Section 238 : IBC provisions that overrides other lawsThe provisions of this Code apply, notwithstanding anything in any other law, now in force or any document having effect under any such law that is inconsistent with them. Section 238 is a non-obstante provision. It signifies that a clause or provision in the Act has the authority to override any other provision or clause in the Act that conflicts with this or another legislation.
THE IMPACT OF SECTION 238 AS INTERPRETED BY THE COURTS
1. The problem of overriding impact was first brought up in the case of Innoventive Industries Limited v. ICICI Bank Limited, which was also the IBC’s inaugural case. It was contended that corporate debtors are fetching advantage of the gain/immunity from quittance given by the government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 for a set period.
i) ICICI filed a claim against Innovative Industries Ltd. as a financial creditor due to a default in payments on financing extended to Innoventive Industries.
ii) They contended that they are not obliged to pay any monies to ICICI due to a relief order granted by the Maharashtra Government under the Maharashtra Relief Undertaking (Special Provisions) Act 1958 (MRUA).
iii) The NCLT issued a moratorium and appointed an Insolvency Resolution Professional based on the overriding implications of the IBC over the MRUA (IRP).
iv) The NCLAT held in the appeal that there is no conflict between MRUA and IBC because they are enactments in two different domains.
v) The provisions of the IBC take precedence over those of the MRUA.
vi) FINALLY, THE SUPREME COURT UPHELD the interpretation by ruling that the non-obstante provision of the IBC would prevail over the non-obstante clause of the MRUA in an appeal against the NCLAT judgment.
vii) On the subject of debt suspension due to the MRUA relief order, it was held that due to the non-obstante provision in the IBC, any right of the corporate debtor under any other law could not come between the IBC and the relief order.
2. The overriding impact of the IBC was again questioned in the instance of Sterling SEZ Infrastructure Ltd, which was governed by the Prevention of Money Laundering Act, 2002 (PMLA).
i) In this instance, SREI Infrastructure Financial Limited filed a CIRP against Sterling SEZ and its controlling company, Sterling Biotech Limited (SBL).
ii) The SBL group’s credit facilities of Rs.8100 crores from various banks and financial institutions were also declared as fraud accounts by the involved banks.
iii) Fearing arrest, the SBL Group’s promoters fled the country under dubious circumstances.
iv) As a result, the Enforcement Directorate began proceedings against the Corporate Debtor, and assets pertaining to the corporate debtor were attached by order dated 29.05.2018 under Section 2(1) (u) of the PMLA Act.
v) In July 2018, the tribunal granted a creditors’ petition to commence CIRP, a moratorium was established and an IRP was appointed as a result.
vi) In the course of his work, the Resolution Professional informed the Directorate of Enforcement about CIRP and requested that the order of attachment of assets be lifted for him to continue to be in charge of, and take custody of it.
vii) The topic was considered during the beginning of CIRP, and it was decided that the temporary attachment of assets order under PMLA 2002 would take precedence over the CIRP u/s 7 of the IBC.
viii) The establishment of actions or processes against the Corporate Debtor, including the execution of any judgment, decision, or order of any court of law, tribunal, or other authority, is said to be banned during the moratorium period.
ix) As a result, the Enforcement Directorate’s order could not be carried out. The defence claimed that the IBC is civil legislation and cannot take precedence over the PMLA Act.
x) As a result, the NCLT was said to lack jurisdiction in the case.
xi) The NCLT’s declaration of a moratorium, thus, did not apply to the Enforcement Directorate’s attachment order or the criminal proceedings brought against the Corporate Debtor.
xii) With the assistance of amicus curiae, the honourable tribunal concluded that the IBC has a greater impact than PMLA based on the objectives of IBC: maximizing asset value, faster settlement, faster recovery, and economic interest of beneficiaries.
3. In the matter of Leo Edibles & Fats Ltd v. the Income-tax Department, the court addressed the question of the IBC’s overriding impact over the Income Tax Act in determining the dues of the Income Tax Authority during liquidation.
i) The Income Tax Authority could no longer claim a priority in respect of clearing of tax dues under the Income Tax Act if the assessee company is undergoing liquidation under IBC.
ii) The High Court further stated that assets under attachment (even if encumbered) will not generate a secured creditor interest in favor of the Income Tax Authority under the IBC.
iii) The High Court further stated that the moratorium in terms of processes established under the IBC guarantees that any outstanding lawsuit begins before the bankruptcy proceeding is stopped.
iv) As a result, assets subject to an order of attachment issued before the liquidation, commencement shall be auctioned along with the assessee company’s other unencumbered assets.
4. In another instance, Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd, the Supreme Court confirmed that anything incongruous in any other statute, including the Income Tax Act, shall be overridden by Section 238 of the Insolvency and Bankruptcy Code, 2016.
5. In one of the cases, Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Others, the NCLAT found that the IBC is a unique law that has precedence over other laws. The corporate insolvency resolution process start date could not be postponed due to an ongoing internal disagreement between Corporate Debtor’s directors over charges of oppression and mismanagement. Financial creditors’ statutory rights could not be curtailed due to pending Oppression and Mismanagement lawsuits under Sections 241 and 242 of the Companies Act, 2013.