Initiation of CIRP against a Company in Liquidation: How Early is too Early?

[Subodh Asthana and Madhur Bhatt are 3rd year B.A., LL.B. (Hons.) students at Hidayatullah National Law University, Raipur.]

Section 279 of the Companies Act 2013 [“Act”] envisages that no legal proceedings shall be admitted if the winding up petition of a company has been accepted by the court or the liquidation proceedings have begun. The article seeks to clarify whether an application to initiate corporate insolvency resolution process [“CIRP”] could be allowed under sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016 [“IBC’’] while the winding up process is ongoing. The Report of Insolvency Law Committee, 2018 (at paragraph 25.7) noted the importance of avoiding “multiple and possibly conflicting orders in winding up/liquidation proceedings of the same corporate debtor”. However, this had not been tested in the courts until now. The Supreme Court’s judgment in A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited & Ors. [“SREI Steels’’] delivered on 1 March 2021 dealt with the question.

Petition to initiate CIRP under the IBC

The CIRP is initiated by the creditors when the corporate debtor fails to discharge the debt payable to the creditors. However, there might be circumstances wherein the petition to initiate CIRP could be filed when the liquidation proceedings of the company have commenced. It is pertinent to note that under section 11(d) of the IBC, there is specific bar on initiating CIRP in cases where the liquidation order has been made by the adjudicating authority. However, there is no bar against initiating CIRP when liquidations proceedings are ongoing. For the purpose of clarification, the terms winding-up proceedings and liquidation proceedings are used interchangeably because under section 2(94A) of the Act, the term winding up under the Act has been treated to be at par with liquidation under the IBC.

Background to the issue

The complication arose when the National Company Appellate Tribunal [“NCLAT’’] in Indiabulls Housing Finance Ltd v. Shree Ram Urban Infrastructure Ltd stated that CIRP cannot be initiated if the winding up proceedings have already commenced. The NCLAT further placed its reliance on M/s. Unigreen Global Private Limited v. Punjab National Bank & Ors. to hold that once the winding up proceedings have been initiated, then the question of going back to initiate CIRP cannot arise.

Analysis of the issue by the Supreme Court

Factual Matrix

The apex court gave its observations in the SREI Steels case, whereinSREI filed a petition under section 7 of the IBC for initiation of CIRP against A. Navinchandra Steels (the Appellants). It is the case of A. Navinchandra Steels that the petition under section 7 of the IBC should be declared non-maintainable, and that no suit or other legal action could be brought once a winding up petition was admitted. It was argued also by the same party that no petition under section 7 of the IBC could be filed after a winding up petition was admitted under section 279 of the Act. Therefore the issue before the Court was whether CIRP proceedings may be initiated against a corporate debtor when the company is in the process of liquidation.

Decision by the Court

The apex court relied on its judgement in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd. to observe that a petition filed under section 7 or section 9 of the IBC is an independent proceeding which is unaffected by any winding up proceedings filed by any company. Therefore, a petition under sections 7 or 9 could be denied in cases where a company is nearing corporate death. It could also be denied where the liquidation or winding up order has been issued by the adjudicating authority.

Furthermore, the court also placed its reliance on section 279 of the Act and held that once a liquidation petition is allowed under section 279, the winding up proceedings shall be subject to IBC provisions. Also, the petition under section 7 of the IBC shall overrule the provisions of the Act and therefore any ongoing winding up proceeding would not have any effect in deciding a petition under section 7 due to a simple reason that the initiation of CIRP and winding up proceedings are independent not interdependent.

Resolving the anomaly between the provisions of the Companies Act & the IBC

The SC also resolved the anomaly that existed between section 434(1)(c) of the Act and section 238 of the IBC. The issue was whether an application for transfer of proceedings before tribunal under section 434 of the Act should take place so as to initiate CIRP proceedings under sections 7 or 9 of the IBC, when winding up proceedings have been initiated and whether the provisions of the IBC shall override the provisions of the Act for such transfer.

To answer the former question reliance must be placed on section 434(1)(c) of the Act, which deals with the transfer of winding up proceedings by the High Court to the Tribunal to examine the application filed for commencing the CIRP under sections 7 or 9 of the IBC. It is pertinent to note that the Supreme Court has already held in the case of Kaledonia Jute & Fibres Pvt. Ltd. v. Axis Nirman & Industries Ltd. [“Kaledonia”] that in an admitted winding up proceeding, all creditors would be parties to such proceeding in rem. A secured creditor being such a party could, therefore, move the High Court under section 434(1)(c) of the Act to transfer the aforesaid proceeding to the National Company Law Tribunal [“NCLT”]. This is to be tried as a separate proceeding under section 7 or section 9, as the case may be.

However, the bare interpretation of the judgement in the Kaledonia case gives the impression that such remedy is discretionary in nature. To understand the exercise of discretion by the courts, we submit that reliance must be placed on judgement in Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd. wherein the SC clarified that the discretionary power must be exercised, keeping in mind the objectives of the IBC. The court suggested that the transfer of proceedings may be rejected in a circumstance where the winding up proceedings have reached a stage where it would not be possible to give any remedy to the applicant seeking to initiate CIRP. Apart from this, it is pertinent to consider the rationale adopted by the court in the Forech to ascertain whether liquidation or winding order has been passed in the cases for considering the application amidst the winding up proceedings.

Moreover, it is a settled proposition that the discretion envisaged under the Act shall be ousted by the proceedings of IBC. The Companies Act is a general statute compared to the IBC, which is a special statute. The Court in Swiss Ribbons Ltd. v. The Union of India settled that the IBC is not only a special statute which must prevail in the event of conflict between the Act and IBC, but also 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. This would further indicate that CIRP proceedings should be transferred to the Tribunal even if the liquidation or winding up proceedings have commenced under the Act due to the legislative intent of the Parliament.

Conclusion

This case has resolved the long-standing anomaly between section 434(1)(c) of the Act and section 238 of the IBC by holding that in case of liquidation, IBC will have superiority over the Act. The presence of simultaneous applicable legislation would go against the raison-d’être of the IBC which is to create a single law for insolvency and bankruptcy.

Subodh Asthana & Madhur Bhatt

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