Insolvency & Bankruptcy Code, 2016 intends to provide a comprehensive approach to maximize assets and provide a remedy to the operational, financial creditors and corporate debtors within a specific timeline. Even in difficult times due to the Covid -19 pandemic, the Code envisages the market economy to mature through National Company Law Tribunals. However, the tribunals...
Insolvency & Bankruptcy Code, 2016 intends to provide a comprehensive approach to maximize assets and provide a remedy to the operational, financial creditors and corporate debtors within a specific timeline. Even in difficult times due to the Covid -19 pandemic, the Code envisages the market economy to mature through National Company Law Tribunals. However, the tribunals are encountering multiple litigations and delivering conflicting decisions due to IBC's precedence over actions under other laws and the statutory authorities were ignoring the overriding effects of the provisions of the IBC.
The legislatures while enacting the Code foresee the allied laws and their conflict with the provisions of IBC. In order to avoid this conflict, the Code itself Provides prohibitory measures by adding S. 14 and S.238 in the IBC. The effect of moratorium u/s 14, on actions undertaken under other statutes, and the overriding provision u/s 238 of IBC has led to achieving the object of time bound resolution of insolvency and maximisation of assets of the corporate debtor during the process of resolution. There are some statutes harmonised with the provisions of IBC and certain statutes inconsistent with the provisions of the Code. The question is how to identify the statutes harmonised with the provisions of IBC and inconsistent with the provisions of IBC. If it is harmonised then the action under the statute would prevail over the provisions of the Code. On the other hand, if it is inconsistent with the provisions of the Code, then S.238 attracts.
Section 238 of IBC gives it an overriding effect over other laws for the time being in force. To harmonise the overriding effect of various other statutes, the code added Sections 245 to 255 of the IBC by amending provisions of statutes like Indian Partnership Act, 1932; The Central Excise Act,1944; the Income Tax Act,1961; The customs Act,1962; The Recovery of Debts due to Banks and Financial Institutions Act,1993; The Finance Act 1994; The SARFAESI Act, 2002; The Sick Industrial Companies (Special Provisions) Repeal Act,2003; The payment and Settlement Systems Act,2007; LLP Act, 2008 and The Companies Act,2013.
The amendment to relevant sections in the above-referred Act has been made subject to provisions under IBC. The Code will override anything inconsistent contained in other enactments. So that the inconsistency has been taken away by way of the said amendment.
Section 14 declaration of the moratorium and section 238 of the Code left a lot of room for judicial interpretation in regards to certain statutes like Prevention of Money Laundering Act, 2002 (PMLA), The Employees' Provident Funds and Miscellaneous Provisions Act1952 (EPF & MP); Payment of Gratuity Act 1972. The Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017; Tea Act, 1963; SEBI Act; Arbitration and Conciliation Act,1996; Negotiable Instrument Act,1881 and Goods and Services Tax,2017 etc.
Numerous cases were filed in various adjudicatory bodies such as NCLT, High Courts, NCLAT, SC, and other appellate Tribunals which related to the effect of moratorium u/s.14 and S.238 of IBC on actions taken under allied laws. The issue of whether the moratorium is applicable to the Prevention of Money Laundering Act, 2002 (PMLA) proceedings has also been dealt with by various forums, which has resulted in some conflicting decisions.
Judicial interference as to the effect of Moratorium declared u/s.14 of IBC, began when the directorate of enforcement under the Prevention of Money Laundering Act, 2002 (PMLA) took action against the assets of the corporate debtor undergoing a corporate insolvency resolution process.
Effect of Moratorium u/s 14 of IBC.
1. National Company Law Tribunal
● In SREI Infrastructure Finance Limited vs. Deputy Director, Directorate of Enforcement, (Prevention of Money Laundering Act) NCLT Mumbai, [CP 405/2018], held that IBC overrides the provisions of PMLA and the proceedings under PMLA have to stay in light of the moratorium. It further held "The non-obstante clause contained in IBC, which is a later statute shall prevail over the non-obstante clause contained in Section 71 of PMLA and the proceedings before the Adjudicating Authority under PMLA is civil in nature and hence, in view of Section 14 of IBC, the proceedings before the Adjudicating Authority of PMLA cannot continue."
● In J.M. Financial Asset Reconstruction Company Vs. Indus Finance Ltd, CP 405/2018 , JM Financial Asset Reconstruction Company had initiated proceedings under the SARFAESI Act against the erring corporate debtor. The sale process of the immovable assets given as security had been initiated under Section 13 of the SARFAESI Act. Following the auction sale process, the sale had been confirmed in favour of a transferee, on payment of 25% of the sale price. However, NCLT Mumbai held that the sale had only been confirmed and not concluded and hence in light of the moratorium, the auction sale has stayed.
