Open Access Research Article
THE INTERPLAY OF INSOLVENCY AND BANKRUPTCY CODE (IBC) OF 2016 WITH OTHER LAWS IN INDIA
Published Paper
Article Details
THE
INTERPLAY OF INSOLVENCY AND BANKRUPTCY CODE (IBC) OF 2016 WITH OTHER LAWS IN
INDIA
AUTHORED
BY - ARYAMAN DUBEY
Abstract
The
Insolvency and Bankruptcy Code (IBC) 2016 is significant and landmark
legislation in India because the primary goal of the legislation is to
consolidate and make necessary amendments to revive/restructure/reorganize and
insolvency resolution of corporate persons, partnerships firms, and so on in a
time-bound manner or within a specified given time because time is of the
essence and the value of money gradually depreciates, causing enormous
financial distress to stakeholder. In my
paper, I have explained how IBC interplays with other legislations such as the
Companies Act 2013, the Indian Contract Act 1872, the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act
2002 (SARFAESI), Labour Laws, Negotiable Instruments Act 1881, the Income Tax
Act 1961, etc. and used case studies to explain how IBC functions with existing
legislations.
Introduction
The
Insolvency and Bankruptcy Code (IBC) 2016 is a significant and comprehensive
piece of legislation that intends to reform and improve India's insolvency and
bankruptcy environment. It is specialized law and it specializes in insolvency
and liquidation proceedings.
Its
primary goal is to consolidate and make necessary amendments to existing laws
and legislations in order to revive/restructure/reorganize and insolvency
resolution of corporate persons, partnerships firms to be financially capable
of paying off their debts and, if not, to initiate liquidation processes, etc.
in a time-bound manner or within a specified period of time.
Its
main objective is to consolidate and make necessary amendments in the existing
laws and legislations to restructure/reorganize and insolvency resolution of
corporate persons, partnerships firms to be financially capable to pay off
their debts and if not then initiate liquidation processes, etc. in a
time-bound manner or in a specified period. After its enforcement, through its
interplay, the IBC has introduced significant changes in other laws such as the
Companies Act 2013, the Securities and Exchange Board of India Act, etc.[i]
Insolvency and
Bankruptcy Code (IBC) 2016: An Overview
The
Insolvency and Bankruptcy Code (IBC) was enacted and enforced with the
objective of addressing and solving the problems of non-performing assets
(default on home loans, vehicle loans, business loans, or credit card dues) in
India, thus providing a consolidated framework for the insolvency and
bankruptcy processes in a time bound manner to protect the interests of all
stakeholders ( creditors, employees ) and also ensuring the maximization of the
value of assets or to retain and maintain some threshold value of the assets.
Note
- Insolvency and Bankruptcy Code (IBC) has an overriding effect against other
legislations to remove any ambiguity.
1)
The Interplay of IBC with Companies Act 2013
The interplay of IBC with the Companies Act 2013 displays
how IBC operates alongside other existing legislations. Earlier the Widening up
provisions were in company law but got removed and are provided in IBC. The
existing Company Law 2013 Act aims to provide the rules and structures for
different types of companies and their functioning under the law, while IBC
deals with their insolvency and liquidation part. In the case of “Innoventive
Industries Limited v. ICICI Bank Limited”[1][2][3],
the apex court held that the Insolvency and Bankruptcy Code (IBC) would prevail
over the Companies Act 2013 in case of any inconsistencies because Insolvency
and Bankruptcy Code (IBC) is a special law enacted and enforced to deal with
insolvency matters.
2)
The Interplay of IBC with the Indian Contract
Act 1872
In the interplay of IBC and with Indian Contract Act
1872, IBC, there too has overriding effects; in the case of “Swiss Ribbons [4]Pvt.
Ltd. Vs Union [ii][iii]of
India” the apex court upheld the constitutional validity of Insolvency and
Bankruptcy Code (IBC) the court held that IBC is not infringing on any
individual or nay rights under the Contract Act 1872 because the main objective
of IBC is to resolve insolvency which involves stakeholder which include creditors
(FCs, OCs), employees etc. and since there is a long chain who people who are
in distress then in the name of public interest IBC can override individual
rights.
