The Insolvency and Bankruptcy Code, 2016, very new legislation having come into operation when the Petitioners challenged various provisions of this Code as unconstitutional.
The case does not deal with any kind of fact as such only that the petitioners challenged the provisions under this IBC, 2016. There were 10 writ petitions, including a Special Leave Petition regarding the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016. A number of issues were raised by the Petitioners involving the appointment of members to National Company Law Tribunal and National Company Law Appellate Tribunal were inconsistent with constitutional provisions, the existence of only one NCLAT bench in Delhi, whether Sections 21 & 24, and the classification of financial and operational creditors under this Code violates Art 14 of COI, etc. Provisions of this Code which were in question were section.7,8,9,12,21,24, 29A,53,210.
The initial arguments were the appointment of members to NCLT and NCLAT were inconsistent with the constitution and they are given administrative support by the wrong ministry as tribunals are supposed to get support from the Ministry of Law and Justice, whereas they are getting it from the Ministry of Corporate Affairs(MCA).
Another argument was the classification of financial and operational creditors under this Code violates Art 14 and section 12 gives unfettered powers to the Committee of Creditors (COC) which will lead to arbitrary misuse, leaving operational creditors with no rights and at the disposal of COC. Hence, they deserve equal treatment as financial creditors.
They also argue that Section 7 of the Code provides no real difference between financial and operational creditors and this classification is discriminatory, manifestly arbitrary and under sections 8 and 9 an operational debtor not just get notified about the default, but they are given the right to challenge the validity of the credit.
Under section 29A related parties or relatives of former promoters are excluded, even if they have no commercial relation to the promoters. Also during liquidation, the operational creditors are ranked lowest and hardly ever get paid, hence, making, Section 53 discriminatory and arbitrary and in violation of Article 14.
They argued that the main objective of the legislation is to ensure the revival and continuation of the corporate debtor(CD) by protecting it from its management and a corporate death by liquidation. Therefore, the resolution process is not derogatory for the CD but, protective of his interests. The moratorium imposed under Section 14 is in the interest of the CD himself, preserving its activities during the termination process. The timing within which the resolution process must take place again protects the business of the CD from further dilution and also protects all its creditors and workers by seeing that the resolution process passes as quickly as possible so that another management can, through his entrepreneurial skills, revive the CD to achieve all these objectives.
The decision was given in January 2019 when SC upheld the validity of IBC in its entirety, resolving the first issue decided that referring to the Companies Act, MCA giving administrative support to it is justified. It mostly favoured contentions made by the respondents. Firstly, the SC asked the government to set up circuit benches of NCLT at all High Court jurisdictions in the country as preventing multiplicity of courts and forums are one of the objectives of IBC, 2016. Also if the principle enshrined in the preamble of this Code mentions that the CIRP process must be conducted promptly and allowing these suits in High Courts would impede and cause a delay in serving justice, so only NCLT and NCLAT are the adjudicating authority under this Code just that only an appeal against NCLAT may lie to the SC.
The SC held that the classification does not violate Article 14 as FC stands in a better position compared to CD to assess the viability and feasibility of the business. Upon cautious assessment of Section 18 read with Regulations 10,12,13 and 14 of CIRP Regulation, SC found that few safeguards are introduced and IRP cannot take any arbitrary action in any matter and must work under the supervision of the COC, which might also alter an IRP if required.
INTERPRETATION OF LEGAL PRINCIPLE
In this case, the concept of financial creditors (FC) has been elaborately dealt with. Apex court opines that FC is the one directly involved both, in the development of the CD from the initial stages and restructuring of debt during financial distress. According to this judgement, most financial creditors have secured creditors and operational creditors are unsecured creditors.
Addressing the argument regarding COC, the NCLT judgement of Binani Industries Limited vs Bank of Baroda 2018 SCC OnLine NCLAT 521 was cited by the petitioners saying that equal treatment to all creditors must be given, so that other kinds of creditors do not vanish from the market which would be contrary to the objective of the Code to promote credit availability, the court the classification as valid and not against any objective. It was held that the main focus of the Code is to ensure revival and continuation of the CD and protection from death by its own hands. A similar logic was applied by the court while addressing the challenge of section 29A stating that people with mala fide intent and are themselves the reason for the death of the CD must be prevented from getting back hold of the CD.
The COC’s primary job is to get involved in financial restructuring and be the watchdog of the resolution plan to judge it based on its viability and feasibility. An insolvency resolution professional (IRP) has no adjudicatory power. It has only the power to collect information. Even while exercising its discretion, it does so administratively as there is an adjudicatory authority supervising the IRP. Hence, IRP is merely a facilitator. Considering the precedent set out in Uttara Foods and Feeds Private Limited vs Mona Pharmachem (2018) 15 SCC 587, SC directed the competent authority to amend the laws to include inherent powers.
A very thoughtful observation was made by SC considering the judgement in Arcelor Mittal India Private Limited vs Satish Kumar Gupta (2019) 2 SCC, by saying that, it should always be made sure that if it is in any way possible to revive and continue a CD, it must be done as the Preamble of the Code nowhere mentions the word ‘liquidation’ but does mention ‘reorganisation’ and ‘balance interests of all stakeholders. Hence, workmen dependent on the CD for their daily bread must not suffer due to the corporate insolvency resolution plan (CIRP) of the CD.
Referring to the Bankruptcy Legislative Reforms Commission (BLRC) Report,2014 chaired by T. K. Viswanathan, SC opined that the code is designed in such a fashion that liabilities of maximum creditors should be met with as the code intends to curb down individual grievances of creditors against a CD for their claim. The efficacy of this judgement can be fairly judged as there has been an establishment of a circuit bench of NCLT in Chennai.