Insolvency Proceedings Maintainable Even If Winding Up Petition Is Pending Against Corporate Debtor: Supreme Court

The Supreme Court held that a petition either under Section 7 or Section 9 of the Insolvency and Bankruptcy Code is an independent proceeding which is unaffected by winding up proceedings that may be filed against the same company.

The bench comprising Justices RF Nariman and BR Gavai observed that a secured creditor stands outside the winding up and can realise its security de hors winding up proceedings.

In this appeal, the appellant's contention was that post admission of a winding up petition, no petition under Section 7 of the IBC can be filed. According to it, the effect of Section 446 of the Companies Act, 1956 (which is equivalent to Section 279 of the Companies Act, 2013) is that no suit or other legal proceeding can be initiated once there is admission of a winding up petition.

Referring to provisions of the IBC, the bench observed IBC will prevail over the other statutes. It said:

Given the object of the IBC as delineated in paragraphs 25 to 28 of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 ["Swiss Ribbons"], 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. 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.

The court said that it is not possible to accede to the argument that given Section 446 of the Companies Act, 1956 / Section 279 of the Companies Act, 2013, once a winding up petition is admitted, the winding up petition should trump any subsequent attempt at revival of the company through a Section 7 or Section 9 petition filed under the IBC. It said:

A conspectus of the aforesaid authorities would show that a petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company. Given the object sought to be achieved by the IBC, it is clear that only where a company in winding up is near corporate death that no transfer of the winding up proceeding would then take place to the NCLT to be tried as a proceeding under the IBC. Short of an irresistible conclusion that corporate death is inevitable, every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country. It is, thus,

Also, referring to Section 230(1) of the Companies Act, 2013, the bench said 

What is clear by this Section is that a compromise or arrangement can also be entered into in an IBC proceeding if liquidation is ordered. However, what is of importance is that under the Companies Act, it is only winding up that can be ordered, whereas under the IBC, the primary emphasis is on revival of the corporate debtor through infusion of a new management.

Another contention raised was that the SREI has suppressed the winding up proceeding in its application under Section 7 of the IBC before the NCLT and has resorted to Section 7 only as a subterfuge to avoid moving a transfer application before the High Court in 28 the pending winding up proceeding.

"These arguments do not avail the Appellant for the simple reason that Section 7 is an independent proceeding, as has been held in 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.", the bench said while dismissing the appeal.

Case:  A. Navinchandra Steels Private Limited vs. SREI Equipment Finance Limited [CIVIL APPEAL NOs.4230-4234 OF 2020]
Coram: Justices RF Nariman and BR Gavai
Counsel: Sr. Adv Abhishek Manu Singhvi and Sr. Adv Ranjit Kumar, Adv Abhijeet Sinha
Citation: LL 2021 SC 122

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