03 October 2017

Overriding effect of Insolvency and Bankruptcy Code

by Aparajitha Narayanan


Until the commencement of the Insolvency and Bankruptcy Code (hereinafter referred to as IBC) in May, 2016, there was no single legislation dealing with matters of insolvency and bankruptcy in India. It was widely known and accepted that a plethora of the erstwhile legislations apropos insolvency and bankruptcy were inadequate and could hardly cater to the needs of those who required quick resolution of their disputes since insolvency matters in India took 4.3 years on an average to be resolved, exponentially higher than the normal clearance ratio in other countries. The very objective of the IBC is, therefore, to warrant that all the insolvency and bankruptcy laws are brought under the same fortified roof of the IBC, and all disputes pertaining thereto are resolved swiftly and effectively.

Various judgments passed by National Company Law Tribunals (NCLT) and the National Company Law Appellate Tribunals (NCLAT) have made steady attempts to implement the law in letter and spirit.  About 9 months post the commencement of the corporate insolvency resolution process (CIRP) provisions of IBC, the Hon’ble Apex Court has passed a judgment, for the first time, interpreting the scheme of IBC, along with certain key provisions, that goes on to establish the efficacy of IBC while upholding the reasons for which the said law was introduced.


The Appellant (Innoventive Industries Limited), a multi-product company began to suffer losses, and was unable to repay financial assistance availed by it from 19 banks. Therefore, corporate debt restructuring was proposed by the Appellant and a Master Restructuring Agreement (MRA) was executed. Under the MRA, funds were to be infused by the creditors (banks), and certain obligations were to be met, in turn, by the Appellant. As things stood thus, the Respondent (ICICI Bank) made an application for initiating CIRP before NCLT, Mumbai.


The Appellant heavily relied on the Maharashtra Relief Undertakings (Special Provisions Act), 1958 (Maharashtra Act), which was enacted to provide financial assistance by the State Government, for certain industrial undertakings to prevent unemployment. It was contented by the Appellant that there was no debt legally due since as per the Maharashtra Act, for 2 years, all liabilities of the Appellant and remedies for enforcement thereof, were temporarily suspended, via declaration of moratorium, as a result of which, all proceedings relating thereto, pending before any Court, Tribunal, Officers or Authorities against the Appellant shall be stayed. The Appellant also contended that the non-obstante clause provided under the Maharashtra Act is to prevent unemployment in the industry, which prevails over the provisions of IBC, while the non-obstante clause mentioned in Section 238 of IBC [see end note 1] is to realise credit facilities availed by debtors, making it clear that the former is more of a worthy cause, which shall therefore not be affected by the invocation of Section 238 of IBC. On the other hand, the Respondent contended that the Appellant had defaulted in making payments to it, there was an enforceable ‘debt’ owed by the Appellant which the MRA did not ‘suspend’. Therefore, CIRP under IBC must be initiated against the Appellant. The Respondent also contended that under Section 7 of IBC, the adjudicating authority is required to determine whether ‘default’ has occurred or not, and accordingly admit an application under the said provision of IBC.

After two hearings before the NCLT, the Appellant moved an application and took a different plea to the effect that, since funds were not released as per the MRA, the Appellant was unable to satisfy payment of its debts, thereby no ‘default’ had actually been committed by it (earlier the Appellant had taken a plea that the Maharashtra Act overrides IBC).

NCLT Order:

NCLT admitted the corporate insolvency petition against the Appellant concluding that the Appellant had indeed defaulted in making requisite payments to its creditors, consequently declaring a moratorium under Section 14 of IBC. NCLT also held that IBC shall prevail over the Maharashtra Act, since (i) the former is a parliamentary statute and (ii) the non-obstante clause mentioned in Section 238 of the IBC stipulates that IBC shall continue to operate even if its provisions are inconsistent with any other law in existence. NCLT also dismissed the subsequent application filed by the Appellant since it was filed belatedly and after completion of two hearings, wherein the Appellant had already been given an opportunity to be heard.

NCLAT Order:

The Appellant then challenged the said order, before the NCLAT, which affirmed the NCLT order. However, it was held by NCLAT that although the Maharashtra Act is not repugnant to IBC, since the Maharashtra Act and the IBC operate in two completely dissimilar fields, the Appellant is not entitled to derive any advantage under the Maharashtra Act in order to delay insolvency proceedings under IBC. Furthermore, in relation to the MRA, it was held that the Appellant had ‘defaulted’ in paying its debts due to the financial creditor, therefore, the MRA could not be used to stave off initiation of CIRP.

