CONSTITUTIONAL VALIDITY OF THE INDIAN INSOLVENCY CODE

We have Insolvency and Bankruptcy Code face challenges of constitutional validity several times since its inception. It is needless to believe that every time an issue was arisen it was well solved by the Supreme Court decisions from time to time and also ambiguities whichever arose, have been tackled with amendments from time. The cure of Amendment has been resorted to so extensively by the legislature that it would not incorrect to assert that it is one the most heavily and frequently  amended  statutes of India.The food for thought for the article below comes from the Supreme Court recent decision regarding determination of constitutional validity of the Insolvency and Bankruptcy Code Amendment Act, 2020.In this article, we shall also deal with various other judgements where constitutional validity of Insolvency and Bankruptcy Code was under consideration and how is the approach of judiciary towards this statute.

The very recent case decided in January 2021 which is, Manish Kumar v Union of India, was indeed neither the first and nor going to be the last case where constitutional validity of  Insolvency and Bankruptcy Code provisions is challenged.As many as 40 writ petitions were filed in this case.This bench consisted of eminent jurists like Justices R F Nariman, Navin Sinha and KM Joseph had considered the petitions.The judgement was beautifully  authored and delivered  by Justice KM Joseph in this case.. In this case,the constitutional validity of Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020 was challenged before Supreme court.

NEW INCLUSIONS

The Insolvency and Bankruptcy Code (Amendment) Act, 2018. The Ordinance amended the stance of  Insolvency and Bankruptcy Code, 2016 clarifying that allottees under a real estate project can  be considered as financial creditors. This new amendment in 2020 authorized a minimum mandatory number of 100 allotee to file for insolvency before National Company Law Tribunal collectively against a real-estate developer who has defaulted In this new Insolvency and Bankruptcy Code Amendment Act,2020, section 3 , 4 and 10 were amended which further cause some new alterations and inclusions in the Code. Section 3  caused the addition of a proviso in section 7.Section 4  caused the addition of an Explanation II in Section 11.Lastly, section 10 led to the addition of the new section to the Code that is, section 32A.

The Petitioners in this case challenged the entire Amendment by claiming that amendments to Sections 3, 4 and 10 are in violation to Article 14.They explained that, inter alia, main problem faced by them was regarding section 7. Prior to Amendment, section 7 allowed individual petitions by financial creditors for corporate insolvency resolution plan but, now it has caused huge impediment to their interests as now they have to be bothered and harassed to total pool of creditors and contact 10% them before filing the petition. However, the Supreme Court rejected arguments by the Petitioners and upheld the constitutionality of Insolvency and Bankruptcy Code.

DECISIONS OVER THE YEARS

The Supreme Court observed in Manish Kumar case that section 3 and 7 are at par with the legislative objective of providing a dome of protection to the Corporate debtor against malfeasant and frivolous  applications. It also upheld the validity of Explanation II of section 11 by declaring it as merely a ‘clarificatory provision’ and section 32A as a provision which was introduced as a result of experience  of the Judiciary while dealing with such cases previously.

Now, let us look back to decided cases by Supreme Court in these previously. The very first case is famous Swiss ribbons case .There were 10 writ petitions,including an Special Leave Petition regarding constitutional validity of  various provisions of the Insolvency and Bankruptcy Code, 2016.The issue before the court was whether section.7,8,9,12,21,24, 29A,53 and 210 were unconstitutional.The Insolvency and Bankruptcy Code Amendment Act 2016 was just newly introduced when it was challenged by this case.The Supreme Court defended the Insolvency and Bankruptcy Code and upheld its validity in entirety and only ended up prescribing certain reforms and amendments. It also referred to Bankruptcy Legislative Reforms Commission (BLRC) Report,2014 chaired by T. K. Viswanathan, Supreme Court opined that the code is designed in such a fashion that liabilities of maximum creditors should be met with as the intention of the code is to curb down individual grievances of creditors against a Corporate Debtor for their claim. The efficacy of this judgement can be fairly judged as there has been an establishment of a circuit bench of National Company Law Tribunal in Chennai.

A very thoughtful observation was made by Supreme Court considering the judgement in Arcelor Mittal, by saying that, it should always be made sure that if there is a way through which it is possible to revive and continue a Corporate Debtor, it must be done as the Preamble of the Code nowhere mentions the word ‘liquidation’ but does mention ‘reorganisation’ and ‘balance interests of all stakeholders’. Hence, workmen dependent on the Corporate Debtor for their daily bread must not suffer due to corporate insolvency resolution plan of the corporate debtor.Even in this case, section 29A of Insolvency and Bankruptcy Code 2016  was challenged. Other notable judgements in this regard are Uttara Foods  and Nisus Finance where a tussle was seen between section 8 and 9 of Insolvency and Bankruptcy Code 2016 together with Article 142 of Constitution.

From the above decisions, it cannot denied that Supreme Court decisions have throughout the existence of this statute has provided with all necessary support and input for the law to flourish and defended it numerous times.It is also safe assume that these precedents are totally in line with the rational solution of the situation as, if we take taking a closer look, not practicing protectionism in regard to the only insolvency statute of the nation would create a lacuna or void.

CONCLUSION

Concluding this, we can reach at the doorstep of three pertinent questions which would generally appear in mind about ascertaining the approach of judiciary towards the viability of the statute.The first question is whether statute which has been challenged numerous times and frequently amended several times be considered defectless. Honestly, even if we consider the time period of preceding 5 year, this statute has been amended every year since 2016 and a new amendment is also under process as a new Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was introduced in April,2021.

This leads us to another question which is whether frequently  amending a statute actually solved inherent vices.For most people, it would be difficult to provide an affirmative response as far as I believe.Therefore, we reach to the last and most important question as to the longevity of the Code.How far can a statute last resorting to frequent Amendments? To this question, some people can surely assert that with the enormous support which it received from the SC, it surely gets a long boon of life before being struck down but considering the frailness of the Code, its only a matter of time till we see its last drag. However, some people can also argue that it is through this process of trial and error ie., getting challenged and amending, that we shall end up having a polished Insolvency Code fruitful and beneficial to all.

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