The Gujarat High Court has issued a show cause notice to the Central government in a challenge to the Insolvency and Bankruptcy Code (IBC), 2016..A Division Bench of Chief Justice R Subhash Reddy and Justice Vipul M Pancholi issued notice returnable on January 22, 2018, in a petition filed by Accord Industries Ltd, Ahmedabad, through Advocate Vishal J Dave..Financial creditor Canbank Factors Ltd. had initiated action under the IBC against the petitioner for which notice was served in October 2017. However, prior to the same, a case had already been filed by the creditor before the Commercial Court, City Civil Court at Ahmedabad, which is currently pending..In this context, the petitioner has challenged the enabling provisions of the Code as well as related provisions in the Companies Act, 2013 and the Finance Act, 2017. Inter alia, Sections 3(12), 5(7), 6, 7, 12, 29, 62, 214(f), 231 and 238 of the Code have been challenged on various grounds, including the following..Violation of Article 14 of the Constitution.The IBC treats financial creditors and operational creditors differently. When it comes to financial creditors, no prior notice is required to be sent before commencing proceedings. Further, operational creditors cannot initiate proceedings under the Code when a legal dispute is already pending. Such a bar does not operate qua financial creditors..There is no intelligible differentia in such discrimination between a financial creditor and an operational creditor. Such a classification has no rational nexus with the object of the Act i.e. insolvency resolution..The corporate debtor is also denied an opportunity to file a statement of objections or a written statement in proceedings initiated by financial creditors, unlike when the dispute involves operational creditors..Violation of Article 19 (1) (g) of the Constitution.The appointment of interim resolution professionals under Section 17 of the IBC for the process of winding up has been challenged. It has been contended that such persons,.“…would have no expertise or experience in the business of the corporate debtor, which solely vests with the promoters, directors, etc. of the corporate debtor, and thereby putting the entire business of the corporate debtor at stake. Hence, the scheme of the Code infringes article 19(1)(g) which provides for freedom of occupation, trade or business.”.Further, such draconian provisions “…can be grossly abused by any competitor or disgruntled creditor, be it Financial or Operational.”.Violation of Right to Privacy under Article 21.Sections 29(2) read with Section 5(25) of the IBC is violative of the fundamental right to privacy. As per the petitioner, resolution applicants are thereby given free access to the information memorandum of the corporate debtor without executing any confidentiality or non-solicitation agreement without any restrictions whatsoever..It has also been submitted that the protective restrictions provided for in the IBC are vague and cannot be deemed reasonable enough, given the drastic implications of the Code..Section 7 of the IBC also destroys the personal liberty of the petitioner by rendering the commercial suit pending before the City Civil Court, Ahmedabad between the parties redundant, nugatory and otiose under the plenary law of the Parliament holding the field..In respect of proceedings before the Ahmedabad Commercial Court, the Civil Procedure Code provides for written agreements, leading evidence, disclosures, discovery and inspection of documents, counter claims, opportunity of hearing etc. Proceedings before the National Company Law Tribunal (NCLT), on the other hand, are summary..Violation of Natural Justice principles.Sections 7 of the IBC read with Rules 4(3) and 6(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016 are contrary to the principles of natural justice i.e., audi alteram partem, principle of legitimate expectation and doctrine of fairness..In the instant case, the act of the NCLT of not serving a prior notice on the petitioner before admitting the application is also in violation of Sections 420 and 424 of the Companies Act, 2013, read with Rule 37 of the National Company Law Tribunal Rules, 2016. Thereby, no opportunity is provided to the corporate debtor to present its case. This is arbitrary in nature and must be held unconstitutional..Moreover, the erstwhile right of the debtor to make objections, suggest plans for restructuring and repayment of debts etc. has also been taken away by the Code, thereby making it wholly arbitrary..Contrary to Section 41 of the Indian Evidence Act.The Board for Industrial and Financial Reconstruction (BIFR) under the Companies Act, when it existed, had no competence to wind up a company. It only had the power to recommend the winding up to the appropriate High Court..This, according to the petitioner, was in consonance with Section 41 of the Indian Evidence Act, 1872, whereby only a court of competent jurisdiction can take away the legal character of a person, such as the case with insolvency proceedings qua a company..