Supreme Court settles jurisdiction for offences under Insolvency and Bankruptcy Code: Insolvency and Bankruptcy Board of India vs. Satyanarayan Bankatlal Malu & Ors. (2024) INSC 319 (19 April 2024)

Date of the Judgment: 19 April 2024
Citation: (2024) INSC 319
Judges: B.R. Gavai, J. and Sandeep Mehta, J.
Can the amendments to the Companies Act, 2013, impact the jurisdiction of courts trying offences under the Insolvency and Bankruptcy Code, 2016? The Supreme Court of India recently addressed this crucial question, clarifying which courts have the authority to handle such cases. This judgment resolves a conflict regarding the interpretation of Section 236 of the Insolvency and Bankruptcy Code, 2016, concerning the jurisdiction of Special Courts. The bench comprised of Justice B.R. Gavai and Justice Sandeep Mehta, with the majority opinion authored by Justice B.R. Gavai.

Case Background

The case revolves around a complaint filed by the Insolvency and Bankruptcy Board of India (the Appellant-Board) against the Ex-Directors of M/s. SBM Paper Mills Pvt. Ltd. (the Respondents). The Corporate Debtor, M/s. SBM Paper Mills Private Limited, had initiated the Corporate Insolvency Resolution Process (CIRP) by filing a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 on 4th September 2017. The National Company Law Tribunal (NCLT), Mumbai Bench, admitted the petition on 17th October 2017 and appointed Mr. Amit Poddar as the Interim Resolution Professional (RP). Subsequently, one of the Ex-Directors filed an application for withdrawal of the petition based on a One Time Settlement (OTS) with the sole Financial Creditor, Allahabad Bank. The NCLT allowed the withdrawal on 20th December 2018. However, due to non-compliance with the OTS terms, the NCLT proposed the prosecution of the Respondents on 20th August 2019. The Appellant-Board then filed a complaint against the Respondents before the Sessions Judge in Special Case No. 853/2020 under Section 236 of the Insolvency and Bankruptcy Code, 2016, read with Sections 190, 193 and 200 of the Code of Criminal Procedure, 1973, for offences punishable under Section 73(a) and Section 235A of the Code. The Sessions Judge directed the issuance of process against the Respondents on 17th March 2021. Aggrieved by this order, the Respondents filed a Writ Petition before the High Court of Judicature at Bombay, which was allowed on 14th February 2022, leading to this appeal before the Supreme Court.

Timeline

Course of Proceedings

The Sessions Judge, 58th Court, directed the issuance of process against the Respondents based on the complaint filed by the Appellant-Board. The Respondents then filed a Writ Petition before the High Court of Judicature at Bombay, challenging the Sessions Judge’s order for lack of jurisdiction. The High Court allowed the Writ Petition, quashing the order of the Sessions Judge, leading to the present appeal before the Supreme Court by the Appellant-Board.

Legal Framework

The core legal issue revolves around the interpretation of Section 236(1) of the Insolvency and Bankruptcy Code, 2016, which states:

“236. Trial of offences by Special Court.—(1) Notwithstanding anything in the Code of Criminal Procedure, 1973 (2 of 1974), offences under of this Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013 (18 of 2013).”

This section mandates that offences under the Insolvency and Bankruptcy Code, 2016, be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013. The dispute arises from the amendments to Section 435 of the Companies Act, 2013, which deals with the establishment of Special Courts. The original Section 435, as it existed when the Insolvency and Bankruptcy Code, 2016, was enacted, provided for Special Courts consisting of a Sessions Judge or an Additional Sessions Judge. However, subsequent amendments in 2015 and 2018 introduced different classes of Special Courts, including Metropolitan Magistrates or Judicial Magistrates of the First Class for certain offences. The question before the Supreme Court was whether these amendments to the Companies Act, 2013, would also apply to the jurisdiction of Special Courts under the Insolvency and Bankruptcy Code, 2016.

The relevant provisions of Section 435 of the Companies Act, 2013, are as follows:

Section 435 (originally enacted):

“435. Establishment of Special Courts.—(1) The Central Government may, for the purpose of providing speedy trial of offences punishable under this Act, by notification, establish or designate as many Special Courts as may be necessary. (2) A Special Court shall consist of a Single Judge who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. (3) A person shall not be qualified for appointment as a Judge of a Special Court unless he is, immediately before such appointment, holding office of a Sessions Judge or an Additional Sessions Judge.”

