The non-obstante nuisance: a critique of Section 238 of the Insolvency and Bankruptcy Code

Abstract

ABSTRACTThis paper argues that the non-obstante clause in the Insolvency and Bankruptcy Code 2016 (IBC), which gives supremacy to the IBC over all previous laws in case of conflict, does not serve its purpose of asset preservation, and highlights problems that arise due to its presence. The paper analyses this provision considering the test for determining inconsistency between statutes in Indian law. It argues that the impact of IBC across different fields of operation brings forth several inconsistencies when deciding a conflict between the IBC and another statute. It presents problems arising due to the supremacy given to the IBC through the non-obstante clause, and exhibits how its application sometimes defeats its purpose. Lastly, the paper analyses insolvency regimes of the UK and Singapore, as well as the UNCITRAL Guide on Insolvency, and presents an example of instituting better cooperation between authorities initiating proceedings against a company under different statutes.KEYWORDS: Insolvency and Bankruptcy Codeinsolvencynon-obstanteSection 238IBCIndian lawnotwithstandingoverarchingblanketconflict Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 South India Corporation (P) Ltd v Secy, Board of Revenue, Trivandrum AIR 1964 SC 207 [215]; Chandavarkar Sita Ratna Rao v Ashalata S Guram (1986) 4 SCC 447; PEK Kalliani Amma (Smt) v K Devi (1996) 4 SCC 76; Moreshwar Balkrishna Pandare v Vithal Vyanku Chavan (2001) 5 SCC 551; Iridium India Telecom Ltd v Motorola Inc (2005) 2 SCC 145.2 Waman Shrinivas Kini v Ratilal Bhagwandas & Co AIR 1959 SC 689.3 ibid.4 ibid.5 M Venugopal v Divisional Manager, Life Insurance Corporation AIR 1994 SC 1343; Hindu Marriage Act 1955, s 16.6 See e.g. Prevention of Money Laundering Act 2002; Electricity Act 2003; Income Tax Act 1961.7 Sandeep Bhalla, Principles of Interpretation in India with Legal Maxims (Lawmystery.com 2006) 121.8 The Insolvency and Bankruptcy Code 2016, s 238.9 Ministry of Finance, Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015) 12 accessed 09 August 2023.10 Aravind Gayam, ‘The Insolvency and Bankruptcy Code: All you need to know’ (PRS Legislative Research, 10 May 2016) accessed 09 August 2023.11 Reserve Bank of India, Master Circular, Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2015–16/101, Issued on October 1, 2021, Paragraph 2, Part A.12 The World Bank, ‘Bank nonperforming loans to total gross loans (%) – United Kingdom, India’ (World Bank Open Data) accessed 09 August 2023.13 Ministry of Finance, Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015) 12 accessed 09 August 2023.14 ibid.15 The Insolvency and Bankruptcy Code 2016, ss 7 and 9.16 The Insolvency and Bankruptcy Code 2016, s 13.17 The Insolvency and Bankruptcy Code 2016, s 14.18 The Insolvency and Bankruptcy Code 2016, s 21.19 Karunjit Singh and Aashish Aryan, ‘In 5 years of IBC, lenders took 61% of the haircut on claims, shows data’ (The Indian Express, 27 July 2021) accessed 9 August 2023.20 The Insolvency and Bankruptcy Code 2016, Chapter III.21 The Insolvency and Bankruptcy Code 2016, s 243. However, s 243 has not yet been notified.22 The Insolvency and Bankruptcy Code 2016, s 255.23 The Insolvency and Bankruptcy Code 2016, s 245.24 The Insolvency and Bankruptcy Code 2016, s 249.25 The Insolvency and Bankruptcy Code 2016, s 251.26 Sati Mukund, ‘Insolvency and Bankruptcy Code, 2016 – Level playing field for all’ (2018) 11 (44) International In-House Counsel Journal 1, 4.27 Ashish Pandey, ‘The