Insolvency Code Provisions challenged in Madras High Court

The Madras High Court yesterday issued notice in a writ petition challenging various provisions of the Insolvency and Bankruptcy Code, 2016 (Code). Notice was issued by the First Bench of the court comprising Chief Justice Indira Banerjee and Justice M Sundar..The petition, filed by Southern Polypet Private Limited, alleges that Sections 5, 8, 9, 13, 14, 17, 20, 25, 29(2), 30, 31 of the Code read with Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 are contrary to Articles 14, 19 and 21 of the Constitution of India..Subsequent decisions made by the Chennai Bench of the NCLT, which is also a respondent in the petition(s), have also been challenged..The Court while issuing notice clubbed the petition with another petition filed by Pratyusha Resources & Infra Pvt. Ltd..The challenge to the Code can broadly be summed up in the following sub headings:.Right to be heard.One of the main grounds for this challenge relates to right to be heard. It is being argued that Sections 7, 8, 9, 14 and 31 of the Code deprive the right of the Petitioner to present its case before being subjected to the provisions of the Code, and are contrary to principles of natural justice i.e., “audi alteram partem”, principle of legitimate expectation and doctrine of fairness. Note that this was first raised in the case of Innoventive before the High Court of Bombay after the Mumbai Bench of NCLT had rejected this right to the debtor..Existence of (prior) dispute.Secondly, Section 8(2) read with 5(6) of the Code is being viewed as violative of Article 14 of the Constitution as it denies equality before the law and equal protection of the law. Section 8(2) classifies debtors into two kinds, those who have raised a dispute prior to initiation of insolvency application and those who haven’t. Without getting into the merits of the dispute, it is being stated that the Code arbitrarily converts what is a subjective test under provisions of the Companies Act, 2013, into an objective one; thereby assuming the bona fide nature of the dispute..Another grievance engraved within Section 8(2) is one which has cropped up several times before various benches as well as the NCLAT (Kirusa Software Private Ltd. v. Mobilox Innovations Private Ltd.). Despite clarification by the NCLAT, according to the petition, there continues to exist (statutory) ambiguity in interpretation of the term “dispute”..The final point within Section 8(2) pertains to the restriction imposed in the nature of repayment of debt. It does not recognise, for instance, a settlement by transfer of property to be a valid repayment of one’s debt and requires that proof of online transfer/ transfer by cheque of the debt needs to be furnished as a record of repayment of the debt..Questionable competency of resolution professional to run business.Thirdly, through Sections 17 and 20, the Code has the effect of vesting the affairs of the corporate debtor in the interim resolution professional (IRP) and suspending the powers of the board of the corporate debtor. It is being argued that an IRP may not necessarily have the expertise to run the business and, eviction of the existing management is wholly arbitrary and based on irrational criteria, namely, existence of a suit or arbitration proceeding on the date of receipt of the notice of insolvency under Section 8(1). This is being viewed as a violation of Article 19(1)(g) of the Constitution, which provides for the freedom of occupation, trade or business upon the citizens of India..Unfettered access to debtors confidential information.Fourthly, an information memorandum is required to be prepared under Section 25 of the Code by the resolution professional. Under Section 29, the applicant, being any person without any qualifying criteria whatsoever, is given a free hand to access to the information memorandum without executing any confidentiality or non-solicitation agreement without any restrictions whatsoever. This is being viewed as violative or Article 19(1)(g) since there is no codified statute that protects confidentiality without an agreement being entered into between the Parties..Discrimination between financial and operational creditors.Fifthly, it is being argued that there exists no intelligible differentia while discriminating between operational and financial creditors insofar as an operational creditor is required to send a notice to debtor whereas a financial creditor is not – a clear violation of the principles of natural justice, and in contravention of Article 14 of the Constitution.It has lastly been argued that the act of the NCLT of not serving a prior notice on the Petitioner before admitting the application is in clear violation of Sections 420 and 424 of the Companies Act, 2013 read with Rule 37 of the National Company Law Tribunal Rules, 2016.