Dissatisfied with the NCLAT order, the Appellant approached the Hon’ble Supreme Court.


Paradigm shift in law:

The Hon’ble Apex Court discussed the provisions of IBC at length, including the scheme and the objective of IBC, contrasting it against the insolvency and bankruptcy laws of other countries like USA, UK etc., and held that there is now a paradigm shift in insolvency law in light of IBC, since entrenched management is no longer allowed to manage a corporate debtor if it cannot pay its debts.


 The Apex Court, in ascertaining ‘repugnancy’ between a central and state enactment, has laid down the following tests:

  • (1) “Repugnancy must exist in fact, and not rest on a possibility.” While establishing repugnancy, the rule of pith and substance cannot be resorted to, because when there are two concurrent state and central enactments on a single subject matter, essentially under the concurrent list, no question of encroaching upon the exclusive jurisdiction of the centre or the state can be contended, since both have the power to enact statutes under the said list.
  • (2) If the legislature with superior efficacy demonstrates through its legislation that it intends to cover the whole field pertaining to a subject matter, the legislation of the other legislature shall give way to the former. Therefore, in the above case, inconsistency need not be established by an exhaustive comparison of provisions of the two legislations, but by the simple fact that there exist two conflicting legislations in the same field.
  • (3) The inconsistency between the two legislations must lead to different legal results even when applied to the same facts.
  • (4) In light of the afore-mentioned tests, if the subject matter of the State legislation is indistinguishable from that of the Parliamentary legislation, such that both of them cannot operate together simultaneously, then it is proven that the State legislation is repugnant to the Parliamentary legislation.
  • (5) Finally, even in the absence of a direct conflict between the state and the parliamentary laws, a state legislation may be inoperative since the Parliamentary legislation is intended to be an exclusive or exhaustive code in itself.

After discussing various judicial precedents, by applying the above tests to the present set of facts, the Apex Court held that the Maharashtra Act, being State Law, dealing with the same subject matter of ‘insolvency’ as the IBC, is indeed repugnant to IBC (thereby disagreeing with the finding of the NCLAT that there was no repugnancy between the Maharashtra Act and IBC) since the Maharashtra Act stipulates that the State Government may take over the management of the relief undertaking, after which a temporary moratorium is imposed.

Furthermore, it was held that the non-obstante clause present under Section 238 of IBC has contours broader than the one present in the Maharashtra Act, whose application is limited.


The Apex Court held that when debt becomes due and is unpaid, insolvency resolution process starts, while stating that ‘default’ under IBC has a wide ambit, and means non-payment of debt (whether in part or in full) once it is due and payable. The Appellant therefore owes a ‘financial debt’ as defined to the Respondent, and it is immaterial whether the said debt is disputed or not, as long as the ‘debt’ was payable unless it is specifically prohibited under any law or becomes due on a future date. Only when the adjudicating authority is satisfied that no default has occurred, the application may be rejected, and not otherwise.


It was further held that timelines mentioned in IBC are of extreme importance, since time is of essence while scrutinizing whether a corporate body may be able to avoid liquidation or not.

The Hon’ble Apex Court thereby dismissed the appeal preferred by the Appellant, and confirmed the order passed by the NCLT.


The future course of action for any person filing applications under IBC is now clear owing to the lucid interpretation of law attempted by the Hon’ble Apex Court.

Firstly, it is imperative that the corporate debtor takes all arguments at the first instance, and before conclusion of hearings, thereby directly ensuring that timelines stipulated under IBC are strictly adhered to, since the touchstone of the present insolvency law is speedy disposal of insolvency matters, which not only helps in settling disputes, but may also provide avenues other than liquidation.

Secondly, while interpreting IBC, what must be borne in mind is the object for which it was introduced, i.e. timely resolution of insolvency.

Next, it was reiterated unambiguously that the IBC is a creditor-centric code, and there is no place for oppressive management to continue controlling the reins of a corporate debtor which has failed in paying its legally enforceable debts. The committee of creditors shall now be entitled to steer the affairs of the corporate debtor.

Finally, the judgment of the Hon’ble Apex Court acknowledged that by virtue of IBC, there is now ‘a paradigm shift in insolvency law’ and the statute secures much needed hope for financial and operational creditors. IBC may thus ensure recovery of stressed loans and be utilized as an instrument to propel the country towards attracting more investment and reducing the burden of non-performing assets for debt ridden financial institutions.

[The author is a Senior Associate in Corporate law Practice, Lakshmikumaran & Sridharan, Hyderabad]


[i] The provisions of IBC 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.


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