Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) stands as a landmark legislation that fundamentally transformed India’s approach to insolvency resolution and bankruptcy proceedings. Central to its effectiveness is the non-obstante clause under IBC embodied in Section 238, which provides the Code with overriding authority over conflicting provisions in other statutes. This mechanism, derived from the Latin phrase “notwithstanding anything contained,” ensures that the IBC’s provisions take precedence when inconsistencies arise with other legislative enactments.
The non-obstante clause represents a critical legislative tool that empowers the IBC to function as a complete code in itself, overriding statutes or provisions that may conflict with its objectives. This overriding effect was deliberately incorporated by the framers to address the fragmented nature of India’s previous insolvency regime, which was scattered across multiple laws including the Sick Industrial Companies (Special Provisions) Act, 1985, the Provincial Insolvency Act, 1920, and various provisions of the Companies Act, 2013.
Background and Legislative Intent
The conceptualization of the IBC arose from the recommendations of the Bankruptcy Law Reforms Committee, which in its report dated November 4, 2015, specifically addressed the necessity of having an overriding provision. The Committee recognized that a parliamentary statute on insolvency and bankruptcy must possess the constitutional authority to supersede other laws dealing with similar subjects. This understanding formed the foundation for the inclusion of Section 238, which serves as the backbone of the Code’s supremacy.
The legislative intent behind incorporating the non-obstante clause under IBC was multifaceted. Primarily, it aimed to eliminate the legal complexities and jurisdictional conflicts that arose under the previous regime where multiple laws governed insolvency proceedings. The Committee envisioned a unified framework where creditors could pursue resolution without being hindered by conflicting provisions in other statutes. This approach aligned with the broader objective of establishing a time-bound, creditor-in-control mechanism that could maximize asset value while ensuring swift resolution of stressed enterprises.
Section 238: The Overriding Provision
Section 238 of the IBC, titled “Provisions of this Code to override other laws,” states:
“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
This provision establishes the IBC’s supremacy over all other laws when there exists an inconsistency between the Code’s provisions and those of other statutes. The language employed is deliberately broad, using terms like “any other law” and “any instrument having effect by virtue of any such law” to ensure maximum coverage and effectiveness.
The Supreme Court has consistently recognized the sweeping nature of this provision. In Innoventive Industries Ltd. v. ICICI Bank and Anr. [1], the Court observed that the non-obstante clause contained in Section 238 operates “in the widest terms possible” to ensure that any right of the corporate debtor under any other law cannot impede the operation of the Code.
Judicial Interpretation and Application
Landmark Decision: Innoventive Industries Ltd. v. ICICI Bank
The foundational interpretation of Section 238 emerged from the Supreme Court’s decision in Innoventive Industries Ltd. v. ICICI Bank [1]. This case, being the first substantial ruling under the IBC, established crucial precedents regarding the Code’s overriding effect. The corporate debtor had argued that proceedings under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 suspended its liabilities, thereby preventing the initiation of insolvency proceedings.
The Supreme Court firmly rejected this contention, holding that the IBC’s non-obstante clause would take precedence over the limited non-obstante clause contained in the Maharashtra Act. The Court emphasized that the Code’s subsequent enactment and broader non-obstante provision ensured its supremacy over conflicting state legislation. This decision established the principle that the temporal sequence of enactments, combined with the scope of their respective non-obstante clauses, determines precedence in cases of conflict.
Interaction with the Limitation Act
The relationship between the IBC and the Limitation Act, 1963 required specific judicial clarification, which came through the Supreme Court’s decision in B.K. Educational Services Private Limited v. Parag Gupta and Associates [2]. The Court addressed whether Section 238 could be interpreted to override the Limitation Act entirely, particularly in the context of time-barred debt recovery applications.
The Supreme Court rejected the proposition that Section 238 should override the Limitation Act comprehensively. Instead, the Court emphasized that the IBC was not designed to provide fresh opportunities to creditors who had failed to exercise their remedies within prescribed limitation periods. The decision clarified that Section 238A, inserted through the 2018 amendment, explicitly brought the Limitation Act’s provisions within the IBC’s framework, thereby resolving any ambiguity regarding temporal restrictions on insolvency applications.
Harmonious Construction and Limitations
The Supreme Court has consistently emphasized that Section 238 should not be applied mechanically without considering the underlying purpose and scope of conflicting legislation. In Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the Court held that the non-obstante clause under IBC would not override the Advocates Act, 1961, as there existed no genuine inconsistency between the two statutes [3].
This approach reflects the judicial preference for harmonious construction wherever possible. Courts have recognized that the mere existence of a non-obstante clause does not automatically invalidate all other statutory provisions. Instead, the focus remains on identifying actual inconsistencies that would impede the IBC’s objectives before invoking Section 238’s overriding effect.
Section 32A: Enhanced Protection Against Criminal Proceedings
The 2020 amendment to the IBC introduced Section 32A, which provides additional protection to corporate debtors and resolution applicants from criminal proceedings and asset forfeiture measures. This provision specifically addresses the interaction between the IBC and laws such as the Prevention of Money Laundering Act, 2002 (PMLA).
Section 32A operates as a specialized non-obstante clause that protects corporate debtors from prosecution, attachment, seizure, or confiscation of assets for offenses committed prior to the approval of a resolution plan, provided there is a change in management and control. This provision was introduced following controversies surrounding the JSW Steel-Bhushan Power & Steel resolution, where the Enforcement Directorate’s asset attachment threatened to derail an approved resolution plan.
