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A. NAVINCHANDRA STEELS PVT. LTD. VS SREI EQUIPMENT FINANCE LIMITED
CITATIONAIR 2021 SUPREME COURT 1180
DATE OF THE JUDGEMENTMarch – 2021
COURTSupreme Court of India
APPELLANT A. Navinchandra Steels Pvt. Ltd
RESPONDENTSREI Equipment Finance Limited
BENCHJ.J., B. R. Gavai, Rohinton Fali Nariman

INTRODUCTION

The Hon’ble Supreme Court of India ruled that applications for initiating the Corporate Insolvency Resolution Process (CIRP) under Section 7 or Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) are independent proceedings that remain unaffected by winding-up proceedings filed by the same company. This judgment arose from a National Company Law Appellate Tribunal (NCLAT) judgment dated 07.02.2020, corrected by an order dated 21.09.2020.

FACTS OF THE CASE

  1. A. Navinchandra Steels Pvt. Ltd. (Appellant) is an operational creditor of Shree Ram Urban Infrastructure Limited (SRUIL).
  2. The Bombay High Court issued a decree in favor of the appellant on 7 October 2015, which was stayed by the Division Bench on 6 October 2016, directing SRUIL to deposit INR 14 crore or furnish a bank guarantee.
  3. “The appellant filed a winding-up petition (Company Petition No.1039 of 2015) against SRUIL, which is pending. Action Barter Pvt. Ltd. filed another winding-up petition (Company Petition No.1066/2015), admitted conditionally on 5 October 2016. This was upheld, with an increased deposit requirement of INR 18 crore after appeals.”
  4. “Indiabulls Housing Finance Ltd., a secured creditor, filed a petition under Section 7 of the IBC before the NCLT, dismissed by the NCLT and NCLAT due to the pending winding-up petition. The Supreme Court admitted an appeal against this dismissal on 6 August 2018. Indiabulls filed for possession of mortgaged properties, which was granted by the Company Judge on 7 February 2019. The assets were sold to Honest Shelters Pvt. Ltd. for INR 705 crore.”
  5. This sale was challenged by the provisional liquidator and SRUIL’s ex-directors in various forums, alleging undervaluation and procedural issues.
  6. “SREI Equipment Finance Ltd. filed a Section 7 IBC petition, admitted by the NCLT on 6 November 2019. Action Barter appealed, but the NCLAT dismissed the appeal based on the Supreme Court’s judgment in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.”
  7. The NCLAT’s dismissal order was corrected on 21 September 2020 to remove a typographical error. Action Barter and the appellant filed appeals before the Supreme Court, which issued notices and stayed proceedings before the NCLAT and NCLT in late 2020.

ISSUE

Whether the application by SREI Equipment Finance Limited to initiate insolvency proceedings under the IBC was maintainable, based on the existence and default of a financial debt owed by A. Navinchandra Steels Pvt. Ltd.

ARGUMENTS OF APPELLANTS

In the appeal, the appellants presented several arguments to support their position that the Section 7 petition under the Insolvency and Bankruptcy Code, 2016 (IBC) should not be maintainable given the existing winding-up proceedings:

