The Insolvency and Bankruptcy Code, 2016 is designed to streamline and improve the process of resolving financial distress for businesses, partnerships and individuals. It was introduced to replace older, inefficient laws and create a faster, more effective system for handling insolvency (when someone cannot pay their debts) and bankruptcy. The Act aims to resolve insolvency cases within a fixed timeframe (usually 180 days and extendable by 90 days) along with maximizing the value of a company’s assets and improve the availability of credit by ensuring creditors can recover their money efficiently. The IBC is a creditor-in-control law, which means that creditors (those owed money) have significant power in deciding how a company’s debts are resolved, unlike older laws that gave more control to the debtor (the company or person owing money). Section 238 is a key provision that ensures the IBC can function smoothly without being blocked by other laws.
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What is Section 238 of the IBC, 2016?
Section 238 of the IBC is a rule that gives the IBC priority over other laws in India when there’s a conflict. It’s found in Part V (Miscellaneous) of the IBC and is titled “Provisions of this Code to override other laws.” Here’s the exact text of the section:
“238. 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.”
Let’s break this down:
The phrase “notwithstanding anything inconsistent” means that if any other law or legal document (like a contract, regulation, or rule) contradicts the IBC, the IBC’s rules will take precedence.
“Any other law for the time being in force” refers to all existing laws in India, such as the Companies Act, 2013, the Income Tax Act, 1961, or the Electricity Act, 2003.
“Any instrument having effect by virtue of any such law” includes things like contracts, agreements, or government notifications that are legally binding because of other laws.
In simple terms, Section 238 ensures that the IBC is the “boss” when it comes to insolvency matters. If another law or legal document tries to interfere with the IBC’s process, the IBC’s rules will win.
Why is Section 238 of IBC Important?
Section 238 is like a shield that protects the IBC’s goals. The IBC was created to make insolvency resolution faster and more efficient, but other laws in India (like tax laws, labor laws, or banking regulations) might have rules that conflict with it. For example, a tax law might demand that a company pay its taxes before paying its creditors, while the IBC prioritizes creditors. Section 238 states that “The IBC’s rules come first,” ensuring the insolvency process isn’t delayed or disrupted.
This is critical because:
It creates a unified system for handling insolvency, so that companies and creditors don’t get stuck navigating conflicting laws.
It supports the IBC’s goal of resolving cases quickly (within 180–270 days) to save businesses or recover money for creditors.
It helps maximize the value of a company’s assets, which benefits creditors, employees, and the economy.
How Does Section 238 of IBC Work in Practice?
Section 238 acts as a non-obstante clause (a legal term meaning “despite any other rule”). Here’s how it impacts different groups:
For Financial Creditors (like banks):
Creditors can start the Corporate Insolvency Resolution Process (CIRP) under the IBC without worrying about other laws blocking them.
For example, if a bank wants to recover money from a company, Section 238 ensures that the IBC’s process for distributing the company’s assets takes priority over other laws, like tax laws demanding payment first.
For Corporate Debtors (companies in debt):
Companies facing insolvency get a clear, structured process to resolve their debts, without being pulled in different directions by conflicting laws.
This helps companies either recover through a resolution plan or wind down (liquidate) in an orderly way.
For Government Authorities (like tax or customs departments):
Government agencies may find their ability to enforce dues limited during IBC proceedings. For example, tax dues are often treated as lower priority compared to secured creditors (like banks with collateral).
This can create tension, as seen in cases where tax authorities challenged the IBC’s priority.
For Cross-Border Insolvency:
India is increasingly connected to global financial markets. Section 238 ensures that foreign laws or agreements don’t interfere with domestic IBC proceedings, aligning with international standards like the UNCITRAL Model Law (a global framework for insolvency).