The Gujarat High Court in AM Mining India Private Limited v. Union of India [4] reinforced the protective scope of Section 32A, holding that the protection granted under this provision would override the Enforcement Directorate’s power to attach properties under the PMLA. The Court emphasized that such protection was essential for maintaining the integrity of the resolution process and encouraging prospective resolution applicants.
Conflict Resolution Between Non-Obstante Clauses Under IBC
When two statutes containing non-obstante clauses come into conflict, Indian courts have developed specific principles for resolution. The Supreme Court in Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. [5] established that where two non-obstante clauses exist in separate special statutes, the later enactment typically prevails. This principle, known as “leges posteriores priores contrarias abrogant,” provides a clear framework for resolving conflicts between competing overriding provisions.
However, courts have also recognized exceptions to this general rule. In cases involving consumer protection or specific social welfare objectives, courts may consider the underlying purpose of legislation rather than merely applying temporal precedence. For instance, in matters involving the Real Estate (Regulation and Development) Act, 2016 (RERA), courts have sometimes favored RERA’s consumer protection objectives over the IBC’s commercial resolution mechanisms.
Interaction with Sectoral Legislation
Banking and Financial Laws
The IBC’s interaction with banking and financial laws has generated significant jurisprudence. The non-obstante clause has been successfully invoked to override provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) when conflicts arise during insolvency proceedings. Courts have consistently held that once the corporate insolvency resolution process commences, the moratorium under Section 14 of the IBC, supported by Section 238, prevents enforcement actions under the SARFAESI Act.
Similarly, the relationship with the Debt Recovery Tribunal’s jurisdiction under the Recovery of Debts and Bankruptcy Act, 1993 has been clarified in favor of the IBC’s specialized proceedings. The Supreme Court has recognized that the IBC’s time-bound resolution mechanism serves the broader economic interest more effectively than traditional debt recovery proceedings.
Securities Law Integration
The interaction between the IBC and securities law, particularly the Securities and Exchange Board of India Act, 1992, has required careful judicial balance. In Anju Agarwal v. Bombay Stock Exchange and Ors. [6], the National Company Law Appellate Tribunal held that Section 14 of the IBC would take precedence over Section 28A of the SEBI Act regarding recovery proceedings during the resolution process. However, the Tribunal clarified that SEBI could still pursue its claims as an operational creditor within the IBC framework.
Limitations and Judicial Restraint
Despite the broad language of Section 238, courts have exercised judicial restraint in its application. The Supreme Court has emphasized that the non-obstante clause should not be interpreted to create absurd results or completely negate other important legislative schemes. In Seven Hills Shopping Mall v. Municipal Corporation [7], the Court held that Section 238 could not be interpreted as overriding legitimate regulatory authority but rather should be understood within the context of the IBC’s specific objectives.
This restrained approach ensures that the IBC’s overriding effect operates only where genuine conflicts exist that would impede insolvency resolution. Courts have been careful not to create a blanket immunity that could undermine other important regulatory objectives or public interests.
Contemporary Challenges and Developments
The application of Section 238 continues to evolve as courts encounter new conflicts between the IBC and emerging regulatory frameworks. Recent challenges have included interactions with environmental laws, labor regulations, and specialized industry-specific legislation. Courts are increasingly called upon to balance the IBC’s commercial objectives with other important societal interests.
The ongoing development of case law reflects the dynamic nature of insolvency proceedings and the need for flexible interpretation of the non-obstante clause. As the Indian economy continues to evolve and new regulatory challenges emerge, the scope and application of Section 238 will likely require further judicial clarification and potentially legislative refinement.
International Comparative Perspective
The concept of overriding provisions in insolvency legislation is not unique to India. Many advanced jurisdictions employ similar mechanisms to ensure the effectiveness of their insolvency regimes. The United Kingdom’s Insolvency Act, 1986, and the United States Bankruptcy Code contain provisions that prioritize insolvency proceedings over other conflicting legal processes.
However, the broad scope of Section 238 reflects India’s specific challenge of harmonizing a complex web of existing legislation. The Indian approach represents a more comprehensive attempt to establish insolvency law supremacy compared to many other jurisdictions, which typically address conflicts on a more targeted basis.
Conclusion
The non-obstante clause under Section 238 of the IBC represents a fundamental shift in India’s approach to insolvency legislation. By providing the Code with overriding authority over conflicting statutes, the clause ensures that insolvency proceedings can be conducted efficiently without being impeded by jurisdictional conflicts or competing legal claims.
The judicial interpretation of Section 238 has evolved to strike an appropriate balance between the IBC’s commercial objectives and other important regulatory interests. Courts have demonstrated both the willingness to enforce the Code’s supremacy where genuine conflicts exist and the restraint necessary to prevent the clause from negating other important legislative schemes.
As India’s insolvency regime continues to mature, the application of Section 238 will likely require ongoing judicial refinement and potentially legislative amendment to address emerging challenges. The success of the IBC in achieving its objectives of timely resolution and value maximization depends significantly on the effective operation of this crucial overriding provision.
The non-obstante clause under IBC thus serves not merely as a technical legal mechanism but as a fundamental enabler of India’s economic transformation through effective insolvency resolution. Its proper application ensures that financially distressed enterprises can be resolved expeditiously, thereby contributing to overall economic stability and growth.
References
[1] Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC 407, Supreme Court of India. Available at: https://indiankanoon.org/doc/181931435/
[2] B.K. Educational Services Private Limited v. Parag Gupta and Associates, Civil Appeal No. 23988 of 2017, Supreme Court of India (2018). Available at: https://indiankanoon.org/doc/4992553/
[5] Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71, Supreme Court of India.
[8] Ministry of Finance, Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (2015). Available at: https://ibbi.gov.in/BLRCReportVol1_04112015.pdf
Published by Rutvik Desai
