TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 450
X X X X Extracts X X X X
X X X X Extracts X X X X
....spondent adjusted Rs.4 Crores towards interest. During the initial period, the loans were repaid on a regular basis, but with the spread of Covid-19 pandemic, resultant lockdown and related issues, the business suffered huge setback and it became impossible for the Company to remit the instalments on time. Without heeding to the Company's request for granting time to augment its business, the 9th respondent initiated SARFAESI proceedings and took symbolic possession of the immovable property given as security for the loans. Petitioner challenged the proceedings before the Debts Recovery Tribunal by filing Securitisation Application No.174 of 2019 and the DRT granted a stay on 21.05.2019, subject to remittance of a portion of the amount. While so, the 9th respondent filed Ext.P7 application before the National Company Law Tribunal under Section 7 of the Insolvency and Bankruptcy Code, 2016 [IBC] r/w Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. This writ petition is filed seeking a declaration that Section 7 of the IBC and the Form appended thereto are unconstitutional. The challenge is on the premise that no power is conferred on the '....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is entrusted to strangers. Unfortunately, the scheme of IBC, particularly Section 7, does not provide for any such consideration by the adjudicating authority. Going by the plain language of the provision, once a proper application is filed under Section 7 along with requisite documents and the adjudicating authority finds the corporate debtor to be in default, the application has to be admitted, upon which the resolution process gets triggered. As such, the role of the adjudicating authority is mechanical, without any element of discretion. Adjudication is a process that requires consideration of the claims of rival parties before arriving at a decision. The absence of such a process in Section 7 militates against fundamental rights guaranteed under Article 14 of the Constitution. Section 7 also discriminates between 'financial creditors' like the 9th respondent and the claims of 'operational creditors' dealt with under Section 8 of IBC. The prayer in the writ petition being for a declaration that Section 7 is ultra vires the Constitution, the objection against maintainability is liable to be rejected. The order in Shivam Water Treaters Pvt Ltd (supra) was rendered in the context ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hallenged as being unconstitutional and violative of Article 14 of the Constitution, the Court must remind itself to the principles relating to the applicability of Article 14 in relation to invalidation of legislation. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these are : (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders-if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is." 6. Applying the principles laid down in the precedents to the challenge against constitu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....means a claim in respect of provision of goods or services. 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corpora....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise." From the above discussion, it is seen that the Apex Court had taken note of the difference in procedure with respect to the claims raised by financial creditors and operational creditors. The Court also opined about the limited scope of adjudication on an application under Section 7 filed by a financial creditor. 8. This position was further clarified in Swiss Ribbons (P) Ltd (supra). There, the court considered the role of the adjudicating authority more elaborately and in relation to Section 4(3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and the National Company Law Tribunal Rules, 2016. After such analysis, the court reached the conclusion that, at the stage of Section 5 of IBC, the corporate debtor has the opportunity to file a reply before the adjudicating authority and the corporate debtor has to be heard before admitting the application under Section 7. The contention that the Code is discriminatory in the matter of adjudication of claims filed by finan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable. 51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. 58. Rules 11, 34 and 37 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) state as follows: "11. Inherent powers.-Nothing in these Rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) Fund [(2021) 6 SCC 436], the relevant portion of which is extracted hereunder; "26. The underlying principle, therefore, from all the above noted decisions is that the reference to the triggering of a petition under Section 7 of the IB Code to consider the same as a proceedings in rem, it is necessary that the adjudicating authority ought to have applied its mind, recorded a finding of default and admitted the petition. On admission, third-party right is created in all the creditors of the corporate debtors and will have erga omnes effect. The mere filing of the petition and its pendency before admission, therefore, cannot be construed as the triggering of a proceeding in rem. Hence, the admission of the petition for consideration of the corporate insolvency resolution process is the relevant stage which would decide the status and the nature of the pendency of the proceedings and the mere filing cannot be taken as the triggering of the insolvency process." Recently, in Vidarbha Industries Power Ltd v Axis Bank [2022 SCC OnLine SC 841], the Apex Court clearly delineated the legal position and declared that the adjudicating authority should examine the expediency of initiating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor. 78. On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expediency of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor. 79. The Legislature has consciously differentiated between Financial Creditors and Operational Creditors, as there is an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP. XXXXXX 85. The judgment of this Court Swiss Ribbons (supra), which was rendered in the context of a challenge to the vires of the IBC, does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary. It is well settled that a judgment is a precedent for the question of law that is raised and decided. The language used in a judgment cannot be read like a statute. In any case, words and phrases in the judgment cannot be construed in a truncated manner out of context. 87. Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner. 88. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part o....