Section 238 IBC
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This article is written by Puskar Deo, pursuing a Certificate Course in Insolvency and Bankruptcy Code from Lawsikho.com.

Introduction

The Insolvency and Bankruptcy Code, 2016 is a landmark legislation, aimed towards replacing the existing framework on insolvency of financially stressed companies, which was inadequate, ineffective and wrought with delays. The Code brought a paradigm shift by introducing a ‘creditor-in-control’ regime replacing the flawed ‘debtor-in-possession’ regime by putting in place a well-oiled corporate insolvency resolution process (CIRP). The goal of the entire insolvency resolution process is to maximise the value of assets of the stressed company, reorganize the management of the stressed company i.e. the Corporate Debtor and keep the company as a going concern, rather than allowing its demise. One of the most unique features of the Code is the time bound manner within which the entire process must be completed. The second proviso to Section 12(3) mandates that the entire insolvency resolution process must be mandatorily completed within 330 days of the insolvency commencement date. It has also introduced the concept of moratorium under Section 14, during which no adverse action is allowed against the Corporate Debtor and its assets.

It was very well possible that a distressed company i.e. the Corporate Debtor, due to its inability to repay moneys, could face actions under various laws such as the SARFAESI Act, 2002 or the RDBA Act, 1993 which had the potential to erode the Corporate Debtor’s asset value and strike at the heart of the insolvency resolution process: maximisation of asset value. With a view to ensure that the insolvency resolution process could continue smoothly, the draftsmen of the Code inserted Section 238 into the Code.

Section 238 of the Insolvency and Bankruptcy Code, 2016

The marginal note of Section 238 of the Code is “Provisions of this Code to override other laws”. The provision has a non-obstante clause and states that notwithstanding anything inconsistent therewith in any other law for the time being in force or any instrument having effect by virtue of any other law, the provisions of the Code shall have full effect.

A non-obstante clause is appended to a section in the beginning, with a view to give the enacting part of the section in case of conflict, an overriding effect over the provision or Act mentioned in the non-obstante clause. Section 238 essentially grants the IBC an overriding effect by insertion of a non-obstante clause by ensuring that provisions of the Code will continue in full force even if they were inconsistent with any other law.

Landmark decisions on Section 238 of the IBC and on non-obstante clauses

Various benches of the National Company Law Tribunal had an opportunity to interpret the overriding nature of the Code over different laws in various decisions, an understanding of which becomes necessary to be able to correctly appreciate and decipher its meaning. The Supreme Court has also expounded on non-obstante clauses and their interpretation in important judgments. The author has covered some of these decisions forthwith:

  • Mr. Bhanu Ram & Ors. v. M/s HBN Daries and Allied Ltd., Company Petition (IB)-547(PB)/2018 (see here)

Brief Facts:

The brief facts of the case where that the Resolution Professional of the Corporate Debtor had filed an application before the Adjudicating Authority praying for directions to the Securities and Exchange Board of India (SEBI) to de-attach immovable properties belonging to the Corporate Debtor which had been attached by the Recovery Officer, SEBI pursuant to order passed by the Adjudicating Officer in exercise of powers under Section 11 & 11B of the SEBI Act read with Regulation 65 of the Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999 and to hand over original title deeds of the said properties to the Resolution Professional.  Another prayer was made to direct the Department of Income Tax to also de-attach immovable properties of the Corporate Debtor and consequently to hand over original title deeds of the said properties to the Resolution Professional.

Pursuant to a Section 7 application against the Corporate Debtor, a moratorium under Section 14 had been imposed against it and its assets.

Issue:

The issue before the Tribunal was whether provisions of the Insolvency and Bankruptcy Code would override the provisions of the SEBI Act and the Income Tax Act in view of Section 238.

Order of the Adjudicating Authority:

The Adjudicating Authority referred to the decision of the Hon’ble Supreme Court in Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., SLP(C) No. 6487/2018 and observed that Section 238 is a non-obstante clause with the widest amplitude due to which the IBC would override anything inconsistent contained in any other enactment including the Income Tax Act and the SEBI Act.

