Redundant Scheme No Shield: Supreme Court Revives CIRP, Holds Defunct Arrangement Cannot Override IBC Mandate

Redundant Scheme No Shield: Supreme Court Revives CIRP, Holds Defunct Arrangement Cannot Override IBC Mandate

Introduction

The Supreme Court of India has held that insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be kept in abeyance on the basis of a Scheme of Arrangement that has become redundant and inoperative due to non-compliance with statutory requirements. A Bench comprising Justices Sanjay Kumar and K. Vinod Chandran clarified that once the conditions under Section 7 of the IBC are satisfied, initiation of CIRP cannot be stalled merely because parallel proceedings under company law are pending.

Factual Background

The case arose from an insolvency application filed by Omkara Assets Reconstruction Pvt. Ltd. seeking initiation of corporate insolvency resolution process (CIRP) for recovery of over ₹154 crore. The debt arose from term loans disbursed in April 1999 and December 2000, with default commencing from January 1, 2003.

The corporate debtor resisted the insolvency plea on the ground that a Scheme of Arrangement approved in 2008 and later sanctioned in July 2019 was subsisting and pending consideration before the Punjab and Haryana High Court. It was contended that in view of the pending scheme proceedings, CIRP ought to be kept in abeyance.

Procedural Background

The National Company Law Tribunal (NCLT) had admitted the Section 7 application. However, the National Company Law Appellate Tribunal (NCLAT) kept the insolvency proceedings in abeyance, taking note of the pendency of the Scheme of Arrangement before the High Court.

Aggrieved by this order, the matter reached the Supreme Court, which framed the core issue as whether pendency of proceedings relating to a Scheme of Arrangement could justify stalling CIRP under the IBC.

Issues

1. Whether pendency of a Scheme of Arrangement under the Companies Act can justify keeping CIRP proceedings in abeyance.

2. Whether a scheme that has not complied with statutory timelines and filing requirements can operate to stall insolvency proceedings.

3. Whether judicial discipline requires deference to parallel company law proceedings in such circumstances.

Contentions of the Parties

The appellant corporate debtor contended that the Scheme of Arrangement, approved in 2008 and sanctioned in 2019, was still subsisting and pending before the High Court, and therefore insolvency proceedings ought not to proceed.

The financial creditor argued that the scheme had become inoperative due to non-compliance with statutory requirements under Sections 391–394 of the Companies Act and the Companies (Court) Rules, 1959. It was submitted that the second motion had not been filed within the prescribed timeline and that the sanction order had not been filed with the Registrar within the stipulated period. It was further contended that once the requirements under Section 7 of the IBC were fulfilled, the insolvency process must proceed irrespective of parallel company law proceedings.

Reasoning and Analysis

The Supreme Court examined the statutory framework governing Schemes of Arrangement and noted material non-compliance with procedural requirements. The second motion was not filed within the prescribed time, and the sanction order was not filed with the Registrar as mandated. The Court held that the scheme had become redundant and inoperative due to sheer passage of time and failure to comply with statutory conditions.

Addressing the argument of judicial discipline, the Court observed that while judicial discipline is a cornerstone of justice and fairness, it cannot be invoked to defeat the object of the IBC. The Court emphasised that insolvency proceedings have significant economic implications, involving not merely public funds but also the rehabilitation of industry in the larger national interest.

The Bench clarified that a compromise or arrangement under Section 230 of the Companies Act, 2013 can be explored at the appropriate stage within the framework of the IBC itself. However, such possibility cannot justify stalling initiation of CIRP once statutory requirements are satisfied. The Court made it clear that its observations were prima facie but found no reason to stall initiation of CIRP.

Decision

The Supreme Court set aside the order of the NCLAT that had kept the insolvency proceedings in abeyance. It restored the NCLT’s admission order under Section 7 of the IBC and permitted the Interim Resolution Professional to proceed with the corporate insolvency resolution process in accordance with law.

In this case the appellant was represented by Ms. Purti Gupta and Ms. Heena George, Advocates. Meanwhile the respondent was represented by Mr. Anand Varma and Ms. Apoorva Pandey, Advocates.