CASE RESEARCH

Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd.

Rule of Law Derived from the case == >The Supreme Court of India, by its order dated
10 has held that the provisions of the moratorium stipulated under section 14 of
the Insolvency and Bankruptcy Code, 2016 would override anything inconsistent
contained in any other enactment.

Section 238: Provisions of this Code to override other laws:

The provisions of this Code shall have an effect, notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or any an instrument
having an effect by virtue of any such law.
Section 238 stands as a non-obstante clause. It means clause or provision in the act
empowers to override any other provision or clause contrary under this law or different
law.

Judicial interpretation of the effect of section 238:

The question of overriding effect was first in question in the case innovative
industries[i] which is the first case in IBC itself. Where it was discussed whether
corporate debtor enjoying the benefits/exemption from repayment and of the specified
period provided by the government under the Maharashtra relief undertaking (special
provisions) act 1958.

Application filed by ICICI as financial creditors against the innovative industries ltd. On
account of a default of payments due on credit availed by innovative industries.it is
argued that pursuant to relief order passed by the Government of Maharashtra under
the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA).they are not
liable to pay any due to ICICI. On the basis of the overriding effects of IBC over MRUA,
National Company Law Tribunal (NCLT) declared a moratorium and appointed
Insolvency Resolution Professional (IRP). In the appeal, NCLAT held that there is no
repugnancy between MRUA and IBC as they are enactments of two diverse fields. IBC
has an overriding effect over the provisions of MRUA.

Finally, in an appeal against NCLAT order, The Supreme Court confirms the
interpretation by holding that the non-obstante clause of IBC will prevail over the non-
obstante clause in the MRUA. On the issue of suspension of debt on account of the relief
order under the MRUA, it held that on account of the non-obstante clause in the IBC, any
right of the corporate debtor under any other law cannot come in the way of the IBC.

In case of Sterling SEZ Infrastructure Ltd, Again the overriding effect of IBC was under
issue with Prevention of Money Laundering Act 2002(PMLA).In this case, SREI
Infrastructure financial ltd initiated the Corporate Insolvency Resolution Process (CIRP)
against Sterling SEZ and its holding co Sterling Biotech Limited (SBL). The credit
facilities availed by the SBL group from the various bank and financial institution to the
extent of Rs.8100 Crores were further declared as fraud account by the concerned
Banks. In the fear of arrest, promoters of the SBL Group left the country under
suspicious circumstances. In result, proceedings were initiated against the Corporate
Debtor by the office of the Enforcement Directorate and attachment of the assets
belonging to the corporate debtor vide order dated 29.05.2018 under Section 2(1) (u)
of the PMLA Act was made.

Whereas Petition by creditors for initiate CIRP was admitted by the tribunal in July
2018 and moratorium declared and IRP was appointed accordingly. In the proceeds
Resolution Professional intimate directorate of enforcement about CIRP and requested
for withdrawal of order of attachment of assets order for smooth conduct of his
functioning for charge and custody over it. The matter was discussed on the initiation of
CIRP u/s 7 of IBC prevail over the provisional attachment of assets order under PMLA
2002. It is contended that during the Moratorium period, the institution of suits or
proceedings against the Corporate Debtor including the execution of any judgment,
decree or order of any court of law, tribunal or any other authority is prohibited. Hence,
the order of the Enforcement Directorate cannot be executed and section 238 has a non-
obstante clause which has an overriding effect on any law contrary whereas in defense
it is stated that IBC is civil legislation and cannot be given precedence over the PMLA,
Act. Thus the NCLT lacks jurisdiction in the matter.

The moratorium declared by the NCLT shall not be applicable to the attachment order
passed by the Enforcement Directorate or to the Criminal proceedings initiated against
the Corporate Debtor. With the help of amicus curie honorable tribunal comes to the
conclusion that IBC has an overriding impact over PMLA on the basis of objects of IBC
maximization of value of an asset, quicker resolution, faster recovery and economic
interest of beneficiaries.[ii]

In another case of Leo edibles &fats ltd vs Income tax department [iii] where the court
dealt with the issue of the overriding effect of IBC over Income tax act in the issue of
setting the dues of Income-tax authority during liquidation. Court held that in the event
that Assessee Company is undergoing liquidation under IBC and the Income Tax
authority can no longer claim a priority in respect of clearance of tax dues under the
Income Tax Act. The High Court further held that assets that are under attachment
(though encumbered) will not create any interest in favor of the Income Tax authority
as a secured creditor under the IBC. Additionally, the High Court further set out that the
moratorium in terms of proceedings as set out under the IBC ensures that any pending
litigation initiated prior to commencement of the insolvency proceeding is suspended.
Accordingly, assets under an order of attachment issued prior to the liquidation,
commencement shall be sold along with the other unencumbered assets of the assessee
company.

In case of Pr. Commissioner of Income Tax vs Monnet Ispat and Energy Ltd. [iv]
Supreme Court confirms that section 238 of the Insolvency and Bankruptcy Code, 2016
will override anything inconsistent contained in any other enactment, including the
income tax act.