3) The
Interplay of IBC with the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002 (SARFAESI)
The
Insolvency and Bankruptcy Code (IBC) has an overriding effect against
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI) as well because the SARFAESI Act 2002
enables the banks and other financial institutions to auction commercial and
residential properties in order to recover loans and prevent any possible
origins of NPAs and this point was further discussed in the case of “Vashdeo R
Bhojwani v. Abhyudaya Co-operative Bank Ltd. and Another” [5][6]and
the apex court held that the proceedings under Insolvency and Bankruptcy Code
(IBC) would override the provisions of the SARFAESI Act 2002 because IBC is a
specialized act for this purpose only.
4)
The Interplay of IBC with Labour Laws
The Insolvency and Bankruptcy Code (IBC) has also
interacted with labour laws regarding unpaid wages[7]
In the case of “JK Jute
Mill Mazdoor Morcha v Juggilal Kamalpat Jute Mills Company Ltd”[8]
, the apex court held that the claims related to the unpaid dues of the
workmen and employees would come under the category and ambit of IBC since it
is considered as an “operational debt” Here the insolvency application filed
under section 9 of the code by a registered trade union is considered to be an operational creditor
for the purposes of the code.[9]
5)
The Interplay of IBC with the Arbitration and
Conciliation Act 1996
The insolvency proceedings can be initiated by
operational creditors (OC) even if an arbitration agreement exists; this issue
was discussed in the case of “Alchemist
Asset Reconstruction Company Limited Vs. M/s Hotel Gaudavan Private Limited
& Ors” and the apex court held that an operational creditor
(OC) can initiate the insolvency proceedings under Insolvency and Bankruptcy
Code (IBC) even if an arbitration agreement exists[10]
. The reasoning behind this judgment is that arbitration is used to resolve
private disputes but the insolvency proceedings under IBC has all information’s
regarding all creditors and stakeholders also, thus in the name of public
interest The Insolvency and Bankruptcy Code (IBC) could override some selective
provisions of the Arbitration and Conciliation Act 1996.
6)
The Interplay of IBC with the Negotiable
Instruments Act 1881
The Insolvency and Bankruptcy Code (IBC) has also
interacted with Negotiable Instruments Act regarding demand instruments such as
cheques when cheques bounce due to insufficient amount in the holder’s bank
account. This issue was further discussed in the case of “P. Mohanraj & Ors[11]. Vs M/s. Shah Brothers Ispat Pvt. Ltd”[12] and the apex court held that the insolvency
proceedings initiated under the IBC can provide a corporate debtor with the
immunity from prosecution for the dishonor of cheques under Section 138 in The Negotiable Instruments
Act, 1881.
7)
The Interplay of IBC with the Real Estate
Regulation and Development Act 2016
The Insolvency and Bankruptcy Code (IBC) has also
interacted with Real Estate Regulation and Development Act and IBC has
overriding effects against Real Estate Regulation and Development Act. This
issue was discussed in the case of “Pioneer Urban Land and Infrastructure Ltd.
and Anr. V. Union of India” and Ors and the apex court held that the reliefs
and remedies provided under RERA and IBC were concurrent[13]
and these two laws are operating in two different realms and sectors with
different objective, while RERA regulates real estate project and IBC deals
with insolvency and bankruptcy. But IBC, being a more recent, later, and
special law would override provisions of RERA when these laws clash.
8)
The Interplay of IBC with the Prevention of
Money Laundering Act 2002
Now the Insolvency and Bankruptcy Code (IBC) and
Prevention of Money Laundering Act 2002 have different sets of objectives but
there is probability of their interaction in cases which involve financial
frauds. This issue was discussed in the case of “Bank of India Vs. The Deputy Director
Directorate of Enforcement” and the Delhi High Court held that the If
insolvency procedures were pending under the IBC, the Enforcement Directorate
could not attach properties [14]engaged
in money laundering”[15].
