Interplay between Insolvency and Winding Up
This article analyses the holdings of the Supreme Court which puts forth that Insolvency proceedings are maintainable even if a winding-up petition is pending against a corporate debtor.
Chapter 20 of the Companies Act 2013 defines the ‘Winding up’ clause which happens to be an essential element in the present dynamics of commercial transactions. Winding up refers to a process used to dissolve a firm. After the assets are sold, the liabilities are settled, and any remaining funds, if any, are divided among the shareholders or members according to their ownership stake in the business. The laws of the Companies Act of 2013 and the Insolvency and Bankruptcy Code of 2016 govern winding up proceedings. There are three modes of closure which are primitively removing or removing the company’s name, the Tribunal’s winding up under the 2013 Companies Act, or the company’s liquidation in accordance with the 2016 Insolvency and Bankruptcy Code.
Section 271 of the Companies Act, 2013 states circumstances in which a company may be wound up by the Tribunal.
- If the firm has determined that the Tribunal should wind it up through a special resolution if the business has violated India’s sovereignty and integrity, state security, cordial ties with other countries, public order, morality, or decency,
- If the Tribunal decides that the company’s affairs have been conducted fraudulently, the company was formed for fraudulent and unlawful purposes, or the individuals involved in its formation or management have engaged in fraud, misfeasance, or misconduct in connection therewith and that it is proper that the application be granted, it will be made by the Registrar or any other person authorized by the Central Government by notification under this Act,
- If the business failed to file its annual reports or financial statements with the Registrar for the five fiscal years that came before,
- If the Tribunal determines that winding up the company would be just and equitable.
One of the grounds for winding up under Section 271 of the Companies Act of 2013 was the ground for winding up known as “inability to pay debts.” But following the enactment of the IBC, 2016, the aforementioned ground was removed from the Companies Act, 2013, and is now solely covered by the IBC, 2016.
Consequently, under the IBC, 2016, a corporation will be subjected to a process known as the “Corporate Insolvency Resolution Process” (CIRP) if it cannot pay its debts and has defaulted by the minimum amount required. Either the entity itself or its creditors may submit the application. The entity (corporate debtor) will be attempted to be saved and revived. It can be observed after this analysis that there is an intricate relationship between IBC 2016 Act and the Companies Act, 2013 which puts forth a question of which law would supersede when conflicting. Such a stimulus is the given thesis on this paper which asks, in the event that a winding up petition is still pending before a High Court, can an application for the resolution/insolvency procedure of a corporation be submitted under the IBC, 2016. This question can be answered by analyzing A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited (2021) case.
The facts of the case are as follows: Appellate, A. Navinchandra Steels Pvt. Ltd., filed a winding-up petition with the Bombay High Court against M/s Shree Ram Urban Infrastructure Limited (“SRUIL” or “Respondent 2,” and the case was pending until this order dated March 1, 2021). SREI Equipment Finance Limited (also known as “Respondent 1”) filed a Section 7 application under the IBC before the NCLT in the meantime, and the NCLT admitted the application by order dated November 6, 2019. A Section 7 application is not maintainable while the same debtor company’s winding up proceedings are ongoing, according to Action Barter (“Respondent 3”), who was outraged by the aforementioned order and filed an appeal before the NCLAT to challenge the NCLT’s decision to admit SREI’s Section 7 petition.
The Appellant argued that irreversible actions have been taken in the winding up petition instituted and ongoing before the Bombay High Court, and as a result, the Section 7 petition filed by SREI under the IBC would have to be held as non-maintainable in light of the ruling in Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd, 2020. Additionally, once a winding-up petition is admitted, no lawsuit or other legal procedure can be started, according to Section 446 of the Companies Act, 1956 (which is equal to Section 279 of the Companies Act, 2013). Furthermore, it was argued that there was gross mala fide in the current case because SREI not only knew about the winding-up petition filed in the Bombay High Court but also took part and asserted its rights in front of the provisional liquidator. In the petition submitted under Section 7 of the IBC, all of this has been suppressed.
The Respondent advocated that the Section 7 case under the IBC is a separate proceeding that may be started at any time, even after a winding-up order has been issued. Regarding the second argument, it was made that the non-obstante clause in Section 238 of the IBC, states that the IBC shall take precedence over Section 446 of the Companies Act of 1956 and/or Section 279 of the Companies Act of 2013.
The Supreme Court analyzed the following cases to reach the conclusion. The first case was Swiss Ribbons (P) Ltd. v. Union of India wherein it was observed IBC will prevail not only because it is a special statute but also because it contains a non-obstante provision, Section 238, which makes it clear that in the case of conflict, the IBC will prevail. It has been noted that the Companies Act is a general statute for all companies, including those in red, whereas the IBC is a special statute that deals with the revival of companies in red.
In Allahabad Bank v. Canara Bank, it was held that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDB Act”), which is a particular statute, will take precedence over the Companies Act in the event of a conflict, according to the Supreme Court when analyzing the proposition of general law versus special laws. The RDB Act also contains a non-obstante clause that expressly excludes the provisions of the Companies Act. The Court came to the conclusion that the RDB Act is special legislation and shall supersede the general statute of the Companies by placing more weight on various prior High Court decisions that had similarly recognized the predominance of special law over public law.
