This article is written by Ishani Khanna, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho), Ruchika Mohapatra (Associate, LawSikho), and Indrasish Majumder (Intern at LawSikho).
This article has been published by Shoronya Banerjee.
The Insolvency and Bankruptcy Code (hereinafter IBC) came into existence in May 2016 as the earlier legal system under the Board for Industrial and Financial Reconstruction (BIFR) had been greatly abused by shareholders of defunct firms in order to keep lenders from taking recovery action. It was widely recognized and accepted that a slew of previous insolvency and bankruptcy laws were insufficient and couldn’t meet the needs of those who needed quick resolution of their disputes, as insolvency cases in India took an average of 4.3 years to get resolved; much longer than the average clearance ratio in comparable nations. The IBC’s sole purpose is to ensure that all insolvency and bankruptcy laws are united under the same reinforced roof and that any conflicts arising from the same are addressed quickly and effectively.
Recently, the Supreme Court upheld IBC’s dominance over SEBI. As a result, the IBC’s summary of judgments have precedence over various enactments. The Insolvency Bankruptcy Code (IBC), which is still in its infancy, is a relevant topic in the media and corporate world these days. Since its implementation, the code has been flavored in part by constructive judicial interpretation and partly by revisions. On June 13, 2019, the overriding implications of the IBC were discussed again, this time concerning the SEBI Act. The NCLT has issued an order prohibiting the SEBI from pursuing money from a company that has been declared insolvent. The dispute was taken to the Supreme Court, which was debating the scope of the IBC’s applicability over SEBI.
Section 238 : IBC provisions that overrides other laws
The provisions of this Code apply, notwithstanding anything in any other law, now in force or any document having effect under any such law that is inconsistent with them. Section 238 is a non-obstante provision. It signifies that a clause or provision in the Act has the authority to override any other provision or clause in the Act that conflicts with this or another legislation.
The impact of Section 238 as interpreted by the courts
The problem of overriding impact was first brought up in the case of Innoventive Industries Limited v. ICICI Bank Limited, which was also the IBC’s inaugural case. It was contended that corporate debtors are fetching vantage of the gain/immunity from quittance given by the government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 for a set period.
ICICI filed a claim against Innovative Industries Ltd. as a financial creditor due to a default in payments on financing extended to Innoventive Industries. They contended that they are not obliged to pay any monies to ICICI due to a relief order granted by the Maharashtra Government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 (MRUA). The NCLT issued a moratorium and appointed an Insolvency Resolution Professional based on the overriding implications of the IBC over the MRUA (IRP). NCLAT held in the appeal that there is no conflict between MRUA and IBC because they are enactments in two different domains. The provisions of the IBC take precedence over those of the MRUA.
Finally, the Supreme Court upheld the interpretation by ruling that the non-obstante provision of the IBC would prevail over the non-obstante clause of the MRUA in an appeal against the NCLAT judgment. On the subject of debt suspension due to the MRUA relief order, it was held that due to the non-obstante provision in the IBC, any right of the corporate debtor under any other law could not come between the IBC and the relief order.
The overriding impact of the IBC was again questioned in the instance of Sterling SEZ Infrastructure Ltd, which was governed by the Prevention of Money Laundering Act, 2002. (PMLA). In this instance, SREI Infrastructure Financial Limited filed a CIRP against Sterling SEZ and its controlling company, Sterling Biotech Limited (SBL). The SBL group’s credit facilities of Rs.8100 crores from various banks and financial institutions were also declared as fraud accounts by the involved banks. Fearing arrest, the SBL Group’s promoters fled the country under dubious circumstances. As a result, the Enforcement Directorate began proceedings against the Corporate Debtor, and assets pertaining to the corporate debtor were attached by order dated 29.05.2018 under Section 2(1) (u) of the PMLA Act.
In July 2018, the tribunal granted a creditors’ petition to commence CIRP, a moratorium was established and an IRP was appointed as a result. In the course of his work, the Resolution Professional informed the Directorate of Enforcement about CIRP and requested that the order of attachment of assets be lifted for him to continue to be in charge of, and take custody of it. The topic was considered during the beginning of CIRP, and it was decided that the temporary attachment of assets order under PMLA 2002 would take precedence over the CIRP u/s 7 of the IBC. The establishment of actions or processes against the Corporate Debtor, including the execution of any judgment, decision, or order of any court of law, tribunal, or other authority, is said to be banned during the moratorium period. As a result, the Enforcement Directorate’s order could not be carried out. The defence claimed that the IBC is civil legislation and cannot take precedence over the PMLA Act. As a result, the NCLT was said to lack jurisdiction in the case.