“…the BIFR was well as the CLB acted within the limitations of being a tribunal wherein it has no power to remove a legal character and declare an entity as insolvent.”.On the contrary, the IBC confers jurisdiction on the NCLT to declare individuals bankrupt or insolvent even though it is not a court within the meaning of Section 41..Objections to the scheme of appointments to the NCLT.The petitioner has contended that the independence of the judiciary has been compromised as the nodal ministry for the IBC is the Ministry of Corporate Affairs, and not the Law Ministry. In light of the same, several objections have been raised with respect to the scheme of appointments to the NCLT..Reference has been made to the insertion of Section 417A in the 2013 Companies Act, by virtue of which the qualification, and the terms and conditions of service of the Chairperson and Members of the Tribunal are governed by the Finance Act. This amendment was brought about vide a Money Bill, although appointments cannot be a subject matter of a Money Bill. In this context, it has been contended that,.“…litigants cannot be expected to approach such Tribunals as same violates its Art. 14,19 and 21 because such Tribunals are wholly not independent.”.A September 2017 notification appointing a bench of two judicial members in the NCLT, Ahmedabad has been challenged as having been made without jurisdiction. The notification has been challenged as ultra vires Section 419 of the Companies Act, 2013, which calls for one judicial member and one technical member to sit as a bench ordinarily..The proviso to Section 419, which allows single bench NCLT sittings has been challenged as manifestly arbitrary as the experience and understanding of the technical member is what makes the concept of the Tribunal work. It has been argued that,.“… in the absence of the technical member, technical laws and issues cannot be properly decided in the complex world of economics and finance.“.Further, as per section 409 (2) of the Companies Act, only a retired High Court judges with five years of experience is eligible to be appointed as the President of the NCLT, who sits in the New Delhi branch. In other branches of the NCLT, district judges with five years of experience or advocates having ten years of experience are eligible to be judicial members..The petitioner contends that such classification is bad as there is no difference in judicial work carried out by these persons and it has no nexus to the insolvency process i.e. the object of the Act..Other Miscellaneous objections .The Parliament is not competent to create a Tribunal under Article 323B for insolvency and liquidation of a company.Amendment made in November 2017 which bars defaulting promoters and connected entities from bidding for their assets has been challenged as it does not distinguish between fraudulent/wilful defaulters and ordinary promoters genuinely interested in reviving their companies.Section 12 of the Code, which requires the Corporate Insolvency Resolution process to be completed within 180 days from the date of admitting the application, is arbitrary, impractical and wholly weighed against any Corporate Debtor.Direct appeal from NCLT orders to the Supreme Court as provided for under Section 62 of the Code is in clear violation of the basic structure of the Constitution as judicial review of High Courts is taken away.Sections 180, 231 and 238 of the Code are unconstitutional for ousting the jurisdiction of all courts, including civil courts, High Courts and the Supreme Court. This is contrary to Article 323B and the law laid down in L Chandrakumar’s case. Further, there was no necessity to divest the jurisdiction of commercial courts, established under The Commercial Court, Commercial Division and Commercial Appellate Division of High Courts Act 2015.The IBC does not provide for withdrawal and compromise of disputes, which is against the spirit dispute resolutionUnder Section 214, there is no provision to question the authenticity of, raise objections to or rectify information furnished as information utility by financial or operational creditors, even if Section 214 (f) provides public access to such financial information..A number of similar petitions challenging the vires of the Code are pending before the Gujarat High Court alone. Similar challenges have been filed in the High Courts of Madras and Punjab & Haryana as well..Read Order.
