The Insolvency and Bankruptcy Code, 2016 ("IBC") has fundamentally altered the landscape of corporate insolvency in India. Section 238 of the IBC contains a non-obstante clause that gives the Code overriding effect over any other law inconsistent with it. The Supreme Court has held that the IBC is a special statute that must prevail in the event of conflict, and that a petition under Section 7 or Section 9 of the IBC is an independent proceeding unaffected by winding-up proceedings filed against the same company.
The Displacement of the Winding-Up Route
Section 271 of the Companies Act, 2013 remains on the statute book, but its practical scope has been narrowed. The IBC applies to companies that have defaulted on a debt of at least one crore rupees. A company that is insolvent and has a debt above the threshold is within the IBC's jurisdiction, and the winding-up route is not available as a parallel remedy. The Supreme Court's decision in A. Navinchandra Steels Pvt. Ltd. v. SREI Equipment Finance Ltd. confirms that an IBC petition is an independent proceeding and that the pendency of a winding-up petition does not bar it.
The Residual Scope of Section 271
Section 271 remains available for companies that are not covered by the IBC—companies with liabilities below the threshold, companies that are not insolvent but are in a shareholder deadlock, companies that have defaulted in filing financial statements for five years, and companies that have acted against the sovereignty and integrity of India. The winding-up route is now exceptional, and it is confined to cases that the IBC does not reach.
The Preferential Payments Issue
Section 327(7) of the Companies Act excludes the application of Sections 326 and 327 to a company undergoing liquidation under the IBC. The Supreme Court has upheld the constitutional validity of this provision, holding that the IBC's waterfall mechanism governs the distribution of assets in an IBC liquidation. The Companies Act's preferential payment provisions apply only to a winding up under the Companies Act, not to an IBC liquidation.
The IBC's overriding effect is not absolute. It applies to the extent of inconsistency, and the Companies Act continues to govern matters that the IBC does not cover. A company that is considering a winding-up petition must first determine whether the IBC applies; if it does, the winding-up route is not available.
Call to Action
Anuj Desai & Associates advises creditors and companies on the choice between the winding-up route and the IBC—from the Section 238 analysis and the debt threshold to the residual scope of Section 271. If you are considering a winding-up petition, we can help you determine whether the IBC bars it.
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