Super Ltd. is engaged in the business of producing auto ancillary products and has a plant near Mumbai. As per the latest audited financial statements the turnover of Super Ltd. was ₹200 crore and investment in plant and

CS Professional · Insolvency - Law and Practice · PYQS · June 2023
Super Ltd. is engaged in the business of producing auto ancillary products and has a plant near Mumbai. As per the latest audited financial statements the turnover of Super Ltd. was ₹200 crore and investment in plant and machinery was ₹35 crore. Turnover and investment in plant and machinery never crossed ₹200 crore and ₹35 crore respectively. Due to reduction in the demand of the products by the auto companies, Super Ltd. started facing financial difficulties. It evaluated many options for rescuing the business and discussed on multiple occasions with the lenders. In one of the consortium meeting, lenders decided to take action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). During the said meeting one of the lenders holding 30% share in the consortium suggested that in the present circumstances it would be apt to proceed under the provisions of the Insolvency and Bankruptcy Code, 2016 (the Code) since the Code is one of the effective tools for resolution of the debt. However, due to the difference in opinion amongst the lenders few of them decided to move ahead under the SARFAESI and others decided to file an application under the Code. Legal counsel of Super Ltd. intervened and informed that once proceedings are initiated under both the laws, SARFAESI being an old law will prevail and the lenders may be in a position to quickly recover their outstanding dues. Considering the circumstances, Rohan, promoter of Super Ltd. suggested to provide one last chance to Super Ltd. to submit a resolution plan for its revival and requested the lenders to consider the Pre-Packaged Insolvency Resolution Process. Rohan is now fully active in the business and making all possible attempts for revival of Super Ltd. and Duper Ltd. (wholly owned subsidiary of Super Ltd.) which is also classified as non-performing asset for last 5 years. On the option given by Rohan, one of the lenders informed that law relating to Pre-Packaged Insolvency Resolution Process is still at a nascent stage and may take years to complete. In response, Rohan clarified that it may not take years, since the process of filing an application is very simple and no documents are required to be attached to the application. Therefore, the adjudicating authority will be in a position to quickly consider and dispose off the case. Consider the above facts and answer the following questions: (i) Whether the contention of legal counsel of Super Ltd. is correct? Discuss in light of the decided case laws(s).

Answer & Explanation:

The contention of the legal counsel of Super Ltd. that SARFAESI, being an older law, will prevail over the Insolvency and Bankruptcy Code, 2016 (IBC) once proceedings are initiated under both laws, is not correct . Legal Position and Case Law: The Supreme Court, in the landmark case of Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407 , established the supremacy of the IBC over other laws in matters of insolvency and bankruptcy. The Court held that the IBC is a complete code in itself and has an overriding effect on other laws inconsistent with its provisions. Following this principle, the National Company Law Appellate Tribunal (NCLAT) has consistently upheld the supremacy of the IBC. In the case of Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd. , the NCLAT, referring to the Supreme Court's verdict in Innoventive Industries Ltd. , ruled that when two proceedings are initiated – one under the IBC and another under the SARFAESI Act, 2002 – the proceeding under the IBC shall prevail. The NCLAT noted that if an application under Section 9 of the IBC (for operational creditors) is complete, and there is no 'existence of dispute', 'debt', and 'default', then the Adjudicating Authority is bound to admit the application. Once the CIRP is initiated under the IBC, a moratorium under Section 14 comes into effect, which prohibits the continuation or initiation of proceedings under other laws, including SARFAESI, against the corporate debtor. Therefore, the NCLAT upheld the NCLT's decision and explicitly stated that actions under SARFAESI cannot continue once the IBC proceedings commence, as the Code will prevail over the SARFAESI Act, 2002. Conclusion: The legal counsel's advice is incorrect. The IBC, being a special law enacted for insolvency resolution, has an overriding effect. Once proceedings are initiated under the IBC, they will take precedence over any parallel proceedings under SARFAESI, and the lenders will not be in a position to quickly recover their dues under SARFAESI if IBC proceedings are underway.

Topics: Insolvency Resolution

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