● Whether proceedings under GST law overrides provisions of the Code has been considered by the NCLT Ahmedabad Bench in Bhavarlal M Jain & Anr. Vs. Metal Link Alloys Ltd. &Ors. [IA 361 of 2018 in CP(IB) 67 of 2017]
The Adjudicating Authority passed an order of liquidation on May 11, 2018. The GST authority passed an order of assessment on June 18, 2018, and issued a recovery notice on September 12, 2018. The NCLT considered whether the proceedings under GST laws are in contravention of the Code. It is observed that the moratorium under section 14 of the Code comes to an end on passing of the order of liquidation. As per section 33(5) of the Code, the legal proceedings can be continued against the CD during liquidation. Observing that as per section 33(5) of the Code, the legal proceedings can be continued against the CD during liquidation, the application filed for a stay of recovery proceedings initiated by the Commissioner Central GST & Central Commissionerate, Daman was dismissed.
2. High Court
● In Deputy Director Directorate of Enforcement Delhi vs. Axis Bank and Ors, [CRL.A. 143/2018 & Crl.M.A. 2262/2018] 2019 SCC ONLINE DEL 7854, the Delhi High Court set aside the decision of the PMLA Appellate Tribunal vide a judgment dated 02.04.2019. The Delhi High Court appreciated the fact that RDDBFI (Recovery of Debts due to Banks and Financial Institutions) Act,1993; IBC, 2016 (Insolvency and Bankruptcy Code) and the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act,2002, had distinct objectives and hence, none could prevail over the other. Hence, a harmonious construction was given to each of them in the light of the facts and circumstances of the case. The HC also observed that the proceeding under the PMLA is a criminal proceeding and an order of attachment under the PMLA does not nullify the prior charge over the property under the RDDBFI Act and SARFAESI Act and vice-versa.
● In Raj Shipping Agencies v. Barge Madhwa and Anr. (2020 SCC Online Bom.651), the Bombay High Court has considered the nature and provisions of proceedings under the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (Admiralty Act) and harmonised the provisions of the Admiralty Act with the Insolvency and Bankruptcy Code, 2016 (IBC) and the Companies Act, 1956 (Companies Act) respectively and held that IBC, not overrides provisions under Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017. The Court observed that the Admiralty Act is a complete code as regards legal proceedings in connection with vessels (otherwise called actions in rem), their arrest, detention, sale and determination of priorities in respect of the sale proceeds of the vessels that were ordered to be arrested. It was noted that a maritime claim is enforced by an action in rem against the vessel (or its sale proceeds) and thus the vessel is liable to pay the claim. The court further held that a declaration of moratorium under the IBC will not prohibit the institution of an action in rem or continuation of a pending action in rem as an arrest of the ship would not amount to Institution of a suit against a corporate debtor as defined under the IBC as it is a ship against whom the proceedings are against and not the owner of the ship or its assets.
3. National Company Law Appellate Tribunal.
● In Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018, dated 27-07-2020, The Appellate Tribunal held that: "as the 'Prevention of Money Laundering Act, 2002' relates to different fields of penal action of 'proceeds of crime', it invokes simultaneously with the 'I&B Code', having no overriding effect of one Act over the other"
● In Directorate of Enforcement vs. Manoj Kumar Agarwal & Ors, CA-AT (Ins) No. 575 of 2019 the appellate Tribunal differing the proposition held in Varsana Ispat ltd, observed that there is no conflict between the provisions of the Code and the Prevention of Money Laundering Act, 2002 ("PMLA"), the Appellate Tribunal went on to hold that the provisions of the Code will override the attachment of the properties (of a corporate debtor) under the PMLA, even when such attachment took place prior to the initiation of the CIR Process.
● In JSW Steel Ltd. vs. MK Khandelwal and Ors., Company Appeal (AT)(Ins.) No. 957 of 2019. By a judgment dated February 17, 2020, the Appellate Tribunal observed that IBC and PMLA provide non-obstante clauses and stressing its effect laid down a precedent by giving Section 32A of the Code a retrospective effect and setting aside the attachment of properties by the Directorate of Enforcement.
- Whether S.14, as well as S.33(5), shall prevail over S. 3 of WBPIDFE Act (West Bengal Protection of Interest of Depositories in Financial Establishment Act, 2013) was under consideration before the NCLAT in Directorate of Economic Offences Vs. Binay Kumar Singhania & Ors. (CA (AT) (Ins) No.935 of 2020).