Challenges and Controversies on Section 238 of IBC
Section 238 of the IBC, 2016 sparks debate due to its potential conflict with public interest laws, like environmental or labor regulations, which may undermine social welfare. Judicial delays and frequent liquidations further challenge its effectiveness which highlights the need for balanced implementation to align economic efficiency with broader societal goals. Followings are some challenges that this provision face:
Conflict with Public Interest Laws: Some argue that Section 238’s broad override power might undermine laws protecting public interests, like environmental regulations or the rights of workers. For example, if a company owes money for environmental cleanup, Section 238 might prioritize creditors over those obligations, raising ethical concerns.
Judicial Delays: Although the IBC aims for quick resolutions, court delays in India can slow down the insolvency cases. The effectiveness of Section 238 depends on fast judicial decisions but the system sometimes struggles to keep up.
Frequent Liquidations: The IBC prefers resolving companies (saving them through a resolution plan) over liquidating them (selling their assets). However, many IBC cases end in liquidation, which critics say limits the law’s success. Section 238 helps streamline the process, but it can’t solve broader implementation issues.
Balancing Economic and Social Goals: Courts and lawmakers must balance the IBC’s focus on economic efficiency (helping creditors recover money) with social goals (like protecting workers or the environment). This is an ongoing challenge and Section 238’s broad override power is at the center of this debate.
Despite these challenges, no amendments to Section 238 have been proposed since the IBC was enacted in 2016, suggesting that lawmakers believe it’s working well as is.
Learn more about Corporate Insolvency Resolution
Impact on Corporate Debt Resolution in India
Section 238 has had a transformative impact on how corporate debt is resolved in India. However, challenges like judicial delays and the risk of undermining public interest laws mean that the IBC and Section 238 of IBC must be implemented carefully to balance the needs of stakeholders:
Improved Creditor Confidence: By ensuring the IBC’s supremacy, Section 238 gives banks and other creditors confidence that they can recover their money through a clear and predictable process.
Faster Resolutions: The override power reduces legal hurdles, helping resolve cases within the IBC’s 180–270-day timeline though delays still occur.
Global Alignment: By prioritizing the IBC, Section 238 aligns India’s insolvency system with international best practices and making it easier for foreign investors and creditors to engage with Indian businesses.
Reduced Bad Loans: The IBC, supported by Section 238, has helped banks reduce non-performing assets (NPAs) (bad loans), strengthening India’s financial system.
Summary
Section 238 of Insolvency and Bankruptcy Code of 2016, ensures the IBC’s supremacy by overriding conflicting laws or legal instruments, as stated: “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 non-obstante clause streamlines insolvency resolution by prioritizing creditor-driven processes along with enhancing recovery rates and aligning with global standards.
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Section 238 of IBC: FAQs
Q1. What is Section 238 of the IBC?
Section 238 says that the IBC’s rules take priority over any other law or legal document that conflicts with it. This ensures that insolvency proceedings under the IBC aren’t blocked by other regulations.
Q2. What is Section 238 of the Insolvency Act?
There’s no separate “Insolvency Act” in India. You’re likely referring to Section 238 of the IBC, which ensures the IBC’s rules override conflicting laws to streamline corporate debt resolution.
Q3. What is Section 238 of the Companies Act?
Section 238 of the Companies Act, 2013, is unrelated to insolvency. It allows the National Company Law Tribunal (NCLT) to extend deadlines for companies to register charges (like loans secured by assets). It’s different from Section 238 of the IBC.
Q4. What is Section 238 of the Income Tax Act?
There’s no Section 238 in the Income Tax Act, 1961 (it goes up to Section 298). You might mean Section 238 of the IBC, which can override Income Tax Act provisions in insolvency cases, treating tax dues as less important than secured creditors’ claims.
Q5. What is Section 238 of the BNS?
Section 238 of the Bharatiya Nyaya Sanhita (BNS), 2023, deals with crimes like destroying evidence or giving false information to protect an offender. It’s unrelated to insolvency and has penalties like up to seven years in prison and a fine.
