1. Winding up petition under Section 433(e) of the Companies Act — Subsequent insolvency petition under Section 7 of the Insolvency and Bankruptcy Code — Conflict over priority of proceedings. (Para 1 , 2 , 3 , 4 )
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2019 Supreme(SC) 77
SUPREME COURT OF INDIA
R.F. Nariman, Navin Sinha, JJ.
Forech India Ltd. – Appellant
Versus
Edelweiss Assets Reconstruction Co. Ltd. – Respondent
Civil Appeal No. 818 of 2018
Decided On : 22-01-2019
IMPORTANT POINTS
All winding up petitions where notices were issued and served u/R 26 on the respondent will be retained in the High Court.
Application u/s 7 is independent proceeding, nothing to do with transfer of pending winding up proceedings before the High Court. It is open to a creditor to apply u/s 7 at any time before a winding up order is passed by High Court.
Section 434, Companies Act, 2013 substituted by Eleventh Schedule of Insolvency & Bankruptcy Code, 2016 cannot be treated as part of the Code.
Section 11(d) of the Code only bars a corporate debtor from initiating a petition u/s 10 in respect of whom a liquidation order has been made. It does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9.
Headnote:(a) Insolvency & Bankruptcy Code, 2016 – Section 255 r/w Section 434, Companies Act, 2013; Rule 5, Companies (Transfer of Pending Proceedings) Rules, 2016 and Rules 26 and 27, Companies (Court) Rules, 1959 – Transfer of cases to NCLT – Notice under Rule 26 a pre-admission notice – All winding up petitions where notices were issued and served u/R 26 on the respondent will be retained in the High Court. (Para 15, 16)
(2017) 4 BomCR 653 – Cited with approval
CP/364/2016 – Distinguished
(b) Insolvency & Bankruptcy Code, 2016 – Section 7 r/w 238 – Application u/s 7 is independent proceeding, nothing to do with transfer of pending winding up proceedings before the High Court – Open to a creditor to apply u/s 7 at any time before a winding up order is passed by High Court. (Para 18)
© Interpretation of statute – Section 434, Companies Act, 2013 substituted by Eleventh Schedule of Insolvency & Bankruptcy Code, 2016 – Provision still remains in Act, 2013 – Cannot be treated as part of the Code – In case of any inconsistency between Section 434 as substituted and the provisions of the Code, the latter must prevail – NCLT correctly applied Section 238 of the Code to an independent proceeding instituted by a secured financial creditor. (Para 18)
(2018) 2 AIR Bom R 350 – Cited with approval
(d) Insolvency & Bankruptcy Code, 2016 – Section 11(d) – Only bars a corporate debtor from initiating a petition u/s 10 in respect of whom a liquidation order has been made – It does not follow that until a liquidation order has been made against the corporate debtor, an Insolvency Petition may be filed under Section 7 or Section 9. (Para 22)
Facts of the case:
A winding up petition was filed by the present appellant before the High Court against Respondent No. 2-Company, alleging its inability to pay dues. Notice in this petition had been served. Further orders have gone on to state that there is a debt or liability which is, in fact, admitted.
A reference had been made by the Company itself to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985, which has abated as on 11.12.2016. Another operational creditor, viz., SKF India Ltd. had filed an application under Section 9 of the Insolvency & Bankruptcy Code, 2016, against Respondent No. 2, which was allowed to be withdrawn so that the aforesaid operational creditor could go to the High Court in a winding up petition which would then be heard along with the Company Petition No. 42/2014.
Respondent No. 1, being a financial creditor of the selfsame corporate debtor, moved the National Company Law Tribunal (NCLT) in an insolvency petition. This petition was admitted. Against the aforesaid order, an appeal was filed by the appellant herein which was dismissed by the Appellate Tribunal and it was held that since there was no winding up order by the High Court, the financial creditor’s petition would be maintainable, as a result of which the appellant’s appeal has been dismissed.
The present matter arises from an Operational Creditor’s appeal to continue with a winding up petition that has been filed by the said creditor way back in 2014.
Finding of the Court:
Appellate Tribunal wrongly held that since there was no winding up order by the High Court, the financial creditor’s petition would be maintainable.
Result: Appeal disposed of.
