Dr. U. K. Chaudhary*
Hailed as one of the biggest legal reforms in the economic progress of the country, aimed at resolving the alarming non-performing assets (NPAs) of the banking sector, the Insolvency and Bankruptcy Code, 2016 (Code) has seen a litigious, yet impactful journey in its less than three-year history. Time and again, the Code has undergone a comprehensive assessment and consequent amendments to reconcile and adapt the working of its provisions to suit the pragmatic needs of the banking and finance industry. Much of the success that the Code has had, in resolving the insolvencies in a timely manner, can be accredited to judicial supplements which fill in the gaps in the working of the Code. The Code, being still in the nascent stage, owes a lot to judicial interpretations that makes its working meaningful and effective.
The Hon’ble Supreme Court of India (SC) is now faced with yet another task of determining an important question in the evolving jurisprudence of the country’s insolvency law. The issue is whether the provisions of the Code will prevail over the Securities and Exchange Board of India Act, 1992 (SEBI Act). The question is one which will require maintaining a fine balance between the two laws and allowing a harmonious interplay of the two so as to not render either one nugatory.
The dispute that escalated to the SC stems from the attachment of properties of one HBN Dairies and Allied Limited (HBN Dairies), which was found by the regulatory authority being Securities and Exchange Board of India (SEBI) to have illegally collected close to Rs. 1,136 crore from various stakeholders under an unauthorised scheme known as ‘Collective Investment Schemes’. The orders of SEBI, under section 28A of the SEBI Act, directing attachment and consequent sale of assets, were upheld by the Securities Appellate Tribunal (SAT). However, frustrated by the long delay in the recovery under the procedure prescribed under the SEBI Act, some unit holders approached the adjudicating authority, National Company Law Tribunal (NCLT), Principal Bench, New Delhi, seeking initiation of insolvency proceedings under the Code. The NCLT admitted the petition and order moratorium under section 14 of the Code. The NCLT was of the view that provisions of the Code will prevail over section 11 and 11B of the SEBI Act read with regulation 65 of the SEBI (Collective Investment Scheme) Regulations, 1999, in view of section 238 contained in the Code, which gives the Code an overriding effect over any other law for the time being in force. The foundation for the observations lay in an earlier judgment of the SC in the case of Pr. Commissioner of Income Tax V. Monnet Ispat and Energy Ltd.,‘ in which it was categorically held that given section 238 of the Code, it is obvious that the Code will override any other law, including the Income Tax Act, 1961.
As a consequence of the order of the NCLT, Principal Bench, SEBI was prevented from recovering any money from the sale of assets of HBN Dairies or taking any coercive action under the SEBI Act. SEBI assailed the order of the NCLT before the National Company Law Appellate Tribunal (NCLAT) which upheld the order of the NCLT and dismissed the appeal. The issue, therefore, is now pending consideration on appeal before the SC.
In the background of the above observations of the NCLT, Principal Bench, on the non-obstante clause contained in the Code, the position of law that emerges is that the Code will have an overriding effect on any other legislation that is found to be inconsistent with the provisions of the Code. This position of law, as reiterated by the NCLT, Principal Bench, is completely in conformity with the SC’s decisions on this point as on the date of the order.
The question of overriding effect has been a subject of judicial interpretation for quite some time and there has been a consistent view adopted by the courts in India. This question was first considered by the SC in the case of Innoventive Industries Ltd. v. ICICI Bank and Anr. 2 Court was faced with the task of reconciling the provisions of the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRUA) and the Code. While orders granting relief from repayment of debt were passed under the MRUA by the Government, the financial creditor (ICICI Bank) approached the NCLT for initiating insolvency proceedings against the corporate debtor (CD). The SC took the view that the non-obstante clause contained in section 238 of the Code, has been couched in very wide terms and the purpose for the same is that any right of the CD under any other law cannot come in the way of the Code.
The SC elaborately dealt with the provisions of the Code and the scheme and object of the Act and contrasted it with the insolvency laws of other countries, and concluded that there is a paradigm shift in the law that has been enacted through the Code. It further observed that the Code has been passed after great deliberations and discourse.
It may not be out of place to mention here that both the SEBI Act and the Code are special legislations governing their respective fields of operations. While the SEBI Act aims to protect the interest of investors in securities and promotes the development, regulation and the sanctity of the securities market, the Code consolidates and amends the laws relating to reorganisation and insolvency resolution of corporate persons in a time bound manner. The aim of the Code is the maximum realisation of the value of assets of corporate persons.
While the two legislations do not appear to have any overlapping spheres of operation, yet in case of a conflict between the two, the question that begs consideration is that which of the two should prevail over the other? The first course of action should naturally be to give a harmonious interpretation to the provisions of the two legislations. This is so because the underlying objects governing the two legislations are different. While the Code aims at achieving the resolution of an entity by keeping it as a going concern, the SEBI Act seeks realisation of the value of assets by attachment and consequent sale. However, in case the interpretation is one that leads to a conflict, then the latter legislation must prevail.