Furthermore, it was observed that if there is a conflict between two special statutes, the later statute will take precedence if it contains a clause that gives it an overriding effect. State Industrial and Investment Corporation of Maharashtra Ltd. v. Maharashtra Tubes Ltd., the Court made the following observation in reliance on the following paragraph of the ruling:
“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 court took into account the decision in Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills, which determined that even though the State Financial Corporations Act of 1951 (“SFC Act”) was an earlier law, the proceedings under Section 29 of that law would take precedence over the Company Judge’s general authority to initiate winding-up proceedings under the Companies Act. In the context of proceedings under Section 29 of the SFC Act, it was stated in Rajasthan State Financial Corporation. v. Official Liquidator by a three-judge bench of this Court that:
“..(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.”
Similarly, with respect to the Transfer of winding-up proceedings to the NCLT under IBC, in Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., the Supreme Court 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 proceed from where they left off. The Supreme Court cited the amendment made under Section 434 (1) (c) in reaching this conclusion. The Court further noted that Section 238 of the Code would take precedence over Section 434 of the Companies Act in the event of a conflict between those provisions and those of the IBC.
Similarly, in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019), a winding-up petition was transferred to the NCLT to be treated as IBC proceedings. The Court found that Section 7 or 9 of the IBC are independent proceedings to be decided in accordance with the provisions of the Code. Furthermore, in Duncans Industries Ltd. v. AJ Agrochem, when addressing the conflict between CIRP proceedings under Section 9 of the Code and winding-up proceedings under Section 16-G(1)(c) of the Tea Act, 1953 (the Tea Act), which require the Central Government’s consent before initiating such proceedings, the Supreme Court held, citing the goal of the Code as being to ensure the revival of the corporate debtor and to protect it from coercion. In light of Section 238 of the Code, the Court decided that the IBC’s provisions would take precedence over the Tea Act and that the Central Government’s prior approval would not be necessary to begin CIRP proceedings under the Code.
Therefore, based on the above comprehensive analysis of the said cases, the court held that Proceedings under Section 7 of the Code are independent proceedings. The Supreme Court of India decided in the case of A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited, that a request for the start of a Corporate Insolvency Resolution Process (“CIRP”) under Section 7 or 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) is a separate action that is unrelated to any winding-up actions brought by the same company. The aforementioned ruling is a result of the National Company Appellate Tribunal’s judgement from February 7, 2020, as amended by an order from September 21, 2020. Following the admission of a winding-up petition filed by the same corporation, the appellate has disputed the maintainability of the Section 7 application under IBC. The bench while dismissing the appeal said:
“These arguments do not avail the Appellant for the simple reason that Section 7 is an independent proceeding, as has been held in a 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. Equally, it cannot be said that any subterfuge has been availed of for the same reason that Section 7 is an independent proceeding that stands by itself. As has been correctly pointed out by Shri Sinha, 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.”
OBSERVATIONS AND CONCLUSION
We draw the following conclusion after taking into account the provisions of the Companies Act of 1956, the Companies (Transfer of Pending Proceedings) Rules of 2016, and the rules of the IBC of 2016: Following are the many stages of the winding up procedure when IBC filing is possible:
- Applications under IBC, 2016 may be filed with NCLT without the High Court’s permission if they have been served on the respondent corporation and/or are pending before the High Court without an Order as of the filing date.
- With prior permission from the relevant High Court, an application under IBC, 2016 may be filed with NCLT if a winding-up order has been issued. Transitional regulations and the stay resulting from Section 446 of the Companies Act have no connection.
Various critiques opine that nothing should prevent a party from submitting a request for the resolution of a business for which winding-up proceedings have been commenced. Even in cases where an order has been made in this regard, asking the Court for authorization to proceed is merely a matter of protocol. This shouldn’t provide a challenge. There is no reason the court should not grant leave if OL has been appointed, a creditor goes to NCLT seeking a settlement, and as a result, goes to court to request leave. Naturally, the law always prefers restructuring as the first option and winding up as the last, even if the creditors determine collectively that the corporation should be resolved rather than wound up. If a leave of absence is denied, one may point to the SC as justification. No one can argue that ongoing cases should remain in court since the IBC’s stated goal was to remove deadwood from the system. Since most significant corporate defaulters have been in default for a while, it is doubtful that no creditor would have filed for winding up in these situations. Regardless of whether a winding-up petition has been filed against the corporate debtor, a creditor is still free to submit an application under sections 7, 8, and 9 of the IBC, 2016. The IBC provisions take effect as soon as the application is approved. According to Section 14 of the Code, no new winding-up petitions may be filed, and any winding-up petitions that have been filed and are ongoing before either forum (NCLT or High Court) will be stopped. The suspension lasts from the application’s admission date until the corporate bankruptcy resolution process is finished. Additionally, liquidation under the Code occurs in accordance with the Code’s provisions rather than the Companies Act if the resolution procedure under the Code results in one of the situations listed in section 33 of the IBC, 2016.
Written By: Tanvi Nimje