  1. Precedent from Action Ispat Case: “The appellants cited the Supreme Court’s decision in Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd., arguing that once irreversible steps are taken in a winding-up petition, a subsequent Section 7 petition under the IBC becomes non-maintainable.”
  2. Irreversible Steps by Bombay High Court: “They pointed out that the Bombay High Court had already admitted a winding-up petition and irreversible steps, such as the sale of a plot with a 72-storey building, had been taken. This, they claimed, made the Section 7 petition filed by SREI on 30.05.2019 under the IBC non-maintainable.”
  3. Legal Prohibition Under Section 446: “The appellants contended that according to Section 446 of the Companies Act (equivalent to Section 279 of the Companies Act, 2013), no new suit or legal proceeding can be initiated after the admission of a winding-up petition”. Therefore, a Section 7 petition under the IBC cannot be filed after such admission.
  4. Potential for Restructuring Under Companies Act: “They argued that winding-up proceedings do not inevitably lead to corporate death. Instead, Sections 391 to 393 of the Companies Act, 1956, allow for restructuring by the winding-up court, which can stay the winding-up process and order restructuring.”
  5. SREI’s Awareness and Participation in Winding-Up Proceedings: “The appellants claimed that SREI was aware of the winding-up petition before the Bombay High Court and had participated in the winding-up proceedings by filing its claim before the provisional liquidator. SREI allegedly suppressed this information in its Section 7 IBC petition.”
  6. Circumvention of Proper Legal Route: “They asserted that SREI circumvented the proper legal process by filing a Section 7 petition and suppressing the ongoing winding-up proceeding. According to the appellants, SREI should have sought the transfer of the company petition in winding-up from the Bombay High Court to the National Company Law Tribunal (NCLT).”

CONTENTIONS OF RESPONDENT

In response to the appellants’ arguments, the respondent’s counsel made several key points in favor of the maintainability of the Section 7 petition under the IBC:

  1. Independence of Section 7 Proceedings: The respondent argued that a Section 7 proceeding under the IBC is independent and can be initiated at any time, even after a winding-up order is made.
  2. Precedence of IBC: “Citing Section 238 of the IBC, which contains a non-obstante clause, the respondent asserted that in case of any conflict between Section 446 of the Companies Act, 1956 / Section 279 of the Companies Act, 2013 and the IBC, the IBC will prevail.”
  3. Settled Precedence: The respondent contended that the precedence on this matter is well-settled and not open to further examination or dispute (no longer res integra).
  4. No Irretrievable Steps: “Alternatively, the respondent argued that no irretrievable steps have been taken in the winding-up proceeding in this case, as the provisional liquidator continues to manage other assets of SRUIL.”
  5. Nature of Private Sale: “The respondent contended that a private sale by a secured creditor outside the winding-up process does not constitute the irretrievable step referred to in Action Ispat. Such a step must be taken by the provisional liquidator in the process of selling the company’s assets for winding up.”

JUDGEMENT

  1. The provisional liquidator handed over possession of the mortgaged property to Indiabulls, who sold it to Honest Shelters Pvt. Ltd. for INR 705 crore. “This sale included not only the mortgaged property but also a superstructure and two additional flats. The ex-directors of SRUIL and the provisional liquidator challenged the sale, claiming it was for a grossly undervalued price and included more assets than what was mortgaged.”
  2. The challenges against the sale by the ex-directors in the Debt Recovery Tribunal and Debt Recovery Appellate Tribunal were unsuccessful. The provisional liquidator also challenged the sale in the Bombay High Court, arguing that the conditions of the order dated 07.02.2019 were violated.
  3. “The Supreme Court reiterated that a Debts Recovery Tribunal can order the sale of a debtor’s properties, even if the company is in liquidation, but only after notice and hearing the Official Liquidator. Similarly, a District Court can order the sale of a borrower company’s assets under the SFC Act after notice and hearing the Official Liquidator. A financial corporation under Section 29 of the SFC Act can sell the debtor’s assets only after obtaining permission from the Company Court and following its directions. The proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) take precedence over the Sick Industrial Companies (Special Provisions) Act, 1985.”
  4. NCLT proceedings will continue, and the company petition in the High Court cannot proceed further due to Section 238 of the IBC. “The Bombay High Court directed the provisional liquidator to hand over the records and assets of SRUIL to the Interim Resolution Professional (IRP) in the Section 7 proceeding pending before the NCLT, although this has not yet occurred.”
  5. The appellant argued that SREI suppressed the winding up proceeding in its Section 7 application under the IBC and used Section 7 as a subterfuge. “The Supreme Court held that a Section 7 petition is independent and must be decided on its own merits, and any suppression of the winding up proceeding is irrelevant. The Court dismissed the appeal, stating that the jurisdiction of the NCLT under the IBC cannot be overridden by discretionary jurisdiction under the Companies Act.”

