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2023 (1) TMI 921 - HC - Insolvency and BankruptcyFraudulent/wrongful trading - Constitutional Validity of Section 66(1) of the Insolvency and Bankruptcy Code, 2016 - defrauding the gullible creditors to siphon off public money - Jurisdiction in course of winding up of company against the persons responsible for fraudulent conduct of the business of the company - HELD THAT - As evident from the precedence Section 339 or Companies Act, 2013 and pari material, the provisions of section 542 of Companies Act, 1956 was aimed at conferring jurisdiction in the course of winding up of company to proceed against the persons responsible for fraudulent conduct of the business of the company. Both these provisions were aimed at making such persons personally liable for such fraudulent trading to recouping losses incurred thereby and to relief the company of the liabilities incurred by fraudulent trading. That Section 66(1) also directed towards making such persons personally liable for such fraudulent trading to recouping losses incurred thereby and to provide that the NCLT can pass order holding such persons liable to make such contributions to the assets of the corporate debtor as it may deem fit. No power has been conferred on NCLT to pass such orders against other organizations/legal entities (other than corporate debtors) with whom such business was carried out against any person responsible in such other organizations/legal entities for carrying on business with corporate debtor. Regulation certified preferential or other transaction All the insolvency and bankruptcy Board of India (Insolvency resolution process for corporate persons) regulations 2016 stipulates strict time limits for formation of requisite action by the resolution professional by any transaction to be hit Sections 43, 45, 50 and 66 for making determination thereof under the intimation to the Board and also for applying to NCLT for appropriate relief - IBC contains adequate measures to make appropriate application by liquidator or resolution professional or by creditor or member or partner of corporate debtor for avoiding certain transaction under appropriate provisions of sections 43, 45, 47, and 50. It is clear from the language of section 66(1) that unlike application provided under section 43, section 45, section 50 and section 47 or avoiding of such transaction and dehors these provisions. An application contemplated exclusively under section 66(1) is not made for avoidance of any transaction. Even if fraudulent but to fix the liabilities of the persons reasonable for conducting the business of corporate debtor which is fraudulent or wrongful, that too an application made by resolution professional during the CIRP or a liquidation process. In SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT that the primary focus of the legislature to ensure revival and continuation of corporate debtor by protecting it from its own management and from a corporate by liquidation. Even its long title does not in any manner refer to liquidation which is only availed of as a last resort. If there is either no resolution plan or the resolution plan submitted are not upto the mark. The IBC is a beneficiary legislature which puts the corporate debtor back on its feet not being a mere recovery legislature for creditors. There is no arbitrariness, matchless manifest arbitrariness in section 66(1) of IBC to entertain the instant petition to declare the said provisions as ultra vires of Article 14 and unconstitutional as alleged or otherwise. There is no merit in the submission of the petitioner and the prayers made cannot be considered. Petition dismissed.
Issues Involved:
1. Constitutionality of Section 66(1) of the Insolvency and Bankruptcy Code, 2016. 2. Expansion of powers and jurisdiction of the National Company Law Tribunal (NCLT) under Section 66(1) of the Insolvency and Bankruptcy Code, 2016. 3. Comparison of Section 66(1) of the Insolvency and Bankruptcy Code, 2016 with Section 339(1) of the Companies Act, 2013 and Section 542 of the Companies Act, 1956. 4. Applicability of judicial precedents in the context of Section 66(1) of the Insolvency and Bankruptcy Code, 2016. Detailed Analysis: 1. Constitutionality of Section 66(1) of the Insolvency and Bankruptcy Code, 2016: The petitioner argued that Section 66(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) is ultra vires Article 14 of the Constitution of India for being manifestly arbitrary and unconstitutional. The petitioner sought a writ of Mandamus to declare Section 66(1) as ultra vires unless its scope is enlarged by the court. However, the court found no arbitrariness or manifest arbitrariness in Section 66(1) of IBC to entertain the petition to declare the provision as ultra vires of Article 14 and unconstitutional. 2. Expansion of Powers and Jurisdiction of the NCLT: The petitioner sought to expand the powers and jurisdiction of the NCLT under Section 66(1) by enabling it to: - Declare fraudulent business transactions as void independent of Sections 43, 45, 47, 49, and 50. - Entertain applications under Section 66(1) even if filed by any creditor or contributory of the Corporate Debtor. - Pass orders making liable not only those who were knowingly parties to the fraudulent business but also other organizations/legal entities involved in such business. - Consider introducing appropriate amendments in Section 66(1) to expand NCLT's powers. The court observed that Section 66(1) does not confer jurisdiction to declare any transaction as void, even if fraudulent. It only allows NCLT to fix liabilities on persons responsible for conducting the business of the corporate debtor fraudulently or wrongfully, based on an application made by the resolution professional during the Corporate Insolvency Resolution Process (CIRP) or liquidation process. 3. Comparison with Section 339(1) of the Companies Act, 2013 and Section 542 of the Companies Act, 1956: The court compared Section 66(1) of IBC with Section 339(1) of the Companies Act, 2013, and Section 542 of the Companies Act, 1956. It noted that: - Applications under Section 339(1) or Section 542 can be filed only during the winding up of a company, whereas applications under Section 66(1) can be filed during the CIRP or liquidation process. - All three provisions aim to fix liability for fraudulent conduct of business with the required mens rea. - Section 66(1) allows NCLT to pass orders making liable those responsible for fraudulent business to contribute to the assets of the corporate debtor, unlike the Companies Act provisions which allow holding such persons personally responsible for debts or liabilities. 4. Applicability of Judicial Precedents: The petitioner relied on various judgments, including: - Usha Ananthasubramanian vs. Union of India (2020) 4 SCC 122: The Supreme Court observed that powers under Section 339(1) of the Companies Act, 2013, cannot be utilized to rope in persons who are heads of other organizations. - South India Paper Mills Pvt. Ltd vs. Sree Rama Vilasam Press & Publications 1980 SCC Online Ker 298: The Kerala High Court discussed the scope of Section 542 of the Companies Act, 1956. - Prashant Properties Limited vs. SPS Steels Rolling Mills Ltd. MANU/WB/2456/2019: The Calcutta High Court noted that under Section 66 of IBC, NCLT cannot avoid past transactions but can direct directors/partners to make contributions to the assets of the corporate debtor. - Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd (2020) 8 SCC 401: The Supreme Court discussed the scope of different provisions under IBC, including Section 66. - Deepak Parasuraman vs. Sripriya Kumar: The NCLAT confirmed an order allowing the application filed by the resolution professional under Sections 43 and 46 read with Section 60(5) of IBC. The court concluded that the precedents cited by the petitioner do not support the claim that Section 66(1) is unconstitutional. The court also noted that Section 66(1) does not bar civil or criminal actions against organizations/legal entities involved in fraudulent business with the corporate debtor. Conclusion: The court dismissed the writ petition, finding no merit in the petitioner's submissions. It held that Section 66(1) of IBC is not ultra vires Article 14 of the Constitution and does not require expansion of NCLT's powers and jurisdiction as sought by the petitioner.
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