This article has been written by Pragya Bajpai pursuing the Certificate Course in NCLT Litigation from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
In the present judgement, the Hon’ble Supreme Court of India (“Supreme Court”) held that an application for initiation of Corporate Insolvency Resolution Process (“CIRP”) under Section 7 or 9 of the Insolvency and Bankruptcy Code, 2016(“IBC” or “Code”) to be independent proceedings which shall remain unaffected by the winding-up proceedings filed by the same company. The aforesaid judgement arises out of the judgement of the National Company Appellate Tribunal dated 07.02.2020, as corrected by order dated 21.09.2020. The Appellate hereunder has contested the maintainability of the Section 7 application under IBC, once there has been an admission of a winding-up petition filed by the same company.
Factual matrix of the case
- The Appellate i.e. A. Navinchandra Steels Pvt. Ltd initiated winding up proceedings against M/s Shree Ram Urban Infrastructure Limited (“SRUIL” or “Respondent 2”) before the Bombay High Court and the same was pending till this order dated, 1st March, 2021.
- Meanwhile, SREI Equipment Finance Limited (“SREI” or “Respondent 1”) filed a Section 7 application under IBC before the NCLT which was admitted by the NCLT by an order dated 06.11.2019.
- Aggrieved by the aforesaid order, Action Barter (“Respondent 3”) filed an appeal before the NCLAT, disputing the order of the NCLT admitting petition under Section 7 of Code filed by SREI on the ground that a Section 7 application is not maintainable during the pendency of winding up proceedings initiated by the same debtor company.
- The NCLAT by the judgement dated 07.02.2020, as corrected by order dated 21.09.2020 dismissed the appeal of Respondent 3 while referring to the judgement of the Forech India Ltd v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549 (hereinafter referred as “Forech”) thereby upholding the maintainability of Section 7 application under the Code and directed the Appellate to move before the Bombay High Court concerning the pending winding-up petition before the Bombay High Court.
- Thereafter, on 08.10.2020, Action Barter filed an appeal against the aforesaid order of the NCLAT before the Supreme Court wherein the Supreme Court directed the parties to maintain a status quo on the mortgaged property and stayed further proceedings before the NCLAT. Similarly, by an order dated 18.12.2020, the Supreme Court stayed further proceedings before the NCLT in an appeal filed by the Appellant on 09.12.2020.
- Action Barter withdrew its appeal filed before the Supreme Court, pursuant to a settlement between him and the purchaser of the mortgaged property, Honest Shelters; leaving the only surviving appeal before this Court that has been filed by A. Navinchandra Steels Pvt. Ltd.
The issue decided by the Supreme Court
Issue before the court
The issue for consideration before the Supreme Court here is whether the CIRP proceedings under the IBC override the liquidation proceedings under the Companies Act, 2013 (“Companies Act”)?
The Supreme Court while placing reliance on various earlier judicial precedents has made some important observations concerning the maintainability of CIRP proceedings during the pendency of winding up proceedings before the Company Court:
- IBC is a special statute and shall prevail in case of conflict by virtue of Section 238 of the Code
The Court relied on paragraphs 25 to 28 of its judgement of Swiss Ribbons (P) Ltd. v. Union of India, observed that IBC is a special statute that deals with revival of companies in red whereas the Companies Act is a general statute for all companies including companies that are in red, therefore, IBC will prevail not only for being a special statute but also because it contains a non-obstante provision i.e. Section 238, which makes it clear that in case of conflict the IBC will prevail.
- Special Law v. General Law
While analysing the proposition of general law vis-a-vis special laws, the Supreme Court referring to the judgement of Allahabad Bank v. Canara Bank, wherein the Court held that in case of conflict between a special statute i.e. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDB Act”) and a general statute of Companies Act; the special statute i.e. the RDB Act will prevail which also has a non-obstante clause that clearly excludes the provisions of Companies Act in case of conflict. Placing further emphasis on some other High Court judgements that had similarly held the prevalence of special law over general law, the Court concluded that the RDB Act is a special statute and shall override the general statute of the Companies Act.
