The Supreme Court on Thursday said that the new insolvency law, being a parliamentary law, will prevail over similar state laws during initiation of the corporate insolvency resolution process by lenders to recover debts from corporate entities. In a first case filed under the Insolvency and Bankruptcy Code, 2016, a bench led by Justice Rohinton Nariman said that “it is settled law that a consolidating and amending act like the present Central enactment forms a code complete in itself and is exhaustive of the matters dealt with therein” and any state law cannot stand in the way of the corporate insolvency resolution process under the exhaustive code. In the present case, Innoventive Industries vs ICICI Bank, the apex court said that unless the Maharashtra Act is out of the way, the Parliamentary enactment will be hindered and obstructed in such a manner that it will not be possible to go ahead with the insolvency resolution process outlined in the code.
In this case, Pune-based steel products maker Innoventive Industries had questioned the constitutional validity of the law after it lost the case. ICICI Bank had filed a case at the National Company Law Tribunal to initiate corporate insolvency resolution process against Innoventive Industries under the bankruptcy law. The tribunal had held that the company, which had debt of over Rs 950 crore, cannot seek protection under the Maharashtra Industrial Development Act as the insolvency regulation is a special Act. The company, which was declared as a relief undertaking by the Maharashtra government under a state law, said that it was not in default because the industries, law and labour departments of the state government had notified a suspension of the firm’s liabilities for a year or so. So no one can proceed against it for recovery of loans or dues during the suspension of the debt, senior counsel AM Singhvi and counsel Shivil Suri had argued.
Upholding the NCLT’s and the appellate tribunal’s decision to admit the financial creditor ICICI Bank’s application, the SC said that every effort should be made to reconcile the competing statutes and construe them so as to avoid repugnancy. “…care should be taken to see whether the two do not really operate in different fields qua different subject matters. Repugnancy must exist in fact and not depend upon a mere possibility.” Justice Nariman rejected the company’s plea that the notification under the Maharashtra Act only kept in temporary abeyance the debt which would become due the moment the notification under the said Act ceases to have effect.
“The notification under the Maharashtra Act continues for one year at a time and can go upto 15 years. Given the fact that the timeframe within which the company is either to be put back on its feet or is to go into liquidation is only 6 months, it is obvious that the period of one year or more of suspension of liability would completely unsettle the scheme of the Code and the object with which it was enacted, namely, to bring defaulter companies back to the commercial fold or otherwise face liquidation. If the moratorium imposed by the Maharashtra Act were to continue from one year upto 15 years, the whole scheme and object of the Code would be set at naught.”