Author: Nishant Shastri
College: ILS Law College, Pune
To the Point
The central legal issue in Indian insolvency jurisprudence revolves around an acute statutory and constitutional tension: Can the non-obstante clause under Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC) override the constitutional Public Trust Doctrine and specialized sectoral statutes to extinguish sovereign regulatory controls, wipe out government statutory dues, and enable the commercial alienation of public natural resources?
Under the commercial asset paradigm of the IBC, financial lenders and corporate applicants view state-allocated rights—such as telecommunication spectrum, mineral extraction concessions, and municipal development lands—as valuable intangible assets essential for maintaining the corporate debtor as a going concern. Creditors argue that Section 238 grants complete statutory supremacy to the IBC, subjecting these state allocations to the moratorium under Section 14 and enabling their unencumbered transfer or debt-restructuring under a Corporate Insolvency Resolution Process (CIRP).
Conversely, the Supreme Court of India has established that natural resources are not private property; they are material resources of the community held by the Union or State governments in trust for citizens under Article 39(b) of the Constitution. Consequently, using insolvency proceedings to bypass regulatory approvals, purge statutory license conditions, or force state exchequers to absorb financial haircuts subverts the constitutional framework governing natural resources.
Use of Legal Jargon
A rigorous legal examination of this constitutional-statutory friction requires precise deployment of specific statutory devices, administrative principles, and judicial doctrines:
● Public Trust Doctrine (Cestui Que Trust): A constitutional doctrine anchored in Article 39(b) of the Constitution of India, establishing that natural resources—such as electromagnetic spectrum, minerals, rivers, and forests—are owned by the citizenry at large. The Sovereign State operates strictly as a trustee (cestui que trust framing), obligated to manage and allocate these resources to serve the public welfare rather than private commercial monetization.
● Non-Obstante Clause (Section 238 IBC): A statutory override mechanism dictating that the provisions of the IBC shall take effect notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law. While expansive in commercial matters, its applicability is restricted when interacting with public law domains and constitutional imperatives.
● Usufructuary Privilege vs. Proprietary Estate: The core legal distinction between a conditional, revocable right to access, harvest, or utilize a resource (a usufructuary privilege granted via a statutory license or lease deed) and absolute legal title or ownership (dominium). Sectoral statutory grants confer usufructuary privileges rather than private proprietary estates.
● Doctrine of Distinct Legal Provinces: A judicial doctrine establishing that private commercial insolvency statutes (IBC) and public administrative regulatory regimes (e.g., Indian Telegraph Act, 1885; MMDR Act, 1957) operate in separate legal domains. The non-obstante clause of the IBC cannot be deployed to usurp administrative powers exercised by statutory authorities in the interest of public welfare.
● Vis Attractiva & Section 60(5) Jurisdiction: Section 60(5)(c) of the IBC grants the NCLT broad jurisdiction to decide questions of priorities, law, or facts arising out of or in relation to the corporate insolvency process. However, this “jurisdictional pull” (vis attractiva) applies exclusively to civil and commercial disputes concerning the corporate debtor’s existing estate and does not extend to public law judicial review of administrative decisions.
● Nemo Dat Quod Non Habet in Insolvency Estates: The fundamental principle that no entity can transfer a better title than it possesses. Under Section 18(f) and Section 36(4) of the IBC, an Insolvency Professional or Liquidator can only assume control over assets where the corporate debtor holds established ownership rights; determinable or encumbered statutory licenses cannot be converted into absolute, unencumbered corporate property.
● Clean Slate Principle: The insolvency doctrine under Section 31 of the IBC allowing a successful resolution applicant to take over a corporate debtor free from past liabilities. The judiciary has established that this principle cannot be weaponized to extinguish sovereign dues or statutory conditions attached to natural resource grants without express state consent.
The Proof
The legal proposition that Section 238 of the IBC cannot override the Public Trust Doctrine or extinguish sovereign control over natural resources is established through four distinct statutory, constitutional, jurisdictional, and economic proofs.
1. Statutory Exclusion Proof under Sections 18 and 36 of the IBC
The statutory structure of the IBC self-limits what constitutes an asset capable of being controlled or liquidated in insolvency. Section 18(f) explicitly mandates that the Resolution Professional shall take control of assets over which the corporate debtor holds ownership rights, as evidenced by title deeds or statutory records. Furthermore, Explanation (a) to Section 18 and Section 36(4)(a) explicitly exclude assets owned by third parties or held in trust from the scope of the insolvency estate.
Because natural resources are held in trust by the State, the corporate debtor possesses no proprietary title; it holds merely a conditional usufructuary privilege. On a plain statutory reading, natural resources fall entirely outside the corporate debtor’s asset pool under Sections 18 and 36. Section 238 cannot create property rights where none exist under parent property laws, as the non-obstante clause operates strictly upon assets that legitimately belong to the corporate debtor.