- Special Law v Special Law
In a situation when there is an inconsistency between two special statutes, then in such a case, the later statute shall prevail if it has a provision that gives it an overriding effect. The Court observed while placing reliance on the following paragraph of the judgement in the case of Maharashtra Tubes Ltd. v. State Industrial and Investment Corpn. of Maharashtra Ltd, which reads as follows:
“1985 Act being a subsequent enactment, the non-obstante clause therein would ordinarily prevail over the non-obstante clause in Section 46-B of the 1951 Act unless it is found that the 1985 Act is a general statute and the 1951 Act is a special one”. (SCC p. 157, para 9)
The judgement also took note of the judgement of Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills, wherein it was held that even though the State Financial Corporations Act, 1951 [“SFC Act”] was an earlier Act; the proceedings under Section 29 of the 1951 Act it shall prevail over the general powers of the Company Judge of winding up proceedings under the Companies Act. A similar view was reiterated by a three-Judge Bench of this Court in Rajasthan State Financial Corpn. v. Official Liquidator wherein in the context of proceedings under Section 29 of the SFC Act, it was stated:
“..(iii) If a financial corporation acting under Section 29 of the SFC Act seeks to sell or otherwise transfer the assets of a debtor company-in-liquidation, the said power could be exercised by it only after obtaining the appropriate permission from the Company Court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution thereof among the creditors in terms of Section 529-A and Section 529 of the Companies Act.”
- When both special laws contain a non-obstante clause
Observing the ruling of the court in the case of Madras Petrochem Ltd. v. BIFR, wherein the Court has held that the predecessor statute to the IBC i.e. the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) shall prevail over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) to the extent of inconsistency therewith. The Court held that the SICA shall prevail in all situations when there is an earlier enactment with a similar non-obstante clause to the SICA whereas, in case of a later enactment with a similar non-obstante clause, the SICA shall prevail only in situations where the reach of the non-obstante clause in the later Act is limited. Further, the Court held the prevalence of SARFAESI Act over SICA because the framers of the SARFAESI Act intend to cover SICA by the non-obstante clause of Section 35 of the SARFAESI Act and not by the exception under Section 37 of the SARFAESI Act which rules out mentioning of SICA while stating that the SARFAESI Act is in addition and not in derogation of the Acts named under the Section.
- Transfer of winding-up proceedings to the NCLT under IBC
In Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd. [“Jaipur Metals”], the Supreme Court, referring to the amendment made under Section 434 (1) (c) held that a party to winding up proceedings pending before the High Court can file an application for transfer of such proceedings to NCLT under the IBC and the proceedings before the NCLT will continue from where they left off. The Court further observed that in case of inconsistency between Section 434 of the Companies Act and the provisions of the IBC, the latter would prevail, referring to the overriding effect of Section 238 of the Code.
Similarly, in the case of, Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549 [“Forech”] winding-up petition was transferred to the NCLT to be treated as proceedings under IBC wherein it was held by the Court that Section 7 or 9 of the IBC are independent proceedings to be decided as per the provisions of the Code. In another judgement of Duncans Industries Ltd. v. AJ Agrochem, the Supreme Court while dealing with the conflict between winding-up proceedings under Section 16-G(1)(c) of the Tea Act, 1953 (Tea Act) which requires the consent of the Central Government before initiation of such proceedings and CIRP proceedings under Section 9 of the Code, held, while making reference to the objective of Code as i.e. to ensure the revival of the corporate debtor and to protect it from corporate death; the CIRP proceedings, therefore, cannot be equated with winding up proceedings. The Court held that the provisions of the IBC will have an overriding effect over the Tea Act considering Section 238 of the Code and that no prior consent of the Central Government would be required for initiation of CIRP proceedings under the Code.
