IN RE: Insolvency And Bankruptcy Code, 2016 Versus Maharashtra Protection Of Interest Of Depositors (In Financial Establishments) Act, 1999. INTRODUCTION: The conflict between the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 (“MPID Act”) and the Insolvency and Bankruptcy Code, 2016 (“IBC”) primarily revolves around the attachment...
IN RE: Insolvency And Bankruptcy Code, 2016 Versus Maharashtra Protection Of Interest Of Depositors (In Financial Establishments) Act, 1999.
INTRODUCTION:
The conflict between the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 (“MPID Act”) and the Insolvency and Bankruptcy Code, 2016 (“IBC”) primarily revolves around the attachment and distribution of properties belonging to financial establishments that defaulted on their obligations.
IBC enacted in 2016, was designed to address several critical issues in the Indian financial and business landscape. The primary objects of the IBC are to provide a structured, time-bound process for resolving insolvency for corporate entities, partnerships, and individuals. The goal is to rehabilitate and revive the business wherever possible, rather than liquidation being the first option to maximize the value of the assets of the insolvent entity. This helps in preserving the value of the business and its assets, ensuring that creditors can recover the maximum possible amount to balance the interests of all stakeholders, including creditors, employees, and shareholders. It ensures a fair and equitable distribution of the assets of the insolvent entity among all stakeholders to provide a clear and predictable framework for resolving insolvencies, the IBC aims to improve the overall ease of doing business in India. This, in turn, attracts more investment, both domestic and foreign, by creating a more stable and reliable business environment and encourages the confidence of lenders and investors in the credit markets.
The MPID Act was enacted to protect the interests of depositors in financial establishments that default on their obligations. The MPID Act, enacted in 1999, is a state-specific legislation aimed at protecting the interests of depositors in the state of Maharashtra. The primary objectives of the MPID Act are to provide protection of the interests of depositors in financial establishments by penalizing financial establishments when they fraudulently default in repaying the depositors and providing for the attachment and sale of properties of financial establishments to repay depositors.
On other hand the IBC aims to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner to maximize the value of assets and balance the interests of all stakeholders. IBC provides a framework for insolvency resolution processes, including liquidation, in a manner that maximizes value for all creditors, including financial and operational creditors.
CONFLICT BETWEEN IBC AND MPID ACT:
Under MPID Act, the State Government has the authority to attach properties of defaulting financial establishments to secure the claims of depositors. This includes freezing bank accounts and attaching movable and immovable properties.
Under IBC, once a company or individual enters insolvency resolution, a moratorium under Section 14 of the IBC or interim moratorium under section 96 of IBC prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority. Further upon approval of the resolution plan, Section 32A of the IBC shields the Corporate Debtor and its assets from all actions prior to the initiation of the Corporate Insolvency Resolution Process under other laws, including MPID Act. Further, any action of the Corporate Debtor, post approval of the resolution plan, will not be immune to action by the Authorities.
MPID Act prioritizes the repayment to depositors on the other hand IBC establishes a structured priority for the distribution of assets, where secured creditors, workmen, employees, and other operational creditors have clearly defined priorities.
PRECEDENTS DEALING WITH THE CONFLICT BETWEEN THE PROVISION OF IBC AND MPID ACT:
In Innovative Industries Limited v. ICICI Bank1 the Hon’ble Supreme Court held that the IBC overrides all other laws in case of any inconsistency, thus reinforcing the precedence of the IBC in matters of insolvency resolution, including the MPID Act.
Hon’ble Bombay High Court in State of Maharashtra v. Anil Kohil2, without addressing the conflict between the provisions of the MPID Act and IBC, held that the Designated Court under MPID Act would have the proper jurisdiction to decide the legality of provisional attachments under the MPID Act.
Hon’ble National Company Law Appellate Tribunal in National Spot Exchange Ltd. & Ors. v. Namdhari Food International Pvt. Ltd. & Ors.3 relied on the judgments of the Hon’ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank & Anr.4 and Hoechst Pharmaceuticals Ltd. v. State of Bihar5 and held that by virtue of the Section 238 of the IBC, the provisions of the IBC would prevail over the provisions of the MPID Act and the attachment under provisions of the of MPID Act will have to be removed.
The Hon’ble Karnataka High Court in Dreams lnfra India Pvt. Ltd v. Competent Authority6, held that by virtue of Section 238 of the IBC and the Judgment of the Hon’ble Supreme Court in Innoventive Industries Limited v. ICICI Bank (Supra), the provisions of the IBC shall have an overriding effect on the provisions of the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004, which is parametria similar to MPID Act.
The Hon’ble Supreme Court recently noted that it will be dealing with the issue that “whether the properties of the Judgment Debtors and Garnishees attached under the Provisions of MPID Act, 1999 would be available for the execution of the decrees against Judgment Debtors in view of the Provision of Moratorium under Section 14 of the IBC, 2016.”
CONCLUSION:
Legislative or regulatory amendments are necessary to align the MPID Act with the IBC, preventing conflicts and ensuring a seamless resolution process. Issuing guidelines for state authorities and resolution professionals to collaborate during insolvency proceedings can help resolve conflicts and streamline asset distribution. The conflict between the MPID Act and the IBC underscores the complexities of managing financial defaults and insolvency. Judicial interpretations have established the precedence of the IBC to provide a structured and fair resolution process. However, ongoing coordination and potential legislative harmonization are essential to address practical challenges and to protect the interests of all stakeholders, including depositors and creditors. In case there is no harmonization possible then MPID Act should give way to IBC. The IBC encompasses a much larger scale in terms of geographical applicability, the range of entities and stakeholders involved, the broad range of objectives and processes, and the comprehensive legal framework it establishes. While the MPID Act serves an important purpose within Maharashtra by protecting depositors from fraudulent financial activities, the IBC addresses a broader spectrum of insolvency and bankruptcy issues across India, making it a more expansive and encompassing legislation.
Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in June 2024.