Forech India Ltd. Vs Edelweiss Assets Reconstruction Co. Ltd.

The case with its judgment created great significance in the field of winding-up petition field of law. It created a path for both creditors and debtors to move with their petitions and application hand in hand within the same forum. The judgment also created and allowed a wider interpretation the code.
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Introduction

The case analysis of Forech India Ltd. Vs Edelweiss Assets Reconstruction Co. Ltd., provides a brief and summarised view for the Civil appeal. 818 of 2018 in the Supreme court of India regarding provisions such as Companies Act and Insolvency and Bankruptcy Code. The case particularly held some interpretations by the Hon’ble apex court in the matter of winding up petitions and application for corporate insolvency resolution process. The case discusses about the application filed by the financial creditor which must be decided in accordance with the code. It clarifies the point of view and powers available to the creditor who has been violated in the due of the winding up petitions.

The case discusses about the actions and power of tribunal in accordance with provisions of the code. The analysis also discusses about independent proceeding in co- relation with a matter raised in the court.

Facts

Forech India Ltd. was the appellant in the case and Edelweiss Assets Reconstruction were the respondents. The present case arises from a filling a winding-up petition against Tecpro Systems Ltd before the High Court of Delhi on the 10th of Janaury,2014 for the allegation of inability to pay dues. SKF India Ltd. being the operational creditor moved to the National Company law Tribunal (NCLT) under section 9 of the code for a corporate insolvency resolution process (CIRP) Application. The application was later allowed or be withdrawn from the court due to ongoing winding-up petition and was adjudicated upon by the High Court of Delhi.

Later, the respondents in the year 2017 moved to NCLT on August 7 in an insolvency petition as the financial creditor. The tribunal accepted the petition and order was provided for the same to the appellants. The said order was appealed before the NCLAT by the Forech India Ltd. The NCLAT dismissed the appeal stating that the application was maintainable. Forech approached the Supreme Court for the order of NCLT.

Issue

  • Whether the application for CIRP under the code is an Independent Proceeding as against Winding Up under Section 433 of the Companies Act, 2013?

Arguments from Both Sides

  • Appellant: It was pointed out by the learned council for the appellant that a reference had been made by the company itself on 14 while in reference to the notification of the ministry of corporate affairs, which, in exercise of powers under Section 239 of the code issued the Companies 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. Learned Counsel argued that this being the case, the winding up petition should be allowed to be continued while the petitions filed by the creditors should not be entertained under code.
  • Respondents: Mr. Sanjiv Sen, learned senior counsel appearing on behalf of Respondent No. 1. He referred to some of our judgments to buttress this submission and, in particular, to Section 238 of the Code. The counsel on-behalf of the respondent argued that the proceeding initiated under section 7 and 9 of the code are independent proceedings which should entertained and provided with a justifiable conclusion without causing any effect from any winding-up petitions that may be pending in a high court. It was argued that the basis of the provision and code is infuse the life into corporate debtor, who is in the red and it is only after the resolution process fails, the corporate debtor goes into liquidation.

Summary of Court’s Judgement

The Hon’ble Supreme Court after the submission and hearing of all the arguments provided by the counsel from both sides referred to the relevant provision of the code which were used the proceeding being the Companies Act 2013, the company’s rules 2016, the company’s rules 1959, and the legislation amendment done. It was stated that the notice referred to in rule 26 was a pre-admission. It was also held after the order of NCLT on 13.04.2018 that the present proceeding is independent has nothing to do with the transfer of pending winding   up proceeding before the High Court which is made cleared from a reading of section 7 with section 238 of the code.

It was also held that the transitional provision cannot affect the remedies available to a person under IBC, vis-à-vis the company against whom a winding up petition is filed and retained in the High Court, as the same would amount to treating IBC as if it did not exist on the statute book and would deprive persons of the benefit of the new legislation. Section 434 of the Companies Act, 2013 included a proviso after the amendment by which the winding up petitions where notice has already been served, any person can move to NCLT for such petition by applying to the court. After, such application the petitions would be transferred to the NCLT from the High Court treated as an Insolvency petition under the code.

On the basis of facts, The Hon’ble Supreme Court did not agree with logic of NCLAT for upholding the order passed by the NCLT. It was observed that any Reference made to Section 11 of the code was irrelevant for the matter at hand. Although the application was not interfered and was considered to be an independent proceeding which must decide as per the provisions of the code.

