Petition u/s 7 or 9 of IBC is an Independent Proceedings and is not affected by winding up proceedings.
[A. Navinchandra Steels (P) Ltd. v. SREI Equipment Finance Ltd., 2021 SCC On Line SC 149, decided on 01-03-2021]
Recently, the Hon’ble Supreme Court in the matter of Naveen Chandra Steels Private Limited Vs. SREI Equipment Finance Limited & Ors. has directed vide order dated 01st March, 2021 that a petition either under section 7 or section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company.
The Appellant i.e. Naveen Chandra Steels Private Limited Vs. SREI Equipment Finance Limited & Ors. was an operational creditor of Respondent 2, Shree Ram Urban Infrastructure Limited (SRUIL) the company under winding up and has a decree dated 07.10.2015 in its favour passed by Bombay High Court in Summary Suit No. 626 of 2014. Vide order dated 06.10.2016, the Division Bench stayed the order dated 07.10.2015 and directed SRUIL to deposit INR14 crore with the Prothonotary and Senior Master of the High Court or furnish a bank guarantee for the same, failing which the stay order would get vacated. The said appeal was pending till the above order dated 01st March, 2010. Sometime in 2015, the Appellant had filed a winding up petition, being Company Petition No.1039 of 2015 against SRUIL before the Bombay High Court, the same was also pending till this order.
A winding up petition was filed by the respondent 3 herein, Action Barter Pvt. Ltd. against SRUIL, stood admitted on 05.10.2016, due to failure of SRUIL and subsequently, the physical possession of the assets of the company was taken over by the provisional liquidator.
While this winding up petition was pending, Indiabulls Housing Finance Ltd., a secured creditor of the company, filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] before the National Company Law Tribunal [“NCLT”], which was dismissed by the NCLT vide order dated 18.05.2018 as being not maintainable as a winding up petition had already been admitted by the Bombay High Court. An appeal to the NCLAT suffered a similar fate as the appeal was dismissed on 30.05.2018. However, on 06.08.2018, the Supreme Court admitted a Civil Appeal from the NCLAT order, which was also pending till this order.
Also, Indiabulls filed an application before Bombay High Court to realise its security outside such winding up proceeding, notices having already been issued under Sections 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [“SARFAESI Act”], which had been allowed by the Company judge and the Provisional Liquidator was directed to handover possession of the Mortgaged Property of the company to Indiabulls. Though, it had been directed that Indiabulls should conduct the sale of the property in consultation with the Official Liquidator.
The property was sold M/s. Honest Shelters Pvt. Ltd., Respondent No.4 herein, for a sum of INR 705 crore, in which not only was the mortgaged property sold, but also the superstructure standing thereon, together with two other flats. The said sale was challenged by the provisional liquidator in the Bombay High Court, alleging that the conditions of the order were flouted, and that what was sold was much more than what was mortgaged to the secured creditor, and that too at a gross undervalue. The said representation by the provisional liquidator was still pending in the Bombay High Court.
Additionally, the respondent 1, SREI Equipment Finance Ltd. (SREI) filed a petition under Section 7 of the IBC before the NCLT, which petition was admitted by the NCLT on 06.11.2019. An appeal was then filed by Action Barter against the aforesaid NCLT order in which, after setting out this Court’s judgment in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549, the NCLAT dismissed the appeal with the following observations:
“5. The case of the Appellant is covered by the decision of the Hon’ble Supreme Court in Forech India Ltd (supra), therefore, we hold that the Application under Section 7 of the I&B Code filed by the Respondent – SREI Equipment Finance Limited is not maintainable. In so far as pending winding up petition before the Hon’ble Bombay High Court is concerned, the Appellant in terms of the decision of the Hon’ble Supreme Court in Forech India Ltd (supra) may move before the Hon’ble High Court of Bombay.
The Appeal is dismissed with the aforesaid observations. No costs.”
An appeal was then filed to Hon’ble Supreme Court by Action Barter on 08.10.2020, in which Hon’ble Supreme Court, by order dated 27.10.2020, issued notice and directed the parties to maintain status quo qua the mortgaged property and also stayed further proceedings before the NCLAT.
Moreover, an appeal was also filed by the Appellant on 09.12.2020, in which Hon’ble Supreme Court, by order dated 18.12.2020, issued notice and stayed further proceedings before the NCLT and tagged the appeal with the appeal filed by Action Barter.
In the instant case the appellant was contesting that the petition under Section 7 of the IBC would have to be held to be non-maintainable that no suit or other legal proceeding can be initiated once there is admission of a winding up petition. The appellant argued that post admission of a winding up petition; no petition under Section 7 of the IBC could be filed. It was also contended that the fact that the company was under winding up had been suppressed in the petition filed under Section 7 of the IBC.
In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held that, “the IBC is a special statute dealing with revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail. Vis-à-vis the Companies Act, which is a general statute dealing with companies, including companies that are in the red, the IBC 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 IBC will prevail.”
Relying on the decision in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549, the Bench stated, in a situation in which 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 IBC. The Bench stated, a conspectus of the aforesaid authorities would show that a petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company.
The Bench stated, it is settled law that a secured creditor stands outside the winding up and can realise its security dehors winding up proceedings. 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.
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