IBC | Defunct Scheme Of Arrangement Under Companies Act Cannot Stall Corporate Insolvency Resolution Process : Supreme Court

The Supreme Court on Tuesday (February 24) held that a defunct Scheme of Arrangement under the Companies Act cannot stall the Corporate Insolvency Resolution Process proceedings under the Insolvency & Bankruptcy Code, 2016. A bench of Justices Sanjay Kumar and K Vinod Chandran set aside the NCLAT's decision, which had kept in abeyance the CIRP initiated under Section 7 of IBC against the corporate debtor, merely because the Scheme of Arrangement was pending before the High Court. “…we find no reason to stall the proceedings for initiation of the CIRP by resorting to the provisions of the IBC, as has been now attempted by the appellant herein, which would ensure rehabilitation of the Company.”, the court observed, while allowing the financial creditor's appeal, pointing out that “Section 7 was held to be an independent proceeding, which stands by itself as reiterated in a catena of judgments of this Court, which had to be tried on its own merits.” The dispute traces back to loans amounting to ₹10.60 crore disbursed in 1999–2000 by IDBI Bank's Stressed Assets Stabilisation Fund, the predecessor of the appellant. The corporate debtor defaulted on January 1, 2003, and by the time insolvency proceedings were initiated under Section 7 of the IBC, the outstanding dues had escalated to ₹154.33 crore, inclusive of interest. Resisting the insolvency proceedings, the corporate debtor contended that a Scheme of Arrangement under Sections 391–394 of the Companies Act, 1956 was pending and alleged suppression of this fact before the adjudicating authority. Aggrieved by the NCLAT's order keeping in abeyance the CIRP, the Appellant moved to the Supreme Court. Reiterating settled law, the judgment authored by Justice Chandran emphasized that the IBC, by virtue of Section 238, has an overriding effect over all other laws in case of inconsistency. Relying on A. Navinchandra Steels (P) Ltd. v. Srei Equipment Finance Ltd. (2021), the Bench underscored that the IBC is a special statute aimed at time-bound resolution of insolvency and cannot be eclipsed by proceedings under the Companies Act, which operates as a general law in this context. The Court clarified that Section 7 proceedings under the IBC are independent and must be examined solely on the existence of debt and default, uninfluenced by parallel proceedings which themselves are legally infirm. Accordingly, the appeal was allowed, thereby restoring the order of the Adjudicating Authority to continue with the CIRP. Also, the Court criticized the trend to stall the CIRP, noting that it would not be in the national interest to stall the CIRP, particularly when an industry/entity is on the verge of a revival. “Judicial discipline, though a corner stone of justice, equity and fairness; ensuring continued public trust in judicial institutions, cannot be urged by tardy litigators engaged in fractious and opulent litigations aimed at jeopardizing public funds and putting the economy in a hostage situation. In cases having economic implications like the present one, at stake is not only public funds but rehabilitation of an industry, in the larger national interest, wherein financial probity is also of pre-eminence.”, the court observed.HeadnoteInsolvency and Bankruptcy Code, 2016 – Section 7 vs. Companies Act, 1956 – Sections 391-394 – Overriding effect of IBC – Redundancy of Scheme of Arrangement (SOA) due to gross delay – The Supreme Court held that proceedings under Section 7 of the IBC cannot be stalled on the grounds of "judicial discipline" due to a pending Scheme of Arrangement under the Companies Act, especially when such a scheme has become defunct and inoperative due to a decade-long delay and non-compliance with statutory timelines - Noted that the IBC is a special statute aimed at the revival of companies, and its provisions prevail over inconsistent provisions in other laws by virtue of Section 238.Companies (Transfer of Pending Proceedings) Rules, 2016 – Rule 3 – Transfer of proceedings to NCLT – Where a "second motion" for a Scheme of Arrangement was pending and not "reserved for orders" at the time the 2016 Rules came into effect (December 15, 2016), the High Court was mandated to transfer the proceedings to the Tribunal - In this case, a second motion filed belatedly in 2009 and left pending for years should have been transferred to the NCLT.Judicial Discipline vs. Economic Implications – While judicial discipline is a cornerstone of justice, it cannot be used by "tardy litigators" to jeopardize public funds or put the economy in a "hostage situation." - In cases with significant economic implications, the larger national interest of rehabilitating an industry and ensuring financial probity takes pre-eminence – Appeals allowed. [Relied on A. Navinchandra Steels (P) Ltd. v. Srei Equipment Finance Ltd. (2021) 4 SCC 435; Paras 13-20]Cause Title: Omkara Assets Reconstruction Private Limited. Versus Amit Chaturvedi and Ors.Citation : 2026 LiveLaw (SC)...

IBC | Defunct Scheme Of Arrangement Under Companies Act Cannot Stall Corporate Insolvency Resolution Process : Supreme Court

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IBC | Defunct Scheme Of Arrangement Under Companies Act Cannot Stall Corporate Insolvency Resolution Process : Supreme Court

Yash Mittal

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