The Court emphasized and paid importance on the necessity of maintaining the
sanctity of the bankruptcy process and allowing creditors to collect their
debts.
9) The
Interplay of IBC with the Income Tax Act 1961 (Taxation Laws)
It is clearly evident that the Insolvency and Bankruptcy
Code (IBC) and Income Tax Act 1961 (Taxation Laws) have different sets of objectives
such as IBC deals with insolvency and bankruptcy and Income Tax deals with
collection of taxes from individuals of various economic classes but they two
legislations do interact, particularly in the situation of tax liabilities and
this issue was discussed in the case of “Pr. Commissioner of Income Tax v.
Monnet Ispat and Energy Ltd”[16]
and the apex court held that the
Insolvency and Bankruptcy Code (IBC) would have an overriding effects on
the Tax Act 1961 (Taxation Laws) if there are any conflicting provisions. The
apex court also held that the “Income-tax dues, being like Crown debts, do not
take precedence even over secured creditors, who are private persons. Given S.
238 of the Insolvency and Bankruptcy Code, 2016, the Code will override
anything inconsistent contained in any other enactment, including the
Income-tax Act”[17].
10) The Interplay
of IBC with Cross-border Insolvency
The IBC has
provisions for cross-border insolvency, but it does not yet fully incorporate
the United Nations Commission on International Trade Law (UNCITRAL) Model Law
on Cross-Border Insolvency. This lack of a comprehensive framework can lead to
complications when dealing with assets and debtors located outside India. The
interplay between the IBC and the laws of other jurisdictions remains an area
that requires greater harmonization and clarity to effectively handle
cross-border insolvency cases.
The Role of the
Judiciary in Harmonizing Laws:
The
judiciary has played a pivotal role in interpreting the IBC and its
relationship with other laws. Various judgments by the Supreme Court and High
Courts have clarified and resolved conflicts between the IBC and other
statutes. Landmark cases such as the Essar Steel and Jaypee Infratech cases [18]have
shaped the understanding of the IBC's overriding effect over other laws and the
treatment of various stakeholders in the insolvency process.
Case Studies
The
aim of the case studies is to provide a clearer picture of the topic of how IBC
interplays with other legislations –
a)
“State Bank of India v. V. Ramakrishnan and
others 2018” [19]–
In this case, apex court clarified that the Insolvency and Bankruptcy Code
(IBC) being a later and comprehensive code, it will prevail over the
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 (SARFAESI) in the event of any clash.
b)
“Jignesh Shah and another v. Union of India
and others 2019” - The issue regarding the constitutional validity of
attachment of assets was discussed by the Bombay High Court and held those
provisions of Insolvency and Bankruptcy Code (IBC) are valid and would prevail
over any other legislations.
c)
Bhushan Steel [20]–
This case addressed interplay of Insolvency and Bankruptcy Code (IBC) with the
Companies Act 2013, the debt was Rs. 56,000 crore and the resolution plan were
approved under IBC which resulted in acquisition of Bhushan Steel by Tata Steel
which ensured the revival of the company.
d)
Alok Industries [21]-
This case also addressed interplay of Insolvency and Bankruptcy Code (IBC) with
the Companies Act 2013, the debt was around Rs.30, 000 the resolution plan was
approved under IBC which resulted in acquisition of Alok Industries by Reliance
Industries, hence making the resolution plan a success for all the
stakeholders.
e)
Essar Steel India Ltd [22]–
It was the first cases that were resolved under Insolvency and Bankruptcy Code
(IBC) and it took two years for the resolution plan to pass since the debt was
of Rs. 50,000 crore and through the resolution plan the payment given to the
creditors was Rs. 42,000 crores.
f)
Jet Airways [23]–
The case of Jet Airways was famous whose resolution plan was made by IBC; the
total debt amount was around Rs. 8,000 crore and took one year to complete and
the resolution plan was later approved by NCLT in 2020 and the payment given to
the credits was of Rs. 1000 crore which was very less compared to the total
amount but the resolution plan also involved revival which was more to achieve.