Section 435 (after the 2015 Amendment):

“435. Establishment of Special Courts.—(1) The Central Government may, for the purpose of providing speedy trial of offences punishable under this Act with imprisonment of two years or more, by notification, establish or designate as many Special Courts as may be necessary. Provided that all other offences shall be tried, as the case may be, by a Metropolitan Magistrate or a Judicial Magistrate of the First Class having jurisdiction to try any offence under this Act or under any previous company law. (2) A Special Court shall consist of a Single Judge who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. (3) A person shall not be qualified for appointment as a Judge of a Special Court unless he is, immediately before such appointment, holding office of a Sessions Judge or an Additional Sessions Judge.”

Section 435 (after the 2018 Amendment):

“435. Establishment of Special Courts.—(1) The Central Government may, for the purpose of providing speedy trial of offences under this Act, except under section 452, by notification, establish or designate as many Special Courts as may be necessary. (2) A Special Court shall consist of — (a) a single judge holding office as Session Judge or Additional Session Judge, in case of offences punishable under this Act with imprisonment of two years or more; and (b) a Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case of other offences, who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.”

Arguments

Appellant-Board’s Submissions:

• The High Court erred in holding that only offences under the Companies Act, 2013, can be tried by a Special Court consisting of a Sessions Judge or Additional Sessions Judge.
• Section 236(1) of the Insolvency and Bankruptcy Code, 2016, clearly stipulates that offences under the Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013.
• The legislative intent was to have offences under the Insolvency and Bankruptcy Code, 2016, tried by the Special Courts established under the Companies Act, 2013, and not a general reference to the provisions of the Companies Act.
• The reference to the Special Court under Chapter XXVIII of the Companies Act, 2013, is a case of ‘legislation by incorporation,’ meaning subsequent amendments to the Companies Act, 2013, would not apply to the Insolvency and Bankruptcy Code, 2016.
• Since the Insolvency and Bankruptcy Code, 2016, came into effect on 28th May 2016, the provisions of Section 435 of the Companies Act, 2013, as it existed then, would apply.
• The Insolvency and Bankruptcy Code, 2016, is a complete code in itself, and thus, a reference to the provisions of a prior statute would have a restrictive operation, making it a case of ‘legislation by incorporation.’
• The Statement of Objects and Reasons of the Companies (Amendment) Act, 2017, shows that the amendments were meant to apply only to the Companies Act, 2013, and not to any other purpose.
• The High Court should have returned the complaint to be presented before the competent court if it found that the Special Court of Sessions Judge did not have jurisdiction.

The Appellant-Board relied on the judgments of the Supreme Court in Bolani Ores Ltd. vs. State of Orissa [(1974) 2 SCC 777] and Mahindra and Mahindra Ltd. vs. Union of India and another [(1979) 2 SCC 529] to support their argument that the reference to the Special Court under Chapter XXVIII of the Companies Act, 2013, in Section 236(1) of the Insolvency and Bankruptcy Code, 2016, is a case of ‘legislation by incorporation’. They also cited Girnar Traders (3) vs. State of Maharashtra and others [(2011) 3 SCC 1] to argue that a complete code like the Insolvency and Bankruptcy Code, 2016, would normally have a restrictive operation when referring to provisions of a prior statute.

Respondents’ Submissions:

• The point regarding ‘legislation by incorporation’ was not argued before the High Court and cannot be raised for the first time in the Supreme Court.
• The judgment of the Supreme Court in Bolani Ores Ltd. (supra) is not applicable because it dealt with the incorporation of a definition, which cannot be in a state of flux.
• The judgment of the Supreme Court in Mahindra and Mahindra Ltd. (supra) is not applicable as it dealt with a substantive right to file an appeal, which could not be left at the mercy of subsequent amendments.
• The judgment of the Supreme Court in Girnar Traders (supra) supports the argument that the present case is one of ‘legislation by reference’ and not ‘legislation by incorporation’.
• The plain language of the statute indicates a general reference to Chapter XXVIII of the Companies Act, 2013, making it a case of ‘legislation by reference’.
• The Respondents have a good case on merits, and the matter should be remitted to the High Court for a decision on merits if the Supreme Court holds that the High Court was not justified in quashing the proceedings.

