Supreme Court Upholds IBC’s Primacy Over Winding Up: A. Navinchandra Steels vs. SREI Equipment Finance (2021)

Introduction

Date of the Judgment: March 1, 2021
Citation: (2021) INSC 142
Judges: Justice Rohinton Fali Nariman and Justice B.R. Gavai. The judgment was authored by Justice Rohinton Fali Nariman.

Can a company facing a winding-up order under the Companies Act still be subjected to insolvency proceedings under the Insolvency and Bankruptcy Code (IBC)? The Supreme Court of India addressed this critical question in the case of A. Navinchandra Steels Private Limited vs. SREI Equipment Finance Limited & Ors. The court clarified the relationship between the IBC and the Companies Act, particularly regarding the initiation of insolvency proceedings when a winding-up petition has already been admitted.

The Supreme Court, in this judgment, emphasized the primacy of the IBC as a special statute aimed at the revival of distressed companies, even when a winding-up process has commenced under the Companies Act. This decision clarifies the legal landscape for creditors and companies facing financial distress.

Case Background

The case involves a dispute between A. Navinchandra Steels Private Limited (the Appellant), an operational creditor, and SREI Equipment Finance Limited (Respondent No. 1), a financial creditor, concerning M/s. Shree Ram Urban Infrastructure Limited (SRUIL), the company under winding up. The Appellant held a decree against SRUIL from the Bombay High Court, while SREI initiated insolvency proceedings against SRUIL under the IBC.

The Appellant had obtained a decree from the Bombay High Court on October 7, 2015, in Summary Suit No. 626 of 2014. The High Court stayed this order on October 6, 2016, directing SRUIL to deposit INR 14 crore or provide a bank guarantee, which SRUIL failed to do. An execution application was also filed by the Appellant and was pending. The Appellant had also filed a winding up petition against SRUIL in 2015, which was also pending.

Another winding-up petition was filed by M/s Action Barter Pvt. Ltd. against SRUIL, which was admitted on October 5, 2016, after SRUIL failed to deposit INR 5.90 crore. This amount was later enhanced to INR 18 crore by the High Court. SRUIL was directed to deposit INR 3 crore immediately and the balance INR 15 crore within six months by the Supreme Court on February 27, 2017. SRUIL and Action Barter agreed to a payment schedule, but SRUIL defaulted, and the winding-up petition was revived on August 24, 2017. The provisional liquidator took possession of SRUIL’s assets on April 17, 2018.

Meanwhile, Indiabulls Housing Finance Ltd., a secured creditor of SRUIL, filed a petition under Section 7 of the IBC, which was dismissed by the NCLT on May 18, 2018, as a winding-up petition had already been admitted. The NCLAT also dismissed the appeal on May 30, 2018. However, the Supreme Court admitted a Civil Appeal on August 6, 2018, which is pending.

Indiabulls filed an application to take possession of the mortgaged property, which the Company Judge allowed on February 7, 2019. The provisional liquidator was directed to hand over the mortgaged property to Indiabulls, who then sold the property to M/s. Honest Shelters Pvt. Ltd. for INR 705 crore. The provisional liquidator challenged this sale in the Bombay High Court, alleging that the conditions of the order dated 07.02.2019 were flouted.

SREI Equipment Finance Limited filed a petition under Section 7 of the IBC, which was admitted by the NCLT on November 6, 2019. Action Barter filed an appeal against this order, which was dismissed by the NCLAT. The NCLAT corrected its order on September 21, 2020. Action Barter withdrew its appeal after a settlement with the purchaser, Honest Shelters. The present appeal was filed by A. Navinchandra Steels Pvt. Ltd.

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) initially dismissed Indiabulls’ petition under Section 7 of the IBC, citing the prior admission of a winding-up petition by the Bombay High Court. The National Company Law Appellate Tribunal (NCLAT) upheld this decision. However, the Supreme Court admitted an appeal against the NCLAT order, which is still pending.

Subsequently, SREI’s petition under Section 7 of the IBC was admitted by the NCLT. The NCLAT dismissed Action Barter’s appeal against this order, citing the Supreme Court’s judgment in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549. The NCLAT later corrected its order to reflect that the Section 7 application was maintainable.

Legal Framework

The primary legal frameworks involved in this case are:

• The Companies Act, 1956 (and its successor, the Companies Act, 2013), which governs the winding up of companies.
• The Insolvency and Bankruptcy Code, 2016 (IBC), which provides a framework for the insolvency resolution of corporate debtors.
• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which allows secured creditors to enforce their security interests.

The Court considered the interplay between these statutes, particularly the non-obstante clause in Section 238 of the IBC, which states that the provisions of the IBC shall have effect notwithstanding anything inconsistent therewith contained in any other law.

The Court also referred to Section 446 of the Companies Act, 1956 (equivalent to Section 279 of the Companies Act, 2013), which deals with the effect of a winding-up order on suits and other legal proceedings.