2. Constitutional Hierarchy Proof: Article 39(b) vs. Ordinary Parliamentary Statutes
The Public Trust Doctrine is anchored in Article 39(b) of Part IV of the Constitution and enforced through Articles 14 and 21. As affirmed in Centre for Public Interest Litigation (CPIL) v. Union of India, natural resources are national assets held by the State strictly as a trustee for citizens.
A non-obstante clause in an ordinary parliamentary enactment (Section 238 of the IBC) cannot supersede constitutional mandates or sovereign trust obligations. Parliament, acting under Legislative List III Entry 9 (Insolvency), lacks the constitutional capacity to divest the Sovereign of its non-delegable trust duties under List I/List II over public natural resources. Where a conflict arises between an insolvency process seeking to commercialize a public asset and the State’s constitutional duty to manage that asset for the common good, constitutional obligations prevail over statutory recovery mechanisms.
3. Jurisdictional Proof: Exclusion of Administrative Public Law Decisions
The NCLT is a tribunal of limited statutory jurisdiction created under Section 408 of the Companies Act, 2013. In Embassy Property Developments, the Supreme Court established that while Section 60(5) grants the NCLT authority over civil/commercial insolvency issues, it does not confer powers of administrative judicial review over public law decisions.
Administrative decisions concerning the grant, extension, forfeiture, or cancellation of mining leases under the MMDR Act, or spectrum allocations under the Telegraph Act, fall squarely within public law. Consequently, the NCLT lacks subject-matter jurisdiction to set aside regulatory cancellations or order deemed lease extensions, proving that Section 238 cannot displace administrative public law remedies.
4. Economic Integrity Proof: Prevention of Moral Hazard and Regulatory Arbitrage
Allowing Section 238 to override natural resource regulations would generate severe moral hazard and regulatory arbitrage. Private entities could aggressively bid for high-value public resources, collect operational revenues, default on statutory license fee commitments owed to the government exchequer, and subsequently seek refuge under voluntary insolvency proceedings.
Through CIRP, financial creditors and resolution applicants could attempt to purge the government license of its associated statutory dues, transferring the unencumbered usufructuary right to a third party while forcing the Sovereign State to absorb a massive financial haircut on public revenues. The Supreme Court recognized that permitting insolvency processes to extinguish sovereign dues under natural resource licenses would incentivize deliberate commercial defaults and bankrupt public treasuries, destroying the integrity of public resource allocation regimes.
Abstract
The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) reshaped India’s credit landscape by introducing a creditor-in-control framework aimed at rapid asset value maximization and corporate revival. Central to this framework is Section 238, which contains an expansive non-obstante clause designed to override inconsistent provisions in other laws. However, a fundamental constitutional and legal conflict arises when a corporate debtor’s main value consists of state-granted privileges over finite natural resources, such as telecommunication spectrum, mineral blocks, or municipal land concessions. In these scenarios, the statutory objective of creditor recovery collides with the constitutional Public Trust Doctrine anchored in Article 39(b) of the Constitution of India, which mandates that the State holds natural resources in trust for the public good.
This report evaluates the statutory and constitutional limits of Section 238 when applied to sovereign natural resources. Through a doctrinal examination of key judicial precedents—including Union of India v. State Bank of India, Embassy Property Developments v. State of Karnataka, and Municipal Corporation of Greater Mumbai v. Abhilash Lal—the study demonstrates that statutory non-obstante clauses cannot override constitutional public trust obligations or rewrite administrative public law frameworks. The Supreme Court has established clear boundaries around the IBC, holding that usufructuary privileges over natural resources do not constitute proprietary assets of a corporate debtor under Sections 18 and 36 of the Code. Consequently, sovereign resources are insulated from automated liquidation, establishing that public interest and sovereign trust mandates take precedence over commercial debt recovery.
Case Laws
Union of India v. State Bank of India & Ors. (Spectrum Insolvency Ruling)
In this landmark decision regarding the corporate insolvency proceedings of telecom operators such as Aircel and Reliance Communications (RCom), the Supreme Court considered whether electromagnetic spectrum allocated to Telecom Service Providers (TSPs) could be subjected to CIRP and transferred under a resolution plan without clearing outstanding statutory Adjusted Gross Revenue (AGR) dues owed to the Department of Telecommunications (DoT).
Financial creditors argued that spectrum usage rights were valuable intangible assets under accounting standards, essential for preserving the corporate debtor as a going concern, and that Section 238 overridden the restrictive conditions of license agreements and Spectrum Trading Guidelines.
The Supreme Court rejected this contention, establishing that:
● Electromagnetic spectrum is a finite material resource held by the Union of India as a trustee for the public under Article 39(b) and Section 4 of the Indian Telegraph Act, 1885.