The Respondents relied on the judgments of the Supreme Court in Collector of Customs, Madras vs. Nathella Sampathu Chetty and Anr. [(1962) 3 SCR 786], New Central Jute Mills Co. Ltd. vs. Assistant Collector of Central Excise, Allahabad & Ors. [(1970) 2 SCC 820], and Ujagar Prints and others vs. Union of India and others [(1989) 3 SCC 488] to argue that the plain language of the statute indicates a general reference, making it a case of ‘legislation by reference’.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the reference to ‘Special Court established under Chapter XXVIII of the Companies Act, 2013’ in Section 236(1) of the Insolvency and Bankruptcy Code, 2016, is a ‘legislation by incorporation’ or a ‘legislation by reference’?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

Cases Relied Upon by the Court:

• Collector of Customs, Madras vs. Nathella Sampathu Chetty and Anr. [(1962) 3 SCR 786] – This case was cited to explain the distinction between ‘legislation by reference’ and ‘legislation by incorporation’. The Court noted that incorporation means the bodily lifting of provisions from one enactment into another, while reference involves citing one statute in another without making it a part of it.
• Bolani Ores Ltd. vs. State of Orissa [(1974) 2 SCC 777] – This case was used to illustrate the principle of ‘legislation by incorporation’, where the definition of ‘motor vehicle’ in the Orissa Taxation Act was held to be the definition as it existed in the Motor Vehicles Act at the time of incorporation, and not as amended later. The Supreme Court of India held that the intention of the legislature was to incorporate the definition of ‘motor vehicle’ as it existed at the time of enactment of the Orissa Taxation Act.
• Mahindra and Mahindra Ltd. vs. Union of India and another [(1979) 2 SCC 529] – This case was cited to further support the principle of ‘legislation by incorporation’, where the reference to Section 100 of the Code of Civil Procedure in the Monopolies and Restrictive Trade Practices Act, 1969, was held to be a case of incorporation, and not reference. The Supreme Court of India held that the grounds for appeal were incorporated as they existed at the time of enactment of the Monopolies and Restrictive Trade Practices Act, 1969.
• Girnar Traders (3) vs. State of Maharashtra and others [(2011) 3 SCC 1] – This case was used to discuss the principles of ‘legislation by reference’ and ‘legislation by incorporation’, and to highlight that when an Act is a self-contained code, the application of these doctrines may lose significance. The Supreme Court of India held that a general reference implies exclusion of specific reference and that the distinction between these two doctrines depends on the language used in the later law.
• New Central Jute Mills Co. Ltd. vs. Assistant Collector of Central Excise, Allahabad & Ors. [(1970) 2 SCC 820] – This case was cited to discuss the difference between reference and incorporation.
• Ram Sarup vs. Munshi [AIR 1963 SC 553] – This case was cited to highlight that where provisions of an Act are incorporated by reference in a later Act, the repeal of the earlier Act has no effect on the later Act.
• Secretary of State for India in Council vs. Hindusthan Cooperative Insurance Society Ltd. [AIR 1931 PC 149] – This case was cited to highlight that where a statute is incorporated by reference into a second statute, the repeal of the first statute does not affect the second.

Legal Provisions Considered by the Court:

• Section 236(1) of the Insolvency and Bankruptcy Code, 2016 – This section was the central focus of the judgment, as it specifies that offences under the Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013.
• Section 435 of the Companies Act, 2013 – This section, in its various forms (original, 2015 Amendment, and 2018 Amendment), was considered to determine the composition and jurisdiction of the Special Courts.