Indian Insolvency and Bankruptcy Bill: Sixty Years in the Making’ (2016) 8(1) Indore Management Journal 26.28 (2018) 1 SCC 407 [50].29 Sara Jain, ‘Analysing the Overriding Effect of the Insolvency and Bankruptcy Code, 2016’ (2020) 13 NUJS Law Review 39, 45.30 Madhusudan Sahoo, ‘The Art of Value Maximisation in CIRP’ (Insolvency and Bankruptcy News, IBBI) accessed 09 August 2023.31 Ministry of Finance, Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015) 22 accessed 09 August 2023.32 2018 SCC OnLine NCLAT 565 [17].33 ibid.34 ibid.35 Power Grid Corporation of India v Jyoti structures (2017) SCC OnLine Del 12,189.36 ibid [8].37 Irrespective of whether the courts have applied the test for non-obstante clauses or not, the cases serve as precedents for knowing which statute would prevail in case of any conflict.38 Deep Chand v State of UP AIR 1959 SC 648; M Karunanidhi v Union of India (1979) 3 SCR 254.39 Deep Chand (n 38) [39].40 (1979) 3 SCR 254.41 Gauri Shankar Gaur v State of UP (1994) 1 SCC 92.42 Shobha Ltd v Pancard Clubs Ltd 2017 SCC OnLine NCLT 7486.43 ICICI Bank Ltd v ABG Shipyard Ltd 2017 SCC OnLine NCLT 12,031 [2.2].44 IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016, reg 32.45 Jain (n 29) 39, 46.46 ibid.47 Bhanu Ram v HBN Dairies & Allied Ltd Tax Pub (CL) 0050, (NCLAT: 2019); Anju Agarwal v Bombay Stock Exchange and Ors (2019) SCC OnLine NCLAT 789. In Anju Agarwal, e.g. the NCLAT held that Section 14 of the IBC will take precedence over Section 28A of the SEBI Act which pertains to recovery of amounts by SEBI, including through attachment of movable property and bank account, by virtue of the non-obstante clause in the IBC. The tribunal further noted that any amount or penalty payable to SEBI can be claimed by it as an operation creditor under the IBC itself but it cannot be recovered during the resolution process.48 Shobha Ltd (n 42).49 Directorate of Enforcement v Axis Bank (2019) SCC OnLine Del 7854.50 ibid [146]; Securities and Exchange Board of India, A Report on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues (2020) 410 accessed 09 August 2023.51 The Insolvency and Bankruptcy Code 2016, s 32A.52 Central Bank of India v State of Kerala (2009) 4 SCC 94; Bhoruka Steel Ltd v Fairgrowth Financial Services Ltd (1997) 89 Comp Cas 547; Solidaire India Ltd v Fairgrowth Financial Services Ltd (2001) 3 SCC 71; KSL and Industries Limited v Arihant Threads Limited (2008) 9 SCC 763 [70], [92].53 ICICI Bank Ltd (n 43).54 Shobha Ltd (n 42).55 This is different from the same field of operation as described earlier. Previously the same field of operation was necessary to determine the existence of a conflict. Here, once the conflict has been established the purpose of the legislation helps determine which one should prevail.56 Swaran Singh v Kasturilal AIR 1977 SC 265.57 (1956) SCR 603.58 Shri Ram Narain v The Simla Banking & Industrial Co Ltd (1956) SCR 603, 615.59 Shri Ram Narain v The Simla Banking & Industrial Co Ltd (1956) SCR 603.60 Prevention of Money Laundering Act 2002.61 Bank of India v Directorate of Enforcement MANU/ML/0040/2018; Punjab National Bank v Directorate of Enforcement 2019 SCC OnLine ATPMLA 5.62 SREI Infrastructure Finance Ltd v Sterling SEZ and Infrastructure Ltd. 2019 SCC OnLine NCLT 6878.63 (2019) SCC OnLine Del 7854.64 It is important to note that the Court, here, stated that the two statutes had different purposes, and thus were not inconsistent, thereby avoiding the exercise of analysing and choosing one over the other. However, by making such a statement, the Court did, indeed, pit one