IBC and its Interplay with Other Statutes (2023)

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was brought in to provide a single unified framework to deal with bankruptcy and insolvency by persons other than financial institutions. Prior to the introduction of IBC, the law of insolvency and bankruptcy was spread across several statutes and fora, which rendered the process time consuming and largely ineffective due to dissipation of value of assets. The IBC consolidated the law related to insolvency by amending 11 laws, including the Companies Act, 2013, Recovery of Debts and Bankruptcy Act, 1993 (DRT Act), and Securitization and Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002 (SARFAESI Act). It further repealed the centuries-old laws of the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 , which regulated insolvency resolution for individuals; and the Sick Industrial Companies Act, 1985 which regulated insolvency resolution for sick companies prior to the introduction of the IBC. This article seeks to trace the IBC in operation and provide an overview of the interplay between IBC and some other statutes, and see how it affects various stakeholders involved.

Statutory Framework of IBC

Overriding Clauses

The Section 238 of IBC gives it an overriding effect over other laws. Section 245-255 of the IBC deal with Amendments to various other statutes to the facilitate the afore-stated overriding effect. With various other statutes already having “overriding” clauses, the three years of IBC in operation and the lacunas in the Code left a lot of room for judicial interpretation.

Moratorium:

The object of IBC is to expedite the insolvency process and to secure maximization of value of assets of Corporate Debtor for distribution to all stake holders. The scheme under IBC provides for a time bound resolution of insolvency. Once the application to initiate a Corporate Insolvency Resolution Process (“CIRP”) by or against a corporate debtor is accepted, the control of the corporate debtor goes in the hands of the Committee of Creditors (CoC). This CoC is formed by and the initiation process is facilitated by an Interim Resolution Professional (“IRP”), who assumes control of the operation of the corporate debtor in the interim. The said IRP can be confirmed as the Resolution Professional (“RP”) by the CoC or replaced by it by another RP. The CIRP process is a time bound process of 180 days, extendable to 270 days, after which the corporate entity is either revived (if a resolution plan is approved) or it goes into liquidation.

In order to ensure that the assets of the corporate debtor are not eroded while the creditors and resolution applicants negotiate resolution of insolvency during the CIRP, the IBC provides for a “calm period” i.e. moratorium period. Moratorium is declared as soon as the application for initiation of CIRP is admitted, during which time:

  1. No legal proceedings can be initiated or continued against the corporate debtor; and
  2. the corporate debtor’s property (even disputed property) cannot be disposed off in any manner.

More specifically Moratorium under Section 14 of the IBC is applicable to

“(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b)transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

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(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d)the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”

The same principle applies when a company goes into liquidation under IBC. Section 33 provides for a situation akin to moratorium during liquidation, which states that:

Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority”

In light of the scheme of IBC and its overriding nature, the subsequent sections will trace the Interplay of IBC with some selected statutes.

IBC and SARFAESI:

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act”), banks and other financial institutions, in the capacity of secured creditors are allowed to auction residential or commercial properties of borrowers to recover loans, without approaching the courts. However, after the introduction of IBC, the secured creditor’s interest in some sense has been compromised. Under the IBC, once a CIRP is initiated, the Moratorium is applicable to “any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)”. Therefore, financial institution or ARC seeking to enforce its security under SARFAESI has to be wary of any impeding proceedings under IBC.

The case of J.M. Financial Asset Reconstruction Company Vs. Indus Finance Ltd.[1], decided by NCLT at Bombay, throws light on the aforesaid position under law. In the said matter, JM Financial Asset Reconstruction Company had initiated proceedings under the SARFAESI Act against the erring corporate debtor. The sale process of the immovable assets given as security had been initiated under Section 13 of the SARFAESI. Following the auction sale process under Rule 9 of the Security Interest (Enforcement) Rules, 2002, the sale had been confirmed in favour of a transferee, on payment of 25% of the sale price. However, the Tribunal held that the sale had only been confirmed and not concluded and hence in light of the moratorium, the auction sale was stayed. It was argued in this case, though unsuccessfully, that the corporate debtor had acted in collusion with the financial creditor to initiate CIRP against itself, in order to stall the SARFAESI proceedings. Be that as it may, it is conceivable that the borrowers may use IBC proceedings to stall recovery under SARFAESI, especially in light of Section 10 of the IBC, which enables the corporate debtor to file an application for initiation if CIRP against itself.

