The High Court of Karnataka has ordered issue of notice to the Union Law Ministry on a petition that has questioned the Constitutional validity of 77 sections of the newly enacted Bankruptcy and Insolvency Code, 2016.
Justice A.S. Bopanna passed the order on the petition filed by Lotus Shopping Centres Pvt. Ltd., Mangluru. The petitioner has specifically challenged the validity of sections 4 to 77, 214, 215, 231 and 238 of the code.
Meanwhile, the court also directed the Bengaluru Bench of the National Company Law Tribunal (NCLT) not to pass any adverse order against the petitioner-company in an insolvency proceedings initiated against it by Axis Bank Ltd. The petitioner-company has contended that the NCLT’s jurisdiction to handle insolvency and liquidation proceedings with reference to companies is ultra vires the Constitution of India as vesting of the jurisdiction of insolvency and liquidation of companies is beyond the scope of the jurisdiction of a tribunal that is constituted under Article 323B of the Constitution.
The Code is per se contrary to Sec. 41 of the Indian Evidence Act as the NCLT is “not a court within the meaning of Section 41 of the Indian Evidence Act” to declare an individual as “bankrupt or insolvent,” it has been claimed in the petition.
Also, the code is violative of Article 14 (equity before law) of the Constitution as the NCLT needs to hear only the creditor before admitting or rejecting an application, and not the debtor and thereby denying right to defend.
“The enactment [the code] is designed to do more harm than good when it comes to restructuring of a corporate debtor, by appointing an Insolvency Professional at the stage of admission, without providing for filing of statement of objections,” it has been claimed in the petition while pointing out that the code does not provide for even withdrawal and compromise of disputes once it reaches the NCLT. As the code allows the NCLT, on admission of the application and initiation of the corporate insolvency process, to appoint an interim resolution professional to take over the management of the company, such a provision is extremely draconian and can be grossly abused by any competitor or disgruntled creditor, it has been claimed in the petition.
After the petitioner issued a legal notice to the bank in June 2017 seeking damages, the bank in July initiated insolvency proceedings against the company, which in August had moved a city civil court seeking ₹101.77 crore as damages from the bank for allegedly defrauding the company in the process of release of loan for its ₹350 crore mall project in Mangaluru.
