Resolving the Conflict between the Corporate Insolvency Resolution Process and Relief Undertaking Legislation

[The following guest post has been contributed by contributed
by Sikha Bansal of Vinod Kothari
& Company, who can be reached at corplaw@vinodkothari.com]
The Insolvency and
Bankruptcy Code, 2016 (the “Code”) is under speedy implementation: while its provisions
relating to corporate resolution and liquidation (except voluntary liquidation)
have been notified, provisions relating to individual insolvency and bankruptcy
are pending effectiveness. Soon after the commencement of relevant provisions, creditors
have begun availing the remedy offered under the Code. In ICICI
Bank Ltd. vs. M/s. Innoventive Industries Ltd.
,  the
Mumbai Bench of the National Company Law Tribunal (“NCLT”) admitted the first
application for corporate insolvency resolution process under the Code
considering the prominent question of the overriding effect of the Code over
the Maharashtra
Relief Undertakings (Special Provisions) Act, 1958
(the “MRU Act”).
Facts of the Case
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. 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. 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.
Relevant Provisions of the MRU Act
Sections 3 and 4 of the
MRU Act are relevant in this context. Section 3 provides for declaration of an
industrial undertaking as a “relief undertaking”. If at any time it appears to
the State Government necessary to do so, the State Government may, by
notification in the Official Gazette, declare that an industrial undertaking specified
in the notification to which any loan, guarantee or other financial assistance
has been provided by the State Government shall, with effect from the date
specified for the purpose in the notification, be conducted to serve as a
measure of preventing unemployment or of unemployment relief and the
undertaking shall accordingly be deemed to be a relief undertaking for the
purposes of this Act.
Section 4 deals with the
power of State Government to prescribe industrial relations and other
facilities temporarily for a relief undertaking. Section 4 is a non-obstante clause,
which states as follows:
“4. (1) Notwithstanding
any law, usage, custom, contract, instrument, decree, order, award, submission,
settlement, standing order or other provision whatsoever, the State Government
may, by notification in the official Gazette, direct that—
(a) in relation to any
relief undertaking and in respect of the period for which the relief
undertaking continues as such under sub-section (2) of section 3—
(i)        all or any of the laws in the Schedule
to this Act or any provisions thereof shall not apply (and such relief
undertaking shall be exempt therefrom), or shall, if so directed by the State
Government, be applied with such modifications (which do not however affect the
policy of the said laws) as may be specified in the notification;
(ii)       all or any of the agreements,
settlements, awards or standing orders made under any of the laws in the
Schedule to this Act, which may be applicable to the undertaking immediately
before it was acquired or taken over by the State Government or before any
loan, guarantee or other financial assistance was provided to it by, or with
the approval of, the State Government, for being run as a relief undertaking,
shall be suspended in operation or shall, if so directed by the State
Government, be applied with such modifications as may be specified in the
notification;
(iii)      rights, privileges, obligations and
liabilities shall be determined and be enforceable in accordance with clauses
(i) and (ii) and the notification;
(iv)      any right, privilege, obligation or
liability accrued or incurred before the undertaking was declared a relief
undertaking and any remedy for the enforcement thereof shall be suspended and
all proceedings relative thereto pending before any court, tribunal, officer or
authority shall be stayed ;
(b) the right,
privilege, obligation or liability referred to in clause (a) (iv) shall, on the
notification ceasing to have force, revive and be enforceable and the
proceedings referred to therein shall be continued:
…”
Question(s) under Consideration
(i)  Whether the
non-obstante clause contained in section 4 of the MRU Act shall override the
non-obstante clause contained in section 238 of the Code?
(ii) In view of the
fact that section 7 of the Code envisages determination of the existence of
default for the admission of an application under the Code, whether the MRU Act
calls for suspension of such determination too?
(iii)            Whether
passing an order under section 7 of the Code will be against the object of the
MRU Act, i.e. protection of the interest of the employees?
Views of NCLT
The NCLT considered the
questions in light of the following:
(i)  The Code has come into existence subsequent to the MRU Act.
Therefore, the non-obstante clause in section 238 of the Code prevails upon any
other law for the time being in force. Hence, the notification issued under the
MRU Act will not operate as a bar to passing an order under section 7 of the
Code.
(ii) The corporate debtor submits that the objectives of the Code and the
MRU Act are different: while the former is for the realization of the credit
facility availed by the corporate debtor, the latter is for preventing
unemployment in the industry. Since the latter object is a more laudable cause
protected by the State, the same shall not be disturbed by invoking the
non-obstante clause of the Code. Relying upon Vishal N Kalsa v. Bank of India and Others (2016) 3 SCC 762, the
corporate debtor contended that if there is no provision in other enactments that
are inconsistent with the Code, the provisions contained in the Code cannot
override other legislations.
The financial creditor contradicted the view stating that
the law envisaged in the MRU Act is inconsistent with section 238 of the Code;
as such, the non-obstante clause in the Code will have overriding effect over
the operation of the MRU Act.
On this, the NCLT viewed that the objective under the MRU
Act is to prevent unemployment of existing employees of a relief undertaking.
By passing an order under section 7 of the Code, it will not cause any
obstruction to their employment until the next 180 days. Even if the company
goes into liquidation, the rights of the employees are protected to the extent
mentioned under the Code. Hence, an order under section 7 will not be against
the interest of the employees.
Further, it was observed that “the subject matter is
liability over the company”. The liability of the company has been dealt with
by the MRU Act and by the Code as well, but with different objectives. The
liability suspended under the MRU Act is inconsistent with the default in
respect of the debt payable to the financial creditor; therefore, an order
under section 7 of the Code will not be against the ratio decided by the
Supreme Court in Vishal N Kalsa v. Bank
of India and Others
.
(iii)            As the financial creditor argues, the notification issued
under the MRU Act is limited to the enactments specified under the schedule to
the said legislation. A plain reading of section 4 of the MRU Act makes it
clear that the said section does not contemplate suspension of existence of
indebtedness or default. Section 7 of the Code merely envisages ascertainment
of the existence of default for the admission of an application for corporate
insolvency resolution process. As such the notification issued under the MRU
Act will not have any bearing on passing an order under section 7 of the Code.
On the basis of the
above, the NCLT admitted the application of the financial creditor, simultaneously
making an order for moratorium and public announcement as required under
section 13 of the Code.
Conclusion
It may be noted that
such an order will not affect the notification issued under the MRU Act. The
status of the relief undertaking pursuant to the notification issued under the
MRU Act shall remain as it is, even after an order is passed under section 7.
However, it would be interesting to see the future developments expected to
take place in the corporate insolvency resolution process over period of 180
days, and the consequence of the process (whether resolution or liquidation) on
the corporate debtor.
– Sikha Bansal

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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