Application under S. 7 or S. 9 IBC is an independent proceeding unaffected by winding up proceedings that may be filed qua the same company; Supreme Court  

Supreme Court: The Division Bench of Rohinton Fali Nariman* and B.R. Gavai, JJ., addressed the instant appeal involving the question that whether an insolvency proceedings could be initiated after the winding up application had been admitted under the Companies Act. The Bench stated,

“…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.”

The Appellant was an operational creditor of Respondent 2, Shree Ram Urban Infrastructure Limited (SRUIL). A winding up petition was filed by the respondent 3 herein, Action Barter Pvt. Ltd. against SRUIL, stood admitted on 05.10.2016, due to failure of SRUIL and subsequently, the physical possession of the assets of the company was taken over by the provisional liquidator.

Meanwhile, Indiabulls, a secured creditor of the company, filed an application to realise its security outside such winding up proceeding, which had been allowed by the Company judge and the Provisional Liquidator was directed to handover possession of the Mortgaged Property of the company to Indiabulls. Though, it had been directed that Indiabulls should conduct the sale of the property in consultation with the Official Liquidator. The property was sold and the said sale was challenged by the provisional liquidator in the Bombay High Court, alleging that the conditions of the order were flouted, and that what was sold was much more than what was mortgaged to the secured creditor, and that too at a gross undervalue.  The said representation by the provisional liquidator is still pending in the Court.

Additionally, the respondent 1, SREI Equipment Finance Ltd. (SREI) filed a petition under Section 7 of the IBC before the NCLT, which petition was admitted by the NCLT. In the instant case the appellant was contesting that the petition under Section 7 of the IBC would have to be held to be non-maintainable that no suit or other legal proceeding can be initiated once there is admission of a winding up petition. The appellant argued that post admission of a winding up petition; no petition under Section 7 of the IBC could be filed. It was also contended that the fact that the company was under winding up had been suppressed in the petition filed under Section 7 of the IBC.

In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held 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.”

Relying on the decision in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549, the Bench stated, in a situation in which notice had been issued in a winding up petition the said petition could be transferred to the NCLT, wherein it would be treated as a proceeding under the IBC. The Bench stated, 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.

The Bench stated, it is settled law that a secured creditor stands outside the winding up and can realise its security dehors winding up proceedings. Relying on S. 230(1) of the Companies Act, 2013, the Bench expressed that a compromise or arrangement is admissible in law in an IBC proceeding if liquidation is ordered.

In Food Controller v. Cork, (1923) A.C. 647, it had been explained that;

“The phrase ‘outside the winding up’ is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say “the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgage is in winding up or not. I remain outside the winding up” and shall enforce my rights as mortgagee. This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say ‘I will prove in respect of my debt’. If so, he comes into the winding up”.

The Bench expressed, 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.

Once a winding up petition is admitted, the winding up petition should not trump any subsequent attempt at revival of the company through a Section 7 or Section 9 petition filed under the IBC.

Consequently, though no application for transfer of the winding up proceeding pending in the Bombay High Court has been filed, the High Court had itself, directed the provisional liquidator to hand over the records and assets of SRUIL to the resolution professional (IRP) in the Section 7 proceeding that is pending before the NCLT.

In the light of above, the Bench held that 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. Hence, the appeal was dismissed.

[A. Navinchandra Steels (P) Ltd. v. SREI Equipment Finance Ltd., 2021 SCC OnLine SC 149, decided on 01-03-2021]


Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice Rohinton Fali Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearance before the Court:

For the appellant: Sr. Adv. Abhishek Manu Singhvi and Sr. Adv. Ranjit Kumar,

For SREI: Adv. Abhijeet Sinha,

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