Supreme Court Upholds Session Judge's Authority To Try IBC Offences Despite Companies Act Amendment

Supreme Court Upholds Session Judge's Authority to Try IBC Offences Despite Companies Act Amendment

The Supreme Court upheld the authority of session judges to issue process against accused individuals for offenses under the Insolvency and Bankruptcy Code, 2016 (IBC). The court affirmed that such offenses fall under the jurisdiction of the Special Court established under Section 435 of the Companies Act, 2013, granting sessions judges the power to initiate legal proceedings.

The Court dismissed the argument of the accused, who claimed that the Sessions Judge lacked the authority to issue process for offenses punishable up to two years under the IBC, asserting that this power rested with the judicial magistrate.

Overturning the High Court's ruling, Justices B.R. Gavai and Sandeep Mehta interpreted Section 236(1) of the IBC to affirm that the authority to adjudicate offenses under the IBC is conferred upon the special court through "legislation by incorporation." This signifies that Parliament's intent was explicit in delegating the power to summon to the special court, presided over by an individual eligible to serve as a Sessions Judge or Additional Sessions Judge. Consequently, the subsequent amendments to Section 435 of the Companies Act, 2013, granting judicial magistrates the authority to issue summonses for offenses punishable under the IBC for up to two years, would not impact Section 236 of the IBC.

“It is further to be noted that the Code has also suffered two subsequent amendments, i.e., the 2015 Amendment and the 2018 Amendment. If the legislative intent was to give effect to the subsequent amendments in the Companies Act to Section 236(1) of the Code, nothing prevented the legislature from amending Section 236(1) of the Code. The legislature having not done that, the provision with regard to the reference in Section 236(1) of the Code pertaining to the Special Court as mentioned in Section 435 of the Companies Act, 2013 stood frozen as of the date of enactment of the Code. As such, the learned judge of the High Court has erred in holding that, in view of the subsequent amendment, the offenses under the Code shall be tried only by a Metropolitan Magistrate or a Judicial Magistrate of the First Class," the judgment authored by Justice B.R. Gavai said.

The High Court invalidated the summons issued by the Sessions Judge to the accused, asserting that the subsequent amendments to Section 435 of the Companies Act, 2013, vested the power to issue summons in the magistrate for offenses punishable up to two years. Consequently, the High Court concluded that the Sessions Judge lacked the authority to issue a summons.

Section 236(1) of the IBC mandates that the offenses punishable under the Code must be adjudicated by the Special Court established under Chapter XXVIII of the Companies Act, 2013.

Originally, Section 435 of the Companies Act, 2013 conferred the authority to issue summons upon the Special Court chaired by the Sessions Judge or Additional Sessions Judge for offenses punishable under the Companies Act, 2013. However, through subsequent amendments to Section 435, the jurisdiction to adjudicate offenses punishable for up to two years was transferred to the Judicial Magistrate, while offenses punishable for more than two years remained under the jurisdiction of the Sessions Judge or Additional Sessions Judge.

In the current scenario, the accused received a summons from the Sessions Judge for an offense punishable for up to two years under the IBC. Contesting the summons, the accused argued that the amendments to Section 435 of the Companies Act, 2013 empower the judicial magistrate, not the Sessions Judge, to issue summons.

The complainant, the Insolvency and Bankruptcy Board of India (IBBI), argued that the Special Court, presided over by a Sessions Judge, appropriately issued the summons to the accused, as the authority for the Sessions Judge to issue summons had been explicitly included since the Code's enactment. Hence, the subsequent amendment to Section 435 of the Companies Act would not diminish the session judge's authority to issue summons.

Agreeing with the IBBI's argument, the Court determined that the current scenario represents a case of 'legislation by incorporation' rather than 'legislation by reference.' This means that the original inclusion of Section 435 of the Companies Act in Section 236(1) of the IBC, since the enactment of the IB Code, dictates that any subsequent alterations to Section 435 of the Companies Act would not impact Section 236(1) of the IBC. Consequently, the Court upheld the summons issued by the Sessions Judge, notwithstanding the subsequent amendments to Section 435 of the Companies Act that empower judicial magistrates to issue summons for offenses committed under the IBC.

The court elucidated the disparity between 'legislation by incorporation' and 'legislation by reference." 'Legislation by Incorporation' entails applying the provisions of an earlier law to a subsequent law, explicitly stated in the latter. Any alterations made to the former law thereafter do not affect the latter law.

On the other hand, 'Legislation by Reference' entails applying the provisions of an earlier law to a subsequent law through a general reference in the latter. In this scenario, any amendments made to the former law would impact the later law accordingly, aligning it with the amended provisions of the former law.

“It could thus be seen that the effect of incorporation means the bodily lifting of the provisions of one enactment and making it part of another so much so that the repeal of the former leaves the latter wholly untouched. However, in the case of a reference or a citation of the provisions of one enactment into another without incorporation, the amendment or repeal of the provisions of the said Act referred to in a subsequent Act will also bear the effect of the amendment or repeal of the said provisions," the court explained.

The court concluded that the reasoning of the learned judge of the High Court, suggesting that following the 2018 Amendment, only offences under the Companies Act would be tried by a Special Court of Sessions Judge or Additional Sessions Judge, while all other offences, including those under the Code, would be tried by a Metropolitan Magistrate or a Judicial Magistrate of the First Class, is untenable.

Hence, in allowing the appeal, the court affirmed that the Special Court, headed by a Sessions Judge or an Additional Sessions Judge, retains jurisdiction to adjudicate upon the complaint under the Code.