Supreme Court clarifies the interplay between Winding-Up Petitions and IBC Proceedings: Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd. (22 January 2019)

Date of the Judgment: 22 January 2019

Citation: 2019 INSC 49

Judges: Rohinton F. Nariman, J., Navin Sinha, J.

Can a winding-up petition filed under the Companies Act, 1956, continue when insolvency proceedings have been initiated under the Insolvency and Bankruptcy Code, 2016 (IBC)? The Supreme Court addressed this crucial question in a recent judgment, clarifying the priority of the IBC over older winding-up proceedings. This case highlights the legislative intent to prioritize the resolution of corporate insolvency through the IBC framework. The judgment was authored by Justice Rohinton F. Nariman, with Justice Navin Sinha concurring.

Case Background

The case involves a winding-up petition filed by Forech India Ltd. (the appellant) against Respondent No. 2-Company on 10 January 2014, before the High Court of Delhi, alleging inability to pay dues under Section 433(e) of the Companies Act, 1956. The High Court had issued a notice in this petition on 20 January 2014. The appellant contended that the debt was admitted by the company.

Subsequently, on 14 July 2015, the company made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985, which the appellant claims abated on 11 December 2016. Another operational creditor, SKF India Ltd., filed an application under Section 9 of the IBC against the same company, which was later withdrawn to pursue a winding-up petition in the High Court.

Meanwhile, Edelweiss Assets Reconstruction Co. Ltd. (Respondent No. 1), a financial creditor, initiated insolvency proceedings against the same corporate debtor under Section 7 of the IBC in May/June 2017. This petition was admitted by the National Company Law Tribunal (NCLT) on 7 August 2017. The appellant’s appeal against this order was dismissed by the Appellate Tribunal, which held that since there was no winding-up order by the High Court, the financial creditor’s petition was maintainable.

Timeline:

Legal Framework

The Supreme Court examined several key legal provisions:

• Section 433(e) of the Companies Act, 1956: This provision allows for the winding up of a company if it is unable to pay its debts. The appellant’s original winding-up petition was filed under this section.
• Section 434 of the Companies Act, 2013: This section deals with the transfer of pending proceedings. It was amended multiple times, particularly by the Eleventh Schedule of the IBC and subsequent notifications. The amendments addressed the transfer of winding-up proceedings from High Courts to the NCLT. The court specifically noted the amendments of 15 November 2016, effective from 1 December 2016, and the substitution of the section on 17 August 2018.
• Section 255 of the IBC: This section mandates amendments to the Companies Act, 2013, as specified in the Eleventh Schedule of the IBC.
• Section 238 of the IBC: This section provides that the provisions of the IBC shall override any other law inconsistent with it. The court relied on this section to prioritize IBC proceedings over winding-up petitions.
• Section 11 of the IBC: This section specifies who is not entitled to initiate corporate insolvency resolution process. Specifically, Section 11(d) states that a corporate debtor in respect of whom a liquidation order has been made cannot initiate such proceedings.
• Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016: This rule, as amended, deals with the transfer of winding-up petitions to the NCLT. The court examined the original rule and its subsequent amendment on 29 June 2017.
• Rules 26 and 27 of the Companies (Court) Rules, 1959: These rules govern the service of petitions and notices in winding-up proceedings. The court analyzed the meaning of “notice” under these rules.

The Court noted that the Eleventh Schedule to the Code amended the Companies Act, 2013, with effect from 1 December 2016. Section 434 of the Companies Act, 2013 was substituted to provide for the transfer of pending proceedings, including winding-up proceedings, to the Tribunal (NCLT). The Court emphasized that the amendments to Section 434 were part of the Companies Act, 2013, and any inconsistency with the IBC would be overridden by the IBC.

Arguments

Appellant’s Submissions:

• The appellant argued that their winding-up petition, filed in 2014, should continue in the High Court as notice under Rule 26 of the Companies (Court) Rules, 1959, had been served prior to the commencement of the IBC. The appellant relied on Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016, to support their contention that their winding up petition should continue.
• The appellant contended that the winding up proceedings before the High Court should take precedence over the insolvency proceedings initiated under the IBC.

Respondent’s Submissions:

