India: Corporate Debtor Vis-À-Vis Financial Debt? You Have No Say!

'Audi Alteram Partem', the age old legal maxim has been defined under the Blacks Law Dictionary to mean as "Hear the other side; hear both sides. No man should be condemned unheard". The said maxim has stood the test of time and every legal system across the globe follows the said principle. The Supreme Court of India in a recent judgment2, while interpreting the maxim, held that every litigant before a court of law has the inherent expectation from the concerned court to be heard, being a fundamental facet of the principles of natural justice.

With the enforcement of the Insolvency and Bankruptcy Code, 2016 ("Code") in India, all the multiple laws that were bifurcated dealing with insolvency and bankruptcy for companies and individuals, now stand consolidated. The objectives of the Code that have been laid down, showcase that the intent of the legislature is a laudable one. The Code aims at consolidation and amendment various laws dealing with insolvency for companies, partnership firms and individuals in a time bound manner. The Code further has introduced the entry of professionals who will carry out the insolvency process, unlike the regime earlier.

Though, the Code is at a very nascent stage, however the establishment of the adjudicating authorities, setting up of the functional Board and enrollment of the professionals, under the Code has taken its own sweet time to become functional. At present, the adjudicating authorities under the Code have commenced proceedings of insolvency, to be carried out in a staggering time bound manner of 180 days and not extending beyond 270 days, a 'specific' number, seldom heard in the history of Indian legal system. Though it will be harsh to comment whether the adjudicating authorities, while dispensing their statutory duties would be able to adjudicate upon the insolvency of a debt ridden company in the specified time period, the same can only be answered with the lapse of time.

The Code has segregated and introduced various categories of creditors3 i.e. financial creditor, operational creditor, secured creditor, unsecured creditor as well as a decree holder. Further, the definition of a debt4 under the Code, refers to a due claim arising out of a financial debt or an operational debt.

Focusing, specifically on the insolvency process initiated by a financial creditor5, the creditor is not required to issue a demand notice under the Code and the relevant rules upon the corporate debtor. Once an application for initiating insolvency process is initiated by the financial creditor, the only requirement is to merely provide a copy of the application as filed before the National Company Law Tribunal ("NCLT") upon the corporate debtor.

Interestingly, the corporate debtor before the NCLT does not have any right to audience and has no right to contest the admission of the insolvency resolution process as initiated by a financial creditor. Coming back to the introduction as provided in the Code, the intent of legislature is to carry out insolvency resolution process in a time bound manner so as to realize maximized value of the assets of the debtors. Has the Government, while drafting the said procedure in the Code, deliberately left out the right for the debtors to be heard? Or is this a case that has been left to be a grey area, subject to judicial interpretation?

While, the intent of the legislature in introducing the Code is commendable, however, on an analysis, it seems that execution is not in sync with the intent. On a plain reading of the provisions of the Code, it can be safely said that the Ministry of Finance is on a serious drive for recovery of debts that have been pending since time immemorial, with hardly any results, however the methodology and the approach adopted may derail this laudable objective.

The above scenario came to shore, when a leading Indian bank was the first to take the plunge and approach the NCLT in Mumbai under the Code and initiate India's first insolvency process under the category of a financial creditor. As a result, the brunt of these "pro-creditor" proceedings, was borne by the debtor company registered in Maharashtra.6

Complying with the provisions of the Code, the corporate debtor was served a copy of the application and as every prudent litigant would assume, rightly or wrongly here, the corporate debtor filed its statement of defence before the NCLT. Interestingly, in the interim orders that were passed by the Mumbai Bench, there were due deliberations by the members over the defense raised by the corporate debtor. However, the NCLT clearly stated that under the resolution process initiated by the financial creditor, a corporate debtor has no right to audience at the time of admission of the insolvency application, and dismissed the defense in limine.

Being understandably aggrieved regarding violation of the fundamental principle of the right to be heard 'audi alteram partem', the Corporate Debtor approached the High Court of Bombay at Mumbai, invoking the writ jurisdiction under Article 226 of the Constitution of India. In these proceedings, the corporate debtor challenged the vires of the Code7 on the ground of there being no provision to a corporate debtor to be granted an opportunity of being heard, apart from other grounds.

The writ was heard by the Chief Justice of the High Court along with her companion judge on the bench, and sought for responses on the challenge to the vires of the Code from the Government and other concerned parties. During the process of the writ being sub-judice, the corporate debtor invoked the appellate jurisdiction under the Code and approached the National Company Law Appellate Tribunal ("NCLAT"). Later, the High Court on being apprised of the fact of the appeal having been filed, and the issue of the right to be heard having been agitated before the NCLAT, the High Court merely disposed off the writ on the ground that the issue became an 'academic one' before them. Thus, the matter is now to be adjudicated by the NCLAT.

During the pendency of the aforesaid writ, the Bombay High Court sought for responses from the Government on the provisions under challenge in the Code. The Hon'ble High Court was aware of the fact that in any circumstance, the insolvency process against the corporate debtor would be complete within 180 days. In view of the facts and the important question challenging the vires of the Code, wouldn't it have been appropriate for the Hon'ble High Court to have stayed the proceedings before the NCLT, thus obviating the need for the corporate debtor to approach the NCLAT and ruled whether the Code is constitutionally valid?

The moot issue that now arises is that has the Hon'ble Bombay High Court merely passed on the buck to the NCLAT? As the appellate tribunal is also constituted under the Code, does the appellate tribunal have powers to pass a decision on the vires of the Code? The answer to the same being a NO! This situation now leaves the corporate debtor, with no other option, but to wait for NCLAT to rule in the case against them and then challenge the same before the Apex Court invoking the appellate jurisdiction of the Supreme Court. Or in the alternate, challenge the order of disposal of the writ by the Hon'ble High Court before the Supreme Court. However, there is every likelihood of the Hon'ble Supreme Court too not deciding this issue, in view of the pending proceedings before the NCLAT.

Interestingly, not very long ago, a similar situation arose, when the vires of the Biological Diversity Rules, 20148 was challenged before the Bombay High Court itself. The Hon'ble High Court in the said matter held that the National Green Tribunal under the National Green Tribunal Act had no powers to decide the constitutionality of statutory provisions.

With the development of this case being watched closely by legal pundits across India, (as well as foreign jurisdictions) there isn't any doubt that many financial creditors may even put their claims on hold and await clarity on the legality of the Code. Interesting times lie ahead; will this be another avenue for a logger head situation between the Judiciary and the Legislators, as seen in recent times?

Footnotes

1. The authors of this article, Sanjeev Kumar is a Partner and Anshul Sehgal is an Associate in the Litigation and Dispute Resolution Group at Luthra & Luthra Law Offices, New Delhi, India. The views of the authors expressed in this article are personal.

2. Ajay Singh & Anr. v. State of Chattisgarh & Anr. reported at 2017 SCC OnLine SC 24

3. Section 3(10) of the Code.

4. Section 3(11) of the Code.

5. Section 7 of the Code.

6. ICICI Bank v Innoventive Industries C.P. No. 01/I before NCLT, Mumbai

7. Innoventive Industries v. Union of India & Ors. W.P. (L.) No. 143 of 2017

8. Central India AYUSH Drugs Manufacturers Association & Ors. v. State of Maharashtra & Anr. W.P. 6360/2015 decided on 28.09.2016.

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