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A COMPARATIVE ANALYSIS OF SECTION 238 OF IBC, 2016

[Parth Birla is a 3rd student at Hidayatullah National Law University]


INTRODUCTION


The Insolvency and Bankruptcy Code of 2016 (IBC) was enacted with the aspiration of quickly restructuring and addressing the insolvency of partnerships, businesses, and individuals. Earlier, insolvency rules were divided into several legislations such as Presidency Towns Insolvency Act of 1909, the Provincial Insolvency Act of 1920, the Sick Industrial Companies Act of 1985, and the Companies Act of 2013. Astonishingly, as per data issued by the Corporate Affairs Ministry since the implementation of IBC, insolvency proceedings in 2020 were resolved on an average in 1.6 years, as opposed to 4.3 years in 2017. One of the main reasons behind IBC’s success can be attributed to Section 238 of IBC which ensures a hassle-free process for resolution and liquidation. The Supreme Court (SC) in its recent judgment Paschimanchal Vidyut Vitran Nigam Ltd. vs. Raman Ispat Private Limited & Others resolved that provisions of IBC shall override the Electricity Act, 2003 (“the Act”). The verdict once again affirms the supremacy of IBC over other laws by virtue of Section 238 of IBC, which functions as a non-obstante clause and specifies that any legislation’s provisions shall cease to have any effect in case of inconsistency with IBC. The judgment is important in itself since it decides the overriding effect, when both statutes contained non-obstante clause. While there have been numerous pronouncements by different courts hailing the dominance of Section 238, it is necessary to understand its application and overriding effect with other statutes.


BRIEF FACTS OF THE CASE


In the present case, the appellant, Paschimanchal Vidyut Vitran Nigam Ltd. (“PVVNL”) raised electricity bills against the respondent Raman Ispat Pvt. Ltd. (“Raman Ispat”). It ought to be acknowledged that both sides signed an agreement for electricity supply in 2010. Non-payment of electricity bills led to Tehsildar imposing a charge on the Corporate Debtor's (Raman Ispat's) property in accordance with one of the clause of the agreement. The clause allows PVVNL to create a “charge on the assets of the company” in case of non-payment of dues.


Afterwards, liquidation proceedings were initiated against Raman Ispat wherein the liquidator approached the National Company Law Tribunal (NCLT) for release of property. The NCLT directed the Tehsildar to release the property (which was previously attached as a charge) on the side of the liquidator for completion of proceedings under IBC. When PVVNL appealed before the National Company Law Tribunal (NCLAT), the appellate authority also concurred with the findings of the Tribunal and hence, PVNNL approached SC.


CONTENTIONS OF THE PARTIES


The PVVNL argued that Sections 173 and 174 of the Act is the non-obstante clause and stated that the Act shall override all the operations of any other law including IBC. Moreover, they furnish that IBC is a general statute whereas the Act is of special nature, thus the rights of PVVNL for recovery of dues do not fall under the mechanism of IBC and it will independently recover all the dues. The contentions were based on State Tax Officer vs. Rainbow Papers Ltd, wherein it was held that “if a resolution plan excluded such tax or statutory dues payable to the government, it would not be in conformity with the provisions of the IBC and, as such, would not be binding on the State.”


The Raman Ispat advanced that these electricity dues do not form any ‘Security Interest’ in the favour of PVVNL and do not enjoy any priority as held in West Bengal State Electricity Distribution Company Limited vs. Sri Vasavi Industries Limited and Another. They further contended that Section 77 of the Companies Act of 2013 and Section 52(3) of IBC was also not followed in the due process by PVVNL. Conclusively, they claimed that Section 238 expressly states that the IBC shall take precedence over any other law in the event of inconsistency, indicating that it is a special act, and that it is also relatively new legislation in comparison to the Act.


