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Karnataka High Court Rules IBC Overriding Effect Does Not Automatically Bar Parallel Proceedings Under Other Laws

  • Writer: Kaustav Chowdhury
    Kaustav Chowdhury
  • 5 minutes ago
  • 4 min read

The Karnataka High Court, in a ruling reported on August 20, 2026, has held that the overriding effect of the Insolvency and Bankruptcy Code, 2016 (IBC) under Section 238 does not automatically bar the continuation or initiation of proceedings under other statutes. The judgment clarifies an important boundary of the IBC's non obstante clause, holding that the overriding effect operates only to the extent of actual inconsistency between the IBC and the other law in question, and does not serve as a blanket prohibition on all parallel proceedings merely because a Corporate Insolvency Resolution Process (CIRP) or liquidation is pending.


The Statutory Framework: Section 238 and the Non Obstante Clause


Section 238 of the IBC provides that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than the Code. This non obstante clause has been the subject of extensive litigation since the IBC came into force in 2016, with courts across India being called upon to determine the extent to which the Code overrides other statutes including the SARFAESI Act, the Recovery of Debts and Bankruptcy Act, the Companies Act, state depositor protection laws, and the Real Estate (Regulation and Development) Act (RERA).


The prevailing judicial understanding, reinforced by the Supreme Court in multiple decisions, has been that Section 238 grants the IBC primacy over conflicting provisions. The Karnataka High Court itself, in Dreamz Infra India Pvt. Ltd. v. The Competent Authority, had earlier quashed parallel proceedings initiated under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004, holding that the IBC would prevail over the state enactment. However, the precise scope of this overriding effect, particularly whether it automatically bars all forms of proceedings under every other law, has remained a contested question.


The Court's Ruling: Overriding Effect Is Not Absolute


The Karnataka High Court has now drawn an important distinction. The court held that Section 238 operates to resolve inconsistencies between the IBC and other laws, but it does not create an absolute prohibition on proceedings under other statutes. The overriding effect is triggered only when there is a direct conflict between the provisions of the IBC and the provisions of the other law. Where the proceedings under the other law do not conflict with the objectives or specific provisions of the IBC, they may continue even during the pendency of CIRP or liquidation proceedings.


This approach recognises that the IBC's moratorium under Section 14, which automatically stays certain categories of proceedings upon CIRP admission, already provides a specific and detailed mechanism for identifying which proceedings must stop. Section 14 bars suits and proceedings against the corporate debtor, prohibits the transfer or disposal of assets, and restrains the enforcement of security interests. However, not every proceeding under every law falls within the scope of Section 14, and the court held that Section 238 should not be used to expand the moratorium beyond its statutory boundaries.


Distinguishing Between Inconsistency and Mere Overlap


The judgment draws a principled line between inconsistency and mere overlap. Proceedings that directly interfere with the insolvency resolution process, such as enforcement actions against the corporate debtor's assets or recovery proceedings that circumvent the collective resolution mechanism, are inconsistent with the IBC and must yield to it. However, proceedings that operate in a different sphere, such as regulatory investigations, criminal prosecutions, or proceedings that do not seek to recover from or attach the corporate debtor's assets, may not be inconsistent with the IBC at all.


This reasoning aligns with the Supreme Court's approach in the Benami Act context, where the court held that attachment orders under the Prohibition of Benami Property Transactions Act cannot be challenged under the IBC because the two statutes operate in different domains. The Karnataka High Court's ruling extends this logic to the broader question of parallel proceedings, establishing that the mere existence of CIRP does not create an umbrella bar on proceedings under other laws unless a specific conflict with the IBC can be demonstrated.


Practical Implications for Stakeholders


The ruling has significant practical implications for multiple stakeholders in the insolvency ecosystem. For regulatory authorities and law enforcement agencies, it confirms that their jurisdiction is not automatically ousted by the initiation of CIRP. Investigations, regulatory proceedings, and enforcement actions that do not seek to recover from the corporate debtor's estate can proceed without awaiting the outcome of the insolvency process. For resolution professionals and the Committee of Creditors, the ruling means that the Section 14 moratorium remains the primary tool for protecting the corporate debtor's assets during CIRP, and that reliance on Section 238 as a supplementary shield requires demonstrating actual inconsistency with the IBC.


For creditors and other stakeholders who have parallel remedies under other laws, the judgment opens the door to pursuing those remedies concurrently with the IBC process, provided they do not conflict with the resolution or liquidation mechanism. This is particularly relevant for secured creditors with SARFAESI rights, homebuyers with RERA claims, and parties with arbitration proceedings, all of whom have faced uncertainty about whether their non IBC remedies survive the initiation of insolvency proceedings.


Key Takeaways


  • Section 238 of the IBC provides overriding effect only to the extent of actual inconsistency with other laws, not a blanket bar on all parallel proceedings.

  • The Section 14 moratorium remains the primary mechanism for staying proceedings against a corporate debtor during CIRP.

  • Proceedings under other laws that do not conflict with the objectives or provisions of the IBC may continue during pendency of insolvency proceedings.

  • Regulatory investigations and criminal prosecutions are generally not barred by the mere initiation of CIRP.

  • The ruling aligns with the Supreme Court's approach of treating the IBC and other statutes as capable of operating in their respective spheres without mutual exclusion.

  • Stakeholders with remedies under SARFAESI, RERA, arbitration law, or other statutes should assess whether their specific proceedings conflict with IBC provisions before assuming they are stayed.


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