| Court | Supreme Court of India |
|---|---|
| Citation | 2018 (1) SCC 407; AIR 2017 SC 4084 |
| Decided | 31 August 2017 |
| Bench | R.F. Nariman and Sanjay Kishan Kaul, JJ. (judgment authored by R.F. Nariman, J.) |
In short: A company in financial trouble said a Maharashtra relief law had put its debts on hold, so a bank could not start insolvency proceedings against it. The Supreme Court disagreed. It held that the Insolvency and Bankruptcy Code, 2016, a Parliamentary law, prevails over the State law, and it refused to let the company raise fresh defences late in the day.
Facts
Innoventive Industries Ltd is a multi-product company that serves several sectors. From August 2012, labour problems caused it losses, and it could not service the credit given by 19 banking entities. The company itself proposed corporate debt restructuring. The lenders formed a consortium led by the Central Bank of India. Their restructuring plan was approved in 2014 and was recorded in a master restructuring agreement (MRA) that was meant to run over two years. Under it, the creditors were to put in funds and the company had its own obligations to meet.
On 7 December 2016, ICICI Bank applied to start the insolvency resolution process under the Code, saying the company had defaulted. The Code had received Presidential assent on 28 May 2016 and its provisions came into force in November-December 2016.
The company's reply, filed on 17 December 2016, took one point only: no debt was legally due. It relied on two notifications, dated 22 July 2015 and 18 July 2016, issued under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958. Each had suspended the company's liabilities, and the remedies to enforce them, for one year.
The National Company Law Tribunal (NCLT) heard the matter on 22 and 23 December 2016. On 16 January 2017 the company filed a second application with a new plea. It said the creditors had not released the funds promised under the MRA, so it could not repay, and that it had therefore committed no default.
On 17 January 2017 the NCLT held that the Code prevailed over the State Act because of the override clause in Section 238 of the Code. It found the company had defaulted, admitted ICICI Bank's application and declared a moratorium. On 23 January 2017 it rejected the second application as belated. Under the Code, the corporate debtor is not given a hearing at that stage, and the plea had not been raised earlier. The Code also allows only 14 days from filing to decide the application. The National Company Law Appellate Tribunal (NCLAT) dismissed the company's appeal. It said the two laws operate in different fields and are not repugnant, but that the company still could not use the State Act to stall the process. The company then appealed to the Supreme Court.
Issues
- Is the Maharashtra Act repugnant to the Code, so that the Code prevails under Article 254 of the Constitution?
- Can a temporary suspension of debts under the State Act stop insolvency proceedings under the Code?
- Could the company's late plea, that the creditors' failure to release funds under the MRA meant no debt was due, be considered?
Held
- The two laws are repugnant. The NCLAT was wrong to say otherwise. Taking over a relief undertaking's management under the State Act would get in the way of an interim resolution professional taking over the company. The State Act's moratorium, which is discretionary, would also clash with the Code's moratorium, which follows as a matter of course.
- The Code prevails. As a later Central law, it overrides the earlier State law under Article 254(1), and the override clause in Section 238 of the Code prevails over the narrower one in the State Act.
- The argument that the debt was only kept in abeyance was rejected. The State Act's notification runs one year at a time and can go up to 15 years. The Code works to a time frame of six months to revive the company or send it to liquidation, so a long suspension would defeat its scheme. A claimed vested right under the State Act could not stand in the way either.
- The second plea was rightly not entertained. The 14-day period had long passed when it was filed, and it looked like an afterthought. The company knew the MRA had failed and could have said so in its first reply.
- Even on the merits, one clause of the MRA decided the point. It made the company's obligations direct and unconditional, so they did not depend on the creditors first putting in funds. The argument that no debt had fallen due was raised for the first time in the Supreme Court and was not accepted at that stage.
The appeals were dismissed, with no order as to costs.
Why it matters
- It settles that a State law offering temporary relief to a struggling company cannot hold up the insolvency process under the Code.
- It shows how Article 254 and the override clause in Section 238 of the Code work together when a Central law and a State law collide.
- It stresses the Code's tight timelines. A company cannot hold back its defences and bring them up after the short window for deciding the application has passed.
- It shows that an unconditional repayment obligation in a restructuring agreement is not excused merely because the lenders are alleged to have failed to release funds.
Exam one-liner
The Insolvency and Bankruptcy Code, 2016 is repugnant to the Maharashtra Relief Undertakings Act, 1958 and prevails under Article 254(1) and Section 238, so a State-law moratorium cannot stop insolvency resolution. (Innoventive Industries, 2017)
Frequently asked questions
Why did the company say it owed nothing?
It relied on two notifications under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, which suspended its liabilities and the remedies to enforce them for a year at a time. It argued that no debt was legally due while they were in force.
Why did the Supreme Court say the Code wins over the State Act?
The two laws clashed directly. The State Act's takeover of management and its moratorium would obstruct the Code's process. The Code is also a later Central law, so Article 254(1) applies, and Section 238 of the Code has an override clause that prevails.
Why was the company's second plea about the MRA not accepted?
It came after the 14-day period for deciding the application had ended, and it looked like an afterthought, since the company knew the MRA had failed. The Court also noted that the MRA made the company's obligations unconditional.