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Legislation by Incorporation v. Legislation by Reference: Supreme Court Explains the Jurisdiction of Special Courts

Introduction

In a landmark ruling that has significant implications for the jurisdiction of Special Courts under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), the Hon’ble Supreme Court of India (‘SC’) has provided a comprehensive analysis of the distinction between ‘legislation by incorporation’ and ‘legislation by reference’. This judgment in the case of Insolvency and Bankruptcy Board of India v. Satyanarayan Bankatlal Malu & Ors.[i], emerged from an appeal challenging a judgment passed by the High Court of Judicature at Bombay (‘BHC’), which delved into the nuances of the IBC and the Companies Act, 2013 (‘CA’), and their interplay in determining the jurisdiction of Special Courts.

Brief Facts

  • M/s SBM Paper Mills Private Limited, the corporate debtor (‘CD’), filed a petition for initiation of the corporate insolvency resolution process (‘CIRP’) of itself on 04.09.2017. The National Company Law Tribunal (‘NCLT’) admitted the petition and appointed Mr. Amit Poddar as the interim Resolution Professional (‘RP’).

  • Mr. Satyanarayan Malu, the Respondent and the Ex-Director of the CD filed an application for the withdrawal of the petition in light of a one-time settlement (‘OTS’) entered into with the sole financial creditor (‘FC’), Allahabad Bank. The NCLT allowed the application filed by the Respondent. However, due to non-compliance with the terms of the OTS by the Respondents, the NCLT issued a show cause notice (‘SCN’) against them.

  • The Insolvency and Bankruptcy Board of India (‘IBBI’) filed a complaint against the Respondents before the Sessions Judge. Thereafter, the Sessions Judge directed the issuance of process against the Respondents. The Respondents filed a writ petition before the BHC, praying for the quashing and setting aside of the order passed by the Sessions Judge for the want of jurisdiction. The BHC allowed the writ petition filed by the Respondents.


Held

  • The SC allowed the petition and quashed and set aside the impugned order, holding that the Special Court presided by a Sessions Judge or an Additional Sessions Judge will have jurisdiction to try the complaint under the IBC.

  • The SC analysed the provisions of s. 236(1) of the IBC and s. 435 of the CA and concluded that the reference in s. 236(1) of the IBC is a case of ‘legislation by incorporation’ and not ‘legislation by reference’. It was held that any amendment to s. 435 of the CA, after the date on which the IBC came into effect, would not have any effect on the provisions of s. 236(1) of the IBC.

  • The SC further held that the ld. A single judge of the BHC grossly erred in quashing the complaint only on the ground that it was filed before a Special Court presided by a Sessions Judge. The matter was remitted to the ld. A single judge of the BHC for considering the petition of the Respondents afresh on merits.


Our Analysis

The SC’s judgment provides a clear understanding of the jurisdiction of Special Courts under the IBC. The SC’s interpretation of ‘legislation by incorporation’ and ‘legislation by reference’ sheds light on how these legal principles apply to the IBC and the CA. The SC’s decision underscores the importance of the IBC as a self-contained statute and the need for its provisions to be interpreted in a manner that upholds the legislative intent.

The judgment highlights the difference between 'legislation by incorporation' and 'legislation by reference'. In ‘legislation by incorporation,’ the provisions of another statute are incorporated into the statute in question, and any subsequent amendments to the incorporated statute do not affect the incorporating statute. In contrast, ‘legislation by reference’ involves a general reference to another statute, and any subsequent amendments to the referred statute are also applicable to the referring statute. In this case, the SC held that the reference to the CA in the IBC is a case of ‘legislation by incorporation,’ thereby excluding the effect of subsequent amendments to the CA.




End Note

[i] 2024 SCC OnLine SC 560




Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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