The NCLT’s declaration of a moratorium, thus, did not apply to the Enforcement Directorate’s attachment order or the criminal proceedings brought against the Corporate Debtor. With the assistance of amicus curiae, the honourable tribunal concluded that the IBC has a greater impact than PMLA based on the objectives of IBC: maximizing asset value, faster settlement, faster recovery, and economic interest of beneficiaries.
In the matter of Leo Edibles & Fats Ltd v. the Income-tax Department, the court addressed the question of the IBC’s overriding impact over the Income Tax Act in determining the dues of the Income Tax Authority during liquidation. The Income Tax Authority could no longer claim a priority in respect of clearing of tax dues under the Income Tax Act if the assessee company is undergoing liquidation under IBC. The High Court further stated that assets under attachment (even if encumbered) will not generate a secured creditor interest in favor of the Income Tax Authority under the IBC. The High Court further stated that the moratorium in terms of processes established under the IBC guarantees that any outstanding lawsuit begins before the bankruptcy proceeding is stopped. As a result, assets subject to an order of attachment issued before the liquidation, commencement shall be auctioned along with the assessee company’s other unencumbered assets.
In another instance, Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd, the Supreme Court confirmed that anything incongruous in any other statute, including the Income Tax Act, shall be overridden by Section 238 of the Insolvency and Bankruptcy Code, 2016.
In one of the cases, Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Others, the NCLAT found that the IBC is a unique law that has precedence over other laws. The corporate insolvency resolution process start date could not be postponed due to an ongoing internal disagreement between Corporate Debtor’s directors over charges of oppression and mismanagement. Financial creditors’ statutory rights could not be curtailed due to pending Oppression and Mismanagement lawsuits under Sections 241 and 242 of the Companies Act, 2013.
The issue before the court
The main question is whether IBC supersedes all main recovery statutes, including the SEBI. SEBI, as the market regulator for schemes like the collective investment scheme (CIS), has complete authority over all aspects of its operation and recovery. The basis of contention is that Section 28 (A) of the SEBI Act deals with recovering money from a firm, among other things, by selling its movable or immovable properties, while Section 14 of the IBC deals with a moratorium that has a predominant impact on others. It is to be seen as a stride forward in the evolution of IBC’s scope.
HBN Dairies ran a Collective Investment Scheme and received roughly Rs 1,136 crores from investors, according to the facts of the case. To collect the funds, SEBI attached assets owned by HBN Dairies to recoup the funds owed to depositors. Some investors asked NCLT to start insolvency proceedings against HBN Dairies due to delays in recovery. After appointing a Resolution Professional, NCLT granted the application and asked SEBI to detach HBN’s properties and transfer them over to the RP.
SEBI appealed the NCLT’s ruling instructing the market regulator to detach HBN Dairies and Allies Ltd.’s properties and transfer them over to a resolution professional for use during the proceedings. The grounds include that Section 238 takes effect when there is a dispute or discrepancy between IBC regulations and SEBI, and since there is no conflict or inconsistency between IBC and SEBI in this situation, investors are simply holders of their units and not lenders or financial creditors. In response to the argument, the Resolution Professional shone a light on the object of code, claiming that it is an attempt to defend not only the interests of stakeholders but also the company’s resolution.
As a consequence, NCLT found Sections 11 and 11B of the SEBI Act read with Regulation 65 of the (CIS) Regulations, 1999, to be in direct contradiction with numerous IBC sections, and that the IBC supersedes the SEBI Act’s provisions, which was affirmed by NCLAT. Although the fact that CIS is not registered with SEBI and that depositors’ applications have been accepted by NCLT is a step toward in confirming the overriding effect of the IBC on SEBI. It is a mistake to overlook the fact that the code governs the resolution of lawful activity, and there is a complete violation of law here. The remedy is confirmed by the Supreme Court’s ruling in July. It’s fascinating to see how Supreme Court specialists examine and evaluate the situation.
The Supreme Court’s decision determines the scope of the overriding effect of Section 238 in the future, but past cases of the overriding effect have weighted more towards IBC, so it is easy to infer that the Supreme Court, looking at the objective points like faster recovery, quicker resolution, and maximisation of asset value with benefits of all, will most likely conclude that IBC prevails over SEBI in recovery proceedings.
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