Decoding Of Insolvency And Bankruptcy Code, 2016, SC's First Major Judgment [Read Judgment]

In a detailed judgment, Justice RF Nariman, while sitting with Justice Sanjay Kishan Kaul, has extensively travelled through the new legislation – Insolvency and Bankruptcy Code of 2016. The Supreme Court was dealing with an appeal preferred by M/s Innovative Industries, against which insolvency proceedings were initiated by ICICI Bank. It was the contention of the appellant, who is a 'defaulter' under the Code, that there was no debt legally due, because under the Maharashtra Relief Undertakings (Special Provisions Act), 1958, all liabilities were temporarily suspended for one year, which was later extended for one more year. It was further contended that the defaulter company was going through a corporate debt restructuring and though a master restructuring agreement was entered into, the funds were not released as per the restructuring agreement.

 The contentions of the company were rejected and NCLT held that the I&B Code would prevail over the Maharashtra Relief Undertakings (Special Provisions Act), 1958, being a parliamentary statute. Though an appeal was carried to the appellate tribunal (NCLAT), it was also rejected, holding that the defaulter company failed to pay the debts and thus, it could not derive any advantage from the Maharashtra Act.

Since an interim resolution professional (IRP) had been appointed and moratorium was declared, a preliminary objection was taken by the financial creditor as to the maintainability of the appeal. According to the financial creditor, the appeal itself was not maintainable as the directors of the company are no longer in the management. Though the Supreme Court favoured with the said contention, the court decided to deliver a detailed judgment with an object that all courts and tribunals would take notice of a paradigm shift occurred in the law regarding the insolvency proceedings. The Supreme Court, in the judgment, elaborately dealt with the insolvency laws existing in the UK and the US, and how the Indian law differed from those laws. The court also dealt with the parliamentary proceedings, particularly the speech of the Finance Minister while piloting the Code in the Parliament and the proceedings of the Bankruptcy Law Reforms Committee.

After analysing major sections of the Code and the circumstances under which an insolvency proceedings can trigger, the court proceeded on capturing what amounts to the repugnancy under Article 254 of the Indian Constitution, analysing hitherto judgments dealing with repugnancy.

Finally, after discussing the provisions of the Maharashtra Relief Undertakings (Special Provisions Act), 1958, and the I&B Code, the court declared that the parliamentary enactment viz, the I&B Code will prevail over the Maharashtra Relief Undertakings (Special Provisions Act ), 1958. As a result, the appeal came to be rejected.

This judgment is a major legal step in insulating insolvency proceedings from the test of repugnancy.

Read the Judgment Here