The Gujarat High Court has issued a notice regarding 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, which was issued by a Bench of Chief Justices Reddy and Pancholi is returnable on 22 January, 2018 and was issued in response to a Petition filed by Accord Industries Limited.
Accord Industries approached the High Court after its financial creditor Canbank Factors Ltd. initiated action against it under the Code even while a dispute between them was pending before a Civil Court. This dispute involved a sum amounting to around Rs. 9 crore.
The Petition challenges several sections such as Section 5(7) which defines a financial creditor, and Section 6 which deals with which persons may initiate corporate insolvency resolution process) and Section 6 which dictates which persons may initiate corporate insolvency resolution process.
The Petition contends the violation of several Articles of the Constitution , including Article 14, the Right to Equality and Article 19, Right to practice any profession or to carry on any occupation, trade or business.
It states that that there currently exists no intelligible differentia in the classification mechanism prescribed for the two creditors. Also included is he assertion that the current law places the management of affairs of the corporate debtor with the resolution professional, who would have no expertise in the business of the corporate debtor.
The petition has challenged the power of the National Company Law Tribunal (NCLT) to take away the legal character of a person through insolvency proceedings, contending that it is not a Court within the meaning a Court under the Evidence Act.
Another contention in the Petition is that it does not distinguish between fraudulent and willful defaulters and promoters. The ordinance bars not only willful defaulters, but also several other categories such as guarantors to debtors, those convicted of any offence with a prison…term of more than two years, directors in disqualified companies etc.
The Code does not see a difference between defaulters and willful defaulters and punishes both equally.
The Petitioners also contend that it is evident that barring willful defaulters is unjust since the process of deciding who a willful defaulter is lies completely with bankers who are biased in the matter as their interest lies in the recovery of the loan amount.