Insolvency And Bankruptcy Code & Ordinance Challenged Before Gujarat HC; Notice Issued

The Gujarat High Court has issued notice on a Petition challenging the constitutional validity of the Insolvency and Bankruptcy Code, 2016 and the recent ordinance barring Promoters from submitting a resolution plan.

The notice returnable on 22 January, 2018 was issued by a Bench comprising Chief Justice R. Subhash Reddy and Justice Vipul M. Pancholi on a Petition filed by Accord Industries Limited.

The Petitioner approached the High Court after its financial creditor Canbank Factors Ltd. initiated action against it under the Code while a dispute regarding payment of an amount over Rs. 9 crore was pending before a Civil Court.

It has now challenged Sections 5(7) (definition of financial creditor), 6 (persons who may initiate corporate insolvency resolution process), 7 (initiation of process by financial creditor), 12 (time-limit for completion of insolvency resolution process), 29 (preparation of information memorandum), 214(f) (obligation of information utility), 231 (bar of jurisdiction) and 238 (Code to override other laws) of the Code.

The Petition alleges violation of Article 14 of the Constitution of India contending that there exists no intelligible differentia in the classification of a financial credit and operational creditor. To this end, it points out the difference in mechanism prescribed for the two creditors.

It further challenges Sections 17 and 20, asserting that these place the management of affairs of the corporate debtor in the resolution professional, who "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". This, it says, violates Article 19(1)(g) of the Constitution of India, which guarantees freedom of occupation, trade or business.

Besides, it alleges violation of Section 41 of the Evidence Act, contending that the National Company Law Tribunal (NCLT) is not a Court within the meaning of the provision and hence, cannot take away the legal character of a person through insolvency proceedings. The time limit of 180 days for completion of the insolvency process, as prescribed by Section 12 of the Code has also been challenged as being "arbitrary and wholly weighed against any purported Corporate Debtor".

It goes on to challenge the recent Ordinance on the ground that it does not distinguish between fraudulent and willful defaulters and promoters, who are genuinely interested in reviving their companies.

It contends, "The ordinance that bars not only willful defaulters, but also several other categories such as guarantors to debtors, those with loans classified as non-performing assets for at least a year, those convicted of any offence with a prison term of more than two years, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities. The said Ordinance does not make difference between defaulters and willful defaulters as punishes both equally. It is also evident that barring willful defaulters appears to be unjust since the process of willful defaulters lies completely with bankers who anyway are prejudice with the matter and are for recovery of the loan amount and there is no judicial scrutiny of making person willful defaulter."

Read the Petition and Order Here