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21 Sep 2017

THE INSOLVENCY AND BANKRUPTCY CODE: RESOLVING THE CONFLICT WITH STATE LAWS

The Supreme Court of India (“SC”) recently delivered its first judgment [1] under the Insolvency and Bankruptcy Code (“IBC”) wherein SC has delved into (i) the circumstances which led to promulgation of the IBC and the legislative intent behind its promulgation; (ii) an in-depth examination of the provisions of the IBC relating to the Insolvency Resolution Process (“Resolution Process”) and (iii) the principles of repugnancy vis-à-vis IBC and State law. 

BACKGROUND OF THE CASE

After it ran into losses, Innoventive Industries Limited (“Debtor”) entered into a Master Restructuring Agreement (“Agreement”) with its creditors including ICICI Bank Limited (“Creditor”) under which the creditors agreed to infuse funds if Debtor fulfilled certain obligations. Despite the existence of the Agreement, the Creditor filed an application with the National Company Law Tribunal (“NCLT”) for initiation of the Resolution Process under IBC. The Debtor contented that Creditor was not entitled to any dues as, firstly, as per two notifications issued under MRUSPA [2], enforcement of the debt was suspended for 2 years, and secondly, the Creditor did not fulfill its obligations under the Agreement. 

DECISION OF NCLT AND NATIONAL COMPANY LAW APPELLATE TRIBUNAL (“NCLAT”)

NCLT held that MRUSPA and IBC are repugnant to each other and as per established law, IBC being a Parliamentary statute would prevail over MRUSPA, and it therefore allowed the Resolution Process to commence. On appeal, NCLAT held that IBC and MRUSPA are not repugnant since they operate in different fields.  It also refused to stall the Resolution Process only because of the presence of the Agreement, and held that existence of a fresh agreement did not absolve the Debtor from its previous outstanding debts. 

APPEAL TO THE SC

Subsequently, the debtor’s directors preferred an appeal before the Apex Court. However, SC held that upon commencement of the Resolution process under IBC, the management of the Debtor had transferred to the insolvency professional, therefore, the directors had no locus standi. However, Supreme Court noted that since “this is the very first application that has been moved under [IBC]…. it [is] necessary to deliver a detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law”. 

OBSERVATIONS BY THE SC 

  1. Objective of IBC: After a detailed discussion regarding the legislative intent behind promulgation of IBC and the Resolution Process, SC concluded that strict adherence to the timeline under IBC is imperative to achieve a speedy insolvency process and that time is of the essence once an application is admitted under IBC. 
  1. Difference in Resolution Process between Financial Creditor and Operational Creditor: SC observed that admission of an application is more onerous for an operational creditor since the application will get dismissed if the debtor is able to prove existence of a dispute/suit/arbitration proceeding on record. On the other hand, a financial creditor only has to give proof of an outstanding debt. 
  1. Issue of Repugnancy between MRUSPA [3] and IBC: On comparison of the objective of the MRUSPA with IBC, the Apex Court observed that the objective of MRUSPA is limited to the welfare of workers in the event of insolvency of the employers, while IBC is a code which consolidates and amends insolvency law.[1] Under MRUSPA, the management of the Debtor is taken over by the State Government, whereas under IBC, it is transferred to an insolvency professional. SC observed that although MRUSPA and IBC fall in different entries under the Concurrent List, MRUSPA is inconsistent to the extent that it encumbers the IBC from taking effect. Thus, SC held that IBC will prevail over MRUSPA, as per the Constitution of India, a Parliamentary law prevails over a State law insofar as they are inconsistent with each other. 

CONCLUSION 

The Apex Court under this landmark judgment has taken the opportunity to visit the new law and has brought out clarity with respect to various provisions including the fact that IBC prevails over State laws in the event of repugnancy. SC’s observation that time is of essence will go a long way to ensure adherence to a strict timeframe provided under IBC ensuring a prompt completion of the Resolution Process.

 

[1] Innoventive Industries Limited v. ICICI Bank Limited dated August 31, 2017.

[2] Maharashtra Relief Undertakings (Special Provisions Act), 1958

[3] SC held that MRUSPA falls under Entry 23 of List III 7th Schedule of the Constitution and IBC falls under Entry 9 of List III 7th Schedule of the Constitution.

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