Tuesday, January 24, 2017

Resolving the Conflict between the Corporate Insolvency Resolution Process and Relief Undertaking Legislation

[The following guest post has been contributed by contributed by Sikha Bansal of Vinod Kothari & Company, who can be reached at corplaw@vinodkothari.com]

The Insolvency and Bankruptcy Code, 2016 (the “Code”) is under speedy implementation: while its provisions relating to corporate resolution and liquidation (except voluntary liquidation) have been notified, provisions relating to individual insolvency and bankruptcy are pending effectiveness. Soon after the commencement of relevant provisions, creditors have begun availing the remedy offered under the Code. In ICICI Bank Ltd. vs. M/s. Innoventive Industries Ltd.,  the Mumbai Bench of the National Company Law Tribunal (“NCLT”) admitted the first application for corporate insolvency resolution process under the Code considering the prominent question of the overriding effect of the Code over the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (the “MRU Act”).

Facts of the Case

Innoventive Industries Ltd. (the “corporate debtor”) availed of term loan, working loan, and external commercial borrowing (“ECB”) facilities from ICICI Bank Ltd. (the “financial creditor”). However, a default occurred in respect of a part of the debt on 30 November 2016, with the total outstanding amount payable being Rs. 1,019,177,034. Therefore, being entitled under section 7 of the Code, the financial creditor initiated application for corporate insolvency resolution process in respect of the corporate debtor. The corporate debtor, in turn, claimed that it is a “relief undertaking” under the provisions of the MRU Act to which financial assistance of industrial promotion subsidy has been provided by the Maharashtra Government. For a period of one year commencing on 22 July 2016 and ending on 21 July 2017, the affairs of the industrial undertaking shall be conducted to serve as a measure of preventing unemployment. Moreover, in relation to such undertaking for the said time period, the rights, privileges, obligations or liabilities accrued or incurred before 22 July 2016 and any remedy for the enforcement thereof shall remain suspended, and all proceedings relating thereto pending before any Court, Tribunal, Officers or Authority shall be stayed. The debts said to have been existing against the corporate debtor, as such, have been suspended.

Relevant Provisions of the MRU Act

Sections 3 and 4 of the MRU Act are relevant in this context. Section 3 provides for declaration of an industrial undertaking as a “relief undertaking”. If at any time it appears to the State Government necessary to do so, the State Government may, by notification in the Official Gazette, declare that an industrial undertaking specified in the notification to which any loan, guarantee or other financial assistance has been provided by the State Government shall, with effect from the date specified for the purpose in the notification, be conducted to serve as a measure of preventing unemployment or of unemployment relief and the undertaking shall accordingly be deemed to be a relief undertaking for the purposes of this Act.

Section 4 deals with the power of State Government to prescribe industrial relations and other facilities temporarily for a relief undertaking. Section 4 is a non-obstante clause, which states as follows:

“4. (1) Notwithstanding any law, usage, custom, contract, instrument, decree, order, award, submission, settlement, standing order or other provision whatsoever, the State Government may, by notification in the official Gazette, direct that—

(a) in relation to any relief undertaking and in respect of the period for which the relief undertaking continues as such under sub-section (2) of section 3—

(i)        all or any of the laws in the Schedule to this Act or any provisions thereof shall not apply (and such relief undertaking shall be exempt therefrom), or shall, if so directed by the State Government, be applied with such modifications (which do not however affect the policy of the said laws) as may be specified in the notification;

(ii)       all or any of the agreements, settlements, awards or standing orders made under any of the laws in the Schedule to this Act, which may be applicable to the undertaking immediately before it was acquired or taken over by the State Government or before any loan, guarantee or other financial assistance was provided to it by, or with the approval of, the State Government, for being run as a relief undertaking, shall be suspended in operation or shall, if so directed by the State Government, be applied with such modifications as may be specified in the notification;

(iii)      rights, privileges, obligations and liabilities shall be determined and be enforceable in accordance with clauses (i) and (ii) and the notification;

(iv)      any right, privilege, obligation or liability accrued or incurred before the undertaking was declared a relief undertaking and any remedy for the enforcement thereof shall be suspended and all proceedings relative thereto pending before any court, tribunal, officer or authority shall be stayed ;

(b) the right, privilege, obligation or liability referred to in clause (a) (iv) shall, on the notification ceasing to have force, revive and be enforceable and the proceedings referred to therein shall be continued:
…”

Question(s) under Consideration

(i)  Whether the non-obstante clause contained in section 4 of the MRU Act shall override the non-obstante clause contained in section 238 of the Code?

(ii) In view of the fact that section 7 of the Code envisages determination of the existence of default for the admission of an application under the Code, whether the MRU Act calls for suspension of such determination too?

(iii)            Whether passing an order under section 7 of the Code will be against the object of the MRU Act, i.e. protection of the interest of the employees?

Views of NCLT

The NCLT considered the questions in light of the following:

(i)  The Code has come into existence subsequent to the MRU Act. Therefore, the non-obstante clause in section 238 of the Code prevails upon any other law for the time being in force. Hence, the notification issued under the MRU Act will not operate as a bar to passing an order under section 7 of the Code.

(ii) The corporate debtor submits that the objectives of the Code and the MRU Act are different: while the former is for the realization of the credit facility availed by the corporate debtor, the latter is for preventing unemployment in the industry. Since the latter object is a more laudable cause protected by the State, the same shall not be disturbed by invoking the non-obstante clause of the Code. Relying upon Vishal N Kalsa v. Bank of India and Others (2016) 3 SCC 762, the corporate debtor contended that if there is no provision in other enactments that are inconsistent with the Code, the provisions contained in the Code cannot override other legislations.

The financial creditor contradicted the view stating that the law envisaged in the MRU Act is inconsistent with section 238 of the Code; as such, the non-obstante clause in the Code will have overriding effect over the operation of the MRU Act.

On this, the NCLT viewed that the objective under the MRU Act is to prevent unemployment of existing employees of a relief undertaking. By passing an order under section 7 of the Code, it will not cause any obstruction to their employment until the next 180 days. Even if the company goes into liquidation, the rights of the employees are protected to the extent mentioned under the Code. Hence, an order under section 7 will not be against the interest of the employees.

Further, it was observed that “the subject matter is liability over the company”. The liability of the company has been dealt with by the MRU Act and by the Code as well, but with different objectives. The liability suspended under the MRU Act is inconsistent with the default in respect of the debt payable to the financial creditor; therefore, an order under section 7 of the Code will not be against the ratio decided by the Supreme Court in Vishal N Kalsa v. Bank of India and Others.

(iii)            As the financial creditor argues, the notification issued under the MRU Act is limited to the enactments specified under the schedule to the said legislation. A plain reading of section 4 of the MRU Act makes it clear that the said section does not contemplate suspension of existence of indebtedness or default. Section 7 of the Code merely envisages ascertainment of the existence of default for the admission of an application for corporate insolvency resolution process. As such the notification issued under the MRU Act will not have any bearing on passing an order under section 7 of the Code.

On the basis of the above, the NCLT admitted the application of the financial creditor, simultaneously making an order for moratorium and public announcement as required under section 13 of the Code.

Conclusion

It may be noted that such an order will not affect the notification issued under the MRU Act. The status of the relief undertaking pursuant to the notification issued under the MRU Act shall remain as it is, even after an order is passed under section 7. However, it would be interesting to see the future developments expected to take place in the corporate insolvency resolution process over period of 180 days, and the consequence of the process (whether resolution or liquidation) on the corporate debtor.

- Sikha Bansal


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