TMI Blog2018 (5) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... a rationale to the financial creditors being treated in a particular way vis-à-vis an operational creditor in an insolvency proceeding with regard to a company. The rationale is a plausible view taken for an expeditious resolution of an insolvency issue of a company. Courts are not required to adjudge a legislation on the basis of possible misuse or the crudities or inequalities that may be perceived to be embedded in a legislation. The rationale of giving a particular treatment to a financial creditor in the process of insolvency of a company under the Code of 2016 cannot be said to offend any provisions of the Constitution of India. Nothing is placed on record that, a different view should be taken on the ground of breach of principles of natural justice in a proceeding under the Code of 2016. - W.P. NO. 672 OF 2017 - - - Dated:- 2-2-2018 - MR. DEBANGSU BASAK, J. For The Petitioners : Mr. S.N. Mukherjee, Sr. Advocate. Mr. Ratnanko Banerjee, Sr. Advocate Mr. Shounak Mitra, Advocate Mr. A. Chowdhury, Advocate Mr. Sambhik Chowdhury, Advocate Mr. D. Majumder, Advocate For The Respondent : Mr. Gyanendra Kumar, Advocate, Ms. Rituparna Chatterjee, Advocate, Mr. Kaushik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sufficiency of a claim lodged by a financial creditor whereas a deeper and a better scrutiny is sought to be introduced in respect of an operational creditor. In both the events, learned Senior Advocate for the petitioners has submitted that, the scope of enquiry as contemplated under the Code of 2016 or at least as the learned Presiding Officers of NCLTs seek to enforce, are within such extreme limited parameters that, justice so far as a corporate debtor is concerned stands affected. He has submitted that, a corporate debtor does not have a platform on which the corporate debtor can get on board along with its creditors to face and challenge the validity, sufficiency, legality and the quantum of the claim leveled against it by any category of creditor, be it the financial or the operational one. In case of an operational creditor, however, the Code envisages a slightly better position for a corporate debtor although such so-called better position is also insufficient. According to him, Section 7 of the Code of 2016 as it stands today does not permit a corporate debtor to claim either set off or make a counter claim, a valid defence against the financial creditor. A corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f insolvency and bankruptcy proceedings in respect of a legal entity as well as a natural person. According to him, previously the secured creditors used to get preference in the insolvency proceedings. Preference was also given to the claims of workers as also to the statutory dues. Under the Code of 2016, there is an innovative and paradigm shift in the priorities of creditors. It was felt that, the Companies Act, 1956, the Sick Industrial Companies (Special Provisions) Act, 1985, Provisional Insolvency Act, 1920 and other laws relating to Insolvency, did not end in the desired level of success as an over emphasis was given to secured creditors, statutory creditors and workers. He has submitted that, the Court should be slow in striking down an Act of a legislature, duly empowered to pass the legislation, if it is in fiscal or economic domain. In the present case, the competence of the parliament in passing the impugned legislation is not under challenge. The impugned legislation is in the economic field. The Courts have recognized that, in fiscal or tax statutes, a greater latitude is given than other statutes. He has relied upon 2000 Volume 5 Supreme Court Cases page 471 (Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time limit prescribed under the Code of 2016 can be held to be directory rather than mandatory, then also, by reason of requirement on the adjudicating authority or the insolvency professional or any other designated authority to come up with a plan for insolvency resolution at the earliest, the Code of 2016 in its essence seeks to address an insolvency issue of a legal entity as expeditiously as possible so as to permit it to survive. In the event, the insolvency issue cannot be resolved as contemplated under the Code of 2016 then such legal entity is sent into liquidation. It is unlike the Companies Act, 1956. Under the Companies Act, 1956, a company would be put to liquidation once the winding up petition presented was admitted. Learned Advocate for the second respondent has relied upon Section 30 of the Code of 2016 and Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to contend that, the interest of operational creditors are fully protected. So far as the principles of natural justice are concerned, learned Advocate for the second respondent has submitted that, the Code of 2016 contemplates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the insolvency issues as expeditiously as possible. He has referred to the various passages of Innoventive Industries Limited (supra) in support of his contentions. He has contended that, no relief should be granted to the petitioners. Learned Additional Solicitor General appearing for the Union of India has submitted that, Code of 2016 cannot be struck down to be ultra vires as sought to be contended on behalf of the petitioners. He has relied upon 2016 Volume 2 Supreme Court Cases page 226 (Director General of Foreign Trade v. Kanak Exports Anr.) and has submitted that, experimentation is permissible in economic matters. The Code of 2016 has introduced new ideas and course corrections with regard to resolution of insolvency of legal entities and natural persons. Legislature is entitled to undertake such experimentations. The Court should be slow in striking down legislations with regard to an economic matter. Referring to 1981 Volume 4 