CIRP Under IBC Can Continue Independent Of Winding Up Petition Pending In High Court : SC [Read Judgment]

Corporate Insolvency Resolution Process(CIRP) under the Insolvency and Bankruptcy Code (IBC) can continue independent of any pending winding up process against the corporate debtor pending in the High Court under the Companies Act, held the Supreme Court in a judgment delivered on January 22 by a bench of Justice R F Nariman and Navin Sinha.

This came in the case Forech India Ltd vs Edelweiss Asset Reconstruction Co.Ltd, which was an appeal filed against the order of NCLAT refusing to terminate CIRP proceedings initiated by a financial creditor.

The appellant was an operational creditor, which had filed an application in the High Court to wind up the corporate debtor under Section 433(e) of the Companies Act, 2013 in 2014.

After the commencement of the IBC, the respondent, a financial creditor, filed application under Section 7 of the IBC against the corporate debtor, which was admitted by the NCLT. The appellant challenged before the NCLAT the admission of financial creditor's application, on the ground CIRP cannot be initiated when winding up proceedings were pending in HC. The NCLAT did not agree, and dismissed the appeal, holding that the application was maintainable as no winding up order was passed. Section 11 of IBC was cited by the NCLAT.

Against this, the appellant approached the SC. It submitted that notice was served on the corporate debtor in terms of Rule 26 of the Companies (Court) Rules. According to Section 434 of Companies Act, as amended by IBC, read with Rule 5 of the Companies (Transfer of Proceedings Rules) 2016,  winding up petitions under Section 433(e) will be transferred to NCLT only if notice of petition has not been served on the respondent as per Rule 26. Relying on this, the appellant contended that the petition could have been retained in the HC, as Rule 26 notice was served. 

The respondent contended that parallel proceedings in HC and under IBC cannot be permitted, and once the CIRP has been initiated, other proceedings should come to a stand still.

On examining the provisions of IBC, the bench concluded that CIRP was an independent process. The bench also noted that Section 434 was amended, adding a proviso to enable a party to seek transfer of winding up petition pending in HC to the NCLT. However, the NCLAT's reasoning based on Section 11(d) was found to be untenable by the SC.The Section barred a corporate debtor, against whom a liquidation order has been passed,from filing application under IBC.

"From a reading of this Section, it does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9 as the case may be, as has been held by the Appellate Tribunal. Hence, any reference to Section 11 in the context of the problem before us is wholly irrelevant", held the judgment authored by Justice Nariman.

But the NCLAT order was sustained on a different reasoning that IBC proceedings were independent.

"we decline to interfere with the ultimate order passed by the Appellate Tribunal because it is clear that the financial creditor's application which has been admitted by the Tribunal is clearly an independent proceeding which must be decided in accordance with the provisions of the Code", the bench said.

The Court however granted liberty to the appellant to seek transfer of the application in HC to NCLT under Section 434. If such transfer is allowed, the NCLT has to treat it as an application under Sectin 9 IBC, clarified the SC.

Judgments of Bombay HC approved

While disposing of the appeal, the SC recorded approval of two decisions of the Bombay High Court on the following points.

Rule 26 notice is a pre-admission notice :

The SC approved the Bombay HC judgment Ashok Commercial Enterprises vs. Parekh Aluminex Limited(2017), holding that Rule 26 notice was a pre-admission notice. The contrary view expressed by Madras High Court in M/s K K Sons Engineering v/s. Eason Reyrolle Ltd(2016) was disapproved.

We are of the view that Rules 26 and 27 clearly refer to a pre-admission scenario as is clear from a plain reading of Rules 26 and 27,which make it clear that the notice contained in Form No. 6 has to be served in not less than 14 days before the date of hearing. Hence, the expression "was admitted" in Form No. 6 only means that notice has been issued in the winding up petition which is then "fixed for hearing before the Company Judge" on a certain day. Thus, the Madras High Court view is plainly incorrect whereas the Bombay High Court view is correct in law.

Post-notice winding up proceeding in HC does not bar applicability of IBC

In PSL Limited vs. Jotun India Private Limited(2018), the Bombay HC held that the continuation of post-notice winding up proceeding in HC will not bar the applicability of IBC.

The HC had held :

The fact that post notice winding up petitions continue to be governed by the Companies Act, 1956, only means – that to those proceedings it will be the Companies Act, 1956 which will apply. It does not, however, mean that if, in a post-notice winding up petition a new proceeding is filed under IBC, and where orders are passed by NCLT, including under Section 14 of IBC, the consequences provided for under IBC will not apply to post notice proceeding, whatever their stage may be.

It  further held :

The mere fact that post notice winding up proceedings are to be "dealt with" in accordance with the provisions of the Companies Act, 1956, does not bar the applicability of the provisions of IBC in general to proceedings validly institutedunder IBC, [nor] does it mean that such proceeding can be suspended

The SC approved the judgment of the Bombay HC, observing : "We may hasten to add that the law declared by this judgment has our approval"

The judgment in Jaipur Metal and Electricals Employees Organization vs Jaipur Metal and Electricals Ltd, delivered by the very same bench last December, where it was held that winding up proceedings under SICA will continue in HC despite the commencement of IBC, was also referred by the SC while disposing of the appeal.

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