Understanding the Scope of Section 238: Overriding Nature of the IBC

[Akhil Kumar is a fifth year BA LLB (Hons.) student and Abhinav Mathur a  fourth year BA LLB (Hons.) student, both at NUALS, Kochi]

The Insolvency and Bankruptcy Code, 2016 was enacted with the view of bringing a complete code of reorganisation and insolvency resolution of corporate debtors in a time bound manner. The Code being at a nascent stage, has seen emerging disputes regarding its interpretation vis a vis other statutes, particularly so in respect to the overriding clause provided under section 238 of the Code. One such issue arose in the recent case of Duncans Industries Ltd. v. A. J. Agrochem, wherein the Supreme Court held that the provisions of the Code would prevail over the Tea Act, 1953. In this post, the authors seek to examine the rationale behind the judgement and venture into the scope of section 238 of the Code.

Background and Facts

Duncan Industries Ltd., the corporate debtor, owed a sum of Rs. 41,55,500/- to AJ Agrochem, an operational creditor, based on which the creditor initiated proceedings against the corporate debtor under section 9 of the Code. The corporate debtor opposed such action on the ground that the Central Government had not consented, as mandated by section 16G(1)(c) of the Tea Act, which lays down that the proceedings for winding up cannot be initiated without the consent of the Government if the management of the tea estate has been taken over by the Central Government. As the corporate debtor claimed, seven out of the 14 tea gardens were taken under the control of the Central Government further to the powers vested in it under section 16E of the Tea Act.

Issue

The question before the Court was whether consent of the Central Government under the Tea Act is required before initiation of proceedings under section 9 of the Code.

Winding up proceedings vis a vis insolvency Process

One of the main objectives of the Code is to inspire life into a corporate debtor struggling to repay its debt. It is only upon the failure of the completion of the corporate insolvency resolution process (CIRP) that the possibility of liquidation comes into the picture under the Code. It is pertinent to note that the power of the Parliament to legislate on winding up is contained under entries 33 and 34 of the Union List, as opposed to insolvency, which is contained in entry 9 of the Concurrent List of the Seventh Schedule of the Constitution.

In Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd., while reading section 7 with section 238 of the Code, the Supreme Court held:

It is clear that Respondent No. 3 has filed a section 7 application under the Code on which an order has been passed admitting such application by the NCLT on 13.04.2018. This proceeding is an independent proceeding which has nothing to do with the transfer of pending winding up proceedings before the High Court. It was open for Respondent No. 3 at any time before a winding up order is passed to apply under Section 7 of the Code.

It is also imperative to note that the preamble of the Code does not, in any manner, refer to liquidation, which is an option of ‘last resort’ in the absence of a resolution plan or reasons incidental thereto. The Court, therefore, held that the CIR Process, as initiated under the Code, is independent and distinct from winding up proceedings.

Scope and overriding effect of Section 238 of the Code

According to section 238, the Code shall prevail over any other provision or law contrary or inconsistent with any of its provisions. The Supreme Court in Innoventive   Industries   Ltd. v. ICICI Bank reiterated the statement of object and reasons of the Code which convey that there was no one law in India to deal with insolvency and bankruptcy and that the existing framework consisting of a plethora of legislations was inadequate, ineffective and resulted in inordinate delay for resolution. Hence, it can be concluded that the Code is a complete code in itself.

The Insolvency Law Committee Report of March 2018 reflects on the legislative intent behind the enactment of the Code. It reads: “…the introduction of this legislation was done with the aim of replacing the existing framework for insolvency, which was visibly inadequate, ineffective and wrought with delays.”

Furthermore, it is a settled point of law that in case of an inconsistency arising between two special legislations, the latter enacted legislation will have an overriding effect on the previously enacted legislation [Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71]. This rule, read with the non-obstinate clause enshrined under section 238, makes it clear that the Code shall prevail over the Tea Act.

In order to determine an inconsistency between two statutes, the Supreme Court laid down an elaborate test in the case of Kishorebhai Khamanchand Goyal v. State of Gujarat. One of the methods the Court devised, was to determine whether the legislature intended to lay down an exhaustive code in respect of the subject-matter replacing the earlier law. Applying this test in the case of Tea Act and the Code, it can be observed that a portion of the Tea Act delves into the realm of what is now the domain of the Code. Therefore, it is evident that the primary reason for the advent of the Code was to replace, enhance and, most importantly, channelize the various laws dealing with insolvency and bankruptcy into one exhaustive piece of legislation, resulting in the Code prevailing over the provisions of the Tea Act.

Consent of the Central Government: whether a prerequisite to file a section 9 application as mandated by the Tea Act

Section 16G(1)(c) of the Tea Act lays down that when the management of a tea unit or a tea undertaking has been taken over by a body of persons authorised by the Central Government, no proceeding for winding up shall be initiated without the consent of the Central Government. In the present case, by an order of the Calcutta High Court, the management and control of the seven tea gardens were handed back to the applicants resulting in the non-application of section 16G in case of the insolvency resolution process of the corporate debtor. The Court went on to hold that actual management and control by the Central Government was sine qua non before section 16G of the Tea Act is made applicable.

It thus can be concluded that, in case section 16G was made applicable to the debtor’s CIRP and consent was not granted by the Central Government, it would vitiate the very purpose for which the Code was formulated. The debtor would, therefore, be absolved of the liabilities even though there exists a debt due and payable.

Conclusion

The judgement, in effect, clarifies the law in relation to the interpretation of the Code vis a vis other special legislations. In our opinion, the instant case provided an occasion wherein the application of section 238 of the Code was warranted on account of the timelines provided under the Code. The entire exercise of obtaining the consent of the Central Government, as envisaged by the Tea Act, is a time consuming process, and was therefore unnecessary. Furthermore, a contrary approach, if taken, would result in putting the creditors at the mercy of the Central Government before initiating the CIRP and, therefore, making it troublesome for certain creditors. Furthermore, in Swiss Ribbons Pvt Ltd v. Union of India, the Supreme Court, while discussing the scheme of the Act has clearly held:

Unless such reorganisation is effected in a time bound manner, the value of the assets of such persons would deplete. Therefore, maximisation of value of assets of such persons so that they are effectively run as going concerns is another very important objective of the Code.

It is also pertinent to note that, according to the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the CIRP shall be mandatorily completed within 330 days from the insolvency commencement date, including any extension granted under the Code as well as time taken in legal proceedings in relation to the CIRP. Therefore, in our opinion, the judgement goes hand in hand with the legislative scheme of the Code.

The Court has also emphasised on the objectives of the Code and liquidation being an option of the last resort that shall only be resorted to upon the failure of the CIRP. This will effectively ensure that greater efforts are taken for the revival of corporate debtors in most cases, as envisaged by the legislature.

– Akhil Kumar & Abhinav Mathur