Recommendations –
a)
Increasing and improving the capacity of
National Law Tribunal (NCLT) – Since the adjudicating authority is NCLT, if it
is seating capacity and infrastructure is improved then it it can provide
faster resolutions in the cases and assist in decreasing the pendency or
backlog of cases.
b)
Clarity and better quality of treatment for
OCs – There should be clearer and better framework with better guidelines
regarding the treatment of Operational Creditors; this will help in reducing
litigation and fasten the overall resolution process.
c)
Flexibility in Sale of Assets – As the
existing rule, the assets need to be sold to the highest bidder but sometimes
it is not possible due to economic issue and highest bidder may not be the best
option to utilize the asset or maximizes the potential of the asset, hence some
flexibility should be given.
d)
Increase awareness – There should be increase
in general awareness to the stakeholders so that they are well informed and
when well informed the stakeholders will know what is happening and maybe
assist to prevent situations of bankruptcy as well because then the owners of
the company will make decisions more carefully and act more vigilant.
Conclusion
There
has been a big paradigm shift in the framework and functioning of India’s
corporate insolvency ecosystem, as we have discussed how Insolvency and
Bankruptcy Code (IBC) 2016 interplays with other legislations such as Companies
Act 2013, Indian Contract Act 1872, the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI),
Labour Laws, Negotiable Instruments Act 1881, the Income Tax Act 1961, etc and
various case studies on how it functions in the real world. But due to the
overriding effect of IBC over other legislations, IBC will enable to ensure a
less conflicting, smooth, seamless and an efficient interplay it is functioning
and processes.
[1]
https://www.centrik.in/blogs/innoventive-vs-icici-bank-supreme-court-settles-law-centres-insolvency-code-override-conflicting-acts/text=The%20judgement%20of%20the%20Supreme%20Court%2C%20in%20the,any%20other%20law%20with%20respect%20to%20the%20Code.
[3]
https://corporate.cyrilamarchandblogs.com/2017/09/innoventive-industries-limited-v-icici-bank-limited-paradigm-shift-insolvency-law-india/
[6]
https://www.supremecourtcases.com/vashdeo-r-bhojwani-v-abhyudaya-co-operative-bank-ltd-and-another-2/
[9] “JK Jute Mill Mazdoor Morcha v Juggilal
Kamalpat Jute Mills Company Ltd, upheld the insolvency application filed
under section 9 of the code by a registered trade union considering it to be an
operational creditor for the purposes of the code”.
[11]
https://ibclaw.in/summary-of-landmark-judgment-p-mohanraj-ors-vs-m-s-shah-brothers-ispat-pvt-ltd/
[12]
https://www.mondaq.com/india/insolvencybankruptcy/1112718/summarizing-the-interface-between-negotiable-instruments-act-and-the-insolvency-code-in-p-mohanraj-v-shah-brothers-ispat
[18]
https://www.businesstoday.in/latest/corporate/story/essar-steel-jaypee-infratech-and-7-others-insolvency-cases-163247-2019-01-29
[19]
https://www.mondaq.com/india/insolvencybankruptcy/759870/case-analysis-to-clarify-the-applicability-of-moratorium-on-personal-guarantor-under-section-14-of-the-insolvency-and-bankruptcy-code
[20]
https://www.tatasteel.com/media/newsroom/press-releases/india/2018/bhushan-steel-limited-is-tata-steel-bsl-limited-now/
[22]
https://www.zeebiz.com/india/news-sc-essar-steel-verdict-banks-to-get-rs-50000-crore-fund-npa-liquidity-crisis-to-go-down-114315
Article Information
THE INTERPLAY OF INSOLVENCY AND BANKRUPTCY CODE (IBC) OF 2016 WITH OTHER LAWS IN INDIA
Authors: ARYAMAN DUBEY
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/01/04
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.