from NCLT to Company Court under section 434(1)(c) of the Companies Act 2013.
A winding up petition was passed by the Company Judge against the appellant company and an Official Liquidator (OL) was appointed to secure the assets/books and to inform the creditors and contributors about the development. However, during the pendency of the petition, before the passing of the winding up order, State Bank of India (SBI), one of the secured creditors of the company moved an application under section 7 of Insolvency and Bankruptcy Code (IBC) before the NCLT, seeking Corporate Insolvency Resolution Process (CIRP) for the appellant company.
The application for transfer was opposed by the ex-management as well as by the OL. The OL claimed that he had already sealed the registered office of the company at New Delhi and the factory premises at Orissa.
The Company Judge held that the power to transfer a petition to NCLT under Section 434(1)(c) of the Companies Act, 2013 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. Thus, the order admitting the petition and appointing the OL was revoked. The Company Judge ordered the transfer of the winding up proceedings to the NCLT.
On appeal, appellant submitted that the winding up proceedings, necessarily, had to continue before the Company Judge and the Official Liquidator alone has jurisdiction to liquidate the assets of the appellant company and settle the claims of all the creditors and contributors.
The Delhi Court ruled that when the plea of the secured creditor to transfer the proceedings to the NCLT from the Company Court is pitted against the plea of the ex-management not to do so, unless very strong reasons for accepting the plea of the ex-management are brought forth – such as a clear statutory bar, the Company Court would lean in favour of transferring the winding up proceedings pending before it to the NCLT. The reason is that the scope of the proceedings before the Company Court after admission of the winding up petition is uni-directional inasmuch, as, the liquidator acts with the mandate of liquidating the assets of the company with a view to satisfy the claims of the secured and other creditors.
The Court further held that IBC is a special code that overrides other laws, including the Companies Act, 2013 by virtue of its non-obstante clause employed in Section 238. Moreover, the proceedings under IBC are independent and have an object different from the one envisaged under the scheme of liquidation provided in the Company Law. IBC aims resolution by way of revival in a manner that benefits all stakeholders, the creditors as well as the company. Thus, the scope of the proceedings before the NCLT is wider – with the object of preserving the company and its business activities in the interest of justice. The court must be sensitive to the scheme and object of the Code and running of parallel proceedings will be futile and create confusion.
The Delhi High Court held that merely because the Company Judge had ordered the winding up of the appellant company, does not mean that the appellant company should necessarily be liquidated and dissolved. The other options available, namely to resolve/revive the appellant company can and should always be explored for which purpose the NCLT is invested with jurisdiction, unless irrevocable steps towards liquidation have already been undertaken.
The Court concluded that 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 Company Judge found it fit to transfer the winding up petition to NCLT on the application of respondent SBI – who is a secured creditor, the High Court would not ordinarily interfere with the judgment of the Company Judge, on the asking of the erstwhile management.