Supreme Court: Insolvency Proceedings Maintainable while Winding Up Petition Is Pending

Supreme Court: Insolvency Proceedings Maintainable while Winding Up Petition Is Pending

The Supreme Court (SC) in the case titled A. Navinchandra Steels Private Limited (Appellant) v. SREI Equipment Finance Limited (Respondent), held that a petition filed either under Section 7 or Section 9 of the Insolvency and Bankruptcy Code (Code) is an independent proceeding which is unaffected by winding up proceedings that may be filed against the same company.

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

An appeal was filed before the Top Court and the appellant contended that post admission of a winding up petition, no petition under Section 7 of the Code can be filed.

It was further urged that according to Section 446 of the Companies Act, 1956 (equivalent to Section 279 of the Companies Act, 2013) no suit or other legal proceeding can be preceded if the winding up petition is pending.

The Apex Court referred to the provisions of the Code and put reliance on the case of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 ["Swiss Ribbons"]. It stated that it is clear that the Code is a special statute that deals with the revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail.

The Court clarified that the Companies Act is a general statute dealing with companies, the Code 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 Code will prevail.

The bench disagreed with the arguments of the appellant and referred to Section 230(1) of the Companies Act and states that "What is clear by this Section is that a compromise or arrangement can also be entered into in an Insolvency 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 the revival of the corporate debtor through an infusion of new management."

The appellant raised another issue before the Court that the Respondents had has suppressed the winding up proceeding while initiating proceedings under Section 7 of the Code before the National Company Law Tribunal (NCLT).

The bench rejected the arguments of the appellant and stated, "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 based on the provisions contained in the Code."

The Court while dismissing the appeal further stated that "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 Code once the parameters of Section 7 and other provisions of the Code have been met."