The Dichotomy of Special Courts: Contrasting the Companies Act and the IBC

[Rhythm Buaria and Payal Chandra are advocates practicing before courts and tribunals in Delhi]

Recently, a Single Judge of the Bombay High Court concluded, in Satyanarayan Bankatlal Malu v. Insolvency and Bankruptcy Board of India, that offences under the Insolvency and Bankruptcy Code, 2016 (“IBC”) can only be tried by the Metropolitan Magistrate or Judicial Magistrate First Class exercising jurisdiction as the “Special Court” under the Companies Act, 2013. This conclusion was reached in a criminal writ petition filed by Malu impugning the Additional Sessions Judge’s order issuing process in a complaint filed by IBBI, inter alia, under section 73(a) of the IBC. Section 73(a) of the IBC provides that an officer of a corporate debtor, if found guilty under this section, would either be imprisoned for a minimum of three years or liable to pay a minimum fine of rupees one lakh or both.

Submissions of the parties

The only ground of challenge that was pressed by Malu, the petitioner, was that the Sessions Judge did not have jurisdiction to entertain IBBI’s complaint. To support this plea, Malu argued that a reading of section 236 of the IBC with section 435(2) of the Companies Act (which he argued was amended in 2017 after some parts of the IBC came into force, inter alia, to ensure speedy trials of offences under the IBC) made it clear that offences under the IBC were to be tried by the Metropolitan Magistrate/Judicial Magistrate First Class alone. Section 236(1) provides for trial of offences under the IBC by the Special Court established under the Companies Act. Section 435(2) of the Companies Act, in turn, designates two categories of Special Courts: (a) a single judge holding office as Sessions Judge or Additional Sessions Judge, empowered to try offences punishable under the Companies Act with imprisonment of two years or more; and (b) a Metropolitan Magistrate or a Judicial Magistrate of the First Class who is empowered to try other offences. Malu also relied on section 237 of IBC under which the High Courts have been vested with appeal and revision powers under the Code of Criminal Procedure in relation to orders passed by the Special Court.

On a reading of the above provisions, Malu argued that the use of the phrase “other offences” under section 435(2)(b) in contradistinction with the use of “under the Act” in section 435(2)(a) was deliberate and led to the undeniable conclusion that only the Special Court of a Metropolitan Magistrate or a Judicial Magistrate of the First Class was empowered to try offences under other acts such as the IBC as also offences under the Companies Act which were punishable with imprisonment upto two years. Malu further argued that the amendment to section 435(2) of the Companies Act was made in view of the IBC coming into force to bring it in line with sections 236 and 237 of the IBC such that offences under the IBC would be tried by a different judge in furtherance of  the objective of speedy trials. Lastly, Malu argued that by virtue of sections 236(3) and 237 of IBC, a deeming fiction had made the courts of the Metropolitan Magistrate/Judicial Magistrate First Class Courts of Session for the purposes of IBC, which would become redundant if any interpretation other than the one espoused was adopted.

On the other hand, it was argued on behalf of the IBBI that a plain reading of section 435(2) of the Companies Act did not permit the interpretation sought to be advanced by Malu. It was also argued that a harmonious interpretation of the two statutes led to only one conclusion, namely that offences under IBC punishable with imprisonment of more than two years were triable by a Sessions Judge or Additional Session Judge, while others were liable to be tried by the Metropolitan Magistrate/Judicial Magistrate First Class.

The Judgment

Upon analyzing the language of section 435(2), as it was originally enacted and subsequently amended in 2015 and 2017, the Court found in favour of Malu. It held that section 435 was amended in 2017 after the IBC came into force to ensure speedy trials of offences under the IBC by not burdening an already burdened court of the Sessions Judge or Additional Sessions Judge. This finding has been buttressed by juxtaposing 435(2)(a) with section 435(2)(b) as mentioned above. The Court, relying on the judgment in Sachida Nand Singh v. State of Bihar, also held that section 435(2)(b) curbed the general jurisdiction of criminal courts and therefore ought to be strictly construed. Lastly, the Court observed that any other interpretation would render the deeming fiction under section 236(3) redundant.

Analysis

In the authors’ opinion, the judgment, by limiting its focus on a single phrase used in section 435(2), deserves a relook for a multitude of reasons.

