Citation: AIR (2019) 4 SCC 17
Case No.: Civil Writ Petition 99 of 2018
Bench: J. R.F. Nariman & J. Navin Sinha
INTRODUCTION:
The instant case decided by the Supreme Court is considered to be a landmark judgement in upholding the constitutionality of certain provisions of Insolvency and Bankruptcy Code, 2016 which gave way to the foundation of modern bankruptcy laws. Fourth amendment to the Code was made in 2016 subsequent to which the present case came into picture. The court referred various reports including the Committee of Bankruptcy Law Reforms, Insolvency Law, Joint Parliamentary Committee in order to arrive at the judgement. The decision of the apex court in this case lays down a foundation stone for implementing insolvency resolution process and in easing its application.
FACTS OF THE CASE:
One of the Senior Advocateappears on behalf of the petitioner challenging the constitutional validity of the enactment. It was presided by 10 civil writ petitions including a SLP. To dismiss all these petitions, a consolidated order was passed by the apex court on 25th January 2019. Now that various cases were already filed before the S.C. with respect to constitutionality of the Code, the court decided of not delving into facts and dealing with the issues straight away. After receiving the entries, Court found it fit to answer all ambiguities in connection with Insolvency Laws in India. Eradi Committee Report was also cited which helped in addressing the importance of Sick Industrial Companies Act of 1985.
QUESTION OF LAW:
Following issues were brought forward in the court of law:
1. Whether operational creditors are obliged to give demand notice to operational debtor to initiate insolvency proceedings as specified under Sec. 8(4) of the Code?
2. Whether Sec. 29A & Sec. 53 of the IBC constitutionally valid?
3. Whether 90% threshold of voting shares in favour of committee of creditors for withdrawal of application from adjudicatory authority provided under Sec. 12A of the Code admissible ?
4. Whether members of NCLT and NCLAT have been appointed as per precedence of the court?
5. Whether restrictions laid by the Code on certain parties to act as resolution professionals justifiable?
CONTENTION OF THE PETITIONER:
- The contentions of the petitioner were related to the procedure of appointment of members of National Company Law Tribunal and National Company Law Appellate Tribunal, alleging that it is opposed to the precedence of the court.
- The Information utilities were challenged on the ground that they are unregulated in nature which puts the truthfulness of information provided by them at risk. Sec. 7, 21, 24 & 53 of IBC provides an inequitable distinction between financial and operational debtors and creditors respectively and violate Art. 14 of the Constitution.
- It was further added by the appellant that Sec. 29A was in violation of the code’s objective of getting speedy resolution of Insolvency and Clause C of the same puts restraint on the participation of all promoters of corporate debtors.
CONTENTION OF THE RESPONDENT:
- Respondents argued that laws before IBC had failed because it only stresses on revival of corporate debtor thereby lacking the fundamentals which is to maximize the value of assets.
- With respect to appointment, they contended that it was with committee’s consideration that the members of NCLT and NCLAT had been selected. Committee comprised of two Supreme Court judges and two bureaucrats who kept in mind the precedence to be followed in such matters.
- In response to Sec. 29A, it was regarded to be an important object of the code which is to overlook that undesired persons mentioned in all its clauses are rendered ineligible to submit plans of resolution. This will restrict their entry into management of stressed corporate debtors.
JUDGEMENT:
It was observed by the Supreme Court that both the creditors are distinct from each other by relying on the rule provided under Art. 14 of the Indian Constitution. While dealing with the issue of difference between financial and operational creditors, the Court gave a notable view by bringing forth the object of the code which is to preserve the corporate debtor as a growing concern ensuring the maximum recovery for all the creditors. In the case of Madras Bar Association v. Union of India[1], various issues including the establishment of NCLT and NCLAT and qualification of members with technical knowledge were discussed by the Supreme Court.
The court laid emphasis on need for judicial restraint that court must exercise while considering constitutional validity of any Code by relying on R.K. Garg[2] case. While dealing with the issue against Sec. 12A & the way in which 90% of board of trustees of lenders are supposed to permit withdrawal, the Court clarified that the reason behind putting such high limit is clearly mentioned in the Insolvency Law Committee Reports as every money lender is expected to focus while permitting such withdrawal. While dealing with the constitutionality of Sec. 53 of the Code, in situation of winding up of the company, court held that it is the operational creditors who are at minimal phase of getting anything as they stand beneath every other creditor including unstable leasers who showcase themselves as money lenders.
CONCLUSION:
This case is believed to have a significant impact on the way the Code is interpreted. As of now, there was a lack of insecurity that could be seen in investors and bidders with regard to acquisition of assets. IBC thereby strives to improve the flow of funds in the Indian commercial market. The judgement aims to provide clarity on the duties of Resolution Professionals and brings a balance between their roles and responsibilities keeping in mind that they are in charge of administrative functions and subject to judicial supervision. By highlighting various distinctions between operational and financial creditors, the Code ensures that legislative goals of the economy are secure and that chances of bad debts comes down. The contribution of Supreme Court in a much awaited economic law proves that it is way ahead of its international coequals.
[1] Madras Bar Association v. Union of India, AIR (2015) 8 SCC 583
[2] R.K. Garg & Ors. v. Union of India, AIR (1981) 4 SCC 675
Written by- Gargi Nagpal, IV sem., Alliance School of Law, Bengaluru (intern under legal vidhiya)
0 Comments