legislation against the other and gave precedence to the PMLA.65 (2019) 4 SCC 227.66 Jain (n 29) 39, 50.67 On the other hand, exclusive jurisdiction can also be transferred to the NCLT from the High Court as well so that the parties have the right to proceed under the legislation in force. However, the option given to parties is problematic. Here, the undue reliance placed on s 238 resulted in multiplicity and not the supremacy of the IBC.68 The Insolvency and Bankruptcy Code 2016, s 5(8)(f) explanation.69 (2019) 8 SCC 416.70 (2019) SCC OnLine SC 1005.71 The Insolvency and Bankruptcy Code 2016, s 7(1); Ministry of Corporate Affairs, Government of India, Report of the Insolvency Law Committee (2020) 24, accessed 09 August 2023.72 K Kishan v Vijay Nirman Co (P) Ltd (2018) 17 SCC 662.73 Vijay Nirman Co (P) Ltd v Ksheeraabad Constructions (P) Ltd (2017) SCC OnLine NCLT 8473. This goes against the established precedent in Mobilox Innovations v Kirusa Software (2018) 1 SCC 353.74 K Kishan (n 72).75 (2018) SCC Online NCLAT 911.76 This case has been criticized due to its implications on s 29A. Defaulting promoters might be able to escape liquidation and take control of the company again, rendering the whole IBC process redundant. This argument might not work very well because, even under s 230, 75% of the creditors need to agree to the scheme whereas, under the IBC, only 66% need to agree to the same. The only possible conflict is that 90% of the creditors are necessary to withdraw the IBC process as opposed to 75%. However, if the creditors are satisfied with scheme, which is a necessary precondition, it should not affect the idea of overall justice. Dipal Modal, ‘Defaulting promoters getting “backdoor” entry to regain companies under IBC’ (Business Today, 19 April 2019) accessed 09 August 2023.77 Insolvency Act 1986 (UK); Insolvency, Restructuring and Dissolution Act 2018 (Singapore).78 United Nations Commission for International Trade Law [UNCITRAL], Legislative Guide on Insolvency Law (2005) 84.79 The Insolvency and Bankruptcy Code 2016, s 14.80 Biosource Technologies Inc v Axis Genetics Plc [2000] 1 BCLC 286.81 Rhondda Waste Disposal Ltd (In Administration), Re [2000] 3 WLR 1304.82 In Re Frankice (Golders Green) Ltd (In Administration) [2010] EWHC 1229 (Ch).83 Rhondda Waste Disposal Ltd (In Administration), Re [2000] 3 WLR 1304.84 Administrator (in the UK) and Judicial Manager (in Singapore) perform a role similar to one performed by the Insolvency Resolution Professional in India.85 Insolvency Act 1986 (UK), Schedule B1 para 43; Insolvency, Restructuring and Dissolution Act 2018 (Singapore), s 96.86 In Re Frankice (Golders Green) Ltd (In Administration) [2010] EWHC 1229 (Ch).87 Re Rhondda Waste Disposal Ltd (2001) (Ch) 57.88 ’High Court Holds Gambling Commission review hearing is legal process for purposes of administration moratorium’ (Practical Law, 2010) accessed 09 August 2023; In Re Frankice (Golders Green) Ltd (In Administration) [2010] EWHC 1229 (Ch).89 UNCITRAL, Legislative Guide on Insolvency Law (2005) 86.90 ibid.91 Ministry of Finance, Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015) 138, accessed 09 August 2023.92 ibid.93 ibid.94 Securities and Exchange Board of India, A Report on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues (2020) 408 accessed 09 August 2023.95 ibid 411.96 11 USC § 362 (b) (4).97 Companies Act 2013, s 230(1).98 A Ramaiya, Guide to the Companies Act (Arvind P Datar and S Balasubramanian (eds), 18th edn, LexisNexis 2015) 3692.99 Companies Act 2013, s 230(6).100 Companies Act 2013, s 230(5).