The IBC affects the rights of the secured creditor, inasmuch as during the CIRP process, the “secured assets” form part of the common pool of assets. During moratorium, the secured creditor cannot enforce its security outside the CIRP process. Its claim stands at par with other creditors. At the CIRP stage, all the decision-making is controlled by committee of creditors (“CoC”), including the decision to accept or reject a resolution plan. The CoC is comprised of financial creditors. A resolution plan is approved for submission to the adjudicating authority if it is passed by atleast 66% of the CoC. It is important to note that a Resolution Plan may provide for:

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  • sale of secured asset [ Regulation 37(a)][2];
  • satisfaction or modification of any security interest [Regulation 37(d)][3];
  • reduction in the amount payable to the creditors [Regulation 37(f)][4]

Therefore, if the secured creditor is either not a financial creditor, or being a financial creditors, its voting share in the CoC is less than 33%, the rest of the CoC may approve a Resolution Plan that compromises such secured creditor’s security interest. Before 5 October 2018, regulation 38(1) of the IBBI CIRP Regulations, 2016, required that a resolution plan provide for payment of liquidation value due to dissenting financial creditors (including abstaining creditors) prior to any recoveries being made by the assenting financial creditors. However, this protection has been done away with after the amendment to Regulation 38 on 05.10.2018.

During the liquidation process however, the secured creditors have been given an option to enforce/ realise their security interest outside the liquidation process. Section 52 of the IBC provides for treatment of secured creditor during liquidation. Section 33 of the IBC, which stays any legal proceedings against the corporate debtor during liquidation, has been made subject to Section 52. As a consequence, the secured creditors who seek to realise their security interest outside of liquidation proceedings, are permitted to do so after proving their security interest[5] and thereafter following the procedure under Regulation 37 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. However, secured creditors enforcing their security through SARFAESI proceedings, are not required to follow this regulation.[6]

IBC and Taxing statutes:

Most of the taxing statues provide for attachment of property as a mode of recovery, which may turn the revenue department in a ‘secured creditor’ in some sense. However, under IBC, the government dues are lower in hierarchy in the waterfall mechanism. An anomalous situation may arise where an attachment order for recovery of dues under a taxing statute is made prior to initiation of liquidation under IBC. In such a scenario, will the property subject to attachment form part of liquidation estate or not? This question came up for consideration in Leo Edibles & Fats Ltd. vs. The tax Recovery Officer, Income Tax Department, Hyderabad, Andhra Pradesh High Court[7]. The court observed that an attachment itself creates no interest in a property[8] and the tax department does not enjoy the status of a “secured creditor”, who can avail provisions of Section 52 of IBC. Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. (SLP(C) No. 6483 of 2018), the Supreme Court while dealing with the interplay between Income Tax Act, 1961 and the Code held that the incorporation of Section 238 in the Code makes its obvious that the Code will override anything inconsistent contained in any other enactment.

More broadly, the IBC has amended various taxing statutes in the following terms:

  • Central Excise Act: Section 11E amended by IBC, whereby first charge is created in favour of revenue. This has been now made subject to IBC in addition to already existing SARFAESI and Recovery of Debts Due to Banks And Financial Institutions Act, 1993 (“RDDBFI Act”).
  • Income Tax Act: Section 178 provides for priority in appropriation of amounts set aside by liquidator for clearance of tax dues. Section 178(6) amended to read “The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force, except the provisions of IBC. In so far as liquidation of a company under the Code is concerned, Section 178 of the Act of 1961 stands excluded by virtue of the amendment of Section 178(6) with effect from 01.11.2016, in accordance with the provisions of Section 247 of the Code read with the Third Schedule appended thereto. Therefore, in the event an assessee company is in liquidation under the Code, the Income-tax Department can no longer claim a priority in respect of clearance of tax dues of the said company, as provided under Sections 178(2) and (3) of the Act of 1961. [Leo Edibles (Supra)]
  • Customs Act: Section 142A (liability first charge on property) amended, and is now subject to IBC in addition to SARFAESI and RDDBFI Act.
  • Finance Act: Section 88 (liability under Act to be first charge) amended and made subject to provisions of IBC in addition to SARFAESI and RDDBFI Act.

