Insolvency and Bankruptcy Code 2016 (IBC) has an overriding effect over other
enactments, recently the news of superiority of IBC over SEBI was an
interpretation before the Supreme Court bench in July. It will be an
evolutionary step of the scope of application IBC. Hence it is the overview of
judgments of IBC having overriding effect over different enactments.
Insolvency Bankruptcy Code (IBC), still in a transitory phase and remains hot potato for media and corporate world in these days. Since the code was implemented it was flavoured partly through the constructive interpretation of judiciary and partly by amendments. Recently on June 13, 2019, overriding effects of IBC again came to the discussion with referencing with the SEBI Act. NCLT order barring the SEBI from recovering money from firm against which insolvency petition was admitted. The matter went up to the Supreme Court considering the scope of application of IBC over SEBI.
Overriding Provision of IBC –Section 238
Section 238: Provisions of this Code to override other laws:
The provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any an instrument having an effect by virtue of any such law.
Section 238 stands as a non-obstante clause. It means clause or provision in the act empowers to override any other provision or clause contrary under this law or different law.
Judicial interpretation of the effect of section 238:
The question of overriding effect was first in question in the case innovative industries[i] which is the first case in IBC itself. Where it was discussed whether corporate debtor enjoying the benefits/exemption from repayment and of the specified period provided by the government under the Maharashtra relief undertaking (special provisions) act 1958.
Application filed by ICICI as financial creditors against the innovative industries ltd. On account of a default of payments due on credit availed by innovative industries.it is argued that pursuant to relief order passed by the Government of Maharashtra under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA).they are not liable to pay any due to ICICI. On the basis of the overriding effects of IBC over MRUA, National Company Law Tribunal (NCLT) declared a moratorium and appointed Insolvency Resolution Professional (IRP). In the appeal, NCLAT held that there is no repugnancy between MRUA and IBC as they are enactments of two diverse fields. IBC has an overriding effect over the provisions of MRUA.
Finally, in an appeal against NCLAT order, The Supreme Court confirms the interpretation by holding that the non-obstante clause of IBC will prevail over the non-obstante clause in the MRUA. On the issue of suspension of debt on account of the relief order under the MRUA, it held that on account of the non-obstante clause in the IBC, any right of the corporate debtor under any other law cannot come in the way of the IBC.
In case of Sterling SEZ Infrastructure Ltd, Again the overriding effect of IBC was under issue with Prevention of Money Laundering Act 2002(PMLA).In this case, SREI Infrastructure financial ltd initiated the Corporate Insolvency Resolution Process (CIRP) against Sterling SEZ and its holding co Sterling Biotech Limited (SBL). The credit facilities availed by the SBL group from the various bank and financial institution to the extent of Rs.8100 Crores were further declared as fraud account by the concerned Banks. In the fear of arrest, promoters of the SBL Group left the country under suspicious circumstances. In result, proceedings were initiated against the Corporate Debtor by the office of the Enforcement Directorate and attachment of the assets belonging to the corporate debtor vide order dated 29.05.2018 under Section 2(1) (u) of the PMLA Act was made.
Whereas Petition by creditors for initiate CIRP was admitted by the tribunal in July 2018 and moratorium declared and IRP was appointed accordingly. In the proceeds Resolution Professional intimate directorate of enforcement about CIRP and requested for withdrawal of order of attachment of assets order for smooth conduct of his functioning for charge and custody over it. The matter was discussed on the initiation of CIRP u/s 7 of IBC prevail over the provisional attachment of assets order under PMLA 2002. It is contended that during the Moratorium period, the institution of suits or proceedings against the Corporate Debtor including the execution of any judgment, decree or order of any court of law, tribunal or any other authority is prohibited. Hence, the order of the Enforcement Directorate cannot be executed and section 238 has a non-obstante clause which has an overriding effect on any law contrary whereas in defense it is stated that IBC is civil legislation and cannot be given precedence over the PMLA, Act. Thus the NCLT lacks jurisdiction in the matter.
