SC upholds Constitutional Validity of various provisions of IBC 2016

Supreme Court upheld Constitutional Validity of various provisions of the Insolvency and Bankruptcy Code, 2016

ABCAUS Case Law Citation:
ABCAUS 2744 (2019) (01) SC

Important Case Laws Cited/relied upon:
Madras Bar Association v. Union of India, (2015) 8 SCC 583

The Petitioners had challenged the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 (The Code).

The Hon’ble Supreme Court observed that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.

Against the issues raised by the Petitioners, the Hon’ble Supreme Court held as under:

(1) Appointment of members of the NCLT and the NCLAT is not contrary to Supreme Court’s judgments.

The Union of India was directed to set up Circuit Benches of the NCLAT within a period of 6 months from today

(2) The tribunals are functioning under the wrong ministry i.e. under Ministry of Corporate Affairs instead of Ministry of Law and Justice as held by the Constitution Bench.

It is high time that the Union of India follow, both in letter and spirit, the judgment of the Constitution Bench of the Court

(3) Classification between Financial Creditor and Operational Creditor neither discriminatory, nor arbitrary, nor violative of article 14 of the constitution of India.

Financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.

(4) Operational creditors are discriminated for the reason that they have no vote in the committee of creditors.

It was held that the Operational Creditors are discriminated against or that Article 14 has been infracted either on the ground of equals being treated unequally or on the ground of manifest arbitrariness.

(5) Section 12A Is Not Violative of Article 14

Ninety per cent of the committee of creditors which is substantially all the financial creditors has to allow withdrawal. The figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy. If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code.

(6) Evidence Provided By Private Information Utilities are only Prima Facie Evidence of Default and can be rebutted

It was alleged that private information utilities that have been set up are not governed by proper norms. Also, the evidence by way of loan default contained in the records of such utility cannot be conclusive evidence of what is stated therein.

The Hon’ble Supreme Court observed that apart from the stringent requirements as to registration of such utility, the moment information of default is received, such information has to be communicated to all parties and sureties to the debt. Apart from this, the utility is to expeditiously undertake the process of authentication and verification of information, which will include authentication and verification from the debtor who has defaulted. This being the case, coupled with the fact that such evidence is only prima facie evidence of default, which is rebuttable by the corporate debtor.

(7) Resolution Professional Has No Adjudicatory Powers

Resolution professional has no adjudicatory powers. Under the CIRP Regulations, the resolution professional has to vet and verify claims made, and ultimately, determine the amount of each claim. The Resolution Professional is given administrative as opposed to quasi-judicial powers.

Unlike the liquidator, the resolution professional cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the Code, which can, by a two-thirds majority, replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.

(8) Constitutional Validity of Section 29A – Persons not eligible to be resolution applicant.

No vested right is taken away by application of Section 29A. A resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant.

(9) Section 29A(C) not restricted to Malfeasance

There is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation.

Given the categories of persons who are ineligible under Section 29A, which includes persons who are malfeasant, or persons who have fallen foul of the law in some way, and persons who are unable to pay their debts in the grace period allowed, are further, by this proviso, interdicted from purchasing assets of the corporate debtor whose debts they have either wilfully not paid or have been unable to pay. The legislative purpose which permeates Section 29A continues to permeate the Section when it applies not merely to resolution applicants, but to liquidation also.

(10) The one-year period in Section 29A(C) And NPAs

The legislative policy, is that a person who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with. Neither can the period of one year be found fault with, as this is a policy matter decided by the RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset.

(11) Constitutional Validity of Section 29A(j) read with the definition of – related party

All the categories of persons mentioned in Section 5(24A) show that such persons must be connected‖ with the resolution applicant within the meaning of Section 29A(j). The said categories of persons who are collectively mentioned under the caption ―relative‖ obviously need to have a connection with the business activity of the resolution applicant. In the absence of showing that such person is ―connected‖ with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under Section 29A(j).

The expression ―related party‖, therefore, and ―relative‖ contained in the definition Sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I, and so read, would include only persons who are connected with the business activity of the resolution applicant.

The provision would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan. Therefore, any such person is not indeterminate at all, but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during implementation of the resolution plan.

(12) Exemption of Micro, Small, And Medium Enterprises from Section 29A

The rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because qua such industries, other resolution applicants may not be forthcoming, which then will inevitably lead not to resolution, but to liquidation.

(13) Section 53 of the Code does not violate Article 14

Repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses.

This rationale creates an intelligible differentia between financial debts and operational debts, which are unsecured, which is directly related to the object sought to be achieved by the Code. In any case, workmen‘s dues, which are also unsecured debts, have traditionally been placed above most other debts.

The unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted.  

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