Overriding Effect of the Insolvency and Bankruptcy Code, 2016

By | September 11, 2017

The Insolvency and Bankruptcy Code shall have an overriding effect over other laws.

According to Section 238, the provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

In the leading case of ICICI Bank v. Innoventive Industries Limited, NCLT (Mumbai), on 17th January 2017 passed an order inter alia accepting the application under the code filed by ICICI Bank for initiating the Corporate Insolvency Resolution Process (CIRP). Innoventive Industries Limited had availed a term loan facility, a working capital facility, and an external commercial borrowing and had defaulted in repayment of these amounts. Accordingly, they sought initiation of the CIR Process under provisions of the Code.

The contention of the Innovative limited was that it had been declared as a ‘relief undertaking’ under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (called as MRU Act) and hence consequently, the existing proceedings against it, stands suspended until 21st July 2017. Further, the contention was also supplemented with an argument that the MRU Act has a non-obstante clause which empowers the State Government to suspend any remedy for enforcement in relation to any right or liability accrued prior to an entity being declared as a relief undertaking.

The NCLT rejected the aforesaid argument and passed an order accepting the application and declaring the moratorium, observing as under:

  • Section 238 of the Code, 2016 also contains a non-obstante clause similar to the MRU Act, which states that the provisions of the Code, 2016 shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Since the Code, 2016 is subsequent to the MRU Act, the non-obstante clause under Section 238 of the Code, 2016 prevails.
  • The suspension of liability under the MRU Code is inconsistent with the ability of a creditor to initiate the CIR Process under the Code, 2016 and therefore, the overriding powers under Section 238 of the Code, 2016 shall render the suspension under MRU Act inoperative.
  • Declaration of moratorium keeps business as usual for employees without affecting their interest and therefore a declaration of the moratorium would not be in conflict with the objective of the MRU Act (which is to prevent unemployment of the existing employees of a relief undertaking).

Thus, it can be concluded that the Code, 2016 has an overriding effect if the provisions are contrary to the other Statutes or Acts.

However, the insolvency matters heard by the adjudicating authority have been rampant, of late. There have been cases defying the principles of natural justice and consequently, the orders of the adjudicating authority have been reversed by the Appellate Tribunal. It brings an interesting point to ponder upon — whether the provisions of the Code, 2016 override the principles of natural justice?

Although the Code, 2016 has an overriding effect if there is anything contrary to the provisions of other Statute or instrument. But the provisions of the Companies Act, 2013 as contained in Sections 420[1] and Section 424[2], lays down that the Tribunal may give a reasonable opportunity of being heard to the parties, before passing its order. It upholds the concept of the principles of natural justice.

Section 7 of the Code, 2016 lays down the procedure for the initiation of corporate insolvency resolution process by a “financial creditor”.

The procedure laid down under this section empowers the Adjudicating Authority i.e., NCLT with discretionary power to admit or reject an application under Section 7 of the Code, 2016. In this regard, it differs from Section 9 of the Code, 2016, under which the NCLT has to admit or reject the application if the conditions under its sub-clause 5(i) are satisfied. In case of Section 7 of the Code, 2017, the financial creditor is not required to serve any demand notice upon the corporate debtor, and the financial creditor may straightaway file the application for initiation of the insolvency proceedings with the NCLT, whereas in case of an operational creditor, a demand notice is required to be served upon the corporate debtor by virtue of Section 8 of the Code, 2016, to which the corporate debtor is required to reply within ten days of the receipt of such notice, stating :

  1. the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
  2. the repayment of unpaid operational debt— a. by sending an attested copy of the record of the electronic transfer of the unpaid amount from the bank account of the corporate debtor; or  b. by sending an attested copy of a record that the operational creditor has encashed a cheque issued by the corporate debtor.

Therefore, unlike Section 9, Section 7 lacks a provision with regard to the right to communication/notice or the right to be heard with respect to such proceedings, before the proceedings under this Code, 2016, is initiated by the financial creditor. The lack of such a provision puts the right of corporate debtors to defend them before the initiation of the corporate insolvency resolution process, in grave peril.

In an application filed under Section 7 of the Code, 2016 by the financial creditor, ICICI Bank before the NCLT, Mumbai Bench, in the matter of ICICI Bank Ltd. Vs. Innoventive Industries Ltd.[3], the NCLT passed an order, dated January 17, 2017, admitting the application and declaring a moratorium. However, in doing so, it also dismissed an application filed by the corporate debtor for non-service of notice upon the corporate debtor, without giving an opportunity to be heard. In a subsequent order, dated January 23, 2017, the NCLT clarified that under the Code, 2016 the Adjudicating Authority is under no obligation to hear the corporate debtor, hence, the application could be dismissed without getting into the merits.

The view of the NCLT was reversed by NCLAT in the case of Innoventive Industries Ltd. v. ICICI Bank and another[4] pronounced on May 15, 2017. The appellant claimed a violation of the principles of natural justice. The NCLAT cited a plethora of landmark Supreme Court judgments indicating the importance of principles of natural justice as a part of “procedure established by law”, from which the NCLAT observed that the principles of natural justice apply in all cases except where they are expressly or impliedly excluded, amongst other circumstances given in the judgments such as exclusion in case of emergency, express statutory exclusion, where disclosure would be prejudicial to the public interests, where prompt action is needed etc.

The NCLAT observed that the Code doesn’t have a provision which provides a hearing under Section 7.

However, it held that the adjudicating body, being the NCLT, was bound by Section 420 of the Companies Act, 2013, which mandates the NCLT to give reasonable opportunity to be heard. Furthermore, the NCLAT held that it is mandatory for the adjudicating authority to follow the principles of natural justice, as per section 424 of the Companies Act, 2013.

NCLAT referred various precedent cases such as SreeMetaliks Limited & Anr. Vs. Union of India[5], wherein it observed that a proceeding for declaration of insolvency of a company has drastic consequences for a company. Such proceeding may end up in its liquidation. A person cannot be condemned unheard. Where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in. When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application.

NCLAT also referred Era Infra Engineering Limited V/s Prideco Commercial Services Private Limited[6]case, wherein te Hon’ble NCLAT in the appeal set aside the order passed by Hon’ble Adjudicating Authority and quashed all orders, interim arrangement including the declaration of moratorium and appointment of Insolvency Resolution Professional. It further held that all actions were taken by Interim Resolution Professional after passing of the order as illegal. The Appellant Tribunal observed that serving of notice under Section 271 of Companies Act, 2013 cannot be considered as sufficient notice as required to be served under Section 8(1) of Code 2016 in the prescribed format.

Thus, it is concluded that although the Code has an overriding effect over the provisions of the other statutes yet it cannot out rightly override the principles of natural justice until/unless the provisions expressly say so.

By – Poornika,  Delhi University

References

[1] Section 420(1) of the Companies Act, 2013 states that the Tribunal may, after giving the parties to any proceeding before it, a reasonable opportunity of being heard, pass such orders thereon as it thinks fit.

[2] Section 424(1) of the Companies Act, 2013 states that the Tribunal and the Appellate Tribunal shall not, while disposing of any proceeding before it or, as the case may be, an appeal before it, be bound by the procedure laid down in the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice, and, subject to the other provisions of this Act and of any rules made thereunder, the Tribunal and the Appellate Tribunal shall have power to regulate their own procedure.

[3]C.P. NO. 01/I & BP/NCLT/MAH2016

[4]Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017

[5]W.P. 7144 (W) OF 2017

[6]Company Appeals (AT)(Ins) No. 31 of 2017

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