2023 (3) TMI 450 - HC - Insolvency and Bankruptcy

Constitutional validity of section 7 of IBC - Adjudication on an application under Section 7 filed by a financial creditor - challenge is on the premise that no power is conferred on the adjudicating authority to adjudicate on any issues on the filing of an application Under section 7 by a financial creditor, and the adjudicating authority is under statutory compulsion to appoint a Resolution Professional. HELD THAT - It is pertinent to note that, over a period of time, the Supreme Court has analysed and interpreted Section 7 and held that Section 7(5)(a) confers the adjudicating authority with the discretion to decide whether to admit the application or not, after considering all relevant aspects. The scope and ambit of Section 7 had come up for consideration in Innoventive Industries Ltd 2017 (9) TMI 58 - SUPREME COURT where 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. The legal position emanating from the above decision leaves no room for doubt that the adjudicating authority is vested with the discretion and is legally bound to consider all relevant aspects, including the financial health and viability of the corporate debtor, while taking a decision on the application filed by the financial creditor. As such, the contention that Section 7 is a draconian provision loaded against the corporate debtor, cannot be countenanced. Therefore, the challenge against constitutional validity of section 7 of IBC on the ground that the provision is arbitrary and discriminatory, is liable to be rejected. It is hence clear that the petitioner has the right to file objections against Ext.P7 application and in such event, the adjudicating authority is bound to consider the objection on merits and take a decision on the admissibility or otherwise of Ext.P7 application after considering all relevant aspects, including those urged in this writ petition. The writ petition is accordingly dismissed.

Summary

Issues Involved:
1. Constitutionality of Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Maintainability of the writ petition challenging the validity of Section 7 of IBC.
3. Discretion of the adjudicating authority under Section 7 of IBC.

Detailed Analysis:

1. Constitutionality of Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016:
The petitioner challenged the constitutionality of Section 7 of IBC, claiming it violates Article 14 of the Constitution by not allowing the adjudicating authority any discretion in adjudicating applications filed by financial creditors. The petitioner argued that Section 7 discriminates between financial creditors and operational creditors, with the former being able to initiate insolvency proceedings more easily. The court, however, upheld the constitutionality of Section 7, referencing precedents such as Innoventive Industries Ltd v. ICICI Bank and Swiss Ribbons (P) Ltd v. Union of India, which affirmed the validity of IBC provisions. The court emphasized that the legislative intent behind IBC is to ensure the revival and continuation of the corporate debtor and that the adjudicating authority does have discretion under Section 7(5)(a) to consider all relevant aspects before admitting an application.

2. Maintainability of the Writ Petition:
The respondent argued that the writ petition challenging Section 7's validity should not be entertained, citing the Supreme Court's order in Shivam Water Treaters Pvt Ltd v. Union of India, which discouraged High Courts from debating the validity of IBC. The petitioner contended that the specific challenge in this case was not covered by the Supreme Court's order. The court noted that the presumption of constitutionality applies to legislative enactments and that any challenge must show a clear transgression of constitutional principles. The court concluded that the challenge to Section 7's constitutionality was without merit, referencing the comprehensive judgments in Innoventive Industries Ltd and Swiss Ribbons (P) Ltd, which had already addressed and upheld the constitutional validity of IBC provisions.

3. Discretion of the Adjudicating Authority under Section 7 of IBC:
The petitioner argued that Section 7 does not provide the adjudicating authority with discretion to consider the unique circumstances of each case, making the process mechanical. The court, however, clarified that Section 7(5)(a) does confer discretion on the adjudicating authority to decide whether to admit an application after considering all relevant aspects. The court referenced several judgments, including Swiss Ribbons (P) Ltd and Vidarbha Industries Power Ltd v. Axis Bank, which highlighted that the adjudicating authority must consider the overall financial health and viability of the corporate debtor before admitting an application. The court concluded that Section 7 is not a draconian provision and that the adjudicating authority is legally bound to consider all relevant aspects, including objections raised by the corporate debtor, before making a decision.

Conclusion:
The court dismissed the writ petition, upholding the constitutionality of Section 7 of IBC and affirming the discretion of the adjudicating authority under the provision. The petitioner was directed to file objections against the application before the adjudicating authority, which is bound to consider them on merits.