 

Firstly, the judgment ignores the first rule of interpretation of statutes, namely that the statute has be literally interpreted unless such interpretation, inter alia, leads to an absurdity. The Court was bound to, as argued by the IBBI, first interpret section 435(2) by applying the literal rule of interpretation and assess if such interpretation was workable. Section 236 of the IBC, quite simply, empowers Special Courts established under Chapter XXVIII of the Companies Act to try offences under the IBC. The applicability of the relevant provisions of the Companies Act is not circumscribed in any manner whatsoever, meaning that any Special Court empowered to try offences under the Companies Act would automatically be empowered to try offences under the IBC. Section 435(2), in turn, designates two classes of courts to deal with offences of different gravity and for that reason punishable with different quantum of imprisonment under the Companies Act.

However, the Companies Act deal with offences under the Companies Act alone. The Court’s stretching of the phrase “other offences” in section 435(2)(b) to mean offences under other enactments is impermissible in law. As such, the phrase “other offences” must be read in tandem with section 435(2)(a) which uses the words “offences punishable under this Act” and the object of the Companies Act. In the authors’ view, the phrase “other offences” refers to other offences under the Companies Act given that the statute generally deals with affairs of a company and the Companies Act does not, in any provision, seek to expand its purview without this [see State of Andhra Pradesh v. Md. Hussain]. On the other hand, any other statute (such as the IBC) which seeks to borrow provisions from the Companies Act does so explicitly. In such a situation, it is implied that the provisions of the general act will apply mutatis mutandis to the special enactment.

The Court’s search for the objective of the 2017 amendment in view of the enactment of the IBC also cannot be countenanced. If at all this exercise was necessary, the objective of the amendment to section 435 ought to have been gathered from the circumstances surrounding its amendment and in particular to the relevant notes on clauses. However, the Court’s attention does not appear to have been drawn to the same. The notes on clauses clearly brings forth the reason for the amendment which is “to include appointment of Metropolitan Magistrate or a Judicial Magistrate of the First Class by Central Government in Special Court in case of offences punishable under the Act with imprisonment of not more than two years”. There is no reference whatsoever to the notification of the IBC being the reason for proposing any amendments to section 435(2).

In fact, the judgment also ignores that at the time when the IBC was brought into force, section 435(2) had been amended once in 2015 such that only the Sessions Judge or Additional Sessions Judge had been designated as the Special Courts, but a proviso had been enacted which empowered the Metropolitan Magistrate/Judicial Magistrate of the First Class to try any offence which was punishable with imprisonment of less than two years. Plainly, if the Legislature intended to have the Metropolitan Magistrate/Judicial Magistrate of the First Class try offences under the IBC, it would have been explicitly said so.

The Court’s interpretation of the provisions of the IBC and the Companies Act also leads to an absurdity by creating an artificial distinction between offences under the IBC and the Companies Act (which runs contrary to the distinction under section 435 on the basis of the gravity of the offence) which cannot be logically countenanced and would not have been intended by the Legislature.

Further, the Court’s apprehension that applying section 435(2)(a) of the Companies Act to section 236 of the IBC would render the deeming provision under section 236(3) and 237 otiose is also without basis. This deeming provision can be read harmoniously with section 435(2) of the Companies Act such that it operates when the Metropolitan Magistrate/Judicial Magistrate First Class exercises jurisdiction for offences which are punishable with imprisonment of less than two years. In fact, section 437 of the Companies Act is verbatim as section 237 of the IBC (a fact which has not been considered in the judgment), thereby rendering the Court’s apprehensions as being entirely misplaced. For all these reasons, “other offences” under section 435(2)(b) can only mean offences under the Companies Act.

Conclusion

For all the reasons discussed above, the Court’s decision in Satyanarayan Bankatlal Malu is questionable and deserves reconsideration. In the authors’ view, an interpretation whereby section 435 of the Companies Act is made mutatis mutandis applicable to the IBC under section 236 will not only be the result of a literal interpretation of the two statutes, but it will also further the evident intent of the Legislature. This includes the object of speedy disposal, which has been the focal point of the judgment. Special Courts composed of Sessions Judge/Additional Sessions Judge will continue to hear graver offences (both under the Companies Act and the IBC), while the Metropolitan Magistrate/Judicial Magistrate of the First Class will try cases of lesser gravity.

Rhythm Buaria & Payal Chandra

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