Court upholds constitutionality of Insolvency and Bankruptcy Code Section 66(1)

The court dismissed the writ petition challenging the constitutionality of Section 66(1) of the Insolvency and Bankruptcy Code, 2016, finding it not arbitrary or unconstitutional. It clarified that NCLT's powers under Section 66(1) are limited to fixing liabilities on those responsible for fraudulent conduct during the insolvency process, not declaring transactions void. The court compared the provision with Companies Act sections and emphasized that Section 66(1) does not prevent legal actions against entities involved in fraudulent activities. The petitioner's reliance on judicial precedents was deemed insufficient to support the claim of unconstitutionality.

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Issues Involved:
1. Constitutionality of Section 66(1) of the Insolvency and Bankruptcy Code, 2016.
2. Expansion of powers and jurisdiction of the National Company Law Tribunal (NCLT) under Section 66(1) of the Insolvency and Bankruptcy Code, 2016.
3. Comparison of Section 66(1) of the Insolvency and Bankruptcy Code, 2016 with Section 339(1) of the Companies Act, 2013 and Section 542 of the Companies Act, 1956.
4. Applicability of judicial precedents in the context of Section 66(1) of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Constitutionality of Section 66(1) of the Insolvency and Bankruptcy Code, 2016:
The petitioner argued that Section 66(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) is ultra vires Article 14 of the Constitution of India for being manifestly arbitrary and unconstitutional. The petitioner sought a writ of Mandamus to declare Section 66(1) as ultra vires unless its scope is enlarged by the court. However, the court found no arbitrariness or manifest arbitrariness in Section 66(1) of IBC to entertain the petition to declare the provision as ultra vires of Article 14 and unconstitutional.

2. Expansion of Powers and Jurisdiction of the NCLT:
The petitioner sought to expand the powers and jurisdiction of the NCLT under Section 66(1) by enabling it to:
- Declare fraudulent business transactions as void independent of Sections 43, 45, 47, 49, and 50.
- Entertain applications under Section 66(1) even if filed by any creditor or contributory of the Corporate Debtor.
- Pass orders making liable not only those who were knowingly parties to the fraudulent business but also other organizations/legal entities involved in such business.
- Consider introducing appropriate amendments in Section 66(1) to expand NCLT's powers.

The court observed that Section 66(1) does not confer jurisdiction to declare any transaction as void, even if fraudulent. It only allows NCLT to fix liabilities on persons responsible for conducting the business of the corporate debtor fraudulently or wrongfully, based on an application made by the resolution professional during the Corporate Insolvency Resolution Process (CIRP) or liquidation process.

3. Comparison with Section 339(1) of the Companies Act, 2013 and Section 542 of the Companies Act, 1956:
The court compared Section 66(1) of IBC with Section 339(1) of the Companies Act, 2013, and Section 542 of the Companies Act, 1956. It noted that:
- Applications under Section 339(1) or Section 542 can be filed only during the winding up of a company, whereas applications under Section 66(1) can be filed during the CIRP or liquidation process.
- All three provisions aim to fix liability for fraudulent conduct of business with the required mens rea.
- Section 66(1) allows NCLT to pass orders making liable those responsible for fraudulent business to contribute to the assets of the corporate debtor, unlike the Companies Act provisions which allow holding such persons personally responsible for debts or liabilities.

4. Applicability of Judicial Precedents:
The petitioner relied on various judgments, including:
- Usha Ananthasubramanian vs. Union of India (2020) 4 SCC 122: The Supreme Court observed that powers under Section 339(1) of the Companies Act, 2013, cannot be utilized to rope in persons who are heads of other organizations.
- South India Paper Mills Pvt. Ltd vs. Sree Rama Vilasam Press & Publications 1980 SCC Online Ker 298: The Kerala High Court discussed the scope of Section 542 of the Companies Act, 1956.
- Prashant Properties Limited vs. SPS Steels Rolling Mills Ltd. MANU/WB/2456/2019: The Calcutta High Court noted that under Section 66 of IBC, NCLT cannot avoid past transactions but can direct directors/partners to make contributions to the assets of the corporate debtor.
- Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd (2020) 8 SCC 401: The Supreme Court discussed the scope of different provisions under IBC, including Section 66.
- Deepak Parasuraman vs. Sripriya Kumar: The NCLAT confirmed an order allowing the application filed by the resolution professional under Sections 43 and 46 read with Section 60(5) of IBC.

The court concluded that the precedents cited by the petitioner do not support the claim that Section 66(1) is unconstitutional. The court also noted that Section 66(1) does not bar civil or criminal actions against organizations/legal entities involved in fraudulent business with the corporate debtor.

Conclusion:
The court dismissed the writ petition, finding no merit in the petitioner's submissions. It held that Section 66(1) of IBC is not ultra vires Article 14 of the Constitution and does not require expansion of NCLT's powers and jurisdiction as sought by the petitioner.

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