Transfer of winding up proceedings from High Court to NCLT can be ordered at the instance of creditor who is not a party: Supreme Court

Transfer of winding up proceedings from High Court to NCLT can be ordered at the instance of creditor who is not a party: Supreme Court

The Supreme Court has ruled that transfer of winding up proceedings of company from a High Court (Company Court) to National Company Law Tribunal (NCLT) can be ordered at the instance of a creditor who is not a party to the proceeding.

A three judge bench, headed by Chief Justice Bobde and comprising of Justices A.S Bopanna and V. Ramasubramanian, was hearing a plea by one of the creditors – Kaledonia Jute and Fibres (hereafter 'Kaledonia') seeking transfer of winding up proceedings against M/s Axis Nirman and Industries Limited (hereafter 'Axis') pending before the Allahabad High Court (Company Court) to NCLT.

A petition was filed before the Company Court (High Court) in 2015 seeking winding up of Axis on the ground that the company was unable to repay its debts. In 2016, Kaledonia, claiming to be a creditor of Axis, moved an application before the NCLT, Allahabad under Section 7 of the Insolvency and Bankruptcy Code (IBC) claiming that Axis was liable to pay a sum of Rs. 32 lakhs to it.

It also moved an application before the Company Court (High court) seeking a transfer of the winding up petition to the NCLT, Allahabad.

However, this application was rejected 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.

When the case reached the Supreme Court, the Court considered the following two issues in its judgment:

(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 Court ruled that transferability, by operation of law, of winding up proceedings, other than those covered by the 4th proviso Section 434(1)(c) of the Companies Act will depend upon the stage at which they are pending before the Company Court.

The Court held that the present case of winding up on account of inability to pay debts was covered by Rule 5 of Companies (Transfer of Pending Proceedings) Rules 2016, according to which, the transferability of a winding up proceeding is directly linked to the service of the winding up petition on the Respondent under Rule 26 of the Companies (Court) Rules, 1959.

According to the Court, "If the winding up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding up petition on the respondent in terms of Rule 26 had not been completed, such winding up proceedings, shall peremptorily be transferred to the NCLT."

The Court then considered the question of whether any of the creditors would be considered a "party to the proceedings". The Court answered in the affirmative and concluded that the words "party or parties" appearing in the 5th proviso to Section 434(1)(c) of the Companies Act would take within its fold any creditor of the company in liquidation and therefore the appellant is entitled to seek transfer of proceedings to NCLT.

The Court allowed the appeal and ordered that the proceedings for winding up pending before the Company Court (Allahabad High Court) be transferred to the NCLT.