The Gujarat High Court has passed an interim order prohibiting the NCLT Ahmedabad Bench from passing any adverse order against the Petitioners, Shivam Water Treaters Pvt. Ltd. The interim order was passed in a writ petition filed by Shivam Water challenging the provisions of the Insolvency and Bankruptcy Code, 2016.
This is just one of the several writ petitions that have been filed challenging the vires of the Code in the recent past.
This one has been filed by Shivam Water, in view of the action taken by Asset Reconstruction Company (India) Limited (Respondent Trust) by approaching NCLT Ahmedabad for triggering insolvency, under Section 7 of the Code.
In 2011, on being classified as non performing assets by the original creditors, State Bank of India (SBI) and Allahabad Bank, applications were moved in the Debt Recovery Tribunal by SBI, which was thereafter assigned to the Respondent Trust.
Shivam Waters challenged the deed of assignment on various grounds, which after having reached the Supreme Court by a series of appeals trickled down back to the DRT, and is currently pending. It was during the pendency of proceedings before the DRT, that the Respondent Trust approached the NCLT for initiation of insolvency and as a counter-measure, Shivam Water moved the High Court challenging the vires of the Code on several grounds, some of which can be summed up as follows:
1. No rational for distinction between financial and operation creditor
One of the primary contentions of Shivam Water is that the Code violates Article 14 of the Constitution for lack of intelligble differentia in classification of financial and operational creditors. It appears to not have any rational with the stated object of the law i.e. reorganisation of insolvency process.
The Code is further stated to infringe principles of natural justice insofar as operational creditor is required to issue notice to the debtor whereas financial is not. And as a consequence of this, existence of dispute raised in response to the said notice only bars proceedings by operational creditor and not by financial creditor. This particularly impacts Shivam Water in this case since several matters are yet to be adjudicated upon by the DRT.
2. Contrary to principles of natural justice
This one, which has been raised in Innoventive before the Bombay High Court, and in another case, before the Madras High Court. Shivam Water is aggrieved with Section 7 of the Code which deprives the debtor from presenting its case before being subjected to provisions of the Code.
3. Issues with appointment of Resolution Professional
The restrictions imposed by the Code i.e. withering away the powers of the corporate debtor from having any say during the moratorium or challenging acts or resolution professional, are arbitrary and based on irrational criteria. It is further being argued that the resolution professional is someone who has no expertise in the running of the business. This by itself infringes Article 19(1)(g) of the Constitution, which provides for freedom of occupation, trade or business.
Another point with respect to the resolution professionals is providing them with a free hand to access information memorandum of debtors without executing any confidentiality or non-solicitation agreement without any restrictions. In light of the recent judgment by the Supreme Court upholding the fundamental right to privacy, the Code seems to violate it.
4. Time limit – manifestly arbitrary
It is being argued that unreasonable timeline of 180 days from date of admission has been provided for coming to a resolution, which is wholly weighted against any corporate debtor and has failed to take into account various practical aspects. The contention here continues to be that the Code is drafted to favour creditors and discriminate against debtors.
5. Information Utility data – manifestly arbitrary
The IU is supposed to be a repository of financial information. Section 214 provides access to this financial information but the Code doesn’t contain a provision to question authenticity of information that has been furnished or for rectification of such information.
6. No regard for pending proceedings
In this case particularly, Shivam Water has, under Section 17 of the SARFAESI Act 2002, challenged the assignment agreement in favour of Respondent Trust, which has already been struck down and on this ground; a fact that has been suppressed by the Respondent Trust before the NCLT. Further, the suit of Respondent Trust under RDDB Act, 1993 was rejected for lack of stamp duty and invalid assignment agreement. The High Court had asked the DRT to look at all the issues at the stage of final hearing; however, before this could happen, the Respondents moved to NCLT.
The next date for hearing is 30 November, 2017.