This view is in conformity with the law laid down by the SC in the case of Solidaire India Ltd. v. Fair growth Financial Services Ltd. and Others. The position of law, as it emerges from this case, is that in case of conflict between two special legislations, the latter piece of legislation must prevail. This is because at the time of enactment of the later statute, the legislature is deemed to be aware of the earlier legislation.
The determination of the question of overriding effect of the provisions of Code, by the SC, assumes even more significance in view of the fact that it is likely to have a bearing on the interplay of Code with other legislations such as the Prevention of Money Laundering Act, 2002 (PMLA), the Companies Act, 2013 and the Advocates Act, 1961 etc.
THE CODE AND PREVENTION OF MONEY LAUNDERING ACT, 2002
The overriding effect of the non-obstante clause, contained in the Code, was also a subject of judicial determination by the NCLT, Mumbai Bench in the case of Sterling S EZ Infrastructure Ltd. v. Deputy Director, Directorate of Enforcement. This case pertained to the interplay of Code with PMLA. In this case, proceedings under PMLA were initiated against the Applicant (Sterling SEZ Infrastructure Ltd.) by the Enforcement Directorate on account of certain fraudulent loan transactions by its holding company. Accordingly, the assets of the Applicant were attached under section 2(1)(u) of the PMLA. However, soon after the attachment order, an application under section 7 of the Code came to be filed against the Applicant/CD. The same came to be admitted and accordingly, an order under section 14 of the Code, imposing moratorium came to be passed. Accordingly, the CD made an application to the NCLT, Mumbai Bench, for a direction to the Enforcement Directorate for release of the provisionally attached assets. The question for determination before the NCLT, Mumbai Bench was whether the provisions of the Code have an overriding effect on the provisions of PMLA?
The NCLT, Mumbai Bench, declared the attachment order of the Enforcement Directorate under the PMLA, as null and void. The reasoning that prevailed with the NCLT, Mumbai Bench, was that the purpose and object of the Code is the resolution of the CD by maximising the value of assets under a regime of strict enforcement of time lines. Whereas, the object of PMLA is to recover properties from wrong doers and compensate the affected. The resolution under the Code being far quicker than under the PMLA, the economic aspect of the same lent support to the conclusion that Code must prevail over PMLA. The NCLT, Mumbai Bench, concluded by holding that the provisions of section 238 of the Code give an overriding effect to the order of moratorium under section 14 of the Code, and thus, the order of attachment was squarely hit by the moratorium Interestingly, one of the criteria for reaching the conclusion that the provisions of the Code must prevail over the PMLA, was the economic implication of proceedings under the two apparently conflicting pieces of legislation. The NCLT, Mumbai Bench, was of the view that the quicker resolution under the Code was economically more viable than the long-drawn proceedings under the PMLA. If this view of the NCLT also finds favour with the SC, in its determination of the conflict between the Code and the SEBI Act, then it may be inclined to hold in favour of the Code, considering the long-drawn proceedings under the SEBI Act.
In contradiction to this, the Hon’ble High Court (HC) of Delhi also had the occasion to deal with the conflict between the provisions of the Code and the PMLA, in the case of The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors. The HC in that case was dealing with the interplay of PMLA with Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (RDDBFI), Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) and the Code. After going through the objects and reasons for enactment of the four legislations, the HC noted that all these laws are distinct and operating in different fields. They must co-exist with each other and each to be construed and enforced harmoniously, without one being in derogation of the other. This view taken by the HC is different from the view taken by the NCLT, Mumbai Bench. The reasoning that prevailed with the HC was that the object and purpose of these legislations being very different from each other, there was no overlap and therefore, none of the legislations was in derogation of the other.
The views of the two forums being different, the decision of the SC will aid in interpreting the interplay of these two enactments and ultimately, put a quietus to the issue.
THE CODE AND COMPANIES ACT, 2013
Before the advent of the Code, it was solely the Companies Act, 1956 and thereafter, the Companies Act, 2013 (the Act), that dealt with all issues related to companies, right from incorporation to dissolution. However, with the advent of the Code, a company can be wound up either under the Companies Act or under the Code, based on the fact and circumstances of the case. Now, the Code comprehensively deals with the aspect of a company’s insolvency and its resolution. Matters that are exclusively under the purview of the Code, will in case of any conflict with the provisions of the Act prevail by virtue of section 238 contained in the Code.
