The Supreme Court has emphasised that the Insolvency and Bankruptcy Code, 2016 (IBC), is a special statute whose provisions have an overriding effect over any inconsistent provisions in other laws, including the Companies Act, by virtue of Section 238 of the IBC. The Court emphasised that the corporate restructuring under the IBC must be prioritized over stalled and ineffective proceedings under the Companies Act to protect public funds and the larger economic interest.
Essentially, the Apex Court held that an independent proceeding initiated under Section 7 of the IBC for the revival of a corporate debtor is not affected by and shall prevail over pending proceedings under the Companies Act, such as a Scheme of Arrangement, especially when the latter has been rendered defunct and inoperable due to gross, unexplained delays and non-compliance with statutory timelines.
A Two-Judge Bench of Justice Sanjay Kumar and Justice K. Vinod Chandran observed that the respondent company had failed to comply with the procedural and statutory timelines mandated under the Companies Act, 1956, and the Companies (Court) Rules, 1959, for the SOA. The delay of almost ten years in getting the scheme sanctioned, which was based on dues as of 2008, rendered it redundant, inoperable, and unenforceable by 2019, especially as the debt had grown astronomically in the interim.
The Bench noted that upon the coming into force of The Companies (Transfer of Pending Proceedings) Rules, 2016, the proceedings for the SOA should have been transferred to the National Company Law Tribunal (NCLT). Thus, the exception for matters ‘reserved for orders’ did not apply here, as the second motion was merely pending and had not been reserved for orders when the 2016 Rules became effective. Therefore, the Bench held that the High Court lacked jurisdiction to sanction the scheme in 2019.
The Bench also emphasized that judicial discipline cannot be invoked by tardy litigators to stall proceedings under the IBC, particularly in cases with significant economic implications involving public funds and the rehabilitation of an industry. It observed that the primary goal of the IBC is the resuscitation of the corporate debtor in the larger public interest, which includes creditors, workmen, and the economy at large. The Bench also clarified that a compromise or arrangement under Section 230 of the Companies Act, 2013, can be entered into even during an IBC proceeding.
Briefly, the case originated from an application filed by the appellant’s predecessor before the Adjudicating Authority (NCLT) to initiate a Corporate Insolvency Resolution Process (CIRP) against Respondent No. 2 for a debt of Rs. 154.33 Crore, which arose from term loans disbursed in 1999 and 2000, with the default commencing from January 01, 2003. The Respondent No. 2 resisted the CIRP application, citing the pendency of proceedings for a Scheme of Arrangement (SOA) under Sections 391-394 of the Companies Act, 1956, before the Punjab and Haryana High Court.
The Adjudicating Authority admitted the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), noting that the SOA had become defunct and that the provisions of the IBC have an overriding effect under Section 238. However, the NCLAT stayed the CIRP until the disposal of the proceedings pending before the High Court.
The timeline of the SOA proceedings revealed significant delays and non-compliance. A meeting of creditors approved the SOA, and the report was taken on record by the High Court. Thereafter, a second motion for sanction, required to be filed within 7 days, was filed belatedly in 2009. Thus, the creditors withdrew their consent to the SOA due to inaction. Eventually, the High Court eventually sanctioned the SOA almost a decade later. This sanction order was recalled, but the recall was subsequently stayed by a Division Bench in the Year 2022. The sanctioned scheme was finally filed with the Registrar of Companies in 2023, well beyond the prescribed statutory timelines.
Appearances:
Senior Advocates Neeraj Kishan Kaul and Abhijeet Sinha, AOR Mandeep Kalra, along with Advocates Abhishek Anand, Karan Kohli, Palak Kalra, Ridhima Mehrotra, Rajat Gupta, Vanshika Dhoot, Heena Kochar, Ira S Mahajan, Varad Kohle, Saumitr Kumar, Radhika Narula, Anushna Satapathy, Chitrangada Singh, Radhika Jalan, Widaphi Lyngdoh, Yashas J, Gauri Rajput, Vaibhav Yadav, Paras Mohan Sharma, and Shefali Tripathi, for the Appellants
AORs Siddhartha Jha, Roopali Lakhotia, and Purti Gupta, along with Advocates Purti Gupta, Henna George, Ravi Sehgal, Ashwani Sharma, and Adithya S. Nair, for the Respondent
