The Calcutta High Court in a recent ruling has dismissed a petition challenging the provisions of the Insolvency and Bankruptcy Code 2016 (IBC)..The challenge, seemingly by an operational creditor, was made while an insolvency application against Sberbank Russia (the corporate debtor) was pending with the NCLT..The writ petition was filed by Akshay Jhunjhunwala challenging Sections 7, 8 and 9 of IBC, whereas the Sberbank, being the corporate debtor, was one of the respondents in the case, defending the vires of the challenged provisions..The Petitioner’s Arguments.The petitioner’s main contention was the lack of intelligible differentia in the distinction made between operational and financial creditors. It was argued that the financial creditor is put on a higher pedestal than the operational creditor, and even in cases where the debt of an operational creditor would exceed that of a financial creditor, the operational creditor does not get a vote in the Committee of Creditors (CoC)..Further deepening the divide between the two, it was argued that IBC does not empower the adjudicating authority (NCLT) to look into the validity and sufficiency of a claim lodged by financial creditor whereas a deeper and better scrutiny is sought in respect of an operational creditor..Taking the previous argument a step further, it was also contended that Section 7 of the IBC does not permit a debtor to claim either a set off or make a counter claim against the financial creditor. In effect, not providing any ground to deny the liability fo the financial creditor..Counter Arguments.Sberbank.The Court’s attention was brought to several precedents, which held that the Court should be slow in striking down a legislation if it’s in the fiscal or economic domain, especially when the competence of the parliament is passing such a legislation is not under challenge..As regards the superior status given to a financial creditor in the IBC, reference was made to contents of the Bankruptcy Law Reforms Committee (BLRC) report, where it was found that claim of a financial creditor is typically more or less uncontested, while the claim of an operational creditor may have various angles which may require further adjudication..It was further argued that the operational creditor does, in fact, have the right to participate (but not vote) in the CoC if its claim is in excess of 10% of total liability of debtor. This distinction based on threshold, seeks to remove ‘fringe players’ who are likely to create difficulties in expeditious resolution of an insolvency situation..Union of India.While relying on precedents, it was argued that- ‘experimentation is permissible in economic matters’. Accordingly, it was placed on record that the IBC as a law has introduced new ideas and course corrections with regard to resolution of insolvency of legal entities and natural persons..It was further argued that the abuse of enactment is no ground to declare it ultra vires the Constitution.The judgment.At the outset, the Court recognised the three categories of creditors that existed prior to IBC regime, under the Companies Act: secured creditors, unsecured creditors and statutory creditors. Further, the Court observed that this classification is now replaced by financial and operational. The Court said that these classifications which existed have not been not obviated, as they continue to apply, albeit, at a different stage of the insolvency proceeding..Not agreeing with the petitioner’s primary contention, the Court ruled that the differentiation between financial and operational creditor has ‘certainty and exactitude, based on intelligible differentia’..Also referring to the BLRC report, while answering if its acceptable to place financial creditor on a higher pedestal, the Court said that the operational creditor is not ousted in entirety. It held that there is a perfectly logical rational for the differential treatment, as recorded in the BLRC report, that is of expeditious resolution of an insolvency issue..Further, the Court agreed with the respondents that, in cases of economic legislation, presumption of constitutionality of legislation is the norm unless manifestly or glaringly unconstitutional. The Court also agreed with the submission on behalf of the State and said that Courts are not required to adjudge a legislation on the possible misuse or other crudities or inequalities..Justifying its stance, the Calcutta High Court quoted the Supreme Court in P. Laxmi Devi where it was ruled that,.“All decisions in the economic and social spheres are essentially ad hoc and experimental. Since economic matters are extremely complicated, this inevitably entails special treatment for special situations”..Lawyers.The petitioner(s) were represented by Senior Advocates S.N. Mukherjee and Ratnanko Banerjee. Cyril Amarchand Mangaldas’s disputes resolution partner Gyanendra Kumar, represented Sberbank. While ASG Kaushik Chandra appeared for the State..(Read the judgment)
