CIRP Is Independent And Not Affected By Winding-Up Proceedings

A CASE STUDY OF A. NAVINCHANDRA STEELS (P) LTD. V. SREI EQUIPMENT FINANCE LTD.
CIRP Is Independent And Not Affected By Winding-Up Proceedings
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CIRP INITIATED UNDER THE CODE ARE INDEPENDENT AND NOT AFFECTED BY WINDING-UP PROCEEDINGS UNDER COMPANIES ACT- A CASE STUDY OF A. NAVINCHANDRA STEELS (P) LTD. V. SREI EQUIPMENT FINANCE LTD.

Introduction

Winding-up is a proceeding through which a company is dissolved and its assets are disposed of, liabilities are paid and distributed among the shareholders.

The Companies Act, 2013 and the IBC, 2016, both statutes contain provisions regarding the winding-up of a company. The power of winding-up under the supervision of the Court is still under the High Court.

Proceedings of winding-up under Companies Act v. IBC

Definition: The IBC changed the definition of ‘winding-up’ with new insertion was made to mean winding-up under the Companies Act or liquidation under the Code.

Modes of winding-up:Under the Companies Act, 2013, winding-up can be voluntary or through

Tribunal. Section 270 of the Companies Act, 2013 i.e., the modes of winding-up, has been deleted after the enforcement of this Code. Section 304 of the Companies Act, 2013 dealt with the circumstances of voluntarily winding-up now omitted by the Code.

Process of winding-up: It initiates against a company when there is an inability to pay. Section 59 of the Code provided that only a corporate person can initiate voluntary liquidation that has not committed any default.

The winding-up procedure was adjudicated before High Courts, while NCLTs is the adjudicating authority under the Code.

Every company that proposes to wind up is required to abide by the Code.

CIRP Process under the Code

The Code introduces the ‘corporate insolvency resolution process’ [CIRP], which allows defaulting debtors a moratorium period to revive their company.

The Code renovates the procedure mentioned under the Companies Act that provided for winding-up of a company due to inability to pay debts.

Section 7 of the Code allows a financial creditor to file for initiating the corporate insolvency resolution process against a corporate debtor. Section 9 provides for the application of insolvency by an operational creditor.

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

Facts of the case

1. The appellant was an operational creditor of Respondent 2, Shree Ram Urban Infrastructure Limited (SRUIL).

2. Respondent 3 herein, i.e., Action Barter Pvt. Ltd. filed a winding-up petitionagainst SRUIL, that was admitted on 05.10.2016, and subsequently, the physical possession of the assets of the company was taken over by the provisional liquidator.

3. The secured creditor of the company i.e. Indiabulls, in the meanwhile, applied to realize its security outside such winding-up proceeding, and the same was allowed by the Company Judge. The Judge directed the Provisional Liquidator to hand over the possession of the Mortgaged Property of the company to the secured creditor.

4. It was further directed that Indiabulls should conduct the sale of the property in consultation with the Official Liquidator.The property was sold to Respondent No.4 i.e. to M/s. Honest Shelters Pvt. Ltd. herein, for Rs 705 crore.

5. The sale was challenged by the provisional liquidator in the High Court of Bombay. The challenge was based on the contentions that the conditions of the order were contravened. It was further contended that the property was sold at a gross undervalue. The said representation still pending in the Court.

6. In the meantime, a petition was filed by Respondent 1 i.e. SREI Equipment Finance Ltd. (SREI) under Section 7 of theIBC before the Adjudicating Authority/ National Company Law Tribunal (NCLT) and the said petition was admitted by the Tribunal by its order dated 6th November 2019.

7. An appeal was filed by the action barter against the order dated 6th November 2019 of the adjudicating authority before the National Company Law Appellate Tribunal (NCLAT) that dismissed the appeal by its order dated 7th February 2020.

8. Then an appeal was filed before the Apex Court against the order dated 7th February 2021 passed by the appellate tribunal.

Cases Referred

i. In Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549,the Supreme Court held that the CIRP is an independent proceeding that must be decided as per the IBC. It would not interfere with the order passed by the Appellate Tribunal dismissing the appeal and granted liberty to the appellant to apply under the proviso to Section 434 of the Companies Act, 2013, to transfer the winding-up proceeding pending before the High Court of Delhi to the NCLT, which could then be treated as a proceeding under Section 9 of the Code.

ii. In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17- The Court held that the Code is a special statute that dealt with the revival of companies and winding-up only being resorted to in case all attempts of revival fail. It was further clarified that the Companies Act, is not a special statute and it is a general statute. Hence, the Code is a special statute and it must prevail in the event of a conflict.

Issue before the Supreme Court

Whether a financial creditor can invoke provisions of the Code while the winding-up procedure is pending under the Companies Act, 2013?

Reliance placed by the Supreme Court

The Apex Court placed reliance on the judgment of the case Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549- The Court concluded that when a 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 Code.

Observations of the Supreme Court

1. An independent proceeding that is unaffected by winding-up proceedings can be initiated under the Code regarding the same company.

2. A secured creditor stands outside the winding-up and can realize its security dehors winding-up proceedings.

3. Relying on Section 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.

Decision of the Supreme Court

a. The Court issued notice and directed the parties to maintain status-quo qua the mortgaged property and also stayed further proceedings before the Appellant Tribunal.

b. The Apex Court stated that a petition either under Section 7 or Section 9 of the IBC is an independent proceeding that is unaffected by winding-up proceedings under the Companies Act, 2013, that may be filed by the same company.

Conclusion

The decision of the Supreme Court as discussed above may be interpreted to lead to the following conclusions-

o Section(s) 7 and 9 of the IBC are independent proceedings in nature and the proceedings of winding-up under the Companies Act, 2013, does not affect the proceedings initiated under the Code.

o The object of the Code is clear that a company that is undergoing winding-up is near to corporate death and hence transfer of the winding-up proceeding would then take place to the NCLT to be tried as a proceeding under the Code.

o In case of a corporate death every effort should be made to save the debtor that includes the workmen of the corporate debtor, and its creditors.

o Once a winding-up petition is admitted then a subsequent petition should not be filed on revival of the company through Section(s) 7 and 9 of the Code.

References

1. https://thelawbrigade.com/wp-content/uploads/2019/05/Nisha-Dhillon.pdf2. Referred to the judgment copy of Supreme Court in A. Navinchandra Steels (P) Ltd. v. SREI Equipment Finance Ltd.3. https://www.scconline.com/blog/post/2021/04/01/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/

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