Authorities Table

Judgment

The Supreme Court held that the reference to the “Special Court established under Chapter XXVIII of the Companies Act, 2013” in Section 236(1) of the Insolvency and Bankruptcy Code, 2016, is a case of ‘legislation by incorporation’ and not ‘legislation by reference’. This means that the provision regarding the Special Court has been bodily lifted from Section 435 of the Companies Act, 2013, as it existed on the date of enactment of the Insolvency and Bankruptcy Code, 2016. Therefore, subsequent amendments to Section 435 of the Companies Act, 2013, do not affect the jurisdiction of the Special Courts under the Insolvency and Bankruptcy Code, 2016. The Special Court, therefore, consists of a person who was qualified to be a Sessions Judge or an Additional Sessions Judge.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied upon the authorities to come to the conclusion that the present case was one of legislation by incorporation and not legislation by reference. The authorities were used to support the reasoning and the conclusion.

• Collector of Customs, Madras vs. Nathella Sampathu Chetty and Anr. [(1962) 3 SCR 786]* – The Court used this case to explain the distinction between ‘legislation by reference’ and ‘legislation by incorporation’.
• Bolani Ores Ltd. vs. State of Orissa [(1974) 2 SCC 777]* – The Court used this case to illustrate the principle of ‘legislation by incorporation’.
• Mahindra and Mahindra Ltd. vs. Union of India and another [(1979) 2 SCC 529]* – The Court used this case to further support the principle of ‘legislation by incorporation’.
• Girnar Traders (3) vs. State of Maharashtra and others [(2011) 3 SCC 1]* – The Court used this case to discuss the principles of ‘legislation by reference’ and ‘legislation by incorporation’.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the specific language of Section 236(1) of the Insolvency and Bankruptcy Code, 2016, which refers to the “Special Court established under Chapter XXVIII of the Companies Act, 2013.” The Court emphasized that this reference was not a general reference but a specific one, indicating an intention to incorporate the provisions of Section 435 of the Companies Act, 2013, as they existed on the date of enactment of the Insolvency and Bankruptcy Code, 2016. The Court also took into consideration the fact that the Insolvency and Bankruptcy Code, 2016, is a self-contained code, which further supported its conclusion that a restrictive interpretation of the reference to the Companies Act was necessary.

The Court considered the legislative intent behind the Insolvency and Bankruptcy Code, 2016, and the specific reference to the Companies Act. The Court also noted that if the legislature had intended to apply the subsequent amendments to the Companies Act, 2013, to the Insolvency and Bankruptcy Code, 2016, it could have amended Section 236(1) of the Code, which it did not. This indicated that the legislature intended the provision to remain as it was at the time of enactment of the Code.

The Court also considered the various precedents on the distinction between ‘legislation by reference’ and ‘legislation by incorporation’, and concluded that the present case fell under the latter category. The Court emphasized that the effect of incorporation is that the provisions incorporated become an integral part of the statute in which they are transposed, and subsequent amendments do not affect the incorporated provisions.

The ratio of fact to law indicates that the court was more influenced by the legal aspects of the case rather than the factual aspects.

Logical Reasoning

The logical reasoning of the court was based on a step-by-step analysis of the relevant legal provisions and precedents. The court first determined the nature of the reference in Section 236(1) of the Insolvency and Bankruptcy Code, 2016, and then applied the principles of ‘legislation by incorporation’ to conclude that subsequent amendments to the Companies Act, 2013, would not affect the jurisdiction of the Special Courts under the Insolvency and Bankruptcy Code, 2016. The court’s reasoning was also supported by the legislative intent and the self-contained nature of the Insolvency and Bankruptcy Code, 2016.

Dissent

There was no dissenting opinion in this judgment. The bench was comprised of Justice B.R. Gavai and Justice Sandeep Mehta, with the majority opinion authored by Justice B.R. Gavai.

Conclusion

The Supreme Court’s judgment in Insolvency and Bankruptcy Board of India vs. Satyanarayan Bankatlal Malu & Ors. clarifies that offences under the Insolvency and Bankruptcy Code, 2016, are to be tried by the Special Court as it was constituted under the Companies Act, 2013, at the time of enactment of the Insolvency and Bankruptcy Code, 2016. This means that the Special Court must consist of a Sessions Judge or an Additional Sessions Judge, and subsequent amendments to the Companies Act, 2013, do not alter this requirement. The judgment settles the ambiguity surrounding the jurisdiction of Special Courts for offences under the Insolvency and Bankruptcy Code, 2016, and ensures a consistent and uniform approach in handling such cases. The matter has been remitted back to the High Court for a decision on merits.