IBC Simplified – Innoventive Industries v. UOI

  June 23, 2021

A summary of the Supreme Court judgment in the matter of Innoventive Industries v Union of India ~ By Sara Jain

Facts:

  • An application was made filed by ICICI Bank Ltd. against the Appellant for initiation of CIRP
  • The appellant claimed that there was no debt legally due as vide two notifications dated 22nd July 2015 and 18th July 2016, both under the Maharashtra Relief Undertakings (Special Provisions Act), 1958 all liabilities of the appellant were temporarily suspended till 18th July 2017.
  • Thereafter, the defence taken was that due to the non-release of funds under the Master Restructuring Agreement (agreement between 19 creditors and Appellant), the appellant was unable to pay back its debts.

Judicial history:

  • NCLT Decision: Section 238 of the IBC contains a non-obstante clause. Held that the Parliamentary statute would prevail over the State statute. Thus, the CIRP application admitted.
  • NCLAT decision: Held that the Code and the Maharashtra Act operate in different fields and, therefore, are not repugnant to each other. But the appellant cannot derive any advantage from the Maharashtra Act to stall the insolvency resolution process under Section 7 of the Code.

Applicable Law:

  • The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

Issues:

  • Whether the present application filed by the erstwhile management of the corporate debtor is maintainable?
  • Whether by operation of Section 238 read with Section 14 of the Code, the proceedings under the Maharashtra Act be stalled?

Arguments made by the Appellant:

  • Maharashtra Act would apply because the moratorium imposed by the two notifications under the Maharashtra Act continued in force at the time when the insolvency application was made by ICICI.
  • No repugnancy exists between the two statutes under Article 254 of the Constitution, and each operates in its field. The Maharashtra Act provides for relief against unemployment, whereas the Code is a liquidation process.
  • The Code is made under Entry 9, List III of the Seventh Schedule to the Constitution, whereas the Maharashtra Act, which is a measure for unemployment relief, is made under Entry 23, List III of the Seventh Schedule.

Arguments made by the Respondent:

  • The only limited defence available to a corporate debtor is that the debt is not due for any reason.
  • After an IRP has been appointed and a moratorium declared, the directors of the company are no longer in management and cannot maintain an application before the Supreme Court.
  • The Court stated that it was obvious that the two Acts are repugnant to each other; Under the Maharashtra Act, a limited moratorium is imposed, after which the State Government may take over management of the company. Under the Code, however, a full moratorium is to automatically attach the moment an application is admitted by the NCLT, and management of the company is then taken over by an IRP.

Judgment: Issue 1

  • The Hon’ble Supreme Court held that once an insolvency professional is appointed to manage the company, the erstwhile directors, who are no longer in management, cannot maintain an appeal on behalf of the company.
  • Therefore, the appeal was not maintainable.

Judgment: Issue 2

  • Though there may be no direct conflict, a State law may be inoperative because the Parliamentary law is intended to be a complete, exhaustive, or exclusive code. In such a case, the State law is inconsistent and repugnant, even though obedience to both laws is possible because so long as the State law is referable to the same subject matter as the Parliamentary law to any extent, it must give way.

Conclusion:

  • The earlier State law is repugnant to the later Parliamentary enactment.
  • The moratorium imposed under Section 4 of the Maharashtra Act would directly clash with the moratorium to be issued under Sections 13 and 14 of the Code.
  • It will be noticed that whereas the moratorium imposed under the Maharashtra Act is discretionary and may relate to one or more of the matters contained in Section 4(1), the moratorium imposed under the Code relates to all matters listed in Section 14 and follows as a matter of course.
  • The non-obstante clause contained in Section 4 of the Maharashtra Act cannot possibly be held to apply to the Central enactment, inasmuch as a matter of constitutional law, the later Central enactment being repugnant to the earlier State enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-à-vis action taken under the later Central enactment.
  • Section 238 of the Code- non-obstante clause would apply.

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