The NCLAT, in the case of Jagmohan BaOaO v. Shivam Fragrances Private Limited & Anr. 6 had the occasion to deal with an apparent conflict of the provisions of the Code with the Companies Act, 2013. In this case, the order granting admission of an application for initiating corporate insolvency resolution process against the CD, was assailed on the ground that a serious dispute of oppression and mismanagement of the CD was pending adjudication under sections 241 and 242 of the Act, before the NCLT, New Delhi. The NCLAT, not finding any merit in the contention, rejected the same holding that internal dispute of directors of the CD and the pendency of a Petition under sections 241 and 242 of the Act, does not construe a valid defence to triggering the CIRP. The Code is a special legislation having an overriding effect on any other law as mandated under section 238 of the Code. The statutory right under the Code cannot be made subservient to adjudication of a Petition under the Act.
In yet another case dealing with the interplay of the Code with the Act, the SC clarified that proceedings for insolvency resolution under the Code are independent proceedings and have nothing to do with the winding up proceedings pending before a HC against the same entity. The case in consideration is Jaipur Metals & Electrical Employees Organization Through General Secretary Mr. Tej Ram Meena v. Jaipur Metals & Electricals Ltd. Through its Managing Director & Ors. The facts leading up to the foregoing conclusion were that during the pendency of winding up proceedings in the Hon’ble HC of Rajasthan, but before the order of liquidation was passed, one of the creditors of the company filed an Application under section 7 of the Code. The same came to be admitted by the NCLT and an order of moratorium was passed under section 14 of the Code. The HC passed an order refusing to transfer the winding up proceedings to the NCLT and further ordered a stay of those proceedings. Against this order of the HC, the present proceedings before the SC came to be filed. The SC, referring to the provisions of section 238 of the Code held that in view of the provisions of the non-obstante clause read with section 7 of the Code, it was open for the creditor to apply under section 7 to the NCLT at anytime before the winding up order was passed.
This view was again reiterated by the SC, in the case of Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.. The SC reiterated the position of law that in view of section 238 of the Code, proceedings initiated under the Code are independent of the proceedings for winding up under the Act.
Thus, as can be seen from the decisions of the NCLAT and the SC, although, the proceedings under the two statutes are independent of each other, however, in case of a conflict between the provisions of one with the other, it is the Code that prevails in view of the non-obstante clause contained in section 238 of the same. This view is also supported by the fact that the Code being a later legislation than the Act, its framers were deemed to be aware of its provisions.
THE CODE AND THE ADVOCATES ACT, 1961
The interplay of the Code with the Advocates Act,1961 came into consideration of the SC in the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.9 The question for consideration before the SC was whether a demand notice of unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?
The SC referred to the provisions of the Advocates Act, 1961 more particularly section 30 of the Act, to state that the term ‘practise’, appearing in that section, is a term of wide import and would include all steps leading up to the filing of an application before the Tribunal and that the doctrine of harmonious construction applies to all statutes made by the Parliament. Therefore, in case of any conflict between the provisions of the Code with those of the Advocates Act, 1961, the doctrine of harmonious construction should apply. However, in the present case, there being no inconsistency between the provisions of the Code with those of the Advocates Act, 1961, the non-obstante clause contained in section 238 of the Code, will not have any application.
The position of law that emerges from the discussion of the law enunciated by various judicial pronouncements, as noted above, is that the non-obstante provision, contained in section 238 of the Code, gives the Code an overriding effect over any other law, for the time being in force, only if there is any inconsistency between the provision of the Code and the provisions of any other law.
Naturally, the first course to be adopted by the courts in case of a conflict should be to harmoniously construe the conflicting provisions so as to not render either one of them nugatory. The normal presumption should be in favour of drawing a consistency and it should not be assumed that what is given with one hand by the legislature is sought to be taken away by the other. This is particularly true if the statements of object and reason of each enactment are examined and no inconsistency is noticed. Each legislation has been enacted to operate in its own sphere and to deal with the specific issues that it seeks to address. Where, however, the rule of harmonious construction cannot effectively be applied, the Code, being a later special enactment of the Parliament than the SERI Act, PMLA, Companies Act, 2013 and the Advocates Act, 1961, will prevail by virtue of the non-obstante clause contained in the Code, in the event of an apparent conflict.
This is also true in view of the favourable economic aspect or the time factor associated with resolution of insolvencies under the Code. The Code has so far been more efficient and speedier in resolving insolvencies as compared to the resolutions under other enactments specified above. This has led the courts to lean in favour of the Code for a faster resolution of issues because ultimately, prompt redressal of issues is the real need of the hour and the ultimate test of the judiciary, as also famously stated, ‘justice delayed is justice denied.’
1SLP (C) No. 6483/ 2018
2 (2018) 1 SCC 407
3(2001) 3 SCC 71
4 M.A. No. 1280/ 2018 in C.P. No. 405/ 2018
5Crl. A. 143/2018 & Crl. M.A. 2262/2018
6Company Appeal (AT) (Insolvency) No. 428 of 2018
7 Civil Appeal No. 12023 of 2018
8 Civil Appeal No. 818 of 2018
9(2018) 2 SCC 674
*(Dr. U. K. Chaudhary is a Senior Advocate and President of NCLT Bar Association. )