IBC Proceedings Overriding Section 391 Companies Act Schemes Despite Pendency or Sanction in High Court

In brief

The question

Whether the pendency of a Scheme of Arrangement under the Companies Act, 1956, acts as a bar to the initiation of CIRP under the Insolvency and Bankruptcy Code, 2016.

The court held

The Supreme Court allowed the appeal and set aside the NCLAT order, restoring the Adjudicating Authority’s (NCLT) order to initiate CIRP.

It also directed

The Court held that independent proceedings under Section 7 IBC are not stalled by a pending or defunct SOA under the Companies Act.

The Interim Resolution Professional (IRP) was directed to resume charge of the Corporate Debtor immediately, and the interim arrangement allowing the erstwhile management to remain in the loop was vacated.

01Facts

The Appellant (financial creditor) initiated Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC against Respondent No. 2 (Corporate Debtor) for a default of approximately ₹154 crores.

pp. 1-2

The Respondent resisted, citing a pending Scheme of Arrangement (SOA) under Sections 391-394 of the Companies Act, 1956, before the Punjab and Haryana High Court.

p. 2

Although a meeting of creditors approved the SOA in 2008, the Respondent failed to move the "second motion" for court sanction within the statutory period under the Companies (Court) Rules, 1959.

pp. 6-7

Sanction was eventually granted in 2019 but was recalled in 2022 due to inoperability and jurisdictional shifts; however, a Division Bench stayed that recall.

p. 8

The NCLAT subsequently stayed the CIRP proceedings pending the High Court’s final decision on the SOA.

p. 2

02Issues

i.Whether the pendency of a Scheme of Arrangement under the Companies Act, 1956, acts as a bar to the initiation of CIRP under the Insolvency and Bankruptcy Code, 2016.

p. 1/5

ii.Whether the overriding effect of Section 238 of the IBC prevails over inconsistent proceedings under the Companies Act.

p. 3/15

03Law Applied

The Court primarily applied Section 238 of the IBC, which mandates that the Code shall have effect notwithstanding anything inconsistent contained in any other law.

p. 3

It relied on *A. Navinchandra Steels (P) Ltd. v. Srei Equipment Finance Ltd.*, establishing that Section 7 IBC is an independent proceeding unaffected by winding-up or other legacy company proceedings.

pp. 15-16

The Court also applied Section 434(1)(c) of the Companies Act, 2013, and the Companies (Transfer of Pending Proceedings) Rules, 2016, which require the transfer of all pending proceedings (not reserved for orders) to the NCLT.

p. 8/13

Provisions in the judgment · 6 · Linked ones open on LawLens

Insolvency and Bankruptcy Code, 2016. Section 7 Section 14 Section 238

Companies Act, 2013 Section 434 Section 279 Section 230

04Reasoning

The Court reasoned that the SOA initiated in 2008 had become "defunct" and "inoperative" due to the Respondent's gross delay of ten years in moving the second motion and the subsequent failure to file the sanction order with the Registrar of Companies within the 30-day statutory window.

pp. 9-10

It observed that the High Court lacked jurisdiction after 2016, as the matter was not "reserved for orders" when the Transfer Rules came into force, necessitating a transfer to the NCLT.

pp. 12-13

The Court emphasized that judicial discipline cannot be used by "tardy litigators" to jeopardize public funds or stall the recovery of astronomical debts.

pp. 13-14

Applying Section 238, the Court held that the IBC’s objective of resuscitation and revival through new management takes precedence over stagnant legacy arrangements.

pp. 17-18