SC upholds Petition u/s 7 or 9 of IBC maintainable during pendency of winding-up proceeding

A Division Bench of the Hon’ble Supreme Court comprising of Justices Rohinton Fali Nariman and B. R. Gavai in A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited and Others, REED 2021 SC 03531 held that a petition either under Section 7 or Section 9 of Insolvency and Bankruptcy Code, 2016 (IBC) is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company. The brief background of this case, the issue involved and analysis of the ruling have been provided below:

BACKGROUND

A. Navinchandra Steels Pvt. Ltd (Appellant) was an Operational Creditor of M/s. Shree Ram Urban Infrastructure Limited (SRUIL)/ Respondent No.2, the company against which winding-up proceeding were pending before the Bombay High Court. Another winding-up petition was filed by M/s Action Barter Pvt. Ltd/ Respondent No.3 (Action Barter) against SRUIL wherein the provisional liquidator took over the physical possession of the assets of SRUIL. Further, during the same time, Indiabulls Housing Finance Ltd. (Indiabulls), a secured creditor of SRUIL also commenced proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) against SRUIL and on receiving the mortgaged property of SRUIL sold it to M/s. Honest Shelters Pvt. Ltd/ Respondent No.4.

During the pendency of appeal against the above matters, SREI Equipment Finance Limited (SREI)/ Respondent No.1 filed an application under Section 7 for commencement of Corporate Insolvency Resolution Process in relation to SRUIL, which was admitted by National Company Law Tribunal and later upheld by National Company Law Appellate Tribunal (NCLAT). Aggrieved by the NCLAT’s verdict of admitting Section 7 IBC application initiated by the SREI against SRUIL during the pendency of winding up proceedings, the Appellant filed an Appeal before the Supreme Court (SC) primarily on the ground that during the pendency of winding up proceedings, Section 7 IBC Application against the same debtor company is not maintainable.

ISSUE

Whether Application under Section 7 of IBC is maintainable during pendency of winding up proceedings?

ANALYSIS

The SC noted that given the objective of the IBC as delineated in Swiss Ribbons (P) Ltd. v. Union of India, REED 2019 SC 01504, it is clear that the 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. Further, 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.

Further, a conjoined reading of SC’s judgment in Forech (India) Ltd. v Edelweiss Assets Reconstruction Co. Ltd., REED 2019 SC 01501. The Supreme Court made the following observations in this case:

1) That Section 279 of the Companies Act, 2013 provides that no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, by or against the company, except with the permission of the NCLT.

2) Further, Section 238 of IBC provides that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

3) That the object of the Companies Act is to wind up a company’s affairs, whereas, under the IBC, the main object is revival of the corporate debtor through infusion of a new management.

Thus, based on the aforesaid observations, the Apex Court held that Section 7 IBC proceeding is an independent proceeding and thus, will not be affected by the pending Winding Up Proceedings. Further, the Supreme Court dismissed the Appeal and also lifted the Interim Stay on NCLT Section 7 IBC Proceedings.