Insolvency Over Arrangement: Supreme Court Reiterates The Overriding Effect Of IBC

INTRODUCTION

The Indian Supreme Court recently, in the case of Omkara Assets Reconstruction Private Limited v. Amit Chaturvedi & Ors.,¹ held that a pending Scheme of Arrangement before the High Court under the Companies Act cannot become a roadblock in the initiation of a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The Apex court firmly held that the IBC, being a special statute, will prevail over the Companies Act, a general law.

Background Of The Case

In the present case, the Corporate Debtor (Respondent No. 2) took two term loans amounting to Rs. 10.60 Cr. in 1999 and 2000 from the Industrial Development Bank of India (IDBI). Respondent No. 2 defaulted on repayment of these loans starting from 01.01.2003 and over the years the total outstanding amount reached Rs. 154.33 Cr. with accumulating interest. Respondent No. 2 was financed by the Stressed Assets Stabilization Fund (SASF) of IDBI Bank, which later assigned these due loan amounts to Omkara Assets Reconstruction Private Limited (Appellant). Owing to continuous default of Respondent No. 2, Appellant approached Ld. National Company Law Tribunal (NCLT) under section 7 of the IBC, 2016 for initiation of CIRP against Respondent No. 2. The Respondent on the other hand challenged the maintainability of section 7 application on the grounds that a scheme of arrangement (SOA) of Respondent No. 2 was pending before the Hon’ble Punjab and Haryana High Court under section 391 to 394 of the Companies Act, 1956 (Companies Act). Ld. NCLT rejected the Respondent’s contention and accepted the section 7 application. NCLT noted that Respondent has failed in complying with section 391 of Companies Act with respect to SOA making the scheme defunct.

The director of Respondent No. 2 (Respondent No. 1) appealed before the Hon’ble National Company Law Appellate Tribunal (NCLAT) against the NCLT order. NCLAT set aside the decision of NCLT and kept the section 7 application in abeyance till the final disposition of SOA proceedings before the High Court. Against NCLAT order, the Appellant approached Hon’ble Apex Court.

The Appellant argued before the Hon’ble Court that because of Respondent No. 2, company’s own deliberate non-compliance and delays, the SOA has already become completely defunct in essence. Section 391 of the Companies Act provides that a company can enter to an arrangement if at least three‑fourths of the total creditors of the total debt value vote in favour of the arrangement in a meeting directed by the Court under section 391(1). If the required majority is obtained in meeting, the Court will pass a sanction order under 391(2). Further, the provisions mandatorily state that the Court’s sanction order becomes effective only when order’s certified copy is filed with the Registrar of Companies (ROC). Companies (Court) Rules, 1959 requires that “the Chairman of the creditors must report the result of the creditors’ meeting to the Court within seven days”. After the Court permits the second motion, it must be filed within the next seven days, and the sanctioned scheme must then be filed with the ROC within thirty days to take effect.

Appellant stated that the creditors gave their consent initially in lieu of first motion approving SOA; however, due to delay on the part of Respondent No. 2 with respect to the second motion, the consent was withdrawn expressly in writing. Thus, the pending proceedings before the High Court cannot stop the Appellant from approaching NCLT for initiating CIRP. Appellant also contended that the pending proceedings before the Hon’ble High Court regarding SOA have no consequence on insolvency proceedings due to Section 238 of IBC, which gives an overriding effect to IBC over other statutes.

The Respondent, on the other hand, argued that due respect to the principle of judicial discipline should be given, and when proceedings before the Hon’ble High Court are pending, IBC proceedings ought not to have been initiated. The Respondent supported this by contending that SOA had been sanctioned by High Court and creditors also gave their consent.

The key issues emerged before the Court were: -

1. Whether the SOA proceedings are valid? and
2. Whether the proceedings under IBC will prevail over SOA proceedings?

Hon’ble Supreme Court, after careful examination of the factual background and law held that the Scheme of arrangement in the instant case had become defunct and is not valid. The Court further said that IBC, being a special statute, will prevail over the Companies Act in case of any inconsistency.

The Scheme of Arrangement (SOA)

In 2008, the creditors of Respondent No. 2 Company approved the SOA under Sections 391-394 of the Companies Act before the Hon’ble Punjab and Haryana High Court. The SOA meeting was conducted, and the report was submitted to the High Court on 25.07.2008. Respondent No. 2 was required to file a second motion within 7 days of this date (as per Companies (Court) Rules, 1959) to obtain formal sanction from the Court; however, it failed to do so within the stipulated time.

In March 2009, the creditors of Respondent No. 2 warned them of the impending withdrawal of their consent if the failure regarding the second motion continues. In July 2009, the creditors formally withdrew their consent to the SOA, due to Respondent No. 2’s continued inaction. Despite this, the company filed the second motion in 2009, but nothing happened for years. It was not until 23.07.2019, over 10 years later, that the High Court sanctioned the SOA. Even after this sanction order, Respondent No. 2 failed to file the High Court’s sanction order with the ROC within the mandated 30-day window.