Section 230(1) of the Companies Act, 2013 was also considered, which provides for compromises or arrangements with creditors and members, including in cases where a company is being wound up.

Arguments

Appellant’s Arguments (A. Navinchandra Steels Pvt. Ltd.):

• The Appellant argued that the matter was concluded in their favor by the judgment in Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd., 2020 SCC OnLine SC 1025, because irreversible steps had been taken in the admitted winding-up petition, such as the sale of the plot.

• They contended that Section 446 of the Companies Act, 1956, prevents the initiation of any suit or legal proceeding once a winding-up petition is admitted, thus barring a Section 7 petition under the IBC.

• The Appellant argued that winding-up proceedings do not necessarily result in corporate death and that Sections 391 to 393 of the Companies Act, 1956, allow for restructuring.

• The Appellant alleged mala fides, claiming that SREI was aware of and participated in the winding-up proceedings and suppressed these facts in its Section 7 petition.

• The Appellant submitted that the proper route for SREI was to seek a transfer of the winding-up petition to the NCLT, which was circumvented by filing a Section 7 petition.

Respondent’s Arguments (SREI Equipment Finance Limited):

• SREI argued that a Section 7 proceeding under the IBC is an independent proceeding that can be initiated at any time, even after a winding-up order, citing various judgments of the Supreme Court, including Action Ispat (supra).

• They relied on Section 238 of the IBC, asserting that the IBC prevails over the Companies Act in case of conflict.

• SREI contended that no irretrievable steps had been taken in the winding-up proceedings, as the provisional liquidator continued to be in possession of other assets of SRUIL.

• They argued that a private sale by a secured creditor outside the winding-up is not an irreversible step as contemplated in Action Ispat (supra).

• SREI pointed out that the Bombay High Court had directed the provisional liquidator to hand over the records and assets of SRUIL to the interim resolution professional appointed in the Section 7 proceeding.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether a petition under Section 7 of the IBC is maintainable when a winding-up petition has already been admitted under the Companies Act, 1956/2013, and whether the IBC overrides the Companies Act in such cases.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered several authorities to arrive at its decision. These are categorized below:

On the primacy of special statutes:

• Allahabad Bank v. Canara Bank, (2000) 4 SCC 406: The Supreme Court held that the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) is a special statute that prevails over the Companies Act, 1956.
• Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills, (2008) 15 SCC 1: The Supreme Court held that the State Financial Corporations Act, 1951, being a special statute, prevails over the general powers of the Company Judge under the Companies Act.
• Madras Petrochem Ltd. v. BIFR, (2016) 4 SCC 1: The Supreme Court held that in the case of two statutes containing non-obstante clauses, the later Act will normally prevail.

On the IBC’s overriding effect:

• Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227: The Supreme Court held that proceedings under the IBC are independent and that the IBC overrides other laws due to Section 238.
• Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549: The Supreme Court held that a financial creditor’s application under the IBC is an independent proceeding.
• Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725: The Supreme Court held that the IBC has an overriding effect over the Tea Act, 1953, and that no prior consent of the Central Government is required for initiating proceedings under the IBC.
• Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd., 2020 SCC OnLine SC 943: The Supreme Court held that a winding-up proceeding can be transferred to the NCLT even if a winding-up order has been passed.
• Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd., 2020 SCC OnLine SC 1025: The Supreme Court discussed the transfer of winding-up proceedings and the circumstances under which a Company Court should proceed with winding up instead of transferring the proceedings to the NCLT.

On the position of secured creditors:

• M.K. Ranganathan v. Govt. of Madras, (1955) 2 SCR 374: The Supreme Court held that a secured creditor stands outside the winding up and can realize its security without the leave of the winding-up Court.
• Central Bank of India v. Elmot Engineering Co., (1994) 4 SCC 159, Industrial Credit and Investment Corpn. of India Ltd. v. Srinivas Agencies, (1996) 4 SCC 165, and Board of Trustees, Port of Mumbai v. Indian Oil Corpn., (1998) 4 SCC 302: These cases reiterated the principle that a secured creditor is outside the winding up.

Judgment

How each authority was viewed by the Court:

