Judicial Discipline Cannot Be a Shield to Stall Insolvency: Supreme Court Restores CIRP, Declares 2008 Scheme ‘Defunct’

“We Cannot Find Even a Pretense of Compliance with Statutory Timelines” –  In a powerful reaffirmation of the supremacy of the Insolvency and Bankruptcy Code, 2016, the Supreme Court held that a long-dormant and procedurally defective Scheme of Arrangement under the Companies Act cannot be used to stall Corporate Insolvency Resolution Process under Section 7 of the IBC.

A Bench of Justice Sanjay Kumar and Justice K. Vinod Chandran set aside the order of the NCLAT which had kept Section 7 proceedings in abeyance on grounds of “judicial discipline” due to pending proceedings before the Punjab and Haryana High Court. Restoring the NCLT’s order admitting the insolvency petition, the Court ruled that the Scheme of Arrangement of 2008 had become “redundant and inoperative” owing to gross non-compliance with mandatory statutory requirements.

At the heart of the controversy was the interplay between Sections 391–394 of the Companies Act, 1956 and Sections 7, 14 and 238 of the IBC.

The appellant, Omkara Assets Reconstruction Pvt. Ltd., as assignee of IDBI Bank’s stressed assets, had approached the NCLT seeking initiation of CIRP for recovery of over ₹154 crores, arising from loans disbursed in 1999 and 2000, with default dating back to 01.01.2003. The Corporate Debtor resisted the move by relying on a Scheme of Arrangement initiated in 2008 before the High Court.

The NCLT admitted the petition, noting that compliance with Section 391 had not been established and invoking the overriding effect of Section 238 of the IBC. However, the NCLAT kept the insolvency proceedings in abeyance, citing judicial discipline in view of pending High Court proceedings.

The Supreme Court decisively rejected this approach.

Examining the procedural framework under the Companies (Court) Rules, 1959, the Bench noted that after the creditors’ meeting report was taken on record on 25.07.2008, the second motion ought to have been filed within seven days. Instead, it was filed in 2009. The sanction order was passed only on 23.07.2019, nearly a decade later. Even thereafter, the order was not filed with the Registrar within the statutory period. Form INC-28 was filed only on 06.07.2023.

The Court observed in unequivocal terms:

“We cannot find even a pretense of the timelines statutorily prescribed having been complied with. The SOA… would have thus become redundant and inoperative… which makes the SOA for all practical purposes defunct.”

The Bench emphasized that a scheme framed on dues as of 2008 could not realistically survive the passage of time when debt had mounted astronomically and creditors had already invoked SARFAESI and obtained a recovery certificate under the RDB Act.

On the issue of jurisdiction, the Court also noted that when the Companies (Transfer of Pending Proceedings) Rules, 2016 came into force on 15.12.2016, the second motion was pending and not reserved for orders. Such proceedings were required to be transferred to the NCLT under Section 434(1)(c) of the Companies Act, 2013. The sanction order passed in 2019 was therefore prima facie without jurisdiction.

However, the Court clarified that even without conclusively deciding the jurisdictional issue, there was “no reason to stall the proceedings for initiation of the CIRP.”

“IBC Is a Special Statute… Revival Is the Primary Emphasis”

Reaffirming earlier precedents including A. Navinchandra Steels (P) Ltd. v. Srei Equipment Finance Ltd., the Court reiterated that the IBC has overriding effect under Section 238 and is a special statute aimed at revival.

Quoting paragraph 25 of Navinchandra Steels, the Bench underscored:

“A petition either under Section 7 or Section 9 IBC is an independent proceeding… Short of an irresistible conclusion that corporate death is inevitable, every effort should be made to resuscitate the corporate debtor in the larger public interest.”

The Court further clarified that compromise or arrangement under Section 230 of the Companies Act, 2013 can also be considered during IBC proceedings, making it clear that a pre-existing scheme does not “trump” Section 7.

“Judicial Discipline Cannot Be Urged by Tardy Litigators”

In a sharp observation that will resonate in insolvency jurisprudence, the Bench held:

“Judicial discipline, though a corner stone of justice, equity and fairness… 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.”

The Court stressed that cases involving economic implications affect not merely private parties but public funds and national economic interests. Financial probity and industrial rehabilitation, it said, are of “pre-eminent importance.”

Accordingly, the appeal was allowed. The NCLAT’s order keeping the Section 7 petition in abeyance was set aside. The NCLT’s order admitting the petition was restored. The Interim Resolution Professional was permitted to proceed, and the interim direction keeping management involved in day-to-day affairs was vacated.

The judgment decisively reinforces that stale and procedurally non-compliant schemes under the Companies Act cannot obstruct insolvency resolution under the IBC, and that Section 238 ensures the Code’s supremacy in cases of inconsistency.

Date of Decision: 24 February 2026