Winding Up Petitions Under Companies Act Not At Irreversible Stage, Should Be Transferred To NCLT For Revival Under IBC: Himachal Pradesh HC

The Himachal Pradesh High Court bench of Justices Tarlok Singh Chauhan and Sushil Kukreja has held that unless the corporate debtor's demise is inevitable or the winding-up proceedings under the Companies Act have reached an irreversible stage making revival impossible, every effort must be made to revive the company. Accordingly, all such winding-up petitions should be transferred to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code, 2016 (Code) under 434(1)(c) of the Companies Act. Brief Facts: Elecon Engineering Company Limited (Appellant) has filed the present company appeal against the order dated 02.08.2024, passed by the Company Judge, transferring the company petition to the NCLT. The appellant had petitioned for the winding up of the respondent-company, citing non-payment of Rs. 3,25,78,000/- (Rs. 1,41,78,000/- for gearbox materials and Rs. 1,84,00,000/- as refundable security deposit). The petitioner submitted that the respondent company has lost its substratum, is commercially insolvent, and is unable to settle the due amount, making its winding-up just and equitable under the Companies Act. During the pendency of the company-petition, the respondent moved an application under Section 434(1)(c) of the Companies Act for transferring the case to the NCLT at Chandigarh, which as observed above, came to be allowed. Against the above order, the present appeal has been filed. Contentions: The Appellant submitted that the findings recorded by the learned Company Judge, is not only wrong and contrary to law but the same are perverse inasmuch as much reliance has been placed on the judgment passed by three-Judge Bench of the Supreme Court in Action Ispat and Power Pvt. Ltd. vs. Shyam Metalics and Energy Limited 2021 which judgment in fact though forms the basis of the decision of the case but was not at all applicable. Per contra, the Respondent submitted that the findings recorded by the learned Company Judge having rendered strictly in accordance with law, warrants no interference. Observations: The court at the outset noted that the substituted Section 434(1)(c) of the Companies Act has seen multiple amendments between 7th December 2016 and 17th August 2018. The first proviso, introduced in 2016, clarified that only certain winding-up proceedings, as prescribed by the Central Government, were to be transferred to the NCLT. It further added that the Companies (Transfer of Pending Proceedings) Rules, 2016, particularly Rule 5, lay down that all winding-up petitions under Section 433(e) for inability to pay debts, where notice has not been served under Rule 26 of the Companies (Court) Rules, 1959, must be transferred to the NCLT. The court further said that the petitioner must also furnish required IBC-related information within 60 days, failing which the petition abates. Additionally, the fifth proviso to Section 434(1)(c), inserted via the 2018 amendment, was aimed at resolving conflicts between the winding-up regime and the IBC, especially in cases where simultaneous proceedings could be initiated under Sections 7 or 8 of the Code against companies already facing winding-up petitions. Based on the above, the court held that a reading of the provisions of the Code with the Companies Act undoubtedly would have primacy over the Companies Act, in case, there is a conflict as the ultimate object of the Code is to resuscitate the corporate debtors who are in the red. This approach is also in some cases necessary to transfer the winding up proceeding to NCLT to prevent parallel proceeding. The Supreme Court in Action Ispat and Power Pvt. Ltd. (Supra) held that the transfer of winding-up proceedings to the NCLT under the Code evolved gradually. Initially, the Code left such transfers to be prescribed by the Central Government, which was later addressed through the Companies (Transfer of Pending Proceedings) Rules, 2016. The Apex Court further noted that these rules mandated that only pre-service stage petitions (i.e., before notice under Rule 26 of the Companies (Court) Rules, 1959) must be compulsorily transferred to the NCLT. However, this led to overlapping proceedings between the Companies Act and the IBC, prompting the introduction of the fifth proviso to Section 434(1)(c), which allows the Company Court to exercise discretion to transfer even post-admission cases. The Supreme Court finally held that as per the scheme under Chapter XX of the Companies Act, even after admission of the petition and appointment of a Company Liquidator, the Court retains the power to transfer the matter to the NCLT, provided the proceedings have not reached an irreversible stage—such as the sale of company assets. If no such irreversible actions have taken place, transfer remains permissible. Whether a winding-up case has reached such a stage is to be determined on ...

Winding Up Petitions Under Companies Act Not At Irreversible Stage, Should Be Transferred To NCLT For Revival Under IBC: Himachal Pradesh HC

Mohd Malik Chauhan

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Winding Up Petitions Under Companies Act Not At Irreversible Stage, Should Be Transferred To NCLT For Revival Under IBC: Himachal Pradesh HC

Mohd Malik Chauhan

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