IBC and Arbitration Act

Section 9 Proceedings: Application by an Operational Creditor

IBC is not a recovery mechanism. Therefore, if there is a “pre-existing dispute” in relation to an “operational debt”, an application to initiate CIRP is not admitted.[9] A “dispute” as defined under Section 5(6) of the IBC, includes an “arbitration proceeding”. An application filed by an operational creditor under section 9 of the IBC during the pendency of arbitration proceedings with respect that operational debt, will be rejected. The Hon’ble Apex Court has also held in K Kishan vs. Vijay Nirman Company Pvt Ltd.[10] that a challenge to an arbitration award under Section 34 of the Arbitration & Concilliation Act, 1996, amounts of existence of dispute under IBC. Therefore, CIRP cannot be initiated even after conclusion of arbitration proceedings with respect to the operational debt, unless the challenge to the award has been concluded or the time period for filing such a challenge is over and the award has become final.

However, due to the overriding effect of the IBC, an arbitration clause by itself will not automatically oust the jurisdiction of the NCLT under the IBC, if other conditions for admission of application are fulfilled.

Section 7 Proceedings: Application by a Financial Creditor:

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There is no defence of “pre-existing dispute” available under section 7 of IBC in an application by a financial creditor. A financial creditor is only required to prove “default”. It flows from the same that an application filed under section 7 of the IBC is not barred by the ongoing arbitration proceedings. Moreover once an application under section 7 of the IBC is admitted the other proceedings pending before any courts or tribunals including the arbitral tribunals are stayed by coming of moratorium into effect from the date of admission of the application by the NCLT. NCLT inReliance Commercial Finance Limited vs. Ved Cellulose Limited, (IB)-156(PB)/2017 held that:-

“Under Section 7 of the IBC there is no bar to initiate CIRP even if arbitration proceeding is pending, such a bar exists in respect of claim made by the Operational Creditor under Section 9 of the IBC.”

IBC and Prevention of Money Laundering Act

Under the Prevention of Money Laundering Act, 2002 (“PMLA”), the Enforcement Directorate (“ED”) has the power to provisionally attach the property which in his belief, qualifies to be treated as “proceeds of crime[11]. Such provisional attachment can thereafter be confirmed by the adjudicating authority under PMLA , which has the effect of “confiscation” of said property.[12] The order of “confiscation” of property attached under PMLA takes away the right and title of its owner and vests it “absolutely in the Central Government free from all encumbrances”.[13] The issue whether moratorium is applicable to such proceedings has been dealt by various forums recently, which has resulted in some conflicting decisions.

The NCLT at Mumbai in SREI Infrastructure Finance Limited vs. Deputy Director, Directorate of Enforcement, (Prevention of Money Laundering Act)[14], vide order dated 12.02.2019 held that IBC overrides the provisions of PMLA and the proceedings under PMLA have to be stayed in light of the moratorium, in the following terms :

“The non-obstante clause contained in IBC, which is a later statute shall prevail over the non-obstante clause contained in Section 71 of PMLA and the proceedings before the Adjudicating Authority under PMLA is civil in nature and hence, in view of Section 14 of IBC, the proceedings before the Adjudicating Authority of PMLA cannot continue.”

