Plea challenging validity of Section 95 of IBC: Delhi High Court notice to Centre, RBI

The Delhi High Court on Wednesday issued notices to the Central government, the Reserve Bank of India (RBI), the Insolvency and Bankruptcy Board (IBC Board), and a Committee of Creditors (CoC), on a petition challenging the constitutional validity of Sections 95 and 101 of the Insolvency and Bankruptcy Code (IBC) [Varun Jajoo and Ors v Union of India and Ors]..The petition has been filed by the suspended directors of an MSME named Emkay Automobile Industries Limited, against whom CIRP proceedings were initiated by the National Company Law Tribunal in October last year..The matter was heard by a Division Bench of Justices Manmohan and Navin Chawla which proceeded to seek response from Centre, RBI, IBC Board and CoC..Section 95 of the IBC provides for initiation of insolvency resolution process after application by a creditor or group of creditors..The petition argued that Section 240A of IBC specifically permits the guarantor of a Micro, Small and Medium Enterprise (MSME), against whom Corporate Insolvency Resolution Process (CIRP) proceedings have been initiated, to propose a resolution plan. However, the same is barred by Section 95.The plea stated that the said Section violates Article 14 of the Constitution for failing to recognise personal guarantors of an MSME Corporate Debtor as a separate class, and treats them at par with personal guarantors of a non-MSME, especially in view of the right created in favour of such personal guarantors under Section 240A read with Section 29A of the IBC..“It is most respectfully submitted that under Section 240A(l) read with the Section 29A(h) of the IBC, 2016 the personal guarantor of an MSME, Corporate Debtor has been granted a right by way of an exception carved under Section 240A(l) read with Section 29A(h) of the IBC, 2016 whereby such a personal guarantor can propose a Resolution Plan for the insolvency resolution of the Corporate Debtor as a going concern,” the petitioners argued..The plea said that once the insolvency resolution process is initiated against the Petitioners under Section 95 of the IBC, they would not be allowed to deal with their assets on account of the moratorium imposed under Section 101 and thus would be unable to provide the funds for the insolvency resolution of the corporate debtor which in effect would prevent the petitioners from filing a resolution plan so as to revive the corporate debtor.“Section 95 read with Section 101 of the IBC, 2016 would result in defeating the right of the Petitioners under Section 240A read with Section 29 A of the IBC, 2016 and thereby rendering the said right of the Petitioners meaningless," the petition said..The petitioners, therefore, sought a declaration holding Section 95 of the IBC to be violative of Article 14 and to make pari-materia provisions under Chapter II of the IBC by giving relaxation to a personal guarantor of an MSME undergoing CIRP to propose a resolution plan.The plea also stay on further proceedings before the NCLT against the petitioners.Advocates Swati Bhardwaj and Shivankar Rao appeared for the petitioner.