Navinchandra Steels Pvt. Ltd. v. SREI Equipment Finance Ltd. & Ors., (2021) SCC Online SC 149

Aug 31, 2021

6 min read

Aditi Jain*

Facts

The Appellant, Navinchandra Steels Pvt Limited is the operational creditor of Shree Ram Urban Infrastructure Limited (‘SRUIL’). The appellant filed a winding up petition against SRUIL which was decreed on 07.10.2015 .The Division stayed the order and directed SRUIL to deposit 14 crores or furnish bank guarantee failing which SRUIL will have to vacate premises. Another winding up petition was filed under the Bombay High Court (‘BHC’) which was pending till the said order.

Subsequently, winding up petition was filed by M/s Action Barter Private Limited (‘Action Barter’) against SRUIL due to non-payment of deposit, which subsequently lead to possession of assets of the company by the provisional liquidator.

During the pendency of the above petition, IndiaBulls Housing Finance Ltd (‘IndiaBulls’) filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The said application was dismissed by the NCLT on the ground that a winding up petition is already being admitted by the BHC. Subsequent appeal to the NCLAT was dismissed in 2018. However a Civil appeal from the NCLAT order was admitted and pending till this order. This resulted in an order dated 07.02.19 that directed the provisional liquidator to handover possession of the property to the secured creditor under section 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [“SARFAESI Act”]. The sale was to be conducted in consultation with the official liquidator and the sale proceeds should be deposited as and when directed. The property was sold to M/s. Honest Shelters Pvt. Ltd.( Honest Shelters) and sale deeds were issued which were later questioned by SRUIL and official liquidator.

Meanwhile, SRERI Equipment Finance Ltd (‘SRERI’), filed an application for initiating a Corporate Insolvency Resolution Process (CIRP) proceeding under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) which was admitted on 06.11.2019. an appeal was filed by Action Barter against the sid NCLT order which was dismissed citing Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549 and stated that, “ The case of the Appellant is covered by the decision of the Hon’ble Supreme Court in Forech India Ltd (supra), therefore, we hold that the Application under Section 7 of the I&B Code filed by the Respondent – SREI Equipment Finance Limited is not maintainable”

However, by order dated 29.09.2020 the NCLAT corrected the order by deleting the word “not” that occurred in the above paragraph. Pursuant, to which an appeal was filed before the SC which was withdrawn at a later stage due to reconciliation between Housing Shelters and Action Barter. Subsequently, an appeal was also filled by the appellant which is the present matter.

Issue

Whether a CIRP can be initiated irrespective of an ongoing winding up petition?

Decision

The SC held that a petition under Section 7 or 9 of the IBC is an independent proceeding and is not affected by any pending winding up proceedings. Relying on the object of the code through various cases, the Court held that where a company is nearing corporate death in a winding up then the same needs to be transferred to the IBC. The Court observed that IBC is a special provision and deals with revival of the companies and a winding up can be only resorted if the attempt in reviving a company fails.

Furthermore, reliance was placed on Section 279 of Companies Act, 2013 (similar to section 446 of Companies Act, 1956) (hereinafter referred to as ‘Act’)and held that it cannot be construed that once a winding petition has been admitted, other ways of revival cannot be initiated. The appeal was dismissed as Section 238 of the IBC has an overriding effect and in case of any conflict IBC will prevail over the winding up proceedings in the Act.

Analysis

The CIRP is a process introduced by the IBC to ensure that in case of any defaults by the corporate debtor, efforts are made to ensure that the company is revived. The present case has rightly analysed the object and the purpose of the IBC and placed reliance on Swiss Ribbons, to state that ‘IBC is a special law that aims to revive a company’.[i]It further held that a winding up should be initiated only when all the efforts to revive a company went in vain.[ii] However, there are circumstances where the winding up proceedings have been commenced and the ambiguity existed whether an application for the CIRP can be initiated in such circumstance.

