India: Calcutta High Court upholds the constitutionality of the provisions of IBC, 2016

Source: www.calcuttahighcourt.nic.in

The Hon’ble Calcutta High Court on February 2, 2018, upheld the validity of Section 7, 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘IBC 2016’ or ‘the Code’) in the case of Akshay Jhunjhunwala & anr. v. Union of India ^[1].

Petitioner’s contention:

1. The Petitioner’s major contention was that amongst corporate debtors, IBC 2016 differentiates between a financial creditor and an operational creditor which is unjust and without any rational or intelligible basis.

2. A financial creditor has a right to be in the Committee of Creditors (hereinafter referred as ‘COC’), however, an operational creditor does not have any say in the Committee of Creditors even if its claim may be much more than that of the financial creditor.

3. The Code does not empower the adjudicating authority to look deeply into the validity of a financial creditor’s claim. However, a deeper scrutiny is exercised for an operational creditor’s claim. The claims of a financial creditor should be scrutinized as much as the claims of an operational creditor are scrutinized.

Respondent’s contention:

1. The competence of Parliament has not been called upon in question.

2. Claims of financial creditors are uncontested in nature unlike the claims of operational creditors which may require further adjudication. (Reference made to Supreme Court decision in the matter of Innoventive Industries Limited wherein no irregularity was noted by the Hon’ble Court in the distinction between financial and operational creditors).

3. An operational creditor also has a right to participate in the meeting of Committee of creditors when its claim is in excess of 10% of the total liability of the corporate debtor. This limit is set to ensure operational creditors with very small claims do not interfere with the expeditious resolution of disputes.

4. Mere possibility of abuse of a legislation provision should not be a ground for striking the same down as ultra vires to the Constitution of India.

Judgment:

The Court held that:

• A financial creditor means a creditor whose claim arises out of a transaction in liquidity entered into by such creditor with the company whereas an operational creditor on the other hand is a creditor whose claim arises out of a normal business transaction that such creditor may have had with the legal entity.
• A secured or unsecured or statutory creditor is reclassified as financial or an operational creditor under the Code. A creditor of a Company when involved in an insolvency proceeding of a company under the Code does not lose the character of being either a secured or unsecured or statutory creditor, of such company as the case may be.
• Classification amongst similarly situated persons is permissible if the classification is based on reasonable differentia. If the classification is on reasonable differentia it does not offend the principle of equality. The classification made by the Insolvency and Bankruptcy Code, 2016 amongst the creditors of a cooperate debtor is based on reasonable differentia and therefore, not unconstitutional in nature.
• An operational creditor is not ousted in its entirety from coming into the committee of creditors. An operational creditor does not have a voting right in the event it is in the committee of creditors.

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^[1]W.P. No. 672 of 2017 in the Calcutta High Court. Available at:


http://judis.nic.in/Judis_Kolkata/All/list_new2_v1.asp?Jud_Pdf_Name=WP_672_2017_02022018_J_241.pdf&Court_Id=1.