LawFarm- Advice & Lawyers Online

Share on facebook
Share on linkedin

Overriding effect of Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016, was enacted by the Rajya Sabha on May 11, 2016, a major economic bill touted as second only to the GST bill in importance. It has long been suspected that India’s insolvency regulations did not meet international norms. Acts such as the Indian Contract Act of 1872, the Recovery of Debts Due to Banks or Financial Institutions Act of 1993, and the Securitization and Reconstruction and Enforcement of Security Interests Act of 2002 dealt with insolvency situations before the Code. These, however, did not yield the anticipated results.

The code replaced the erstwhile Presidency- Towns Insolvency Act (1909) and the Provincial Insolvency Act (1920). The code made significant changes in numerous acts like the Companies Act (2013), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002) and Indian Partnership Act (1932).

The Code’s new institutional framework is one of its most prominent characteristics. A regulator, insolvency experts, information utilities, and adjudicatory mechanisms make up the system. This will help to promote corporate governance significantly. It will make it easier to resolve insolvency in a timely and official manner, setting a positive precedent in corporate governance. However, the elephant in the room is with respect to “Who shall prevail over whom?”

Non- obstante clause in the IBC

The unique feature of the code is S 238. In order to ensure the smooth functioning of the Code, S 238 of the code provides for a non-obstante clause which has an overriding effect over any law which is inconsistent with the provisions of the IBC (2016). The juridical impact and legislative intention of the statute must be considered before the application of the non-obstante clause. 

In Deep Chand v. State of U.P., the Hon’ble Supreme Court laid down the test to determine inconsistencies or repugnancy among statutes as a) whether the provisions are in direct conflict; b) legislative intent; and c) scope of operation of the legislations. 

It was in the case of Innoventive Industries Ltd. v. ICICI Bank Ltd. where the primacy and overriding effect of IBC regulations were first noticed. It is pertinent to note that this is the very first case before the IBC Tribunal. Here, it was debated if corporate debtors were benefiting from the government’s Maharashtra Relief Undertaking (Special Provisions) Act, 1958, which offered benefits/exemption from payments for a defined period (MRUA). Furthermore, the Hon’ble Supreme Court confirmed that the IBC’s non-obstante clause will take precedence over the MRUA’s non-obstante clause.

Further, in Ravi Dutt Sharma v. Ratan Lal Bhargava, the Supreme Court declared that when two non-obstante clauses exist in the same field, the latter enacted will prevail because it was enacted with knowledge of the preceding non-obstante provision.

IBC and other legislations

RERA and IBC both work in the same sphere, but from opposite angles. While the IBC applies to all businesses, RERA is focused on real estate firms. The overarching provisions of the legislation are a grey area of conflict and disagreement. RERA’s Section 89 allows the law to take precedence over other laws.

Because IBC was enacted later than RERA, it was determined that IBC had higher authoritative value. It diminished the importance of RERA and its principles in comparison to the IBC. The non-obstante clauses in both bills are not invalid, but they do create a significant constitutional concern. How might it be permissible to submit RERA while upholding the terms of the IBC if both legislations are working in the same field and both adjudicating authorities have the same power?

Similarly, the court addressed the topic of the IBC’s overriding impact over the Income Tax Act in calculating the dues of the Income Tax Authority during liquidation in the case of Leo Edibles & Fats Ltd. v. Income Tax Department.

Conclusion 

An insolvency law’s primary goal is to restructure a legal framework in which creditors’ rights and remedies are suspended, as well as to establish a procedure for the orderly collection and realisation of the debtor’s assets, as well as the fair use of such assets in accordance with creditors’ claims.

Even after the inclusion of a non-obstante clause in the Code in the form of Section 238 in the Code, there has always been a lot of litigation about the contradiction between the Code and other statutes. The contours of Section 238 have been decided by the courts many times, where the overwhelming impact of the IBC has been awarded supremacy over the State Act. 

Footnotes

  1. Piyush Soni and Sanskar Modi, Initiation of Parallel proceedings under the State Act post the declaration of moratorium under IBC: An analysis of IBC’s overriding effect over State Laws, (2021) 129 taxmann.com 33.
  2. Saloni Neema and Adithi Singh, A Tussle between IBC and RERA, (2022) 138 taxmann.com 427.
  3. Omkar Upadhyay and Sukruti Nigam, The Unsettled Primacy of IBC, 2016, (2021) 128 taxmann.com 75

Vivek Das, The Conflict Between IBC 2016 and Tea Act 1953: A Missing Nexus, (2019) 111 taxmann.com 469.

By Ananya Bhat