Winding up proceedings under the Act is an independent proceeding than the IBC and the case by analyzing the object of the IBC have relied on Forech (India) Ltd.[iii]Further reliance is placed on Jotun India Pvt Ltd, wherein the BHC held that admission of winding up proceedings does not bar the filing of a CIRP application under the Code. They were of the opinion that till the time, the final order of winding up is not passed the application can be entertained by IBC.[iv]

In this regard, Section 11, IBC also does not explicitly put a bar on initiate a proceeding for CIRP where the liquidating proceedings have been initiated by the relevant adjudicating authority. The present case relied on the discussions pertaining to the anomaly that exists between Section 434, Act for transfer of winding up proceedings.

The Companies (Transfer of Pending Proceedings) Rules, 2016 (‘Transfer Rules’) allows for the transfer of winding up proceedings to the NCLT based on territorial jurisdiction in situations where the corporate debtor is unable to pay the debt and in cases where the petition is not served along with Rule 26, Companies (Court) Rules, 1959.[v] In this regard, the rules provide for filing a fresh petition under Sections 7 or 8 or 9 of the Code as required. Reliance is placed on Kaledonia Jute & Fibres Pvt. Ltd.,[vi]wherein the Court held that in a winding up proceedings all creditors will be party in rem and therefore a secured creditor can transfer the winding up petition to NCLT. This power however is discretionary in nature and In Jaipur Metals, the Court held that the said discretionary powers needs to be interpreted in light of the object of the IBC and has nothing to do with the transfer of pending winding up proceedings by the NCLT.[vii]Thereby indicating that there exists no bar in the application of the IBC despite the pending winding up proceedings.

The case also dealt with circumstances where such winding up proceeding can be considered final and stated that only in situations where irreversible steps have been taken during the winding up petition only then the company should proceed with winding up.[viii] In this regard, reliance is placed on Action Ispat,[ix]wherein the case deals with Section 290,Act to state that till the time actual sales of immovable property or movable property is done the winding up proceeding is reversible and would warrant a Company court stay in the transfer process. The present case has very well acknowledged the said position of law as the three sale deeds are already contested by SRUIL and the official liquidator. The case has thus held that if the sale deeds are held to be invalid then the assets remain in the hand of the liquidator.[x]

Further to develop on the discussions, reliance is placed on the Law Committee report wherein it was stated that in situations where the case cannot be directly transferred pursuant to the Transfer rules, then Court has the right to initiate such CIRP. The present case also deals with a similar situation as the Transfer rules did not account for such transfer and rather BHC itself initiated the CIRP. Thereby applying the same jurisprudence, the said petition under section 7 is maintainable irrespective of the pending winding up petition.

In order to address the overlapping issue, the Supreme Court went on to discuss the object and purpose of the Code which is revival of company and continuation of corporate debtor[xi]. The case also noted that IBC is a special law[xii]and hence precedence will be given over general law. Further distinction was also made in cases where both the legislations are specific law, then the subsequent enactment of legislation will be given precedence.[xiii]The case takes into account the larger interest of the public to state the importance of revival.

Conclusion

To conclude, the case has provided much-needed clarity with respect to the ambiguity that existed regarding inconsistency of CIRP proceedings vis a vis Winding up proceedings under the Act and the IBC. Reliance is placed on the non-obstante clause under Section 238, IBC to hold that a special law will always prevail over a general law and the object of the IBC in the first place is to create a single separate law for Insolvency and Bankruptcy.

*The author is a fourth-year student at Jindal Global University, Sonipat.

[i]Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17

[ii] Ibid.

[iii]Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549

[iv]Jotun India Pvt. Ltd. v. PSL Ltd MANU/MH/0005/2018

[v]The Companies (Transfer of Pending Proceedings) Rules, 2016 (’Transfer Rules’)

[vi]Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd., 2020 SCC OnLine SC 943

[vii]Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227

[viii] Id 1.

[ix]Action Ispat and Power Pvt. Ltd. v. ShyamMetalics and Energy Ltd., 2020 SCC OnLine SC 1025

[x] Id 1.

[xi]Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725