• The respondent argued that the IBC proceedings, initiated under Section 7, are independent and must reach their logical conclusion without being hampered by any pending winding-up petition in the High Court.
• The respondent emphasized that the primary objective of the IBC is to resuscitate corporate debtors in financial distress. They argued that winding-up petitions in the High Court should not impede the IBC process.
• The respondent relied on Section 238 of the IBC, stating that the provisions of the IBC override any inconsistent laws.
• The respondent also referred to judgments supporting the view that IBC proceedings are independent and should not be affected by pending winding-up petitions.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether a winding-up petition filed in the High Court under the Companies Act, 1956, should continue when insolvency proceedings have been initiated under the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Whether the service of notice under Rule 26 of the Companies (Court) Rules, 1959, in a winding-up petition, affects the transfer of such petitions to the NCLT under the IBC.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Ashok Commercial Enterprises vs. Parekh Aluminex Limited, (2017) 4 Bom. CR 653*: The Bombay High Court’s view that the notice under Rule 26 is a pre-admission notice was approved by the Supreme Court.
• M/s. M.K. & Sons Engineering v/s. Eason Reyrolle Ltd. in CP/364/2016*: The Madras High Court’s view that the notice under Rule 26 is a post-admission notice was overruled by the Supreme Court.
• Jaipur Metals & Electricals Employees Organization Through General Secretary Mr. Tej Ram Meena vs. Jaipur Metals & Electricals Ltd. Through its Managing Director &Ors.*: This judgment was referred to by the Supreme Court to highlight the statutory scheme and the priority of the IBC.
• PSL Limited vs. Jotun India Private Limited, (2018) 2 AIR Bom R 350*: The Bombay High Court’s view that IBC proceedings are independent and not suspended by pending winding up proceedings was approved by the Supreme Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the Insolvency and Bankruptcy Code, 2016 (IBC). The court emphasized that the IBC’s main objective is to resuscitate corporate debtors in financial distress and that the IBC process should not be hampered by pending winding-up petitions. The court also considered the need for a streamlined process for insolvency resolution, which the IBC provides, and the fact that the IBC has an overriding effect over other laws, as per Section 238. The court’s reasoning also focused on the interpretation of the relevant rules and amendments to the Companies Act to ensure that the IBC’s objectives are met.

Logical Reasoning:

The Court considered the argument that the winding-up petition should continue due to the service of notice under Rule 26 of the Companies (Court) Rules, 1959, but rejected it. The Court clarified that the notice under Rule 26 is a pre-admission notice, and it does not prevent the transfer of the winding-up petition to the NCLT. The Court also considered the legislative intent behind the IBC, which is to provide a streamlined process for insolvency resolution, and held that the IBC proceedings should take precedence over the winding-up petition.

The court quoted from the judgment:

“The resultant position in law is that, as a first step, when the Code was enacted, only winding up petitions, where no notice under Rule 26 of the Companies (Court) Rules was served, were to be transferred to the NCLT and treated as petitions under the Code.”

“However, on a working of the Code, the Government realized that parallel proceedings in the High Courts as well as before the adjudicating authority in the Code would stultify the objective sought to be achieved by the Code, which is to resuscitate the corporate debtors who are in the red.”

“In accordance with this objective, the Rules kept being amended, until finally Section 434 was itself substituted in 2018, in which a proviso was added by which even in winding up petitions where notice has been served and which are pending in the High Courts, any person could apply for transfer of such petitions to the NCLT under the Code, which would then have to be transferred by the High Court to the adjudicating authority and treated as an insolvency petition under the Code.”

Key Takeaways

• Priority of IBC: The Insolvency and Bankruptcy Code, 2016 (IBC) takes precedence over winding-up petitions filed under the Companies Act, 1956. This means that if insolvency proceedings are initiated under the IBC, any pending winding-up petitions will be either transferred to the NCLT or stayed.
• Pre-Admission Notice: The notice under Rule 26 of the Companies (Court) Rules, 1959, is a pre-admission notice and does not prevent the transfer of winding-up petitions to the NCLT.
• Independent Proceedings: IBC proceedings are independent and must be allowed to reach their logical conclusion without being hampered by pending winding-up petitions.
• Resuscitation of Corporate Debtors: The primary objective of the IBC is to resuscitate corporate debtors in financial distress. This objective is prioritized over the liquidation process under the Companies Act.
• Transfer of Proceedings: Parties in pending winding-up petitions can apply for the transfer of such proceedings to the NCLT, where they will be treated as insolvency petitions under the IBC.

Directions

The Supreme Court granted liberty to the appellant to apply under the proviso to Section 434 of the Companies Act (added in 2018) to transfer the winding-up proceeding pending before the High Court of Delhi to the NCLT. The NCLT would then treat it as a proceeding under Section 9 of the IBC.

Development of Law

The ratio decidendi of this case is that the Insolvency and Bankruptcy Code, 2016 (IBC) takes precedence over winding-up petitions filed under the Companies Act, 1956. The Supreme Court clarified that the notice under Rule 26 of the Companies (Court) Rules, 1959, is a pre-admission notice and does not prevent the transfer of winding-up petitions to the NCLT. This judgment reinforces the legislative intent to prioritize the IBC process for the resolution of corporate insolvency. The judgment also clarifies the interplay between the IBC and the Companies Act, particularly concerning the transfer of pending proceedings. This case has changed the previous position of law, wherein winding up petitions were given preference over IBC proceedings by clarifying that IBC proceedings should take precedence over winding up petitions.

Conclusion

The Supreme Court’s judgment in Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd. clarifies the priority of the Insolvency and Bankruptcy Code, 2016 (IBC), over winding-up petitions filed under the Companies Act, 1956. The court held that IBC proceedings are independent and should not be hampered by pending winding-up petitions. The court also clarified that the notice under Rule 26 of the Companies (Court) Rules, 1959, is a pre-admission notice and does not prevent the transfer of winding-up petitions to the NCLT. This judgment reinforces the legislative intent to prioritize the IBC process for the resolution of corporate insolvency and provides clear guidance on the interplay between the IBC and the Companies Act.