[Kushal Tekriwal is a 4th year B.B.A. LL.B. (Hons.) student at Jindal Global Law School, Sonipat, India]
The Insolvency and Bankruptcy Code (IBC), 2016 has transitioned itself from a regime of ‘debtor-in-possession’ to ‘creditor-in-possession'. The IBC brought a gradual shift repealing the earlier operating Presidency and Provincial Insolvency Act. One of its provision in nature of Section 238, provides for an overriding and overarching effect over laws being inconsistent with provisions of IBC in the nature of a non-obstante clause. However, the determination of such overarching and inconsistency effect must be cautiously adjudicated by the courts. This article analyses the scope and interpretation of Section 238 in light of similar substantial legislations operating in the corporate law framework which involves Companies Act, 2013, the Securities Exchange Board of India (SEBI) legislations and other relevant State legislations.
ANALYSIS OF SECTION 238
However, prior to analysing the same, it is necessary to examine the provision itself. The insertion of such a provision has resulted in the applicability of other legislations. Also, as per Union of India v. G.M. Kokil, these act as ‘legislative device’ to preclude the applicability of all the inconsistent provisions. Such non-obstante clauses must be viewed in a restrictive manner to ensure a harmonious interpretation of statutes in question. With regards to the nature of such provisions, it must be examined that the Legislature would not enact any inconsistent and conflicting law without repealing the already existing and operating one. Unless it does not provide for a repeal of provision or legislation in express terms, they are meant to be applicable. This is to facilitate the principle of harmonious interpretation between two legislations which becomes inoperative only when the principle of est exclusion alterius applies i.e. an express intention conveyed by the statute to exclude the other. Furthermore, this provision must be cautiously applied in light of a clear, definite, and irreconcilable inconsistency existing between the legislations in such a manner that it becomes impossible to comply with statutes simultaneously. This test was applied and affirmed in cases of Deep Chand v. State of Uttar Pradesh, Municipal Council v. T.J. Joseph and the recent decision of Innoventive Industries v. Union of India.
THE POSITION OF INSOLVENCY AND BANKRUPTCY CODE vis-à-vis OTHER STATUTES
A. STATE LEGISLATIONS
Now, with respect to the corporate law framework, the major operating legislations are the Companies Act, SEBI legislations and other State legislations. Often there has been an issue raised questioning the position of such legislations with respect to IBC. An observation with respect to State legislations, primarily with one of the provisions in Maharashtra Relief Undertaking Act, 1958 being the major highlight wherein it imposes a moratorium on any remedy for enforcement of any right, obligation or liability incurred. In the case of Innoventive Industries, the Apex Court for the first time highlighted the significance and purpose of such clause in IBC. It held that IBC would prevail over such State statute such that no obstruction is caused and facilitates the purposes of IBC. Furthermore, as per the general principles of law, since IBC is a parliamentary legislation enacted under the Concurrent List, it would have supremacy over any legislation enacted under the State List in events of any inconsistency.
B. THE COMPANIES ACT, 2013
Accordingly, for Companies Act, 2013, the major issue raised are for aspects regarding the winding up proceedings and scheme of arrangement. With respect to winding up, there has been a misnomer regarding an automatic transfer of cases pending before the High Court to the National Company Law Tribunal (NCLT). This position was clarified in Jaipur Metals and Electricals Employees Organisation v. Jaipur Metals and Electricals Ltd. wherein it’s upon the parties to file an application for transfer of proceedings to NCLT. This position however may have some issues as it allows parties to opt for the adjudicatory forum leading to lack of uniformity displaying inefficiencies and unproductiveness in the legal structure. There might be an occurrence of two cases based on similar facts to be decided in two different adjudicatory forums and ultimately their decision being different to each other. Furthermore, with respect to the main issue at hand, this case clarified the ambiguity which persisted over the overarching nature of IBC over the Companies Act to state that the proceedings of corporate insolvency resolution process instituted under the IBC are independent proceedings which can be initiated before a winding up order is passed. This was even extended in Bank of New York Mellon v. Zenith Infotech wherein even if a winding up order has been passed, it is open for the company to seek remedies under IBC statute. The intent behind such an observation was that if a company is deprived of such opportunity, then IBC would be treated as if it did not exists and would not allow the company to take benefits of such a legislation.
Secondly, with respect to scheme of arrangements, it can be stated that under Section 29A of IBC, certain persons are prohibited from submitting a resolution plan whereas under Section 230 of the Companies Act, there are no such restrictions for proposing plans of reconstruction. It must be noted that a plan for reconstruction and resolution plan has similar objectives to achieve. Thus, the issue arises when a person who is prevented under Section 29A, proposes a scheme of arrangement under Companies Act after a liquidation order has already been passed under the IBC. Such issue was however, stated to bear no conflict with each other in Arun Kumar Jagatramka v. Gujarat NRE Coke Ltd. This position needs dire attention by the legal fraternity since it permits the promoters of such companies for an alternative route to escape the legal embargo of Section 29A, thereby providing a loophole and rendering the intent of the legislation as futile.
C. THE SEBI ACT, 1992
The next aspect deals with SEBI legislations, majorly being the SEBI Act, 1992 whereby a series of restrictions were imposed on corporate debtors and directors of company due to numerous SEBI Regulations which extended to actions such as prohibiting collection of money from investors, access to markets, alienation of the assets etc. as observed in Sobha Limited v. Pancard Clubs Ltd. The Court applied the test of inconsistency to a great detail to find no direct inconsistency, rather would be used as a measure to take out the company as well as the investment frozen in by the SEBI, thereby facilitating the purpose of enacting IBC.
Employing from the above arguments, it can be inferred that IBC is an evolving and dynamic legislation in which numerous aspects are still left to be discovered by. Its major intention of eliminating any uncertainty in law relating to insolvency was a prominent feature of its enactment, thereby leading to the non-obstante clause. However, as seen above, Courts need to apply it cautiously and judiciously to provide a harmonious construction and correct interpretation of the statutes. Such rules must not be isolated and rather be collectively applied by the judges only when there exists clear and definite inconsistency between the statutes and must be used as a last resort. It must be noted that the presence of a non-obstante clause does not imply a primacy in application of the IBC provisions over the provisions in other legislations.