The Tribunal noted that the Resolution Professional was duty bound to run the affairs of the Corporate Debtor on a day to day basis and to take possession of the property belonging to the Corporate Debtor. It further observed that if the orders passed by the Adjudicating Officer of SEBI in lieu of powers under Section 11 & 11B of the SEBI Act were allowed to go through, it would come in direct conflict with Section 238 as well as Sections 15, 17, 18 & 25 of the IBC. The omnibus provision under Section 14 would also be hit as execution proceedings under SEBI Act or any other law were barred.

The Tribunal declared that in view of the non-obstante clause of Section 238, no right under any other law can come in the way of the IBC as in absence of records of possession over the Corporate Debtor’s property, the Resolution Professional would be unable to perform his statutory duties under the Code in a time bound manner and no possibility of resolution would then exist, which was the primary object of the Code. Since the Department of Income Tax had already detached properties of the, the Adjudicating Authority ordered SEBI to do the same and have over records and possession of the immovable properties of the Corporate Debtor to the Resolution Professional for expeditious resolution of the Corporate Debtor.

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  • SREI Infrastructure Finance Ltd. v. Sterling SEZ and Infrastructure Ltd., M.A. No. 1280/2018 in C.P. No. 405/2018 (see here)

Brief Facts:

An application under Section 60(5) of the Code was filed by the Resolution Professional of Sterling SEZ and Infrastructure Ltd., the Corporate Debtor, praying to the Adjudicating Authority to direct the Enforcement Directorate to release attachments on all assets and properties of the Corporate Debtor and hand over the charge of the same to the RP. A further prayer was made to direct the Sub-Registrar to hand over two original lease deeds entered into by the Corporate Debtor with another company.

The Enforcement Directorate, established under the Prevention of Money Laundering Act 2002, had provisionally attached certain properties of the Corporate Debtor before the initiation of corporate insolvency resolution process as part of an investigation which had been initiated by its office.

Issue

The issue before the Tribunal was whether provisions of the IBC would override the provisions of the PMLA, 2002 considering the fact that even the PMLA had a non-obstante clause under Section 71?

Order of the Adjudicating Authority:

The Adjudicating Authority delved deeply into the objects of both the legislations and observed that:

  1. The object of the PMLA was to recover property from the wrongdoer and compensate the affected parties by confiscation and sale of assets of the wrongdoer apart from imposing punishment.  The beneficiaries would be the creditors of the wrongdoer. It then observed that criminal proceedings under the PMLA would take a longer time as compared to the resolution process under the IBC.
  2. Section 238 of the IBC, which was a later legislation, would override Section 71 of the PMLA and the IBC would provide a solution at the earliest to the Corporate Debtor as well as to its Creditors. It would be much favourable if resolutions were conducted under the IBC rather than to take the longer route under the PMLA.
  3. The Tribunal, while referring to Section 14(1)(a) of the Code, stated that the attachment order of the Enforcement Directorate is a legal proceeding which is barred in the moratorium period and went on to declare that since provisions of the PMLA are in conflict with Section 14 and since Section 238 gives the Code an overriding effect, the attachment order is nullity and non-est in law and will not have any binding force.
  4. Section 63 of the Code bars any Civil Court or authority to entertain any suit or proceeding in respect of any matter on which the NCLT or NCLAT has jurisdiction. Since proceedings before the Adjudicating Authority under PMLA in respect of attachment are civil proceedings, the Adjudicating Authority would have no jurisdiction to attach properties of the Corporate Debtor during CIRP.

The Tribunal concluded by stating that considering the economic factors associated with the case, the suggestion of the amicus curiae to appeal against the attachment order before the Adjudicating Authority under PMLA, would lead to a further delay in the resolution process under the IBC. It would be beneficial to take a route where the assets could be utilized in a speedy manner rather than waiting which could lead to erosion of its value. The Tribunal accordingly declared that the attachment order of the Enforcement Directorate was nullity in view of Section 14 and Section 238 and further directed the Sub-Registry Jambusar to hand over the original lease deeds to the Resolution Professional.

