Overhauling the Constitutional validity of Insolvency and Bankruptcy Code, 2018
By Shiva Tiwari and Devyani Sharma,
B.A.LL.B. 3rd Year,
Aligarh Muslim University Centre Jangipur Murshidabad.
Abstract
Where wealth is health, bankruptcy is death- John Maiorana
Insolvency and Bankruptcy Code was enforced for the virtue of approaches which were dealing with the matter subsequent to insolvency and Bankruptcy. The code led emphasis on separate insolvency resolution process. For this process there is a selection of licensed insolvency professionals. The petition with regards to this code is submitted before NCLT and then before NCLAT. As this law is not so absolute there is certain flaws developed in it. However in plethora of cases the constitutional validity of this code has been challenged before the court. In this paper we tend to elaborate the grounds on which this code has been challenged. Major grounds which have been challenged were that there is no Right to Heard given to the opposite party which violates the natural principal of Audi Alteram Partem. There is no prior notice given to the petitioner before admitting the application. There is no provision related to Settlement of Dispute. Although, there is no intelligible differentia between financial creditor and operational creditor but there is discrimination between these two. Even though sometime undue preference has been given to financial creditor as they have the right to became part of committee of credit incorporated by a corporate debtor whereas operational creditor does not have any such rights which somehow contravene Article 14 of our constitution i.e. Right to Equality. During the process of insolvency all the affairs vest in the hand of resolution professional and somehow the rights of board of director or partners have been suspended. This curtail Article 19(1)(g) of our constitution i.e. freedom of occupation, trade or business upon the citizens of India.
Keywords: Right to Heard, Audi Alteram Partem, Right to Equality and freedom of occupation
Introduction
Insolvency and Bankruptcy code, 2016 is one of the biggest economic reforms which were occurred during the present time. The main objective of this code is to make the systematic balance of the interest of all the stakeholders by consolidating, to promote business practices, to help in doing business. It also help in making the credit facilitates available to businessmen and also help to reduce the time of resolution which were enshrined under this code for maximizing the value of assets. In this code several purpose were enumerated by the virtue of which this code perform its duty.
This code is basically divided into 5 parts.
Part I deals with section 1 to section 3 which contains preliminary objection.
Part II deals from Section 4 to Section 77 in which insolvency resolution and liquidation process for corporate.
Part III deals from Section 78 to Section 187 in which insolvency resolution and bankruptcy process for individual & partnership Firms.
Part IV deals from Section 188 to Section 223 in which insolvency professionals Agencies and information utilities.
Part V deals from Section 224 to Section 255 in which contains miscellaneous provision.
In this paper we laid our emphasis towards the constitutional validity of few provision of this code along with plethora of cases in which these provision is been challenged in the court.
Purpose of this code
1. Building up and revising the laws related with redesigning and settling the indebtedness of substances like organization firms, people and corporate people.
2. Giving goals in a period bound way.
3. Advancing enterprise in India.
4. Boosting the accessibility of credit in the Indian market.
5. Setting up Insolvency and Bankruptcy Board in India.
6. Adjusting the interests of the whole partners incorporating modification in the endorsed request of need of government charges installment.
7. With littler time allotment for goals, danger of losing speculation was radically utilized for outside financial specialists.
8. The remote financial specialists would now be able to utilize an adaptable exist system.
9. More emphasis can be put towards new businesses that are bound to succeed.
10. Notwithstanding when an organization goes indebted, the IBC is outfitted towards augmenting the estimation of its benefits[3].
Insolvency and Bankruptcy Board of India (IBBI)
This board was established on 1st October 2016, by incorporation of the head office at New Delhi. It is a body corporate which also has a perpetual succession and common identity. The main purpose of this board is to oversee and check the insolvency procedure[4].
Insolvency professional Agencies
The main aim of these agencies is to draft bye- laws for insolvency professionals, promote professionals development. The agencies also keep an bird eye on its members by gathering information about their performances.
Insolvency professionals
They play a key role in efficient working of the insolvency process as mention under the aforesaid code. They generally can verify the claims of the corporate debtors, runs the debtors business and also act as a liquidator etc. the main aim is that they can took a reasonable care while performing their duties and comply with the terms and condition which were enshrined in Insolvency and Bankruptcy code.
Information utilities
It is generally a centralized electronic database which is used to get the information about the corporate debtors. Such information would be available to financial institution as well as creditors.
Violation of Article 14 and discrimination between operational creditor and financial creditor
Article 14 enumerate that there must be equality in the eye of law. In this code there is curtailment of this fundamental right. This code marked up a clear cut distinction between financial creditor and operational creditor. The commencement of corporate insolvency resolution procedure would be done by the virtue of the application given by the financial creditor or with other financial creditor to the adjudicating authority. This procedure is enshrined in section 7 of this Code. Basically, a financial creditor is “the person from whom the financial debts is owned and include a person to whom such debt has been legally assigned or transferred“.[5] Operational creditor is any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred“[6].
