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TMI Blog2023 (3) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... ME 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l further proceedings pursuant to Ext.P7. 2. Adv.Jolly John, learned Counsel appearing for the 9th respondent, urged that the question of maintainability of the writ petition should be heard immediately since the interim order is causing extreme prejudice to his client. It is contended that, as per order dated 25.01.2018 in SLP(C) No.1740 of 2018 [Shivam Water Treaters Pvt Ltd v. Union of India (UOI) others] [2018 SCC OnLine SC 3708] , the Honourable Supreme Court has requested the High Courts not to enter into the debate pertaining to the validity of the Insolvency and Bankruptcy Code, 2016 or the Constitutional validity of the National Company Law Tribunal. Further, all issues mooted in the writ petition are settled by the decisions of the Apex Court in Swiss Ribbons (P) Ltd v. Union of India [(2019) 4 SCC 17]. 3. Adv.George Poonthottam, learned Senior Counsel appearing for the petitioner, put forth the following contentions; The very objective of IBC is to ensure revival and continuation of the corporate debtor. The petitioner Company is the world s first agricultural theme park spread across 30 Acres of land. The park has more than 4800 species of plants includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention based on Shivam Water Treaters Pvt Ltd (supra) and pointed out that the position canvassed by the Senior Counsel is no longer res integra in view of the exhaustive judgment rendered in Swiss Ribbons (P) Ltd upholding the constitutional validity of the IBC provisions, including Section 7. The Apex Court has made it clear that the IBC is a beneficial legislation and the resolution process is not adversarial, but, in fact, protective of the interests of the corporate debtor 5. As the petitioner is challenging the constitutional validity of a statutory provision, it is only appropriate to consider the guidelines indicated by the Apex Court as to the manner in which such a challenge is to be dealt with. The legal position categorically laid down by the precedents is to the effect that the presumption should always be in favour of constitutional validity of a statutory provision and courts should lean in favour of the view that would sustain validity. In order to sustain the presumption of maintainability, courts may take into consideration matters of common knowledge, matters of common import and the history of the times. The Court must therefore adjudge t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Swiss Ribbons (P) Ltd (supra). 7. Having carefully gone through the decisions rendered, after surgical analysis of the objects, scheme and provisions of IBC, I find that the challenge against Section 7, based on the contention that it has no space for adjudication, is misplaced. 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 (supra) . Therein, after elaborate consideration of the scheme of IBC and the purpose of Section 7, it was held as under; 27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of debt , we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt , which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under subsection (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be. 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the Code. The contextually relevant portion of the judgment in Swiss Ribbons (P) Ltd (supra ) reads as under; 50. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a particular case in accordance with the principles of natural justice. (2) The general heading in all proceedings before the Tribunal, in all advertisements and notices shall be in Form No. NCLT 4. (3) Every petition or application or reference shall be filed in form as provided in Form No. NCLT 1 with attachments thereto accompanied by Form No. NCLT 2 and in case of an interlocutory application, the same shall be filed in Form No. NCLT 1 accompanied by such attachments thereto along with Form No. NCLT 3. (4) Every petition or application including interlocutory application shall be verified by an affidavit in Form No. NCLT 6. Notice to be issued by the Tribunal to the opposite party shall be in Form NCLT 5. *** 37. Notice to Opposite Party. (1) The Tribunal shall issue notice to the respondent to show cause against the application or petition on a date of hearing to be specified in the notice. Such notice in Form No. NCLT 5 shall be accompanied by a copy of the application with supporting documents. (2) If the respondent does not appear on the date specified in the notice in Form No. NCLT 5, the Tribunal, after according reasonable opportunity to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability of the corporate debtor. The relevant paragraphs of the judgment containing the discussion regarding the procedure for considering the application filed by the financial creditor under Section 7 of IBC is extracted hereunder for easy reference; 60. There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters. XXXXX 63. As pointed out by Mr. Gupta, the Legislature has, in its wisdom, chosen to use the expression may in Section 7(5)(a) of the IBC. When an Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application of a Financial Creditor is complete and there are no disciplinary proceedings against proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute. 64. The meaning and intention of Section 7(5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of supply of goods and services. Financial credit is usually secured and of much longer duration. Such credits, which are often long term credits, on which the operation of the Corporate Debtor depends, cannot be equated to operational debts which are usually unsecured, of a shorter duration and of lesser amount. The financial strength and nature of business of a Financial Creditor cannot be compared with that of an Operational Creditor, engaged in supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an Operational Creditor than on a financial creditor. 80. As observed above, the financial strength and nature of business of Financial Creditors and Operational Creditors being different, as also the tenor and terms of agreements/contracts with financial creditors and operational creditors, the provisions in the IBC relating to commencement of CIRP at the behest of an Operational Creditor, whose dues are undisputed, are rigid and inflexible. If dues are admitted as against the Operational Creditor, the Corporate Debtor must pay the same. If it does not, CIRP must be commenced. In the case of a financial debt, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation. The example is only illustrative. The legal position emanating from the above decisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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