In the one of the case Jag Mohan Bajaj v. Shivam Fragrances Pvt. Ltd & Another, [v]
NCLAT held that as IBC is a special law with overriding effect on other laws contrary.
Commencement of CIRP cannot be defeated by taking resort of pendency of internal
dispute between Directors of Corporate Debtor on allegations of oppression and
mismanagement. The statutory rights of financial creditors cannot be step down due to
pending proceedings under Oppression and Mismanagement cases under section 241
and 242 of the Companies Act, 2013.

Legal Analysis

Section 14(1)(a) of the Code stipulates that the order of moratorium shall come in force
from the “insolvency commencement date” upon an order of the NCLT prohibiting, inter
alia, the institution of suits or continuation of pending suits or proceedings against the
corporate debtor including the execution of any judgement, decree or order in any court
of law, tribunal, arbitration panel or other authority.

According to the to the Report of the Bankruptcy Law Reforms Committee, the intent
behind an order for moratorium is to ensure stability of the financial position of the
corporate debtor so as to facilitate the assessment of its financial position as stipulated
under the Code as it exists on the date of the commencement of insolvency. Further,
the Insolvency Law Committee in its Report in 2018 had noted that the purposes of the
moratorium extends to keeping the corporate debtor’s assets together during the
insolvency resolution process and facilitating orderly completion of the processes
envisaged during the insolvency resolution process. Therefore, any claim or execution of
claim by the tax authorities is clearly barred under section 14(1)(a) of the Code.

The Supreme Court, in arriving at its decision in this matter, made reference to its
decision in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. wherein it
was held that income tax dues, being in the nature of crown debts, do not take
precedence even over secured creditors who are private persons. It is necessary to note
in the course of this analysis that the Code affirms in its preamble the alteration in the
order of priority of payment of Government dues. Therefore, it is necessary for the
undisturbed assessment of the financial position and integrity of the corporate debtor
that the government dues sought by the tax authorities, as in this case, be barred under
the order of moratorium as provided in the Code.

An exception to this rule exists in the form of section 14(3)(a) of the Code where it is
stipulated that the order of moratorium under section 14(1) of the Code shall not apply
to such transactions as may be notified by the Central Government in consultation with
any financial regulator. The Insolvency Law Committee has made the following
observations in this regard:

5.4 Thus, if a purposive interpretation is given to section 14, a moratorium on the mere
determination of the amount (and not its enforcement) may not have been the intent of
the Code. However, the same was deliberated in the Committee and in light of absence of
concrete empirical evidence of any hardship being faced by any authority or court in this
regard, the Committee agreed that it may not be prudent to provide explicit carve-outs
from section 14 without on-ground evidence, at this stage. The power of the Central
Government under section 14(3) to notify transactions which may be exempt from the
moratorium may be explored to address this issue on the basis of demonstrated hardship
in the future.
The Challenge

As is the case presently, the order of moratorium under the Code stipulates not only the
halting of execution or recovery of claims against the corporate debtor but also to the
determination of the existence or quantum of the dues. The prohibition of the latter
creates procedural inefficiencies after the approval of the resolution plan stretching the
time required for the completion of the insolvency proceedings under the Code only to
determine the position of the dues after the fact and not consecutively.

Only the determination of the claim and not its recovery or execution serves the
purpose of the insolvency proceedings as firstly,the determination of the quantum of all
the claims and dues that the company is liable for only goes towards empowering the
resolution professional with the accurate source of claims and position of stakeholders,
to form a better and more accurate resolution plan in the interest of all. Secondly, with
the determination of the existence or non-existence of the dispute, the possibility of
consideration of any frivolous claims from the items for consideration in the course of
the insolvency resolution process and in formulating the resolution plan can be
effectively removed.

Therefore, the determination of the existence or quantum of liability when the order of
moratorium is in force serves the ambitious object envisaged under the Code where it
stipulates for the timely processing and disposal of cases under section 12 which
provides for the completion of insolvency resolution process within 180 days.

Conclusion

The Supreme Court has appropriately reiterated its stance that the provisions of the
Code would prevail over any other statute where there exists a conflict between them,
keeping in view the object of the Code. The object of the order of moratorium under the
Code is to ensure the fair and clear assessment of the current financial position of the
corporate debtor so as to effectuate the insolvency proceedings in the best interest of all
parties. Therefore, the law is clear in its imposition and there is sound reasoning behind
such holding of the Supreme Court to uphold the stay on the proceedings for the
execution of an order of the ITAT imposing a tax liability on the corporate debtor.
However, the Central Government is free to identify such transactions as would not be
covered by the order of moratorium under the Code, but it is submitted that the same
ought to be driven by cogent reasoning and sufficient evidence behind it and this
decision must be in furtherance of the Code and be efficacious in its operation, keeping
in mind the working of the Code as compared to other laws in force
In the matter of Pr. Director General of Income Tax v. Synergies Dooray Automotive
Limited & Ors, the Hon’ble NCLAT, held that ‘Income Tax Department of the Central
Government’ and the ‘Sales Tax Department(s) of the State Government’ and ‘local authority’,
who are entitled for dues arising out of the existing law are ‘Operational Creditor’ within the
meaning of Section 5(20) of the ‘I&B Code.