The High Court of Delhi in the case of Deputy Director Directorate of Enforcement Delhi vs. Axis Bank and Ors[15], vide order dated April 2, 2019, while, considering appeals against appellate tribunal (as constituted under PMLA), which held that the RDBA, SARFAESI Act and IBC prevail over relevant statutory provisions of PMLA, set aside the said order and held that provisions of IBC do not override provisions under PMLA, in the following terms:

To sum up on the issue, the objective of the legislation in PMLA being distinct from the purposes of the three other enactments viz. RDBA, SARFAESI Act and Insolvency Code, the latter cannot prevail over the former. There is no inconsistency. The purpose, the text and context are different. This court thus rejects the argument of prevalence of the said laws over PMLA.”

The Hon’ble High Court held that the moratorium enforced in terms of Section 14 of Insolvency Code cannot come in the way of the statutory authority conferred by PMLA on the enforcement officers for depriving a person (may be also a debtor) of the proceeds of crime.

The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in its judgment dated 02.07.2019, in Rotomac Global Private Limited (through Liquidator) vs. Deputy Director, Directorate of Enforcement [16] by placing reliance on Varrsana Ispat Limited vs. Deputy Director, Directorate of Enforcement’ – Company Appeal (AT) (Insolvency) No. 493 of 2018[17] held that moratorium under Section 14 of the IBC is not applicable to attachment proceedings under PMLA against properties acquired through proceeds of crime[18]. The Hon’ble NCLAT proceeded on the basis that there is no inconsistency between IBC and PMLA. The Hon’ble NCLAT in Varrsana Ispat Limited Case had held that:

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as the ‘Prevention of Money Laundering Act, 2002’ relates to different fields of penal action of ‘proceeds of crime’, it invokes simultaneously with the ‘I&B Code’, having no overriding effect of one Act over the 8 Company Appeal (AT) (Insolvency) No. 140 of 2019 other including the ‘I&B Code’

Most recently, the Appellate Tribunal for Prevention of Money Laundering Act at New Delhi in the case of M/S PMT Machines Ltd. vs. The Deputy Director, Directorate of Enforcement, Delhi[19] vide its decision dated 16.09.2019 ordered the release of properties belonging to Biotech Sterling Group attached by ED under PMLA, in view of the CIRP initiated against PMT machines (part of Sterling Group). However, the Tribunal does not record any finding with respect to the overriding effect of IBC over PMLA. The order was made in light of the fact that the attached properties were acquired much before the alleged commission of alleged offences by Sterling Group Promoters. The Ld. Tribunal harmonised both the statutes in light of their respective objectives.

IBC and the TeaAct,1953

The Hon’ble Supreme Court has recently vide its judgement dated 04.10.2019, in the case of Duncans Industries Ltd vs. A. J. Agrochem[20] held that the provisions of the IBC override the provisions of the Tea Act, 1963 (“the Tea Act”). Section 16 (G) of the Tea Act requires the consent of the Central government to initiate winding up proceedings or for appointment of receiver against a Company owing tea estates in cases where the management of the tea estate owned by such a Company has been overtaken by the Central Government.

The Hon’ble Apex Court was examining whether in light of Section 16(G)(1)(c ) of the Tea Act, the Applicant seeking to initiate action under IBC against such a company is required to obtain Central Government’s consent before initiating such proceedings. The Hon’ble Court observed that “Corporate insolvency resolution process” as such cannot be equated with “winding up proceedings”. The Hon’ble Court observed that the requirement of consent would frustrate the objective of IBC to complete the CIRP in a time bound manner. In light of Section 238 of the IBC, which is subsequent to the Tea Act the Hon’ble Court held that the provisions under IBC have an overriding effect over provisions of the Tea Act and any other interpretation would frustrate the object and purpose of the IBC.