In 2022, the SASF moved to recall the 2019 sanction order, which was allowed on 02.08.2022. This recall was held by a Division Bench on 10.10.2022. Even after the stay, the company did not file the order with the Registrar within 30 days. The Form INC-28 was eventually filed before ROC only on 06.07.2023, approx. four years after the 2019 sanction order.

Hon’ble Court in this case discussed in detail the legal and factual background concerning the scheme of arrangement (SOA) and overriding effect of IBC.

Validity of the Scheme of Arrangement (SOA)

The moot dispute in the case was validity of the SOA which got sanctioned by the Court only in 2019. The hon’ble Court examined very meticulously the procedural timelines and related legal provisions of the SOA. The court concluded that SOA had become unenforceable and redundant. While relying upon the case of Alpha Corp. Development Private Limited and Euthoria Developers Private Limited^[2], Court held that the second motion was not filed within seven days of 25.07.2008 after the creditors had approved arrangement. Court note that sanction order dated 23.07.2019 came nearly after the eleven years of the creditors meeting by which time the SOA terms had become outdated. Respondent No. 2 again failed in procedural compliance by not filing the belated sanction order before the ROC within 30 days of 23.07.2019. The Form INC-28 was eventually filed before ROC in July 2023. Court held that SOA never truly came in effect at any point. For all practical purposes, SOA had become truly defunct. 

The Argument of Judicial Discipline

Hon’ble Court rejected the argument of ‘judicial discipline' raised by the Respondent. The Hon’ble NCLAT in this case had kept in abeyance the Section 7, IBC application in the interest of judicial discipline to avoid conflict outcomes of IBC proceedings and High Court proceedings. The Supreme Court set aside this approach. The Court acknowledged that judicial discipline is indeed a cornerstone of equity, justice and fairness. However, Court drew a clear distinction between respect for judicial processes and tactical abuse of those processes. Court held that judicial discipline principle cannot be used for jeopardizing the public funds and putting the economy in a hostage situation.

Overriding Effect of IBC

One of the core legal issues before the Court involved IBC and Companies Act relationship. Section 238 of IBC gives an overriding effect to IBC over other laws that may be inconsistent with its provisions. The Apex Court upheld and reiterated the overriding effect of the IBC over all other laws, as has been previously held by the Court^[3]. The Court referred to the cases of A Navinchandra Steel (P) Ltd v. Srei Equipment Finance Ltd⁴ and Sunil Kumar Sharma v. ICICI Bank⁵ to hold that the IBC is a special statute which deals with the revival of companies and it will prevail over the general laws including the Companies Act in case of any inconsistency between the two. Court held that the section 7 IBC application is an independent proceeding which stands on its own merits and the mere pendency of an SOA before the High Court will not bar initiation of CIRP. Court also emphasized that efforts must be taken to resuscitate a corporate debtor in larger public interest.

The Apex Court thus could not find a reason to sustain order of NCLAT and restored the order of NCLT, entitling the Resolution Professional to proceed with the CIRP.  An issue that was seen was the procedural irregularity, lapses and inefficiencies that could have hampered the entire process of insolvency, but the Overriding clause was the saving grace that enabled the proceedings under section 7 to cut through the procedural complex entanglement, thus ensuring primacy of rehabilitation of industry and protection of the Creditors against misuse of procedural mechanism to stall or delay the proceedings.

Conclusion

The Apex Court, while upholding the independence of IBC Proceedings upheld the overriding effect of the IBC over the existing general laws such as the Companies Act. The ruling reinforced longstanding approach of courts upholding the supremacy of IBC over other laws. The decision bolsters the resolution of corporate debtors in the interest of public and economy. The ruling also upheld the principle of Judicial Discipline as corner stone of justice, equity and fairness, however the Court reminded that it cannot be used as a shield by a defaulting company to stall insolvency proceedings.

Footnotes

1. Omkara Assets Reconstruction Private Limited v. Amit Chaturvedi & Ors, 2026 SCC OnLine 299.

2. Alpha Corp. Development Private Limited, In re, 2017 SCC OnLine P&H 407

3. National Spot Exchange Ltd. v. Union of India, (2025) 8 SCC 393; Noida Special Economic Zone Authority v. Manish Agarwal, (2025) 1 SCC 415; A. Navinchandra Steels (P) Ltd. v. Srei Equipment Finance Ltd., (2021) 4 SCC 435; Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725

4. A Navinchandra Steel (P) Ltd v. Srei Equipment Finance Ltd, (2021) 4 SCC 435

5. Sunil Kumar Sharma v. ICICI Bank Ltd, 2025 SCC OnLine SC 145 

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