  • Duncans Industries Ltd. v. A.J. Agrochem, Civil Appeal No. 5120 of 2019 (see here)

Brief Facts:

The Respondent-Operational Creditor had filed an application under Section 9 of the Insolvency & Bankruptcy Code against the Appellant-Corporate Debtor before the National Company Law Tribunal for initiation of insolvency resolution process. The Appellant-Corporate Debtor opposed the application on the ground that by a notification under Section 16E of the Tea Act, 1953 the Central Government had taken over the management and control of 7 out of 14 tea gardens of the Appellant-Corporate Debtor. It was further contended that under Section 16G of the Tea Act, once the management of tea unit has been taken over by the Central Government, proceedings for winding up or appointment of receiver cannot be initiated without the consent of the Central Government. Furthermore, it was argued that ‘winding up proceedings’ under Companies Act also includes insolvency proceedings under the IBC, and therefore, since the Respondent-Operational Creditor had not taken such consent, the application under Section 9 would not be maintainable. 

The National Company Law Tribunal affirmed the contentions of the Appellant-Corporate Debtor and dismissed the Section 9 application. Upon appeal, the National Company Law Appellate Tribunal set aside the order passed by the NCLT and held that application under Section 9 would be maintainable in view of the overriding nature of Section 238. The Appellant-Corporate Debtor preferred an appeal before the Supreme Court contending, inter alia, that the reference made by the NCLAT to Section 238 was incorrect. Section 238 gave an overriding nature to the Code only when an inconsistency existed between the Code and another law. It was contended by the Appellant-Corporate Debtor that no inconsistency existed between the Code and the Tea Act and hence the both of them must be read harmoniously.

Issue

The Issue before the Court was whether the Insolvency and Bankruptcy Code would override the provisions of the Tea Act, 1953?

Judgment of the Court:

The Court firstly took note of the fact that the notification under Section 16E of the Tea Act, 1953 by which the Central Government had taken over management and control of 7 tea gardens of the Appellant-Corporate Debtor had been challenged by the Appellant-Corporate Debtor before the Calcutta High Court, pursuant to which a Division Bench of the High Court had passed an interim order and allowed the Appellant-Corporate Debtor to keep control over the 7 tea estates.

The Supreme Court then observed that consent under Section 16G of the Act would be required only when the Central Government had taken over the control, but in the instant case due to the Division Bench’s interim order, it was the Appellant-Corporate Debtor who was in control and not the Government. Therefore, seeking consent would be irrelevant since the Government had no control.

The Supreme Court then proceeded to address the main issue as to whether initiation of insolvency proceedings would require prior consent of the Central Government under Section 16G of the Act. The Court answered this in negative and stated that the Code was complete in itself. It further observed that ‘winding up proceedings’ for which consent of the Government was mandated under Section 16G did not include insolvency resolution proceedings as liquidation was only the last step in the Code. The Court finally concluded that considering Section 238, the Code would have an overriding effect over the tea act and no prior consent of the Central Government is required before initiation of proceedings under Section 7 or Section 9 and even without such consent, insolvency proceedings would be maintainable. The Court dismissed the Appellant-Corporate Debtor’s appeal.

  • Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. & Ors., (2001) 3 SCC 71

Though this case was not based upon the Insolvency and Bankruptcy Code, the Supreme Court gave an important principle of statutory interpretation that where there are two non-obstante clauses in two special statutes, the statute which was later in time would prevail. The dispute herein pertained to a conflict between the non-obstante clauses of the Sick Industrial Companies (Special Provisions) Act, 1985 and the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992.