The corporate insolvency resolution procedure would be initiated by the virtue of demand notice and after 10 days of demand notice if the debt is not paid then the operational creditor may file an application in front of adjudicating authority. Commencement of insolvency procedure is enshrined in section 9 of the aforesaid code. In the case of demand notice, somehow the predilection is allotted to the unpaid operational debtors. The opportunity was given to them so that they can pay the undue amount to operational creditor. In such case he gets rid from the judicial proceedings. In due course if the debt is not paid then in such situation the application is filed by the operational creditor in the court of law.
There is an allotment of plethora of undue preference to financial creditors. In the committee of creditor, financial creditor exclusively or all the financial creditor collectively constitute and became the member of such committee. This right is enshrined in the section 21(2) of the aforesaid code. Such right is not present in the case of operational creditors. They do not constitute or became element of the committee of creditors.
As per section 7(3) of the aforesaid code the financial creditor shall along with the application furnish the name of the resolution professional proposed to act as an interim resolution professional. While as per section 9 (4) an operational creditor may propose a resolution professional to act as an interim resolution professional.
As per section 215 (2) a financial creditor shall submit financial information as per section 215 (3) an operational creditor may submit financial information.
As per section 5(28) financial creditor were specified voting right but the operational creditor were nowhere given any voting rights in the aforesaid code.
As per the virtue of the code financial creditor are enumerated as secured creditors as because of the mortgage documents while operational creditors are treated as an unsecured creditors.
The money which is owed by the financial creditors is subsequently more than what the money owed by operational creditors.
The reimbursement of debt to a financial creditor is prearranged under an assortment of schedules and default in imbursement attracts penalty and a similar circumstances does not subsist for operational creditors; and
The financial creditor is compulsory to demonstrate subsistence of default by the debtor whereas the operational creditor minimally claims his right of payment.
Madras Bar Association v. Union of India[7]
In this case it was stated that there is no as such difference profound in the aforesaid code that can intelligible differentia between these two type of creditors i.e. operational creditors and financial creditors. It is also been clear that both the creditors either give their money in terms of loans or money’s worth i.e. in form of goods and services.
In the case of Swiss Ribbons Pvt. Ltd & Anr. V. Union of India & Ors.[8]
In this case petitioner argued that when the liquidation process is on the way, the chances of the operational creditors to recover their amount are not as much of as compared to other creditors as because they ranked below all the other creditors including financial creditors as well. These rights were given by the virtue of section 53 of the aforesaid code. This section discriminatory and manifestly arbitrary and thus, there is a curtailment of Article 14 of the Constitution of India.
Right to heard
It is one of the principle of natural justice which is been violated by this code. As per Section 424 of the Companies Act it was the duty of NCLT as well as NCLAT to adhere with the principle of natural justice.
In the case of Innoventive Industries Ltd. v. ICICI Bank and Ors[9],
It was held in this case that the adjudicating authority would be bound to issue a limited notice to corporate debtor before the admission of the case.
Audi Alteram Partem
Departmental enquiries identifying with the offense of people ought to adjust to specific gauges. One of the gauges is that the individual concerned must be given a reasonable and sensible chance to guard himself. It implies that no man ought to be denounced unheard and he has ideal to realize the allegations leveled against him. He has additionally the privilege to know the reason on which such allegation is based, and a sensible chance to show all pertinent proof with all due respect. In numerous rules, arrangements are made guaranteeing that a notice is given to the individual against whom a request is probably going to be passed before a choice is taken, yet a few rules may not contain such arrangements. It is here that the principles of normal equity come to assume their job. They work in those territories which are not secured by any law. These standards along these lines supplement the law and forestall the event of treachery[10].
In this code there is no notice of default but yet there is a notice for demand in case of operational debtors. By this a right of an individual to know what the default performed by him is not allocated.
Default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be[11].
The NCLAT too stressed that the insolvency resolution process would influence the privileges of people since the commencement of the process the Board of Directors stands suspended and its forces vest with the between interim resolution professional,, also, different people are influenced because of the ban, and thusly, the ‘ adjudicating authority’ is compelled by a sense of honor to give a notice to the corporate account holder before affirmation of a petition under Section 7 or Section 9[12]
Bank of India v. Tirupati Infra projects Ltd.[13] ,
In this case it was held that the adjudicating authority must have to determine whether the default has occurred or not. It is not obligatory by the adjudicating authority to determine the exact amount of default.
Right to freedom
Freedom of trade, commerce and occupation is enshrined in Article 19(1)(g) of our constitution. As per this code during the procedure all the power of the management was restraint and they were given no right to pursue anything. This violates this Article of our constitution.
In shivam water treatment v. Union of India[14]
In this case it was held that high court has no rights to entertain the petition in which constitutional validity of this code is challenged.
Different difficulties were likewise raised against the legitimacy of Section 29A of the aforesaid code. The legitimacy of this area was tested in light of the fact that
- It had retrospective application.
- It was contended that area 29A(c) holds asymmetrical as equivalents by treating a promoters who didn’t act with wrongdoing comparable to the individuals who had. The Court held that segment 29A was planned to apply to people other than offenders or the individuals who had been improper, and this was defended by the administrative reason for the section.