Pending liquidation proceedings against M/s Pincon Spirits Ltd (CD) the DEO (Directorate of Economic Offences), WB sealed the registered office of the Corporate Debtor and attached the Bank Accounts, movable and immovable properties of the Corporate Debtor. He has to look after all the properties, moveable and immovable till the realization of the liability with the help of the local police stations. The Ld. The Adjudicating Authority allowed the application filed by the Liquidator under Sections 33 (5), 60 (5) (c), and 238 of the IBC and directed the DEO to de-attach all the properties. The DEO challenged the same as the attached properties claimed by the liquidator are not assets of the Corporate Debtor. The appellate Tribunal set aside the order of NCLT by observing that the property of Corporate Debtor, who is not a financial establishment under Section 2(e) WBPIDFE Act, can be attached. The High Court did not intend to keep the assets of the Corporate Debtor outside the purview of sale. The Court further added that Section 14 of the IBC has no overriding effect on Section 3 of the WBPIDFE Act. The Court finally concluded that the attached property is not in possession and control of the DEO, WB, thus he cannot de-attach the property.
4. Supreme Court
- Whether the institution or continuation of a proceeding under section 138/141 of the Negotiable Instrument Act can be said to be covered under section 14 of the IBC was considered by the supreme court in P. Mohanraj vs M/S. Shah Brothers Ispat Pvt. Ltd. (CIVIL APPEAL NO.10355 OF 2018).
Pending criminal proceedings under section 138/141 of the NI Act, the Operational Creditor filed section 9 of the IBC application for initiating CIRP against the CD. The Adjudicating Authority stayed further proceedings in the two criminal complaints pending before the Additional Chief Metropolitan Magistrate ["ACMM"], Kurla, Mumbai. In an appeal filed to the National Company Law Appellate Tribunal ["NCLAT"], the NCLAT set aside this order, holding that Section 138, being a criminal law provision, cannot be held to be a "proceeding" within the meaning of Section 14 of the IBC. Feeling aggrieved appellant preferred the appeal before the Supreme Court. The SC upheld the order of NCLT and set aside the order of the NCLAT by holding that " In conclusion, disagreeing with the Bombay High Court and the Calcutta High Court judgments in Tayal cotton Pvt. ltd V.State of Maharashtra, 2018 SCC OnLine Bom 2069 : (2019) 1 Mah LJ 312 and M/s MBL Infrastructure Ltd.V. Manik Chand Somani CRR 3456/2018 (Calcutta High Court; decided on 16.04.2019), respectively, we hold that a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC."
Effect of S. 238.
National Company Law Tribunal
- In Mr. Banu Ram and ors Vs. HBN Dairies & Allied Ltd., CP (IB) No.547/PB/2018, the NCLT Principal Bench has held that the IBC has an overriding effect over the SEBI Act and directed SEBI to de-attach the properties of the corporate debtor HBN Dairies & Allied Ltd. Securities and Exchange Board of India ("SEBI") has filed Civil Appeal No. 5089 of 2019 before the Supreme Court against the NCLT, PB order and it appears to me is still pending before the Supreme Court. However, the appeal was admitted and an interim order has been passed. " In the meanwhile, the resolution professional may continue to perform his functions. We, however, only grant the stay of the direction of the NCLT insofar as it has directed SEBI to hand over the title deeds to the resolution professional. It is further made clear that the SEBI shall not in any manner create any encumbrance on the properties held by them by virtue of the title deeds". Let us wait for the findings from SC.
● In Duncans Industries Ltd vs. A. J. Agrochem. The Supreme Court held that the provisions under IBC have an overriding effect over provisions of the Tea Act. The Apex Court was examining whether, in light of Section 16(G)(1)(c ) of the Tea Act, the Applicant seeking to initiate action under IBC against such a company is required to obtain Central Government's consent before initiating such proceedings. The Supreme Court observed that the "Corporate insolvency resolution process" as such cannot be equated with "winding up proceedings". The Court further observed that the requirement of consent would frustrate the objective of IBC to complete the CIRP in a time-bound manner. In light of Section 238 of the IBC, which is subsequent to the Tea Act the Court held that the provisions under IBC have an overriding effect over provisions of the Tea Act and any other interpretation would frustrate the object and purpose of the IBC.
High Court
In M/s Dreams Infra India Pvt Ltd Vs. The Competent Authority ( Writ Petition No. 13477/3020(GM-RES) the High Court of Karnataka At Bengaluru held that IBC has an overriding effect over State Acts.
The Writ Petition is filed to quash the proceedings initiated by the respondent under Section 5(1) of the Karnataka Protection of Interest of Depositors in Financial Establishment Act, 2004. Referring to various case laws the High Court observed that IBC is having an overriding effect over other laws and the same would prevail in view of section 238 of the Code. Upon the said observation the proceedings initiated against the CD have been quashed.
