Over Riding Effect of IBC Code on Other Acts

ICICI BANK LTD VS. INNOVENTIVE INDUSTRIES LTD

IBC is not a Recovery Law, it is Revival Law

SHORT SUMMARY

In this Flash editorial column, the author begins by referring the provisions of Insolvency and Bankruptcy Code, 2016 in relation to section 238 of IBC Code, 2016.

As IBC code has prescribed non-obstante clause under section 238. The main shove of the article, is upon the question 'WHETHER IBC CODE, 2016 SHALL HAVE OVER RIDING EFFECT ON OTHER LAWS'

In this editorial author discuss the provisions under Section 238 of the IBC and landmark judgment delivered by NCLT, Mumbai Bench in case of ICICI Bank Ltd Vs. Innoventive Industries Ltd.

CASE ELEMENT:

A. FACTUAL BACKGROUND:

I. Innoventive Industries Ltd. (the 'corporate debtor') availed of term loan, working loan, and external commercial borrowing ('ECB') facilities from ICICI Bank Ltd. (the 'financial creditor'). However, a default occurred in respect of a part of the debt on 30 November 2016, with the total outstanding amount payable being Rs. 1,019,177,034.

II. Therefore, being entitled under section 7 of the Code, the financial creditor initiated application for corporate insolvency resolution process in respect of the corporate debtor.

III. The corporate debtor, in turn, claimed that it is a 'relief undertaking' under the provisions of the MRU Act to which financial assistance of industrial promotion subsidy has been provided by the Maharashtra Government. For a period of one year commencing on 22 July 2016 and ending on 21 July 2017, the affairs of the industrial undertaking shall be conducted to serve as a measure of preventing unemployment. Moreover, in relation to such undertaking for the said time period, the rights, privileges, obligations or liabilities accrued or incurred before 22 July 2016 and any remedy for the enforcement thereof shall remain suspended, and all proceedings relating thereto pending before any Court, Tribunal, Officers or Authority shall be stayed. The debts said to have been existing against the corporate debtor, as such, have been suspended.

IV. The corporate debtor, in turn, filed another application saying notice has not been served to the debtor.(Para 14)

V. The Corporate Debtor claimed that this code can't over ride the MRU Act. However, the Applicant counsel states that non obstante clause in section 292 of IBC 2016 will have over riding effect over the operation of MRU Act, 1958.

B. PROVISIONS RELATING TO OPERATIONAL CREDITOR UNDER THE IBC, 2016:

AS PER SECTION 238 The provisions of this Code shall have 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.

FINDINGS OF THE NCLT BENCH:

The issues the Tribunal considered were whether the non-obstante clause contained in Section 238 of IBC, 2016 shall override the inconsistent contained in any other law (like : Section 4 of MRU Act)?

Based on the above factual background, the NCLT dismissed the case and held as follows:

It is evident on record that IB Code has come into existence subsequent to MRU Act therefore, notwithstanding clause in Section 238 of IBC prevails upon any other law for time being in force, hence it could not be said that notification given under MRU Act will become a bar to passing the order u/s 7 of IBC, 2016.

The subject matter is liability over the Company, the liability of the Company has been dealt with by the IBC and in IBC, it is for protecting the creditors who have supplied fuel to company to make it run.

The plea of operation debtor of non serving of notice, pales into insignificance because this Bench already heard the Corporate Debtor and his application has already been dismissed.

Hence, it can be opine that non-obstante clause contained in Section 238 of IBC, 2016 shall override the inconsistent contained in any other law or shall have over riding effect on other laws.

MATTER BEFORE NCLAT

The appeal was filed against above order passed by the National Company Law Tribunal (NCLT), Mumbai Bench (discussed here) rejecting all contentions raised by Innoventive (the corporate debtor) and admitting the application preferred by ICICI Bank (the financial creditor) by holding it complete in terms of section 7(2) of the Code.

The impugned judgment has been challenged by appellant on the following grounds:

i. The order has been passed by NCLT without notice to the CD is against the 'principle of rules of natural justice, as stipulated u/s 424 of CA, 2013. (Para 4)

ii. It was also contended that the NCLT, being a creation of the Act, is bound by section 420 of the Act, which required ‘reasonable opportunity of being heard' to be given to the parties before passing an order. (Para 6)

iii. Further, Section 424 of the Act 2013, which grants liberty to the Tribunal to regulate its own procedure mandate to follow the principles of natural justice. Therefore, the aforesaid sections cast duty upon the Tribunal to issue notice to and hear a party before passing any order affecting the rights of the party. (Para 6)

iv. It was contended that the provisions of (Maharashtra Relief Undertaking (Special Provisions Act (Bombay Act XCVI of 1958) (the MRU Act, 1958), will prevail over the Code as it was a beneficial piece of legislation.

v. it was contended that ICICI Bank did not obtain consent from the Joint Lenders Forum (JLF) to initiate the present proceedings

FINDINGS OF THE NCLAT BENCH:

The key issue for consideration before NCLAT was whether a notice is required to be given to the corporate debtor for initiation of insolvency resolution process and Whether IBC, 2016 have over riding effect on other Laws.

NCLAT has ruled on certain important requirements to be complied with while admitting an application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016 (the Code).

1. CONDITION TO BE SATISFIED BY THE NCLT U/ S 7(5):

The Judgment makes it clear that:

* Under Section 7(5) of the Insolvency Code, the NCLT is only required to be satisfied on whether:

i. The corporate debtor has defaulted-The statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient.

ii. An application filed by the financial creditor is complete.

iii. Disciplinary proceeding is pending against the insolvency resolution professional, proposed by the financial creditor.

Beyond the above mentioned issues, the NCLT is not required to look into any other factor, including the question of whether permission or consent has been obtained from one or other authority, including the JLF. Once it is satisfied it is required to admit the case but in case the application is incomplete application, the financial creditor is to be granted seven days' time to complete the application.

2. WHETHER A NOTICE IS REQUIRED TO BE GIVEN TO THE CORPORATE DEBTOR FOR INITIATION OF INSOLVENCY RESOLUTION PROCESS

The NCLAT examined various decisions of the Supreme Court and also cited a recent Calcutta High Court decision in the case of 'Sree Metaliks Limited & Anr. (Writ Petition 7144 (W) of 2017)', wherein the Court held:

'When the NCLT receives an application under Section 7 of the Code of 2016, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application.'

In conclusion, the NCLAT held that the Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default based on material submitted by the corporate debtor and to find out whether the application is complete and or there is any other defect required to be removed.

3. WHETHER A NOTICE IS REQUIRED TO BE GIVEN TO THE CORPORATE DEBTOR FOR INITIATION OF INSOLVENCY RESOLUTION PROCESS

The NCLAT held that section 238 of the Code is a non-obstante clause which overrides the all other Acts, and thus the provisions of the Code shall prevail over the provisions of the MRU Act.

4. DISTINCTION BETWEEN SECTION 7 & 9

CONCLUSION:

The judgment provides much needed clarity with regard to the scope and extent of the corporate debtor's right to contest admission of insolvency applications filed by financial creditors and will provide guidance to the NCLTs across the country in deciding insolvency applications filed by financial creditors.