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Waterfall Mechanism in Insolvency & Bankruptcy Code, 2016 (IBC) vs. in Companies Act, 2013 – Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma Vs. Union of India and Ors. – Supreme Court

Hon’ble Supreme Court held that (i) in principle, it cannot be doubted that the cases of revival or winding up of the company on the ground of insolvency and inability to pay debts are different from cases where companies are wound up under Section 271 of the Companies Act 2013. The two situations are not identical. The reasons and grounds for winding up under Section 271 of the Companies Act, 2013 are vastly different from the reasons and grounds for the revival and rehabilitation scheme as envisaged under the Code.
(ii) In view of the enactment of IBC and Section 53 of the IBC, it necessitated to amend the Act, 2013. As per Sub-Section (7) of Section 327, Sections 326 and 327 shall not be applicable in the event of liquidation under the IBC.
(iii) Entire unpaid dues are not covered by the proviso to sub-section (1) to Section 326 of the Companies Act, 2013.
(iv) The provisions under the IBC cannot be compared with that of the earlier regime, namely, the Companies Act, 1956/2013.
(v) The waterfall mechanism is based on a structured mathematical formula, and the hierarchy is created in terms of payment of debts in order of priority with several qualifications, striking down any one of the provisions or rearranging the hierarchy in the waterfall mechanism may lead to several trips and disrupt the working of the equilibrium as a whole and stasis, resulting in instability. Every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments.
Hon’ble Apex Court concluded that as sub-section (7) of Section 327 of the Act, 2013 provides that Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC, which has been necessitated in view of the enactment of IBC and it applies with respect to the liquidation of a company under the IBC, Section 327(7) of the Act, 2013 cannot be said to be arbitrary and/or violative of Article 21 of the Constitution of India. In case of the liquidation of a company under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC subject to Section 36(4) of the IBC, in case of liquidation of company under IBC.

Waterfall Mechanism in Insolvency & Bankruptcy Code, 2016 (IBC) vs. in Companies Act, 2013 – Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma Vs. Union of India and Ors. – Supreme Court Read Post »

Even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT – Action Ispat And Power Pvt. Ltd. Vs. Shyam Metalics And Energy Ltd. – Supreme Court

What becomes clear upon a reading of the Jaipur Metals, Forech India and Kaledonia Jute judgments of the Hon’ble Supreme Court is the following:

(i) So far as transfer of winding up proceedings is concerned, the Code began tentatively by leaving proceedings relating to winding up of companies to be transferred to NCLT at a stage as may be prescribed by the Central Government.

(ii) This was done by the Companies (Transfer of Pending Proceedings) Rules, 2016 which came into force with effect from 15.12.2016. Rules 5 and 6 referred to three types of proceedings. Only those proceedings which are at the stage of pre-service of notice of the winding up petition stand compulsorily transferred to the NCLT.

(iii) The result therefore was that post notice and pre admission of winding up petitions, parallel proceedings would continue under both statutes, leading to a most unsatisfactory state of affairs. This led to the introduction of the 5th proviso to section 434(1)(c) which, as has been correctly pointed out in Kaledonia (supra), is not restricted to any particular stage of a winding up proceeding.

(iv) Therefore, what follows as a matter of law is that even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT. The question that arises before us in this case is how is such discretion to be exercised?

Even post admission of a winding up petition, and after the appointment of a Company Liquidator to take over the assets of a company sought to be wound up, discretion is vested in the Company Court to transfer such petition to the NCLT – Action Ispat And Power Pvt. Ltd. Vs. Shyam Metalics And Energy Ltd. – Supreme Court Read Post »

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