Conclusion

The effect of moratorium on actions undertaken under other statues, coupled with the overriding provision under the IBC has given it a lot of teeth in order to achieve the object of time bound resolution of insolvency and maximisation of assets of the corporate debtor during the process of resolution. Most of the statues having a penal element have the provisions for attachment of the properties of the erring entity. The question then becomes whether the relevant provision under the said statute and IBC can be harmonised (view taken by the Hon’ble NCLAT in Rotomac and Verrsana Cases) or are inconsistent (Duncas Industries Case). However, the answer is not always straightforward. The distinct views expressed by the Hon’ble High Courts and Delhi and Mumbai in cases involving IBC and PMLA, leave much to be clarified in similarly situated matters. Recently Securities and Exchange Board of India (“SEBI”) has approached the apex court against the Delhi NCLT’s order dated 30.04.2019[21] in the case of whereby it directed SEBI to de-attach the properties of the corporate debtor HBN Dairies & Allied Ltd., against whom CIRP is underway by holding that IBC has overriding effect over the SEBI Act. It will be interesting to see how the Apex Court deals with the conundrum.

By
Anu Sura, PSL Advocates & Solicitors.
[1] 2017 SCC OnLine NCLT 11466;
[2] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
[3] ibid
[4] ibid
[5] Section 52(3) of IBC read with Regulation 21 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
[6] Regulation 37(7) of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016: “The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).
[7] Writ Petition No.8560 OF 2018; Also at https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jul/26th%20Jul%202018%20in%20the%20matter%20of%20Leo%20Edibles%20&%20Fats%20Ltd.%20Vs.%20The%20Tax%20Recovery%20Officer%20(Central)%20IT%20Dept.,%20Hyderabad_2018-07-27%2014_02_39_2018-07-28%2021:02:14.pdf
[8] Ananta Mills Ltd. (In Liquidation) vs. City Deputy Collector, Ahmedabad: ; (1972) 42 Comp Cas 476 : (1972) 13 GLR 633, the Gujarat High Court observed that the purpose of attachment appeared to be to prevent private alienations of the property but the attaching-creditor does not acquire, by merely levying attachment, any interest in the property.
[9] Section 9(5)(ii)(d) of the IBC
[10] Civil Appeal No. 21824 of 2017
[11] Section 5 of the PMLA
[12] Section 8 of the PMLA
[13] Section 9 of the PMLA
[14] C.P. 405/ 2018; Available at : https://nclt.gov.in/sites/default/files/Interim-order-pdf/SREI%20INFRASTRCTURE%20FINANCE%20LTD.%20MA%201280-2018%20IN%20CP-405-2018%20NCLT%20ON%2012.02.2019%20INTERIM.pdf
[15] 2019 SCC OnLine Del 7854, Also available at: https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Apr/RKG02042019CRLA1432018_2019-04-03%2014:45:26.pdf
[16] Company Appeal (AT) (Insolvency) No. 140 of 2019; Available at :https://ibbi.gov.in//webadmin/pdf/order/2019/Jul/2nd%20July%202019%20In%20the%20matter%20of%20Rotomac%20Global%20Pvt.%20Ltd.%20VS%20Deputy%20Director,%20Directorate%20of%20Enforcement%20[CA(AT)(Insolvency)%20140-2019]_2019-07-04%2010:17:56.pdf
[17] Available at https://ibbi.gov.in//webadmin/pdf/order/2019/May/2nd%20May%202019%20In%20the%20matter%20of%20Varrsana%20Ispat%20Ltd%20through%20the%20RP%20of%20Anil%20Goel%20VS%20Deputy%20Director,%20Directorate%20of%20Enforcement%20[CA(AT)(Insolvency)%20493-2018]_2019-05-06%2014:52:44.pdf
[18] See Section 2(1) (u) of the ‘Prevention of Money Laundering Act, 2002’
[19] FPA-PMLA-2792/DLI/2019
[20] CIVILAPPEALNO.5120OF2019; Available at: https://ibbi.gov.in//uploads/order/e28afc56033ed5b324a7f49ad62e3049.pdf
[21] Available at: https://ibbi.gov.in//webadmin/pdf/order/2019/May/Mr.%20Bhanu%20Ram%20&%20Ors%20Vs.%20Ms.%20HBN%20daries%20&%20Allied%20Ltd%20_7_2019-05-16%2017:46:25.pdf

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