Appellate Tribunal for Prevention of Money Laundering Act
● In the case of M/S PMT Machines Ltd. vs. The Deputy Director, Directorate of Enforcement, Delhi [FPA-PMLA-2792/DLI/2019] by its order dated September 16, 2019, the Appellate Authority of the Prevention of Money Laundering Act, Delhi, has held that the provisions of the Indian Bankruptcy Code, 2016 shall prevail over the provisions of the Prevention of Money Laundering Act, 2002. This order was passed by the Appellate Authority when the Resolution Professional of PMT filed an appeal challenging the attachment by the Enforcement Directorate of the Sterling Biotech group including the assets of PMT during the pendency of the Corporate Insolvency Resolution Process, of PMT. Such an order of attachment was affecting the resolution process of PMT. The Appellate Authority also observed that the mortgaged properties were acquired much prior to the date of the alleged offence and the date of charge of properties are also much prior to the date of the alleged offence committed. The Ld. Tribunal harmonised both the statutes in light of their respective objectives.
● In Punjab National Bank v. The Deputy Director Directorate of Enforcement (APPEAL No. 1950/2017) the appellate Authority has held that " this Tribunal is of the considered opinion that the proceeding u/s. 8 of PMLA, 2002 before the Adjudicating Authority is a civil proceeding and the Adjudicating Authority should have stayed the proceedings on passing of the moratorium order by the NCLT. The continuation of the proceedings from the date of commencement of the moratorium order is contrary to the intention of the legislature hence the consequential order of confirmation of PAO is contrary to law. In the facts of the present case, it appears that a hurdle has been created in the process after passing the order of NCLT which ought not to have been done. The question of registering ECIR does not arise. The passing of the provisional attachment order was not application of mind and without consulting the facts and law."
National Company Law Appellate Tribunal
● In Regional Provident Fund Commissioner- I Ahmedabad. Vs. Ramachandra D.Choudhry NCLAT(CA (AT) (Ins.) No. 1001 of 2019, the Appellate Tribunal has held that "However, as no provisions of the Employees Provident Funds and Miscellaneous Provision Act, 1952 is in conflict with any of the provisions of the I&B Code and, on the other hand, in terms of S.36(4) (iii), the provident fund and gratuity fund are not the assets of the Corporate Debtor, there being specific provisions, the application of Section 238 of the I&B Code does not arise". Thus, it is clear that the provisions under IBC have no overriding effect over provisions of the EPF & MP Act.
- Whether S.238 of the IBC will have an overriding effect on proceedings under the provisions of Electricity Act, Rules & Regulation was considered by the Appellate Tribunal in Paschimanchal Vidyut Vitran Nigam Ltd.Vs.Raman Ispat Private Limited & Ors. (CA (AT) (Ins.) No. 639 of 2018.
In this case, during the pendency of the liquidation process initiated against the CD, the appellant attached the property of the CD. NCLT Allahabad directed to release the order of attachment and directed to submit its claim to the liquidator on the observation that the appellant is an operational creditor. Feeling aggrieved, the appellant filed this appeal. The NCLAT, confirming the order under challenge, observed that " We have noticed Section 238 of the 'I&B Code' which is a subsequent parliamentarian law, which talks of overriding effect on all existing laws, therefore, we hold that the 'I&B Code' will have an overriding effect on the 'Electricity Act, 2003, if any of the provisions of the 'Electricity Act, 2003' is inconsistent with the provisions of the 'I&B Code'."
Supreme Court
● Solidaire India Ltd. v. Fairgrowth Financial Services Pvt. Ltd. Appeal (civil) 3760 of 1995 is a judgment that lays down the guiding principles regarding interpretation of non-obstante clauses in two Acts. In this case, the Supreme Court considered the effect of S.32 of Sick Industrial Companies (Special Provisions) Act, 1985 on S. 13 of the Special Court (Trial) of the Offences Relating To Transactions And Securities) Act (in short Special Court Act,1992). Interpreting non-obstante clauses in the said two Acts, the supreme court held "The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, provides in Section 13, that its provisions are to prevail over any other Act. Being a later enactment, it would prevail over the Sick Industrial Companies (Special Provisions) Act, 1985. Had the Legislature wanted to exclude the provisions of the Sick Companies Act from the ambit of the said Act, the Legislature would have specifically so provided. The fact that the Legislature did not specifically so provide necessarily means that the Legislature intended that the provisions of the said Act were to prevail even over the provisions of the Sick Companies Act."