THE VERDICT OF SC


The court held that though PVVNL has government participation, this cannot be used as the primary criterion for declaring it a part of or the government itself. The court further stated that the Rainbow paper case referenced by the Corporate Debtor is irrelevant as it involved a resolution process, whereas the present case involves liquidation. Section 53 was thoroughly analysed in the judgment, with special attention placed on the 'government dues' provided under the said section. The court later confirmed IBC's supremacy over the Act by virtue of Section 238, despite the fact that the latter statute also has a specific non-obstante clause. The court highlighted its previous judgments such as Duncans Industries Ltd. vs. AJ Agrochem, Sundaresh Bhatt and Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs etc. to strengthen the proposition of superiority of Section 238. It also discussed the various circumstances of payment of dues to the secured creditor in case of relinquishment and non-relinquishment of security.


OVERRIDING EFFECT OF SECTION 238


It is important to highlight that one of the primary issues in this case was which act should take precedence where two statutes have conflicting provisions and both contain non-obstante clauses. Sections 238 of the IBC and 173 & 174 of the Act provide both acts to exercise primacy over other laws. The court while answering the issue observed that more recent statutes should override the other which was proclaimed in KSL & Industries Ltd vs. M/S. Arihant Thread Ltd. & Others and Maharashtra Tubes Limited vs. State Industrial and Investment Corporation of Maharashtra. The same discrepancy i.e. clash between IBC and the Act arose in ICICI Bank Ltd. v. ABG Shipyard Ltd., in which the Tribunal observed that since both the laws are special in nature, the latest one shall triumph over the older one. Thus, it is a settled stance that in case of discrepancy the latest enacted statute shall outperform the functioning of older statute.


In the past as well there have been instances of inconsistencies were faced in the application of other statutes due to IBC, as found in M/s. Platinum Rent A Car (India) Private Limited vs. M/s. Quest Offices Limited, J.M. Financial Asset Reconstruction Company vs. Indus Finance Limited, K Kishan vs. Vijay Nirman Company Private Limitedwherein the court upheld the primacy of IBC through Section 238 against Limitation Act of 1963, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFAESI) and Arbitration and Conciliation Act of 1996 respectively. The above pronouncements hail the dominance of IBC over other laws and in terms of initiating the Insolvency Resolution Process which cannot be effectively overruled by resorting to remedies provided under other laws of the nation. The courts through its various judgments already clarified that IBC is an umbrella code and with respect to corporate entities, it shall also override the functioning of the Income Tax Act, Companies Act and Prevention of Money Laundering Act whenever discord exists among them. Thus, it can be very well inferred that all the above laws which also synchronizes the processes for a corporate entity, however courts time and again reiterated that the foremost preference should be conferred to IBC only.


IS SECTION 238 ABSOLUTE?


The question becomes very relevant with respect to above cases, as it can be very well construed that the supremacy of IBC on account of Section 238 can be misused by parties to negate the operation under other laws. In the case of Shobha Limited v/s Pan Card Clubs Limited the Mumbai NCLT bench was deciding the tussle between IBC and SEBI Act, the Tribunal noted that since both the laws have separate field of operation and Section 238 do not have Blanket Overriding Effect, and thus it was held “no order could be passed invoking section 238 jurisdictions to nullify SEBI order.” Recently, the Bombay High Court also observed that an application under Section 11 of the Arbitration Act is not barred by the mere filing of an application under Section 7 of the IBC. The cited instances truly supports that the court of law have showed a proactive approach whenever there appears to be a possible misuse of Section 238.


CONCLUSION


It is an undisputable fact that IBC is a historic legislation having a direct effect to economy of the country and its enforcement led to key changes to various legislations governing the finance field. The recent decision of SC reinstates the proposition of upper hand of IBC over other law, and it can be easily made out that it aligns with the objective of IBC i.e. to maximise the value of asset and pay off the creditors. The above cited cases also strengthen the position that inconsistencies among statutes shall be dealt by totally resorting to non-obstante clause of IBC. However, there lies a caveat that the given provision is not absolute and it shall have no effect where subject matter of disputes differs or where the very object of parties is to escape from the liability under other statutes.

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1 Comment


Sourav Singh
Sourav Singh
Oct 06, 2023

Brief and informative

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