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Insolvency and Bankruptcy Code, 2016:Constitutional validity of – Held: Provisions of the Code passes constitutional muster. ss. 5(7), 5(8), 5(20), 7(1), 7(4), 7(5), 8 and 9 – Classification between financial creditor and operational creditor – Whether discriminatory, arbitrary, and violative of Art. 14 – Held: Preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors – Thus,there is an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code – Thus,there is no discrimination – Constitution of India – Art. 14.ss. 3, 3(9)(c), 214(e), 60, 65, 75, 7, 8 and 9 – Notice, hearing,and set-off or counterclaim qua financial debts – Triggering of insolvency resolution process by financial creditors and operational creditors – Submission that the difference in the triggering process at behest of financial creditors and operational creditors is discriminatory and arbitrary – Held: A financial creditor has to prove “default” as opposed to an operational creditor who merely“claims” a right to payment of a liability or obligation in respect of a debt which may be due – In view thereof, the differentiation in the triggering of insolvency resolution process by financial creditors u/s. 7 and by operational creditors u/ss. 8 and 9 becomes clear –Insolvency and Bankruptcy Board of India (Information Utilities)Regulations, 2017 – Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 – Form I. ss. 21, 24, 28 and 30(2)(b) r/w s. 31 – Operational creditors– Right to vote in the committee of creditors – Plea that operational creditor do not have even a single vote in committee of creditors –Held: Financial creditors are best equipped to assess viability and feasibility of the business of the corporate debtor and evaluate the contents of a resolution plan – On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business –Resolution plan cannot pass muster u/s. 30(2)(b) rw s. 31 unless a minimum payment is made to operational creditors, being not less than liquidation value – Regulation 38 strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors’ rights, together with priority in payment over financial creditors – Thus, the operational creditors are not discriminated against nor Art. 14 has been infracted either on the ground of equals being treated unequally or on the ground of manifest arbitrariness – Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – Regulation 38 –Constitution of India – Art. 14.ss.12A(as amended) and 60 – s. 12A wherein withdrawal of application admitted u/ss 7, 9 or 10, with approval of ninety percent voting shares of the committee of creditors – s. 12A if violative of Art. 14 – Held: s. 12A is not violative of Art. 14 – ILC Report has explained that as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into –In any case, 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 – Also, 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 u/s. 60 –Insolvency and Bankruptcy (Second Amendment) Act, 2018 –Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – Reg 30A.s. 210 – Private Information Utilities – Evidence provided by private information utilities – Plea that Private Information Utilities not governed by proper norms and evidence of loan default in records of such utility not conclusive evidence – Held: Regulations 20 and 21 makes it clear 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 and an information utility shall expeditiously undertake the process of authentication and verification of information – Evidence provided by private information utilities is only prima facie evidence of default which is rebuttable by the corporate debtor – Insolvency and Bankruptcy Board of India(Insolvency Resolution Process for Corporate Persons) Regulations,2016 – Regulations 20 and 21ss. 18, 41, 42 and 28 – Resolution professional – Adjudicatory power, under the Code and the Regulations – Held: It is clear from the Code as well as the Regulations that the resolution professional has no adjudicatory powers – Resolution professional is given administrative as opposed to quasi-judicial powers – Even when the resolution professional is to make a “determination” under Regulation 35A, he is only to apply to the Adjudicating Authority for appropriate relief based on the determination made – 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 – Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 – Regulations 10, 12, 13,14, and 35A.s. 29A(as amended) – Retrospective application – Submission that vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor have been impaired by retrospective application of s. 29A – Held: A statute is not retrospective merely because it affects existing rights or merely because a part of the requisites for its action is drawn from a time antecedent to its passing– Resolution applicant has no vested right for consideration or-approval of its resolution plan – By application of s. 29A, no vested right is taken away – Since a resolution applicant who applies u/s.29A(c) has no vested right to apply for being considered as are solution applicant, submission cannot be accepted. s. 29A and s.35(1)(f) proviso – s. 29A if restricted to malfeasance – Submission that s. 29A puts a blanket ban on participation of all promoters of corporate debtors, without any mechanism to weed out the unscrupulous as against the efficient manager but who have not been able to pay off their debts due to other reasons – Held: s. 29A not restricted to malfeasance –Legislative purpose which permeates s. 29A continues to permeate the Section when it applies not merely to resolution applicants, but to liquidation also.s. 29(A)(c) – One year period in s. 29A – Non-performing-asset – Plea that u/s. 29A(c), a person’s account may be classified as a non- performing asset even though he is not a wilful defaulter;and that the period of one year referred in clause (c) is wholly arbitrary and without any basis either in rationality or in law –Held: A person is a defaulter when an installment and/or interest on the principal remains overdue for more than three months, after which, its account is declared NPA – During the period of one year thereafter, this grace period is given to such person to pay off the debt – If a person is unable to repay a loan taken, in whole or in part, within this period of one year and three months, he would be ineligible to become a resolution applicant – This legislative policy cannot be found fault with – Neither can the period of one year be found fault with.ss. 29A(j) and 5(24A) – Related party – Plea that persons who may be relatives of erstwhile promoters are debarred from becoming a resolution applicant – Held: Persons who act jointly or in concert with others are connected with the business activity of the resolution applicant – Similarly, all the categories of persons mentioned in s. 5(24A) show that such persons must be “connected”with the resolution applicant within the meaning of s. 29A(j) – Thus,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 u/s. 29A(j) – Explanation I clause (ii) to s. 29A(j) makes it clear that if a person is otherwise covered as a “connected person”,this 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 – Thus, 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.s. 29A – Exemption of micro, small and medium enterprises from s. 29A – Justification of – Held: Justified – Rationale for excluding such industries from the eligibility criteria laid down inss. 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 – Micro, Small and Medium Enterprises Development Act, 2006 – s. 7.s. 53 – Distribution of assets – Submission that in the event of-liquidation, operational creditors would never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors, thus s. 53(1)(f) discriminatory and arbitrary thus, violative of Art. 14 – Held: s. 53 does not violate Art. 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 – So long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute, Art. 14 does not get infracted – Constitution of India – Art. 14.Object and reasons for the Code – Explained.Enactment and working of the Code – Explained.Companies Act, 2013: s. 412 – Selection of members of tribunal and appellate tribunal – Plea that appointment of members of the NCLT and the NCLAT contrary to Madras Bar Association(III)’s case – s. 412 whereby members of the tribunal and appellate tribunal to be selected, two judicial members of the Selection Committee get outweighed by three bureaucrats – Held: s. 412 has been amended by the Companies Amendment Act, 2017 – Present members of NCLT and NCLAT have been appointed by the Selection Committee, reconstituted in compliance with the direction of this Court. Judiciary: NCLAT Bench – Creation of Circuit Benches –Submission that NCLAT Bench has a seat only at New Delhi and is contrary to the judgment in Madras Bar Association (II) case –Held: In view of the assurance by the Attorney General that Circuit Benches would be established soon, issuance of direction to Union of India to set up Circuit Benches of the NCLAT within the stipulated period.Constitution of India: Art. 77 – Submission that the tribunals-NCLT and NCLAT are functioning under the wrong Ministry-Ministry of Corporate Affairs, however, as per the Madras Bar Association(I)case the administrative support for all the tribunals should be from the Ministry of Law and Justice – Held: Rules of business being mandatory in nature and having to be followed, are to be followed by the executive branch of the Government – However, this Court is being bound by the Madras Bar Association(I), the Union of India to follow the judgment, both in letter and spirit. |