● In Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. (SLP(C) No. 6483 of 2018 Income-tax Act ), (SLP(C) No. 6483 of 2018), the Supreme Court by affirming the view of High Court of Delhi [ITA No. 543/2017], has held that "Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income Tax Act. We may also refer to this connection to Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. (2000) 5 SCC 694, and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons". Hence, Section 238 in the Code makes it clear that the Code will override anything inconsistent contained in any other enactment.
● Whether the protection granted under the Maharashtra Relief Undertaking Act (MRU Act) renders an application under the Insolvency Code was considered by the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank and Anr. CIVIL APPEAL NOs. 8337-8338 OF 2017.
In this case, ICICI Bank, a financial creditor approached the NCLT for initiating insolvency proceedings against the corporate debtor (CD) while the Government granted relief from repayment of debt by the CD under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRUA). The SC took the view that the non-obstante clause contained in section 238 of the Code, has been couched in very wide terms and the purpose for the same is that any right of the CD under any other law cannot come in the way of the Code. The SC thereby reconciled the provisions of Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRUA) and the Code and held "On the aspect of whether the provisions of the MRU Act will prevail over the provisions of the Insolvency Code, the Court held that MRU Act operates in the same field as the Insolvency Code and is repugnant to Insolvency Code and that the later non-obstante clause (Section 238) of the Parliamentary enactment (Insolvency Code) will also prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act."
● Whether a demand notice of unpaid operational debt can be issued by a lawyer on behalf of the operational creditor under section 8 of IBC has been considered by the Supreme Court in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (CIVIL APPEAL NO.15135 OF 2017)
In this case the operational Creditor filed an application before the National Company Law Tribunal u/s. 9 of IBC for initiating CIRP as against the corporate debtor. The NCLT dismissed the application holding that the application was incomplete as it did not comply with the mandatory requirements under Section 9(3)(c) of the Insolvency and Bankruptcy Code which required a certificate from a financial institution with regards to the non-payment of the outstanding amount by the Corporate Debtor and on finding that there was an existence of dispute before the Demand Notice was furnished upon the Corporate Debtor as per Section 8(2)(a) of the IB Code which was also raised at the time when a reply to the Statutory Notice was furnished under Section 433 and 434 of the Companies Act by the Respondent. The operational creditor filed an appeal before the NCLAT. The Appellate Tribunal among other grounds took cognizance of the Demand Notice which was furnished by the lawyer of the Appellant and noted that such Demand Notice has to be in compliance with Form 3 under Rule 5 of the Insolvency and Bankruptcy Code Rules, 2016. Observing that the Demand Notice was invalid as it has to be furnished as per Form 3 by the Creditor himself or by any authorized person on his behalf and lawyer cannot come under such purview as there was the absence of any authority by the Operational Creditor dismissed the appeal. The Supreme Court referring to the provisions of the Advocates Act, 1961 more particularly section 30 of the Act, observed that the term 'practise', appearing in that section, is a term of wide import and would include all steps leading up to the filing of an application before the Tribunal and that the doctrine of harmonious construction applies to all statutes made by the Parliament. With these observations, the Supreme Court held that "there should be a clear inconsistency between the two enactments before giving an overriding effect to the non-obstante Clause but when the scope of the provisions of an earlier enactment is clear the same cannot be cut down by recourse to the non-obstante clause. Harmonious interpretation, it is clear that both the statutes must be read together. Section 30 of the Advocates Act deals with the right of advocates to practice which is in consonance with Article 19(1) (g) of the Constitution. Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would not be out of order" By an order of remand the Supreme Court further held that "S.8 of the Code must be read as including an operational creditor's authorized agent and lawyer, as has been fleshed out in Forms 3 and 5 appended to the Adjudicatory Authority Rules".
Thus in view of the aforesaid, it is postulated that once the moratorium period comes into effect, the proceedings under any other statute as against the assets of the CD would not prevent the resolution process initiated against the stressed assets of the CD. If any civil or criminal proceedings are initiated against the secured assets of a CD, under allied laws, then also there would not be any stay of proceedings to be initiated as against the assets of the CD under IBC. According to the construction of provisions of the two Act's, if one is conflicting with the other, but the two Acts can be harmonised and constructed, then the latter must be adopted as held in the case of Solidare India Ltd. which is referred to above. The above discussion seems to have thrown some light in regards to uncertainty as to whether or not a party can effectively enforce its rights under Allied Acts, without fear of the overriding effect of u/s.238 of IBC and declaration of Moratorium u/s.14 of IBC.
Views are personal.
The Author is an Advocate practicing at the High Court of Kerala.