Supreme Court Cases page 675 (R.K. Garg v. Union of India) he has submitted that, possibility of an abuse of a piece of legislation is no ground for it being struck down as ultra vires the Constitution of India. Referring to 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ( 4) . ( 5) . ( 6) dispute includes a suit or arbitration proceedings relating to - ( a) the existence of the amount of debt; ( b) the quality of goods or service; or ( c) the breach of a representation or warranty; ( 7) financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; ( 8) financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes - ( a) money borrowed against the payment of interest; ( b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; ( c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; ( d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Adjudicating Authority when a default has occurred. Explanation .- For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. ( 2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. ( 3) The financial creditor shall, along with the application furnish - ( a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; ( b) the name of the resolution professional proposed to act as an interim resolution professional; and ( c) any other information as may be specified by the Board. ( 4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under subsection (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). ( 5) Where the Adjudicating Authority is satisfied that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred. 9. Application for initiation of corporation insolvency resolution process by operational creditor.- ( 1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under subsection (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process. ( 2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed. ( 3) The operational creditor shall, along with the application furnish - ( a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor; ( b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt; ( c) a copy of the certificate from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o effect from May 28, 2016, the provisions of the Code of 2016 under challenge in the writ petition have come into effect from December 1, 2016. Prior thereto, the Companies Act, 2013 and even prior thereto the Companies Act, 1956 dealt with the insolvency issues of a Company incorporated or existing under such Act. A company has various stakeholders. Creditors of a company are one of the stakeholders. Prior to the concepts of financial and operational creditors being introduced through the Code of 2016, a creditor of a company was classified broadly under three categories, namely, secured creditor, unsecured creditor and statutory creditor. The Code of 2016 segregates creditors of a company into two broad categories of financial and operational creditor. In addition to the three classifications of creditors existing prior to the Code of 2016, it now seeks to introduce financial and operational creditors. The definition of financial creditor appears in Section 5(7) which is to be read along with Section 5(8) and Section 3(10) of the Code of 2016. Essentially a financial creditor means a creditor whose claim arises out of a transaction in liquidity entered into by such credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btaining in the Code of 2016 can be said to have certainty and exactitude. The classification made by the Code of 2016 amongst the creditors of a company is on reasonable differentia. The differentia introduced by the Code of 2016 in respect of a creditor of a company does not offend any provisions of the Constitution of India. At least the same is not the argument of the parties before Court. What has been argued is that, the differentiation between the two creditors is such that, one of the classified creditors, that is to say, the financial creditor takes precedence over the operational creditor. Whether the treatment of a financial creditor on pedestal higher than an operational creditor and bestowing a higher or better right, so to speak, to a financial creditor is just and proper or whether the same offends any provisions of the Constitution of India requires consideration. The insolvency process prior to the coming into effect of the Code of 2016 was found to be inadequate to deal with the issues of insolvency of both legal entities and that of natural persons. The existing framework for insolvency and bankruptcy resolution was found to be ineffective and causing undue de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore be left with wide latitude in devising ways and means of fiscal or regulatory measures, and the court should not, unless compelled by the statute or by the Constitution, encroach into this field, or invalidate such law. The Bankruptcy Committee gives a rationale to the financial creditors being treated in a particular way vis- -vis an operational creditor in an insolvency proceeding with regard to a company. The rationale is a plausible view taken for an expeditious resolution of an insolvency issue of a company. Courts are not required to adjudge a legislation on the basis of possible misuse or the crudities or inequalities that may be perceived to be embedded in a legislation. The rationale of giving a particular treatment to a financial creditor in the process of insolvency of a company under the Code of 2016 cannot be said to offend any provisions of the Constitution of India. Sree Metaliks Limited Anr. (supra) , Innoventive Industries Limited (supra) and Mobilox Innovations Private Limited (supra) did not decide the issues of vires of the provisions of the Code of 2016 as sought to be urged in the present petition. Kanak Exports Anr. (supra) has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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