Insolvency and Bankruptcy Code and State Laws

 Context

• The Apex court has ruled that the IBC, being a central statute shall prevail over the state laws that are objectionable to it.
• Provisions of all state enactments which obstruct the country’s new Insolvency and Bankruptcy Code shall be declared void

What is Insolvency and Bankruptcy code?

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India that administers the insolvency proceedings and establishes a framework for insolvency resolution processes effectively
• The Insolvency and Bankruptcy Code was introduced by (FM) ArunJailtely in December’15 and was subsequently passed by the Lok Sabha on 5 May’16.

Read more about Insolvency and Bankruptcy code below:

What is Bankruptcy code?

What was the case and what is Courts decision?

• The company challenged the move on grounds that all remedies for enforcement against the company were temporarily suspended under the Maharashtra Relief Undertaking (Special Provisions Act), 1958 (MRU Act). 
• The provisions in the MRU Act allow the state government to take over the management of a company.
• SC decided that any entrenched managements shall not be allowed to continue in management if they cannot pay their debts
• The judgment dismissed an appeal by Innovative Industries against insolvency proceedings under the IBC by lender ICICI Bank.
• The company invoked the Maharashtra Relief Undertakings (Special Provisions Act) of 1958 against the insolvency resolution process under Section 7 of the IBC.

‘Parliament statute’ (1958 Act)

• The 1958 Act allowed temporary suspension of any debt recovery against the company and allowed the State to run the company as a measure to mitigate the hardship caused to workers
• The National Company Law Tribunal had however, dismissed the plea, saying the parliamentary statute would prevail against the Maharashtra Act.
• The appellate tribunal, National Company Law Appellate Tribunal, had held that Innoventive Industries’ management cannot derive any advantage from the Maharashtra Act to stall proceedings under the Code.
• Appearing for the bank, senior advocate Harish Salve argued that the “old notion of a sick management which cannot pay its financial debts continuing nevertheless in the management seat has been debunked by the Code”.
• He added that the erstwhile management of the company cannot represent its interests once the management was handed over to the insolvency professional.

Why is the significance of this decision by the Apex court?

• The Supreme Court ruled on the basis of Section 238 and laid down that:
• The insolvency law that gives the IBC an overriding effect over conflicting laws.
• State laws will be subservient to the central Act
• If a company is not made a party to cheque-bouncing proceedings, no action can be taken under the Negotiable Instruments Act