Analysis         

  • Corporate Insolvency Resolution Process: It is the Process under the Insolvency and Bankruptcy Code 2016 which allows a financial creditor or corporate to file an application before NCLT for initiating CIRP when a default takes place against the debtor. It is a recovery Mechanism for Creditors. An action can initiated by a Financial Creditor under Section 7 and Operation Creditor under Section 9 of the code and by the corporate debtor under Section 10 of the IBC, 2016. The Financial creditor can himself or jointly can initiate filing of application before the NCLT against the corporate debtor for insolvency proceeding. An Operational Creditor have up-to 10 days to serve prior notice to the debtor for the debtor to provide his money back before initiating any such process. An Insolvency process must be completed within 180 days from the date of initiation in NCLT.
  • Winding-Up Petition: A legal notice put forward to the court by a creditor. The petition allows the court to liquidate the company as it is believed the company is insolvent. The Proceed and returns from the liquidation is further utilized to pay back the creditor. It is the most serious action which can be taken by the creditor in order to regain the investment and credited money towards the debtor company. It provided the creditor a way to recover their money from the debtor as it is believed the company is in no position to return it back.
  • Basic Objective of the Code: The Act is to consolidate and to amend the laws which is relating to reorganisation and insolvency resolution of corporate persons, partnership   firms and individual in a time bound manner for maximisation of value of assets of any such persons, to promote in order to promote aspects of entrepreneurship, availability of credit in the market and balancing the interest of the creditors and stakeholders in the companies.

Provisions

  1. Section 433(e) of Companies Act (CA) : if the company is unable to pay its debts;
  2. Section 9 of Insolvency and Bankruptcy Code (IBC): Conditions on which creditor may petition.—
  3. Section 7 of IBC: A financial creditor either by itself or jointly with 1[other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
  4. Section 11 of IBC :The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter;
  5. Section 239 of IBC: The Central Government may, by notification, make rules for carrying out the provisions of this Code.
  6. Section 238 of IBC: The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
  7. Section 255 of IBC: The Companies Act, 2013 shall be amended in the manner specified in the Eleventh Schedule.
  8. Section 434 of the Companies Act, 2013 : Transfer of certain pending proceedings.- (1) On such date as may be notified by the Central Government in this behalf,—
  9. Section 485 of CA: Publication of resolution to wind up voluntarily  
  10. Section 11 of CA: Persons not entitled to make applications- The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter.

Cases Referred

  1. The Hon’ble Supreme Court referred to its decision in Jaipur Metals & Electricals Employees Organization through General Secretary Mr. Tej Ram Meena v. Jaipur Metals & Electricals Ltd.[1] through its Managing Director and Ors. 2018 SCC OnLine SC 2801 to clarify that if there is any inconsistency between Section 434 as substituted and the provisions of the Code, the latter must prevail and the winding up petitions pending before the High Court cannot be proceeded further in view of Section 238[2] of the Code.
  2. In the case of Ashok Commercial Enterprises vs. Parekh Aluminex Limited [3], it was states that the notice referred in rule 25 was a pre-admission notice and hence held that winding-petition where the pre-admission notices were issues and served on the respondent will be retained in the High Court.
  3. In Another case of M/s. M.K. & sons Engineering v/s. Eason Reyrolle Ltd.[4], it was held that only purpose the Madras High Court Strongly replies up the form No.6 appended to Rule 27 and the expression “was admitted “in the Notice of Petition provided in the Form.
  4. In reference to PSL Limited vs. Jotun India Private Limited[5], in which it was held that “The fact that post notice winding up petitions continue to be governed by the Companies Act, 1956, only means – that to those proceedings it will be the Companies Act, 1956 which will apply. It does not, however, mean that if, in a post-notice winding up petition a new proceeding is filed under IBC, and where orders are passed by NCLT, including under Section 14 of IBC, the consequences provided for under IBC will not apply to post notice proceeding, whatever their stage may be”.

Conclusion

The case with its judgment created great significance in the field of winding-up petition field of law. The ruling set method for many Pending winding-up petitions before the High court in different states. It created a path for both creditors and debtors to move with their petitions and application hand in hand within the same forum. The judgment also created and allowed a wider interpretation the code. The objectives which were intended by the code can be supplied to the parties in court. The Hon’ble court provided a way without interfering the powers and action of the appellant tribunal in the case by allowing the appeal as independent proceeding and granting liberty to appeal before us to apply under the provision to section 434 of the Companies Act through the transfer of the winding-


[1] CIVIL APPEAL NO. 12023 OF 2018

[2] Firm body corporate or association not to be appointed as inspector. No firm, body corporate or other association shall be appointed as an inspector under section 235 or 237.

[3]  (2017) 4 Bom. CR 653

[4] CP/364/2016

[5]  (2018) 2 AIR Bom R 350

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