- Transfer of winding up proceedings to the NCLT after the winding-up order has been passed by the Company Court
The Supreme Court held in Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd., 2020 SCC OnLine SC 943 [“Kaledonia”], held that the winding-up proceedings are proceedings in rem, therefore, a secured creditor despite being a non-petitioner to the original winding up proceedings is a party to such proceedings and can therefore file an application under the fifth proviso to Section 434(1)(c) of the Companies Act to transfer such proceedings to the NCLT for initiation of CIRP under the IBC.
Thereafter the Supreme Court, in the case of Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd. [“Action Ispat”], referring to the judgements in Jaipur Metals, Forech, and Kaledonia and the winding-up provisions of the Companies Act, made a conclusive position as to transfer of winding up proceedings to the NCLT in the following manner:
i. Winding up of companies to be transferred to NCLT at a stage as may be prescribed by the Central Government.
ii. According to Rule 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules, 2016”), proceedings at the pre-stage of notice stand are compulsorily transferred to the NCLT.
iii. Thereafter, via the introduction of the 5th proviso to section 434(1)(c), the transfer of winding up proceedings is not restricted to any particular stage of such proceedings as held by the Supreme Court in the Kaledonia case.
iv. Lastly, the Court discussed how the Company Court is to exercise its discretion to transfer such proceedings to the NCLT wherein the Court has held that in a case where the proceedings are not compulsorily transferable to the NCLT i.e. post admission of winding up proceedings and after the assets of the company are taken over by the Company Liquidator, the Company Court can exercise the discretion to transfer such proceedings to the NCLT until no actual sales of immovable or movable properties has taken place and the winding-up proceedings have not reached a stage where it would be irreversible to set the clock back then in such a case, a transfer can be made.
Making observations of the judgement of Action Ispat, the Court has held that in the present case, no irretrievable action has been made.
- Stay of suits on admission of winding up proceedings under Section 279 of the Companies Act
The argument made by the counsels of the Appellate regarding stay of suit or any other legal proceedings once there has been admission of winding up petition under Section 279 of the Companies Act was rejected by this Court given the proceedings under Section 7 or 9 of the Code are independent proceedings and they shall remain unaffected by the winding up proceedings filed by the same company. The object of the IBC is to pull the company out of the red whereas the Companies Act aims at winding up the affairs of the company, therefore, every effort should be made to revive the company in the larger public interest. Therefore, the efforts made to revive the company under Section 7 or 9 of the Code shall trump the winding up proceedings and any stay on such proceedings will be against the object of the IBC that is to revive the corporate debtor through infusion of new management.
- A secured creditor stands outside the winding up proceedings
Placing reliance in the judgment of M.K. Ranganathan v. Govt. of Madras, (1955) 2 SCR 374, wherein the Court has held that a secured creditor is outside the winding-up proceedings and can realise his security without the leave of the Company Court and if the creditor considers to file a suit or take other legal proceedings for the realisation of his security only then he shall be bound under Section 231 of the Companies Act to take leave from the winding up Court. Considering the facts of the present case regarding realisation of security outside the winding up proceedings by the secured creditor of SRUIL i.e. Indiabulls; the Bombay High Court has already by order dated 28.11.2019 and 23.01.2020, directed the provisional liquidator to hand over the records and assets of SRUIL to the IRP in the Section 7 proceeding that is pending before the NCLT.
- Proceedings under Section 7 of the Code are independent proceedings
Lastly, this Court held that the CIRP proceedings under Section 7 of the Code are independent proceedings to be decided by the provisions of the Code and therefore, the argument of the Appellant that the initiation of the CIRP proceedings is to avail subterfuge to the winding-up proceedings stands invalid as the same shall have no effect on the CIRP proceedings. For the same reasons, the discretionary jurisdiction of the NCLT under the fifth proviso to Section 434(1)(c) of the Companies Act shall not prevail over the jurisdiction of NCLT while deciding a Section 7 application under the Code.
In conclusion, the Supreme Court has declared by its judgment in the present case that the proceedings under Section 7 or 9 of the Code are independent proceedings and shall remain unaffected by the winding-up proceedings of the Companies Act. Thereby, this Court has dismissed the appeal and also vacated the stay order passed by the Court on 18.12.2020.
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