Legal Category Hierarchy
- insolvency and bankruptcy law
- company law
Table of Contents
2. Whether a winding up petition with served notice under Rule 26 of the Companies (Court) Rules precludes independent insolvency proceedings under the Insolvency and Bankruptcy Code. (Para 5 , 6 )
3. Rule 26 notice is pre-admission — IBC proceedings are independent and override inconsistent laws under Section 238 — Section 11(d) only bars specific corporate debtor applications. (Para 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 )
4. Independent insolvency proceedings under the Insolvency and Bankruptcy Code prevail over pending winding up petitions in High Courts pursuant to the overriding effect of Section 238. (Para 17 , 18 , 19 , 20 )
5. Appeal dismissed — Order of Appellate Tribunal sustained — Liberty granted to apply for transfer of winding up proceedings to the National Company Law Tribunal under Section 434. (Para 23 , 24 )
6. Does the notice referred to in Rule 26 of the Companies (Court) Rules, 1959, signify a pre-admission or post-admission stage?
The notice under Rule 26 refers to a pre-admission scenario. The expression was admitted in Form No. 6 simply means notice has been issued and the petition is fixed for hearing before the Company Judge. (Para 15 , 16 )
7. Can a pending winding up petition in a High Court block the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code?
No. Proceedings initiated under Section 7 or Section 9 of the Code are independent and must reach their logical conclusion. Under Section 238, the Code overrides any inconsistent provisions in other laws, including pending winding up petitions. (Para 6 , 17 , 18 , 19 , 20 )
8. Does Section 11(d) of the Insolvency and Bankruptcy Code prevent the filing of insolvency petitions if no liquidation order has been passed?
No. Section 11(d) only bars a corporate debtor from initiating a petition under Section 10 of the Code if a liquidation order has already been made against it. It does not bar petitions filed under Section 7 or Section 9. (Para 21 , 22 )
JUDGMENT :
Rohinton F. Nariman, J.
1. The present matter arises from an Operational Creditor’s appeal to continue with a winding up petition that has been filed by the said creditor way back in 2014. The facts relevant for disposal of this appeal are as follows:-
2. A winding up petition, being No. 42 of 2014, was filed by the present appellant before the High Court of Delhi on 10.01.2014, against Respondent No. 2-Company, alleging (under Section 433(e) of the Companies Act) inability to pay dues. Notice in this petition had been served, as is recorded by an order dated 20.01.2014 of the High Court of Delhi. Further orders which have been pointed out to us by learned counsel for the appellant, have gone on to state that there is a debt or liability which is, in fact, admitted.
3. It was also pointed out by learned counsel for the appellant that a Reference had been made by the Company itself on 14.07.2015 to the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies Act, 1985, which, according to the learned counsel for the appellant, has abated as on 11.12.2016. It transpires that another operational creditor, viz., SKF India Ltd. had filed an application under Section 9 of the Insolvency & Bankruptcy Code, 2016 (in short ‘the Code’), against Respondent No. 2, which was allowed to be withdrawn so that the aforesaid operational creditor could go to the High Court in a winding up petition which would then be heard along with the Company Petition No. 42/2014.
4. Meanwhile, Respondent No. 1, being a financial creditor of the selfsame corporate debtor, moved the National Company Law Tribunal (NCLT) in an insolvency petition filed under Section 7 of the Code sometime in May/June 2017. This petition was admitted on 07.08.2017. Against the aforesaid order, an appeal was filed by the appellant herein which was dismissed by the Appellate Tribunal, in which Section 11 of the Code was referred to, and it was held by the Appellate Tribunal that since there was no winding up order by the High Court, the financial creditor’s petition would be maintainable, as a result of which the appellant’s appeal has been dismissed.
5. Learned counsel appearing on behalf of the appellant has painstakingly taken us through the record, and has referred to the Code, together with Notifications from the Ministry of Corporate Affairs, which, in exercise of powers under Section 239 of the Code, have made Rules called the Companies (Transfer of Pending Proceedings) Rules, 2015. She has also referred to amendments made up to date in the Eleventh Schedule to the Code and has argued before us that the winding up petition that had been preferred by her would clearly fall within the ambit of Rule 5 of the aforesaid Rules inasmuch as notice under Rule 26 of the Companies (Court) Rules had been served much prior to the commencement of the Code. This being the case, this winding up petition should, therefore, have carried on and should be allowed to carry on before the High Court. The necessary concomitant of this argument was that the winding up proceedings before the High Court should continue and not proceedings filed by other creditors under the Code.
6. Mr. Sanjiv Sen, learned senior counsel appearing on behalf of Respondent No. 1, countered these submissions and has placed before us all the relevant materials, statutory and otherwise, to state that the whole object of the Code would be frustrated if petitions for winding up in the High Court were to continue in the face of the insolvency petitions that have been filed under the Code. He referred to some of our judgments to buttress this submission and, in particular, to Section 238 of the Code. According to him, as has been held in some of our judgments, the proceedings that were initiated under Section 7 or Section 9 of the Code are independent proceedings, which must reach their logical conclusion unhampered by any winding up petition that may be pending in a High Court. According