The moratorium declared by the NCLT shall not be applicable to the attachment order passed by the Enforcement Directorate or to the Criminal proceedings initiated against the Corporate Debtor. With the help of amicus curie honorable tribunal comes to the conclusion that IBC has an overriding impact over PMLA on the basis of objects of IBC maximization of value of an asset, quicker resolution, faster recovery and economic interest of beneficiaries.[ii]
In another case of Leo edibles &fats ltd vs Income tax department [iii] where the court dealt with the issue of the overriding effect of IBC over Income tax act in the issue of setting the dues of Income-tax authority during liquidation. Court held that in the event that Assessee Company is undergoing liquidation under IBC and the Income Tax authority can no longer claim a priority in respect of clearance of tax dues under the Income Tax Act. The High Court further held that assets that are under attachment (though encumbered) will not create any interest in favor of the Income Tax authority as a secured creditor under the IBC. Additionally, the High Court further set out that the moratorium in terms of proceedings as set out under the IBC ensures that any pending litigation initiated prior to commencement of the insolvency proceeding is suspended. Accordingly, assets under an order of attachment issued prior to the liquidation, commencement shall be sold along with the other unencumbered assets of the assessee company.
In another case of Pr. Commissioner of Income Tax vs Monnet Ispat and Energy Ltd. [iv] Supreme Court confirms that section 238 of the Insolvency and Bankruptcy Code, 2016 will override anything inconsistent contained in any other enactment, including the income tax act.
# In the one of the case Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Another, [v] NCLAT held that as IBC is a special law with overriding effect on other laws contrary. Commencement of CIRP cannot be defeated by taking resort of pendency of internal dispute between Directors of Corporate Debtor on allegations of oppression and mismanagement. The statutory rights of financial creditors cannot be step down due to pending proceedings under Oppression and Mismanagement cases under section 241 and 242 of the Companies Act, 2013.
The present issue before the court:
The legal tussle is that, whether IBC overrides all major acts pertaining to recovery proceeding including SEBI. SEBI being the market regulator of the schemes like the collective investment scheme (CIS) have absolute control supervision on all it's working and recovery as well. The point of discussion is that by Section 28 (A) of SEBI Act deals with the recovery of money from a company, by selling its movable or immovable properties, among others and section 14 of IBC regarding moratorium which shall have a prevailing effect on others. It shall be considered to be an evolutionary step in extending the scope of IBC.
The fact of the present case is that HBN Diaries was running a Collective Investment Scheme and collected approximately Rs 1,136 Crores from investors. In the recovery of the same, SEBI takes action of attachment of properties belonging to HBN Dairies in order to return the dues to the depositors. Due to delays in recovery, some investors approached NCLT for initiation of insolvency proceedings against HBN Dairies. NCLT admitted the Application and after appointing Resolution Professional directed SEBI to de-attach the properties of HBN and hand them over to the RP.
SEBI challenged the order of NCLT directing the market regulator to de-attach properties of HBN Dairies and allies Ltd. and hand over to a resolution professional for functioning under proceedings. The arguments are such that section 238 comes to effect when inconsistency between IBC provisions and SEBI and herein the case Collective investment scheme has no conflict or inconsistency between IBC and SEBI so investors are just holders of their units and not to be considered to be lenders and fit in the term of financial creditors. While opposing the contention, Resolution Professional puts the light on the object of code and stated that it is an attempt not only to save the interest of stakeholders but also the resolution of the company as well.
In result, NCLT held Sections 11 & 11B of SEBI read with Regulation 65 of (CIS) Regulations, 1999, to be in direct conflict with many IBC sections and IBC overrides the provision of SEBI act and which was further upheld by NCLAT. The fact that CIS is not registered with SEBI and application of depositors admitted by NCLT is halfway done for the confirmation of the overriding effect of IBC on SEBI as well but it is a mistake to ignore the fact that the code governs the resolution of lawful activity and herein there is a complete violation of law The decision of Supreme a court in July confirms the solution on it. It is interesting to watch how Supreme Court experts look and interpret at the issue. [vi][vii][viii]
The view of the Supreme Court decides future track of the scope of overriding effect of section 238 but from the past cases of the overriding effect it can be weighted more towards IBC so it is easily inferred that Supreme court by looking at the object points like faster recovery, quicker resolution, and maximization of value of the asset with benefits of all likely come at the conclusion that IBC prevails over SEBI as well pertaining to recovery proceedings.
Written by: Bhushan Kulkarni – Student, CS Professional - Email Id- [email protected]
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