Brief Facts:

The Appellant had taken a loan of INR 1 crore from the Respondent under a loan agreement, against the repayment of which there was a massive default of INR 1, 57, 20, 216. The Respondent initiated proceedings under the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992, which was a special statute. The Act had established special courts for trial of offences related to transactions in securities.

During the pendency of proceedings under the Special Court Act, the Appellant Company became sick and proceedings were initiated under the Sick Industrial Companies (Special Provisions) Act, 1985. A sick company under the Act is one which has, at the end of any financial year, accumulated losses equal to or exceeding its entire net worth.

It was contended by the Appellant that since the Sick Companies Act was a special statute and Section 32 of the Act contained a non-obstante clause which gave the Act an overriding effect on any other law, proceedings under the Special Court Act cannot be initiated. 

Issue

The issue before the Hon’ble Court was whether the Sick Companies Act, 1985 would override the Special Court Act, 1992?

Judgment of the Court:

The Court firstly noted that the Special Court Act, 1992 also contained a non-obstante clause which gave it an overriding effect over any other law under Section 13. It further observed that both the statutes were special statutes.

The Court declared that since both the Acts contained non-obstante clauses, the Act which was later in time would prevail i.e. since the Special Court Act 1992 came after the Sick Companies Act 1985, the former would prevail over the latter.

The Court’s rationale behind this observation was that at the time of the enactment of the later statute, the Legislature was aware of the earlier legislation and its non-obstante clause. If the Legislature still conferred the later enactment with a non obstante clause it meant that the Legislature wanted that enactment to prevail. The Court further noted that if the Legislature did not want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier enactment continue to apply.

It finally noted that if the Legislature wanted to exclude the provisions of the Sick Companies Act from the ambit of the Special Court Act, it would have provided so specifically. The fact that the Legislature did not specifically so provide necessarily meant that the Legislature intended that the provisions of the Special Court Act were to prevail even over the provisions of the Sick Companies Act.

Thus, the Hon’ble Court gave an important principle of interpretation that if two special statutes contained non-obstante clauses, and if harmonious construction could not resolve the inconsistencies, then the statute which was later in time would prevail.

  • Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited, (2018) 18 SCC 786

Brief Facts:

The Income Tax Department had preferred a Special Leave Petition against the order of the Delhi High Court wherein the Income Tax Department had presented an appeal against the order of the Income Tax Appellate Tribunal in respect of the tax liability of the Respondent Assessee. The Hon’ble Delhi High Court had dismissed the said appeal as CIRP had been initiated against the Respondent Assessee and a moratorium order had been passed under Section 14 prohibiting, inter alia, institution of suits or continuation of pending suits or proceedings against the Respondent Assessee.

Issue:

The short issue before the Hon’ble Supreme Court in the SLP was whether the Insolvency and Bankruptcy Code, 2016 would override the provisions of the Income Tax Act.

Judgment

In a short judgment, the Hon’ble Supreme Court affirmed the view taken by the Hon’ble Delhi Court and dismissed the special leave petition stating that given Section 238, it was obvious that the Code would override anything inconsistent in any other enactment including the Income Tax Act and that income tax dues, which are in the nature of Crown debts, would not take precedence even over secured creditors, who are private persons.

Conclusion

The Insolvency and Bankruptcy Code, 2016 brought nothing short of a revolution in the Indian economy, which was witnessing companies defaulting on payments worth thousands of crores of rupees. The novel corporate insolvency resolution process, which was strictly time bound, ensured that the distressed companies did not see a corporate death due to liquidation. Ensuring maximisation of asset value mandated that the corporate insolvency resolution process be completed as expeditiously as possible, to avoid deterioration of asset value of the stressed company. Therefore, it was indeed extremely beneficial to give the Code an overriding effect over other laws so that the Resolution Professional and the Committee of Creditors could take control over the Corporate Debtor’s assets and resolve its insolvent state without any hindrance.

The various decisions by the NCLT’s and the Hon’ble Supreme Court has further reinforced the overriding position of the Code and has ensured that insolvent companies are provided another chance to continue as a going concern.


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