The Gujarat High Court has issued a show cause notice to the Central government in a challenge to the Insolvency and Bankruptcy Code (IBC), 2016..A Division Bench of Chief Justice R Subhash Reddy and Justice Vipul M Pancholi issued notice returnable on January 22, 2018, in a petition filed by Accord Industries Ltd, Ahmedabad, through Advocate Vishal J Dave..Financial creditor Canbank Factors Ltd. had initiated action under the IBC against the petitioner for which notice was served in October 2017. However, prior to the same, a case had already been filed by the creditor before the Commercial Court, City Civil Court at Ahmedabad, which is currently pending..In this context, the petitioner has challenged the enabling provisions of the Code as well as related provisions in the Companies Act, 2013 and the Finance Act, 2017. Inter alia, Sections 3(12), 5(7), 6, 7, 12, 29, 62, 214(f), 231 and 238 of the Code have been challenged on various grounds, including the following..Violation of Article 14 of the Constitution.The IBC treats financial creditors and operational creditors differently. When it comes to financial creditors, no prior notice is required to be sent before commencing proceedings. Further, operational creditors cannot initiate proceedings under the Code when a legal dispute is already pending. Such a bar does not operate qua financial creditors..There is no intelligible differentia in such discrimination between a financial creditor and an operational creditor. Such a classification has no rational nexus with the object of the Act i.e. insolvency resolution..The corporate debtor is also denied an opportunity to file a statement of objections or a written statement in proceedings initiated by financial creditors, unlike when the dispute involves operational creditors..Violation of Article 19 (1) (g) of the Constitution.The appointment of interim resolution professionals under Section 17 of the IBC for the process of winding up has been challenged. It has been contended that such persons,.“…would have no expertise or experience in the business of the corporate debtor, which solely vests with the promoters, directors, etc. of the corporate debtor, and thereby putting the entire business of the corporate debtor at stake. Hence, the scheme of the Code infringes article 19(1)(g) which provides for freedom of occupation, trade or business.”.Further, such draconian provisions “…can be grossly abused by any competitor or disgruntled creditor, be it Financial or Operational.”.Violation of Right to Privacy under Article 21.Sections 29(2) read with Section 5(25) of the IBC is violative of the fundamental right to privacy. As per the petitioner, resolution applicants are thereby given free access to the information memorandum of the corporate debtor without executing any confidentiality or non-solicitation agreement without any restrictions whatsoever..It has also been submitted that the protective restrictions provided for in the IBC are vague and cannot be deemed reasonable enough, given the drastic implications of the Code..Section 7 of the IBC also destroys the personal liberty of the petitioner by rendering the commercial suit pending before the City Civil Court, Ahmedabad between the parties redundant, nugatory and otiose under the plenary law of the Parliament holding the field..In respect of proceedings before the Ahmedabad Commercial Court, the Civil Procedure Code provides for written agreements, leading evidence, disclosures, discovery and inspection of documents, counter claims, opportunity of hearing etc. Proceedings before the National Company Law Tribunal (NCLT), on the other hand, are summary..Violation of Natural Justice principles.Sections 7 of the IBC read with Rules 4(3) and 6(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016 are contrary to the principles of natural justice i.e., audi alteram partem, principle of legitimate expectation and doctrine of fairness..In the instant case, the act of the NCLT of not serving a prior notice on the petitioner before admitting the application is also in violation of Sections 420 and 424 of the Companies Act, 2013, read with Rule 37 of the National Company Law Tribunal Rules, 2016. Thereby, no opportunity is provided to the corporate debtor to present its case. This is arbitrary in nature and must be held unconstitutional..Moreover, the erstwhile right of the debtor to make objections, suggest plans for restructuring and repayment of debts etc. has also been taken away by the Code, thereby making it wholly arbitrary..Contrary to Section 41 of the Indian Evidence Act.The Board for Industrial and Financial Reconstruction (BIFR) under the Companies Act, when it existed, had no competence to wind up a company. It only had the power to recommend the winding up to the appropriate High Court..This, according to the petitioner, was in consonance with Section 41 of the Indian Evidence Act, 1872, whereby only a court of competent jurisdiction can take away the legal character of a person, such as the case with insolvency proceedings qua a company..