● TSPs possess merely a conditional, revocable usufructuary privilege (“right to use”) under statutory licenses, devoid of proprietary ownership or title.
● Under Sections 18(f) and 36(4) of the IBC, spectrum cannot form part of the insolvency or liquidation estate of the corporate debtor.
● Section 238 of the IBC cannot override license conditions or extinguish the DoT’s statutory authority to revoke licenses for non-payment of dues. Consequently, spectrum usage rights cannot be transferred or monetized under a resolution plan unless all past sovereign AGR dues are cleared in full.
Embassy Property Developments Pvt. Ltd. v. State of Karnataka
In this case, the corporate debtor held a mining lease granted by the State of Karnataka under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), which expired during the CIRP. The Resolution Professional applied to the NCLT seeking a direction to compel the State Government to grant a “deemed extension” of the mining lease under Section 8A of the MMDR Act, arguing that the lease was an asset critical to the debtor’s survival and protected by the moratorium under Section 14 and the override of Section 238. The NCLT granted the relief, which was challenged by the State before the High Court.
The Supreme Court ruled in favor of the State, holding that:
● The relationship between a mining lessee and the State is governed by statutory rules under public law, where the land and minerals belong to the Sovereign State.
● A decision by the State Government to refuse an extension of a mining lease is an administrative order executed in the public law domain.
● The NCLT’s jurisdiction under Section 60(5)(c) is confined to civil and commercial matters arising out of insolvency and does not encompass powers of administrative judicial review over public law decisions.
● Section 238 cannot be utilized to expand the NCLT’s jurisdiction to set aside statutory orders issued under specialized natural resource legislation.
Municipal Corporation of Greater Mumbai v. Abhilash Lal & Ors.
This case concerned a resolution plan approved for SevenHills Healthcare Private Limited, which proposed creating a mortgage over public land leased to the corporate debtor by the Municipal Corporation of Greater Mumbai (MCGM). MCGM objected, stating that under Sections 92 and 92A of the Mumbai Municipal Corporation Act, 1888, public municipal land could not be encumbered or transferred without explicit prior statutory approval from the municipal authority. The resolution applicant argued that Section 238 overridden the MMC Act’s statutory approval requirements.
The Supreme Court held that:
● Section 238 of the IBC cannot override a public body’s statutory right and duty to control and regulate how public properties held in public trust are dealt with.
● The overriding effect of Section 238 applies strictly to assets owned by the corporate debtor, not to third-party public assets leased under statutory conditions.
● In the absence of formal statutory approval under public law, a resolution plan cannot unilaterally alter lease conditions or encumber public assets.
Avil Menezes RP v. Ministry of Coal (NCLAT 2024)
Illustrating ongoing friction in appellate tribunals, the NCLAT examined whether Annual Mine Closure Costs (AMCC) deposited into an escrow account under a Coal Mine Development and Production Agreement (CMDPA) constituted an insolvency asset or a protected public trust fund for environmental remediation.
The NCLAT held that pre-CIRP AMCC dues were statutory operational claims within the CIRP pool, ruling that Section 238 overridden the MMDR Act and Coal Mines (Special Provisions) Act to prevent preferential recovery outside the CIRP. This decision highlights the tension between lower appellate tribunal applications of Section 238 to environmental escrow accounts and the Supreme Court’s sovereign trust framework established in Spectrum and Embassy Property.
Conclusion
The evolution of Indian insolvency jurisprudence confirms that Section 238 of the Insolvency and Bankruptcy Code, 2016, while vital for corporate debt restructuring, is not an unrestricted statutory override mechanism. The Supreme Court of India has established clear constitutional boundaries around the IBC, affirming that statutory non-obstante clauses must yield to the constitutional Public Trust Doctrine anchored in Article 39(b). Sovereign natural resources—including electromagnetic spectrum, mineral deposits, and public land concessions—do not constitute absolute proprietary assets of private corporate debtors under Sections 18 and 36 of the Code. They remain public property held by the State as trustee, accessible strictly through conditional, usufructuary permissions.
This legal distinction safeguards public exchequers from commercial arbitrage and prevents insolvent corporate entities from using insolvency proceedings to extinguish sovereign statutory obligations. However, it also creates economic complexity for financial institutions that extend credit against the perceived collateral value of government-granted operating rights.
To reconcile creditor recovery with public resource protection, future legislative reforms should establish a formal dual-track regulatory non-objection framework under the IBC. Under such a framework, usufructuary rights over natural resources could be monetized or transferred in insolvency only on the condition precedent that statutory regulatory dues are satisfied or assumed by the successful resolution applicant. This harmonization would preserve the constitutional imperative of sovereign guardianship under the Public Trust Doctrine while providing clarity for commercial lenders within India’s credit ecosystem.