The Supreme Court emphasized the precedence of IBC proceedings over winding up petitions and upheld the independent nature of Section 7 IBC petitions, dismissing the appeal and vacating the interim order passed earlier.

ANALYSIS

The IBC, being a special statute with a non-obstante clause in Section 238, takes precedence over the general provisions of the Companies Act in case of conflict. This precedence is further underscored by the principles established in various judgments of this Court.

“In Swiss Ribbons (P) Ltd. v. Union of India (2019), the Court elucidated that the primary focus of the IBC is the revival and continuation of the corporate debtor, with liquidation being the last resort. This objective aligns with the IBC’s role as a special statute designed specifically to handle insolvency and bankruptcy issues, distinguishing it from the general framework provided by the Companies Act.”

“The precedent set in Allahabad Bank v. Canara Bank (2000) highlighted the principle that a special statute (in this case, the RDB Act) would prevail over a general statute (the Companies Act) in the event of a conflict, especially when the special statute contains a non-obstante clause. This principle is consistently applied across various judgments, indicating that the Companies Act can be treated as a general statute vis-à-vis more specific legislation.”

“In Bakemans Industries (P) Ltd. v. New Cawnpore Flour Mills (2008), the Court reiterated that the SFC Act, being a special statute, would prevail over the general powers of the Company Judge under the Companies Act in winding up proceedings. This underscores the precedence of special statutes with specific objectives over the more generalized provisions of the Companies Act.”

“The decision in Madras Petrochem Ltd. v. BIFR (2016) further cemented this principle by stating that the Sick Industrial Companies (Special Provisions) Act, 1985 (a predecessor to the IBC) would prevail over the SARFAESI Act in the case of inconsistencies, especially given the non-obstante clause in the later Act.”

“In Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd. (2019), the Court confirmed that proceedings under the IBC are independent and unaffected by pending winding-up proceedings under the Companies Act, asserting the primacy of the IBC due to its non-obstante clause.”

“Similarly, Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd. (2019) and Duncans Industries Ltd. v. AJ Agrochem (2019) emphasized that the IBC proceedings, initiated independently under Section 7 or Section 9, must continue even if there are parallel winding-up proceedings under the Companies Act, reinforcing the overriding effect of the IBC.”

“The Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd. (2020) case highlighted that even post-admission of a winding-up petition, the Company Court retains discretion to transfer proceedings to the NCLT to be resolved under the IBC, demonstrating the flexibility and precedence of the IBC process.”

“Lastly, in Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd. (2020), the Court underscored that even post-admission of winding-up petitions, unless irreversible actions such as sales of assets have occurred, proceedings can be transferred to the NCLT under the IBC framework.”

CONCLUSION

The Supreme Court’s judgment in A. Navinchandra Steels Pvt. Ltd. vs Srei Equipment Finance Limited reaffirmed the robust framework of the IBC in facilitating the resolution of corporate insolvency. The decision emphasized the importance of upholding the integrity of the insolvency process by ensuring that legitimate claims by financial creditors are addressed promptly and efficiently.

By dismissing the appeal, the Supreme Court reinforced the principles of the IBC, ensuring that financial creditors can effectively utilize the CIRP mechanism to recover dues and address defaults, thereby contributing to the overall objective of insolvency resolution and economic stability.

REFERENCES

  1. A. Navinchandra Steels Private Limited Vs. SREI Equipment Finance Limited & Ors

LL 2021 SC 122

  1. https://indiankanoon.org/doc/10385552/
  2. https://blog.ipleaders.in/case-analysis-a-navinchandra-steels-pvt-ltd-v-srei-equipment-finance-ltd/
  3. https://ibclaw.in/drb-case-name/a-navinchandra-steels-pvt-ltd-vs-srei-equipment-finance-ltd-ors/

AUTHOR

D. SUVARCHANA BAI, DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY, an intern under legal vidhiya

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.


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