The Calcutta High Court in a recent ruling has dismissed a petition challenging the provisions of the Insolvency and Bankruptcy Code 2016 (IBC)..The challenge, seemingly by an operational creditor, was made while an insolvency application against Sberbank Russia (the corporate debtor) was pending with the NCLT..The writ petition was filed by Akshay Jhunjhunwala challenging Sections 7, 8 and 9 of IBC, whereas the Sberbank, being the corporate debtor, was one of the respondents in the case, defending the vires of the challenged provisions..The Petitioner’s Arguments.The petitioner’s main contention was the lack of intelligible differentia in the distinction made between operational and financial creditors. It was argued that the financial creditor is put on a higher pedestal than the operational creditor, and even in cases where the debt of an operational creditor would exceed that of a financial creditor, the operational creditor does not get a vote in the Committee of Creditors (CoC)..Further deepening the divide between the two, it was argued that IBC does not empower the adjudicating authority (NCLT) to look into the validity and sufficiency of a claim lodged by financial creditor whereas a deeper and better scrutiny is sought in respect of an operational creditor..Taking the previous argument a step further, it was also contended that Section 7 of the IBC does not permit a debtor to claim either a set off or make a counter claim against the financial creditor. In effect, not providing any ground to deny the liability fo the financial creditor..Counter Arguments.Sberbank.The Court’s attention was brought to several precedents, which held that the Court should be slow in striking down a legislation if it’s in the fiscal or economic domain, especially when the competence of the parliament is passing such a legislation is not under challenge..As regards the superior status given to a financial creditor in the IBC, reference was made to contents of the Bankruptcy Law Reforms Committee (BLRC) report, where it was found that claim of a financial creditor is typically more or less uncontested, while the claim of an operational creditor may have various angles which may require further adjudication..It was further argued that the operational creditor does, in fact, have the right to participate (but not vote) in the CoC if its claim is in excess of 10% of total liability of debtor. This distinction based on threshold, seeks to remove ‘fringe players’ who are likely to create difficulties in expeditious resolution of an insolvency situation..Union of India.While relying on precedents, it was argued that- ‘experimentation is permissible in economic matters’. Accordingly, it was placed on record that the IBC as a law has introduced new ideas and course corrections with regard to resolution of insolvency of legal entities and natural persons..It was further argued that the abuse of enactment is no ground to declare it ultra vires the Constitution.The judgment.At the outset, the Court recognised the three categories of creditors that existed prior to IBC regime, under the Companies Act: secured creditors, unsecured creditors and statutory creditors. Further, the Court observed that this classification is now replaced by financial and operational. The Court said that these classifications which existed have not been not obviated, as they continue to apply, albeit, at a different stage of the insolvency proceeding..Not agreeing with the petitioner’s primary contention, the Court ruled that the differentiation between financial and operational creditor has ‘certainty and exactitude, based on intelligible differentia’..Also referring to the BLRC report, while answering if its acceptable to place financial creditor on a higher pedestal, the Court said that the operational creditor is not ousted in entirety. It held that there is a perfectly logical rational for the differential treatment, as recorded in the BLRC report, that is of expeditious resolution of an insolvency issue..Further, the Court agreed with the respondents that, in cases of economic legislation, presumption of constitutionality of legislation is the norm unless manifestly or glaringly unconstitutional. The Court also agreed with the submission on behalf of the State and said that Courts are not required to adjudge a legislation on the possible misuse or other crudities or inequalities..Justifying its stance, the Calcutta High Court quoted the Supreme Court in P. Laxmi Devi where it was ruled that,.“All decisions in the economic and social spheres are essentially ad hoc and experimental. Since economic matters are extremely complicated, this inevitably entails special treatment for special situations”..Lawyers.The petitioner(s) were represented by Senior Advocates S.N. Mukherjee and Ratnanko Banerjee. Cyril Amarchand Mangaldas’s disputes resolution partner Gyanendra Kumar, represented Sberbank. While ASG Kaushik Chandra appeared for the State..(Read the judgment)