• The Court relied on Allahabad Bank v. Canara Bank, (2000) 4 SCC 406* to establish that a special law prevails over a general law, and applied this principle to the IBC as a special law.
• The Court cited Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills, (2008) 15 SCC 1* to further reinforce the principle that a special statute prevails over the Companies Act.
• The Court used Madras Petrochem Ltd. v. BIFR, (2016) 4 SCC 1* to support the position that a later statute with a non-obstante clause prevails over an earlier statute with a similar clause.
• The Court followed Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., (2019) 4 SCC 227* to emphasize that the IBC is an independent proceeding and overrides other laws due to Section 238.
• The Court relied on Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549* to support its conclusion that a financial creditor’s application under the IBC is an independent proceeding.
• The Court used Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725* to demonstrate that the IBC has an overriding effect over other statutes.
• The Court cited Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd., 2020 SCC OnLine SC 943* to show that winding-up proceedings can be transferred to the NCLT even after a winding-up order.
• The Court referred to Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd., 2020 SCC OnLine SC 1025* to discuss the transfer of winding-up proceedings and to clarify when a Company Court should proceed with winding up instead of transferring the proceedings to the NCLT.
• The Court used M.K. Ranganathan v. Govt. of Madras, (1955) 2 SCR 374* to reiterate that a secured creditor is outside the winding up and can realize its security without the court’s leave.
• The Court cited Central Bank of India v. Elmot Engineering Co., (1994) 4 SCC 159*, Industrial Credit and Investment Corpn. of India Ltd. v. Srinivas Agencies, (1996) 4 SCC 165*, and Board of Trustees, Port of Mumbai v. Indian Oil Corpn., (1998) 4 SCC 302* to further emphasize the position of a secured creditor.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the IBC, which is to prioritize the revival of distressed companies over their liquidation. The Court emphasized that the IBC is a special statute designed to address corporate insolvency and that its provisions should prevail over the general provisions of the Companies Act. The Court also considered the fact that the sale of the mortgaged property by a secured creditor was not an irreversible step that would prevent the transfer of the winding up proceeding to the NCLT.

Fact:Law Ratio

The Court’s reasoning was heavily based on legal principles and the interpretation of statutory provisions, with less emphasis on the specific factualdetails of the case. The Court primarily focused on the legislative intent behind the IBC and its overriding effect over other laws.

Decision

The Supreme Court dismissed the appeal filed by A. Navinchandra Steels Private Limited, upholding the maintainability of the Section 7 petition under the IBC. The Court held that the IBC has an overriding effect over the Companies Act in cases of conflict, particularly when a winding-up petition has been admitted.

Flowchart

Ratio Decidendi

The ratio decidendi of the case is that the Insolvency and Bankruptcy Code, 2016, being a special statute aimed at the revival of distressed companies, has primacy over the Companies Act, 1956/2013, in cases of conflict, particularly when a winding-up petition has been admitted. The Court emphasized that the IBC’s provisions prevail due to Section 238, which provides for its overriding effect.

Obiter Dicta

While the primary focus of the judgment was on the primacy of the IBC, the Court also made the following observations:

• The sale of a mortgaged property by a secured creditor outside the winding-up process is not considered an irreversible step that would prevent the initiation of insolvency proceedings under the IBC.
• A petition under Section 7 of the IBC is an independent proceeding and is to be tried on its own merits, regardless of the existence of winding-up proceedings.
• The legislative intent behind the IBC is to prioritize the revival of distressed companies over their liquidation, unless corporate death is inevitable.

Impact

The Supreme Court’s judgment in A. Navinchandra Steels vs. SREI Equipment Finance has had a significant impact on the legal landscape concerning corporate insolvency and winding-up proceedings. The key impacts include:

• Clarity on IBC’s Primacy: The judgment has unequivocally established the primacy of the IBC over the Companies Act in cases of conflict, providing clarity to creditors and companies facing financial distress.
• Independent Proceedings: It has reinforced the position that insolvency proceedings under the IBC are independent and can be initiated even when winding-up proceedings have commenced.
• Emphasis on Revival: The judgment underscores the legislative intent of the IBC to prioritize the revival of distressed companies over their liquidation, unless corporate death is inevitable.
• Secured Creditor’s Rights: While upholding the IBC’s primacy, the judgment acknowledges the rights of secured creditors, clarifying that their actions outside winding-up do not necessarily prevent the initiation of IBC proceedings.
• Legal Certainty: The decision has brought legal certainty by clarifying the interplay between the IBC and the Companies Act, reducing ambiguity and potential litigation.

Critical Analysis

The Supreme Court’s judgment in A. Navinchandra Steels vs. SREI Equipment Finance is a significant milestone in the jurisprudence of insolvency law in India. By unequivocally establishing the primacy of the IBC over the Companies Act in cases of conflict, the Court has reinforced the legislative intent behind the IBC, which is to facilitate the revival of distressed companies.

The Court’s reasoning is grounded in the principle that a special law should prevail over a general law, and that the IBC, being a later statute with a non-obstante clause, should take precedence over the Companies Act. The Court also rightly emphasized that the winding-up process should be seen as a last resort, and that the IBC provides a mechanism for the revival of companies that should be given precedence.

However, the judgment also raises some questions. While the Court has clarified the position of secured creditors, there is still some ambiguity regarding the extent to which their actions outside the winding-up process can be challenged under the IBC. The Court’s emphasis on the independent nature of Section 7 proceedings may also lead to a situation where multiple proceedings are initiated against the same company, which could lead to confusion and delay.

Overall, the judgment is a welcome step towards a more efficient and effective insolvency resolution framework in India. It provides much-needed clarity on the interplay between the IBC and the Companies Act and reinforces the importance of the IBC in the Indian legal system.