“…the BIFR was well as the CLB acted within the limitations of being a tribunal wherein it has no power to remove a legal character and declare an entity as insolvent.”.On the contrary, the IBC confers jurisdiction on the NCLT to declare individuals bankrupt or insolvent even though it is not a court within the meaning of Section 41..Objections to the scheme of appointments to the NCLT.The petitioner has contended that the independence of the judiciary has been compromised as the nodal ministry for the IBC is the Ministry of Corporate Affairs, and not the Law Ministry. In light of the same, several objections have been raised with respect to the scheme of appointments to the NCLT..Reference has been made to the insertion of Section 417A in the 2013 Companies Act, by virtue of which the qualification, and the terms and conditions of service of the Chairperson and Members of the Tribunal are governed by the Finance Act. This amendment was brought about vide a Money Bill, although appointments cannot be a subject matter of a Money Bill. In this context, it has been contended that,.“…litigants cannot be expected to approach such Tribunals as same violates its Art. 14,19 and 21 because such Tribunals are wholly not independent.”.A September 2017 notification appointing a bench of two judicial members in the NCLT, Ahmedabad has been challenged as having been made without jurisdiction. The notification has been challenged as ultra vires Section 419 of the Companies Act, 2013, which calls for one judicial member and one technical member to sit as a bench ordinarily..The proviso to Section 419, which allows single bench NCLT sittings has been challenged as manifestly arbitrary as the experience and understanding of the technical member is what makes the concept of the Tribunal work. It has been argued that,.“… in the absence of the technical member, technical laws and issues cannot be properly decided in the complex world of economics and finance.“.Further, as per section 409 (2) of the Companies Act, only a retired High Court judges with five years of experience is eligible to be appointed as the President of the NCLT, who sits in the New Delhi branch. In other branches of the NCLT, district judges with five years of experience or advocates having ten years of experience are eligible to be judicial members..The petitioner contends that such classification is bad as there is no difference in judicial work carried out by these persons and it has no nexus to the insolvency process i.e. the object of the Act..Other Miscellaneous objections .The Parliament is not competent to create a Tribunal under Article 323B for insolvency and liquidation of a company.Amendment made in November 2017 which bars defaulting promoters and connected entities from bidding for their assets has been challenged as it does not distinguish between fraudulent/wilful defaulters and ordinary promoters genuinely interested in reviving their companies.Section 12 of the Code, which requires the Corporate Insolvency Resolution process to be completed within 180 days from the date of admitting the application, is arbitrary, impractical and wholly weighed against any Corporate Debtor.Direct appeal from NCLT orders to the Supreme Court as provided for under Section 62 of the Code is in clear violation of the basic structure of the Constitution as judicial review of High Courts is taken away.Sections 180, 231 and 238 of the Code are unconstitutional for ousting the jurisdiction of all courts, including civil courts, High Courts and the Supreme Court. This is contrary to Article 323B and the law laid down in L Chandrakumar’s case. Further, there was no necessity to divest the jurisdiction of commercial courts, established under The Commercial Court, Commercial Division and Commercial Appellate Division of High Courts Act 2015.The IBC does not provide for withdrawal and compromise of disputes, which is against the spirit dispute resolutionUnder Section 214, there is no provision to question the authenticity of, raise objections to or rectify information furnished as information utility by financial or operational creditors, even if Section 214 (f) provides public access to such financial information..A number of similar petitions challenging the vires of the Code are pending before the Gujarat High Court alone. Similar challenges have been filed in the High Courts of Madras and Punjab & Haryana as well..Read Order.
