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The Top Court in its decision dated March 1, 2021, held that Corporate Insolvency Resolution Process under Section 7 IBC is independent of winding up proceedings initiated under the Companies Act, 2013. Drawing a difference between the two Statutes, the bench observed, “what is of importance is that under the Companies Act, it is only winding up that can be ordered, whereas under the IBC, the primary emphasis is on revival of the corporate debtor through infusion of a new management.”

A Division Bench of Justice R.F. Nariman and Justice B.R. Gavai, while dismissing the present appeal, held, “Section 7 is an independent proceeding, as has been held in the catena of judgments of this Court, which has to be tried on its own merits. Any suppression of the winding up proceeding would, therefore, not be of any effect in deciding a Section 7 petition on the basis of the provisions contained in the IBC.”

Brief Facts

The instant appeal arise out of the judgment of National Company Law Tribunal (NCLT) dated 07.02.2020, as corrected by order dated 21.09.2020 (by NCLAT), sought for initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 IBC. Respondent 3; Action Barter had filed an appeal before the NCLT against admission of Section 7 petition by SREI Equipment Finance Limited, Respondent 1 herein. By the impugned order, NCLT dismissed the said appeal citing the judgment of the Apex Court in Forech India Ltd v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549.

Against the aforementioned order of dismissal, Action Barter filed an appeal before the Apex Court on 08.10.2020. Through an order dated 27.10.2020, the Top Court directed to maintain the status quo and also stayed further proceedings before the NCLAT. An appeal was also filed by the Appellant on 09.12.2020 wherein the present Court upon notice, stayed further proceedings before the NCLT and tagged the said appeal with the appeal filed by Action Barter.

Pursuant to the settlement between Action Barter and purchaser of the mortgaged property of the company, appeal by Action Barter was withdrawn, leaving Court with the only surviving appeal of A. Navinchandra Steels Pvt. Ltd, the appellant herein.

Contentions

Dr. Singhvi and Shri Ranjit Kumar, Learned Senior Counsel, argued that in view of the judgment in Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd, 2020 SCC OnLine SC 1025, irreversible steps have been taken in the winding up petition instituted and pending before the Bombay High Court, as a result of which Section 7 petition filed by SREI under the IBC would have to be held as non-maintainable. 

Further, the effect of Section 446 of the Companies Act, 1956 (which is equivalent to Section 279 of the Companies Act, 2013) says no suit or other legal proceeding can be initiated once there is admission of a winding up petition. 

Furthermore, it was submitted that there are gross mala fides in the present case as SREI was not only aware of the winding up petition before the Bombay High Court, but has also participated and filed its claim before the provisional liquidator. All this has been suppressed in the petition filed under Section 7 of the IBC. 

Shri Abhijeet Sinha, Learned Counsel appearing on behalf of SREI submitted that Section 7 proceeding under the IBC is an independent proceeding, which can be initiated at any time, even after a winding up order is made. With respect to the second contention, it was argued that Section 238 of the IBC, which contains a non-obstante clause, clearly comes to his rescue as, if there is any conflict between Section 446 of the Companies Act, 1956/Section 279 of the Companies Act, 2013 and the IBC, the IBC shall prevail. 

Observations

The Bench, pursuant to its decision, reiterated some fundamentals related to the Insolvency and Bankruptcy Code.

1. Referring Para 25 to 28 of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was observed, “IBC is a special statute dealing with revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail. Vis-à-vis the Companies Act, which is a general statute dealing with companies, including companies that are in the red, the IBC is not only a special statute which must prevail in the event of conflict, but has a non-obstante clause contained in Section 238, which makes it even clearer that in case of conflict, the provisions of the IBC will prevail.” [Additional Reference, on the same proposition was drawn from, Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills, (2008) 15 SCC 1, Madras Petrochem Ltd. v. BIFR, (2016) 4 SCC 1, Jaipur Metals & Electrics Employees Organisation v. Jaipur Metals & Electrics Ltd., (2019) 4 SCC 227 and Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725]
2. Crystallizing the finds of Action Ispat, Jaipur Metals, Forech and Kaledonia, the Bench noted, “… a petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company. Given the object sought to be achieved by the IBC, it is clear that only where a company in winding up is near corporate death that no transfer of the winding up proceeding would then take place to the NCLT to be tried as a proceeding under the IBC… It is, thus, not possible to accede to the argument on behalf of the Appellant that given Section 446 of the Companies Act, 1956 / Section 279 of the Companies Act, 2013, once a winding up petition is admitted, the winding up petition should trump any subsequent attempt at revival of the company through a Section 7 or Section 9 petition filed under the IBC.”  Provisionary understanding of Section 230 Companies Act, 2013 was also taken into account.
3. It is a settled law that a secured creditor stands outside the winding up process and can realise its security outside the scope of winding up proceedings; M.K. Ranganathan v. Government of Madras, (1955) 2 SCR 374. [Followed in Central Bank of India v. Elmot Engg. Co, (1994) 4 SCC 159, Industrial Credit and Investment Corporation v. Srinivas Agencies, (1996) 4 SCC 165 and Board of Trustees, Port of Mumbai v. Indian Oil Corporation, (1998) 4 SCC 302]
4. Arguments on suppression of winding up proceedings in a Section 7 petition before the NCLT, only to avoid moving a transfer application before the High Court have no bearing on the claim of the Respondent.
5. A discretionary jurisdiction under the fifth proviso to Section 434(1)(c) of the Companies Act, 2013 cannot prevail over the undoubted jurisdiction of the NCLT under the IBC once the parameters of Section 7 and other provisions of the IBC have been met.

Case Title: A. Navinchandra Steels v. SREI Equipment Finance Limited | Civil Appeal No. 4230-4234 of 2020