Insolvency and Bankruptcy Code to prevail over State Legislations

Case Analysis: Innoventive Industries vs ICICI Bank

Facts

Appellant is a multi product manufacturing company in diverse sectors. It started going into losses in 2012 and failed to meet with the requirements of 19 of its financial creditors (banking entities). It then proposed a corporate debt restructuring and the financial creditors formed a consortium led by the Central Bank and a restructuring plan was approved in 2014. According to the aforementioned restructuring plan, the creditors were to infuse more capital into the entity and the debt would be repaid by a 2 year payment plan. Subsequently, an application was filed under Section 7 of IBC by ICICI Bank due to default on part of the Appellant in meeting with the requirements of the payment plan. 

On the first instance, the Appellant was of the contention that under Maharashtra Relief Undertakings (Special Provisions) Act, all the liabilities and remedies for enforcement were suspended for a period of one year by the way of notification issued on 22^nd July 2015 and for another one year as notified on 18^th July 2016. In the second hearing, the appellant contended that the default has occurred to due to non release of funds under the Master Restructuring agreement by the creditors. It was stated that the credit given by five of its lenders were repaid in accordance to the agreement as they have complied with its terms in full. 

NCLT held that IBC would prevail over the Maharashtra Act in view of the non-obstinate clause given under Section 238 of the Code. It was held that the Parliamentary statute would prevail over that of a State and the evidence placed before it was sufficient to ascertain the existence of a default. Hence the application was admitted and moratorium was imposed. 

An appeal was filed before NCLAT. NCLAT was of the view that both of these legislations operate in different fields and are not repugnant to each other. It further held that the Appellant cannot derive any advantages from the state act as it was done only in order to stave of the proceedings under Section 7. 

It was contended by the appellant before the Supreme Court that both the acts are repugnant to each other and they cannot function together. The Maharashtra Act imposes a limited moratorium and the directors are still in control of the management of the corporate debtors after which the State government may take control over the company. While on the other hand the Code places a complete moratorium and adopts a creditor in control model. It was contented by the Respondents that the erstwhile directors are no longer in control over the corporate debtor and hence are not in position to initiate any proceedings on behalf of the corporate debtors. 

Issues 

1. Whether the present appeal by the erstwhile directors on behalf of the corporate debtor maintainable ?
2. Whether the Maharashtra Act and IBC are repugnant to each other?

Ratio 

It was held by the Apex Court that, the management of the company was handed over to the interim resolution professional and the directors are no longer in a position to represent the debtor. Hence it was held that the appeal is not maintainable by the Directors.

The SC held that the NLCT and NCLAT were correct in holding that the Maharashtra Act does not place a bar on proceedings under Section 7 of the code owing to the non obstinate clause under Section 238 of the Code. The Court referred to Article 254 of the Constitution which states that in case of any inconsistency between laws made by the Parliament and laws made by the Legislature of the State, the laws made by the Parliament would prevail irrespective of whether they have been made prior or later than the state legislation. It was held that the admission of under Section 7 was right and the appellant is unconditionally obligated to follow the provisions of the code.