The overriding power of IBC

With the proximity of the 2019 elections to the onset of another scorching summer, the divergent opinions on the overall success of the Insolvency and Bankruptcy Code, 2016 (IBC) are expected to heat the debates. Be that as it may, one aspect that remains undebated is the primacy garnered to the IBC on the judicial side. Contextually, a key decision passed last month has strengthened the position of resolution professionals and has in turn brought much relief to creditors under the insolvency and bankruptcy regime. 

The decision came in the matter of Srei Infrastructure Finance versus Sterling SEZ and Infrastructure, where the Mumbai bench of the NCLT (National Company Law Tribunal) upheld the supremacy of the provisions of the IBC over those of the Prevention of Money Laundering Act, 2002 (PMLA) — a stand that was hotly argued against by the Directorate of Enforcement.

The crux of the debate in the SREI Infrastructure matter pertained to whether a moratorium as announced under Section 14 of the IBC would hit the attachment proceedings under the ambit of PMLA? The wider debate concerned whether the IBC provisions ought to be given primacy over other special legislations, contextually the PMLA? 

The decision answered both the questions in affirmative and in doing so the tribunal relied upon the trite position in law that in the event of conflicting provisions of two special statutes those of the later enacted one shall persist. 

This rule of interpretation was confirmed by the Supreme Court in the 2001 Solidaire India versus Fairgrowth Financial Services case, wherein it effectively noted that had the legislature intended to subject the overriding powers of the later special statute to those of the earlier, it would have specifically provided so. But an unconditioned non-obstante clause in the later enacted statute indicates otherwise.

From the standpoint of conflict of laws, the above debate falls within the broad confines of the doctrines of “lex specialis derogat legi generali” (that a special law will prevail over a general statute) and “lex posterior derogat priori” (that in case of two conflicting laws the later statute will prevail). These two principles have been extensively propounded in various contexts to determine not only the applicability of conflicting statutes, but also to precisely determine the degree and extent of application of the statutes aiming at defining the relevant legal framework. 

Importantly, as per “lex specialis”, when a special law stops short or remains silent on certain aspects, the gaps so created can be filled by the provisions of the generally applicable statutes; at times even expressly noted under the special code/statute, for instance, that the provisions as prescribed under the codes of civil or criminal procedure shall be applicable.

“Lex posterior” as applied in the said decision noted that between the Section 71 of the PMLA and Section 238 of the IBC — both granting overriding effect to the provisions of the respective statutes — the latter will prevail, thereby ensuring that the resolution professional will proceed to take control and custody of all the assets of the corporate debtor including those subject to attachment under the PMLA.

This finding was cemented in view of the 2018 ruling of the PMLA Appellate Tribunal in Bank of India versus Deputy Directorate Enforcement, Mumbai, which ruled that the proceedings before the adjudicating authority under the PLMA in respect of attached properties is a civil proceeding, and in view of the moratorium as effected under Section 14 of the IBC the adjudicating authority under the PMLA does not have jurisdiction to attach properties of the corporate debtor undergoing the corporate insolvency resolution process.

The consequence of the aforementioned decision has confirmed the vesting of the NCLT and the NCLAT with the power to raise the attachment of properties under PMLA and to direct the Enforcement Directorate to hand over the possession of such properties of the corporate debtor to the resolution professional — an advantage that had been extended to the liquidator under the IBC as seen last year in Surender Kumar Joshi versus REI Agro, where the NCLT (Kolkata Bench) had directed the Enforcement Directorate to hand over the possession of the attached properties of the corporate debtor to the liquidator.

The NCLT Mumbai bench in the above decision has given due consideration to the object and purpose of both IBC and PMLA. Although the resolution professional could have approached the adjudicating authority under the PMLA to seek raising of the attachment, the NCLT noted that it was “advisable to take a route where assets can be utilised in a speedy manner rather [than] waiting and lose the value of assets over a period of time.” 

Upon perusing the stance taken by the NCLT, the principle of maximum efficacy originally propounded as “règle d’efficacité maximale” — often followed in interpreting conflicting provisions in enforcement of international arbitration awards — comes to mind. In 1996, the apex court of Spain had noted in Actival Internacional S.A. versus Conservas El Pilar S.A. that: “According to the [rule of maximum effectiveness], in case of discrepancies between provisions in international conventions regarding the recognition and enforcement of arbitral awards, preference will be given to the provision allowing or making such recognition and enforcement easier, either because of more liberal substantive conditions or because of a simpler procedure.”

The decision, which in all probability will go through appellate rounds, gives resolution professionals and creditors. a reason to cheer about.

The author is senior associate, Hammurabi & Solomon Partners. Views are personal