Tug of Statutes: IBC Emerges Victorious in Insolvency Resolution

[By Pratishtha Shrivastava]

The author is a student of Institute of Law, Nirma University.

 

Introduction

In the ever-evolving world of corporate insolvency jurisprudence, a recent decision by the National Company Law Tribunal (NCLT), Kolkata Bench, has cast a spotlight on the intriguing interplay between two significant legal frameworks: the Insolvency and Bankruptcy Code, 2016 (IBC), and the State Financial Corporation Act, 1951 (SFC). The case of Pankaj Tibrewal v. the West Bengal Industrial Development Corporation (WBIDC) is an interesting statement on the hierarchy of laws and the protection of creditor and debtor rights in the complex realm of corporate insolvency resolution. The verdict contributes to legal certainty and predictability in the corporate insolvency resolution process as it assures stakeholders, including RP, creditors, and debtors, that the IBC’s provisions will prevail and guide the proceedings.

This blog will dive deep into the intriguing legal battle that unfolded and dissect the NCLT’s verdict, exploring its far-reaching implications. It will also analyze the provisions of IBC and State Financial Laws that were in conflict and were employed by the Court to reach its decision.

Background of the Case

The Resolution Professional (RP) filed an application under the Insolvency and Bankruptcy Code, 2016 (IBC) against the WBIDC, a State Financial Corporation (SFC), seeking possession of the factory premises and assets of the corporate debtor.

The RP contended that the WBIDC’s refusal to hand over possession of the factory premises was hindering the smooth conduct of the Corporate Insolvency Resolution Process (CIRP) of the corporate debtor. The RP argued that the IBC provides the jurisdiction to issue appropriate directions to the WBIDC to extend assistance and cooperation in the CIRP.

On the other hand,  WBIDC, being a public limited company governed by the State Financial Corporation Act, 1951 (SFC Act), argued that the application was not maintainable under the provisions of the IBC. The respondent claimed that the relief sought by the RP did not fall within the provisions of the IBC.

The WBIDC also contended that it had provided a term loan to the corporate debtor for the expansion of its existing Rice Bran Oil Refining Plant. The terms and conditions of the loan were embodied in a Term Loan Agreement. They asserted that they had a right to the assets of the corporate debtor as per the agreement.

The court held that the provisions of the IBC would prevail over the provisions of the SFC Act in this case. The court referred to Section 238 of the IBC, which states that the provisions of the IBC have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

Legal Battle Unfolds: SFC v. IBC

Section 46B of the SFC Act, states that the provisions of the Act shall have effect notwithstanding anything inconsistent contained in any other law for the time being in force or the memorandum or articles of association of an industrial concern or any other instrument having effect under any law other than the SFC Act.

On the other hand, Section 238 of the IBC explicitly states that the provisions of the IBC shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect under any such law.

The key difference between the provisions of the SFC Act and the IBC lies in the scope of their non-obstante clauses. While Section 46B of the SFC Act limits the reach of its non-obstante clause, the non-obstante clause in Section 238 of the IBC has a broader and unlimited reach, ensuring the primacy of the IBC over any other law.

Judicial Precedents 

Judicial Precedents have established that the IBC prevails over other laws. Section 238 of the IBC states that the provisions of the Code have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The Hon’ble Apex Court in various cases has affirmed the overriding effect of the IBC over other laws. In the case of Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., the court noted that the IBC will override anything inconsistent contained in any other enactment, including the Income Tax Act. Furthermore, in the case of Indian Overseas Bank v. RCM Infrastructure Limited, the Hon’ble Apex Court categorically held that the IBC shall have an overriding effect over any other law. It stated that once theCIRP is commenced, there is a complete prohibition on any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property. These judicial precedents establish that the IBC prevails over other laws, ensuring its primacy in insolvency and bankruptcy proceedings.

Implications

The NCLT’s decision to prioritize the provisions of theIBC over the State Financial Corporation Act, 1951 sets a clear legal precedent. The verdict reinforces the critical role of a Resolution Professional in the corporate insolvency resolution process. It ensures that RPs have the right and power to take over the possession of assets, even in cases where a financial corporation like WBIDC may have certain rights under the SFC.

Further, it establishes that in cases of conflict between different statutes, especially when a specific later statute has a non-obstante clause, the later statute will prevail. This way it contributes to legal certainty and predictability in the corporate insolvency resolution process.

Moreover, Financial corporations like WBIDC may need to reassess their involvement in insolvency cases and adapt to the precedence set by this case. They need to cooperate more effectively with RPs and acknowledge the RP’s authority in taking over assets during the resolution process.

Conclusion 

This case not only settles a legal dispute but also contributes to the legal evolution of corporate insolvency. At its core, this case represents the delicate and sometimes contentious interplay between two vital legal frameworks: the IBC, and the State Financial Corporation Act, 1951. Furthermore, the decision clarifies the scope and reach of non-obstante clauses within these statutes. While the SFC Act limits the reach of its non-obstante clause, the IBC’s Section 238 grants it a broader and unlimited scope, ensuring the IBC’s supremacy over any other law.

 Judicial precedents further reinforce this hierarchy of laws, as established by the Supreme Court. The IBC’s overriding effect over other laws, including the Income Tax Act, is well-established. Once the CIRP is initiated, any action to foreclose, recover, or enforce security interests created by the corporate debtor in respect of its property is prohibited, further affirming the IBC’s dominance. Financial corporations must adapt to this evolving landscape, cooperating effectively with RPs and acknowledging their authority in asset possession during the resolution process. The NCLT’s decision, therefore, not only resolves one case but leaves an indelible mark, shaping the future of corporate insolvency resolution in India.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in