- It was contended that setting a bar on people precluded under section 29A of this code from acquiring any advantages of the corporate account holder in liquidation also would be in opposition to the reason for expanding the estimation of the benefits of the corporate borrower.
- It was contended that the time of one year recommended in segment 29A for the exclusion to apply was discretionary and without premise
- It was contended that the preclusion of relatives of people who are precluded in segment 29A was self-assertive.
- It was contended that the exclusion of MSMEs from area 29A was self-assertive.[15]
- Sections 17 and 20 of the Code vests the administration of undertakings of the corporate account holder then goals proficient and suspends the forces of the top managerial staff or the accomplices of the corporate indebted person, by and large. Here, the rule dispute of the solicitor is that expulsion of the current administration is completely subjective and dependent on silly criteria, in particular, presence of a suit or intervention continuing on the date of receipt of the notice of bankruptcy under Section 8(1). This is infringing upon Article 19(1)(g) of the Constitution, which accommodates the opportunity of occupation, exchange or business upon the natives of India[16].
The Alvarez and Marsal report insolvency court which were present in USA are regularly 10 times faster than Indian courts[17]. It has additionally suggested that current DRT courts might be changed over to NCLT
seats.
seats.
Organizations come up short for a wide range of reasons. Extended financial system work in a weight valve for such consequences where the aftermath on every one of the partners is negligible and settled rapidly. Prior to 2016, when IBC progressed toward becoming law, an organization going midsection up set off a long chain of procedures and lawful tangles that commonly implied little ramifications for the advertisers and couple of powerful gatherings for plan of action for investors, lenders and different partners.
Some other challenges faced by the Insolvency and bankruptcy code
Home-Buyer Relief: Home-purchasers will currently be perceived as financial creditors enshrined under the IBC since an “allotte” of a land venture has now been acquired line with the money related lender. This change settles the perplexity with respect to the status of homebuyers made because of the distinction in assessment of the National Company Law Appellate Tribunal and the Supreme Court.
Micro, Small and Medium Enterprise: Section 240A has been acquainted with permit the advertisers of Micro, Small and Medium Enterprise (“MSME”) to take an interest in the offering procedure and further enable the administration to prohibit MSME from the domain of specific areas of IBC.
Withdrawal of Application: The new Section 12A states that the Adjudicating Authority may permit the withdrawal of use as submitted under the IBC on an application made by the candidate with the endorsement of 90% of the democratic portion of the Committee of Creditors, in the way recommended. Be that as it may, such an application will just be permitted till the business procedure of the offering starts.
Conclusion
Overall the things can be unambiguously dealt with the Insolvency and Bankruptcy code in context with the violation of our fundamental as well as constitutional rights. In this paper we tend to pay our due concern on section 7, 8 and 9 in which insolvency procedure related to companies were enshrined. In this paper we enumerate that how these section violates our fundamental rights which is mentioned in our constitution. These provisions would be declared void so that this law may perform well as consequences of which there is an advancement of enterprises in India. This law also helps in boosting the accessibility of credit in the Indian market.
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[1] Student, BALLB 3rd Year, Department Of Law, Aligarh Muslim University Centre Jangipur Murshidabad, West Bengal
[2] Student, BALLB 3rd Year, Department Of Law, Aligarh Muslim University Centre Jangipur Murshidabad, West Bengal
[3] Apruv Sardeshmukh, IBC Ordinance: Addressing the Inadequacy?, retrieved from http://www.lawstreetindia.com/experts/column?sid=252 on 8/28/2019
[4] Manpreet Singh, “Transition from SICA to IBC- Historical Analysis” retrieved from https://blog.ipleaders.in/sica-to-ibc-historical-analysis/ on 28/09/2019.
[5] Section 5(7) of Insolvency and Bankruptcy Code
[6] Section 5(20) of Insolvency and Bankruptcy Code
[7] (2014) 10 SCC 1
[8] Writ Petition (Civil) 100 of 2018
[9] company Appeal (AT) (Insolvency) No. 1 & 2 of 2017
[10] Anil k bansal, Rule of Natural Justice, retrieved from https://www.lawteacher.net/free-law-essays/administrative-law/the-rule-of-natural-justice-administrative-law-essay.php on 26/09/2019.
[11] Section 3 (12) of Insolvency and Bankruptcy code
[12] Vidhi centre for legal policy, understanding the insolvency and bankruptcy code, 2016: Analysis development in jurisprudence, 2019, page Number 23.
[13] NCLT, New Delhi Principal Bench, C.P. No. IB – 104(PB)/2017
[14] SLP no 1740/2018
[15] Vidhi centre for legal policy, understanding the insolvency and bankruptcy code, 2016: Analysis development in jurisprudence, 2019, page Number 23.
[16] Richa Saraf, constitutional validity of Insolvency and Bankruptcy code, published in IBC: Ushering in new era, page 299.
[17] Suman layak, how to prevent IBC from becoming a victim of its own success, Economic Times, 23 September, 2018
