Case Summary Sri Babu A Dhammanagi vs Union of India

Babu A. Dhammanagi Vs Union of India (High Court of Karnataka) 

Facts of the Case:

The Corporate Debtor and the Financial Creditor Perminal Enterprise, the Respondents in this case, signed an Inter Corporate Deposit Agreement. The Respondents filed an application under section 95(1) of the code r/w section 7(2) of the Insolvency and Bankruptcy Code. Under section 97 of the Insolvency and Bankruptcy Code, the NCLT issued an interim moratorium and appointed Resolution Professional. Under section 99(1) of the law, the Resolution Professional submitted a report to NCLT recommending that the Financial Creditor’s application be accepted. The petitioners disputed the constitutionality of the provisions mentioned above through this writ. 

Issues 

• Whether Section 95(1) of The Insolvency and Bankruptcy Code is unconstitutional since it allows applications to be filed through the Resolution Professional.
• Whether Section 99 and 100 of the Bankruptcy and Insolvency Code are unconstitutional because it violates Article 14 of the Constitution.

Laws Involved 

• Section 7(2) Insolvency and Bankruptcy Code: Initiation of corporate insolvency resolution process by financial creditor.
• Section 95 Insolvency and Bankruptcy Code: Application by the creditor to initiate the insolvency resolution process
• Section 97 Insolvency and Bankruptcy Code: Appointment of resolution professional
• Section 99 Insolvency and Bankruptcy Code: Submission of report by resolution professional
• Section 100 Insolvency and Bankruptcy Code: Admission or rejection of application. 

Contentions made by the Petitioners:

The Petitioner argued that a creditor could make an application to commence the insolvency resolution process through a Resolution Professional under Section 95 of the Insolvency and Bankruptcy Code. It was contended that the same Resolution Professional who files the application must analyse it and make a report on whether it should be rejected or approved. As a result, the entire method is unlawful because no one can judge his own case. 

Contentions made by the Respondents:

The Respondents Financial Creditor Contended that the process prescribed under Section 95 to 100 of the Insolvency and Bankruptcy Code was a time-bound process, which was fair and reasonable with sufficient safeguards. They cited the case of John Zachariah and Ors. v. UOI & Ors.,[1] where the Hon’ble Kerala High Court upheld the constitutional validity of Sections 95, 97, 99 or 100 of the Code. 

Judgement of the Court

The Hon’ble Karnataka High Court relying upon the judgment of the Supreme Court in the case of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [2], rejected the petition. The Court determined that the procedure outlined in Sections 95 to 100 is a time-limited procedure that requires the Resolution Professional to first provide grounds for his proposal. Second, the Resolution Professional’s job is confined to making recommendations; there is no aspect of adjudication on the Resolution Professional’s behalf. The final decision on whether the application should be accepted or rejected is made by the Adjudicating Authority, which is not bound by the Resolution Professional’s advice.

The High Court also dismissed the Petitioner’s claim that the appointment of the same Resolution Professional who submitted the application with the NCLT was arbitrary. The Court noted that the Code establishes specific eligibility requirements for Resolution Professionals and a Code of Conduct that controls their acts. A Resolution Professional has no personal interest in the application. The writ petition was thus dismissed.

[1] 2022 SCC Online Ker 849

[2] (2021) 7 SCC 209

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

In this writ petition, the petitioner inter alia has assailed the validity of Section 95(1), 99 and 100 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as `the Code’ for short) as unconstitutional being violative of Article 14 of the Constitution of India.

2. Facts giving rise to filing of this petition briefly stated are that an inter corporate deposit agreement was executed between the Corporate debtor and the Perimal Enterprise , respondent No.2 on 27.05.2016. The aforesaid intra corporate deposit agreement was assigned to respondent No.2 on 22.09.2016. The respondent No.2 filed two separate applications under Section 95(1) of the Code read with Rule 7(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 with a prayer to initiate corporate insolvency resolution process. The National Company Law Tribunal, Bangalore passed an interim moratorium order dated 11.11.2021 against the petitioners and also appointed respondent No.3 as a resolution professional under Section 97 of the Code. The respondent No.3 issued notices to the petitioners on 18.11.2021 and the petitioners responded to the aforesaid notice by an email dated 25.11.2021. The petitioners also requested for an early hearing. Thereafter a virtual meeting of respondent No.3 and the petitioner’s counsel was held on 29.11.2021. The respondent No.3 submitted its report to National Company Law Tribunal, Bangalore on 01.12.2021 under Section 99(1) of the Code recommending the acceptance of the application filed by respondent No.2. The petitioners in the aforesaid factual background have challenged the validity of the aforesaid provisions.

3. Learned counsel for the petitioner submitted that the impugned provisions are in violation of principles of natural justice as no opportunity of hearing is envisaged in the proceedings. It is further submitted that the resolution professional is appointed by the creditor and no person can be a judge in on own In support of aforesaid submissions, reliance has been placed on ‘UMA NATH PANDEY AND OTHERS VS. STATE  OF  UP  AND ANOTHER´, AIR 2009 SC 2375, ‘JUSTICE P.D.DINAKARAN VS. HON´BLE JUDGES INQUIRY COMMITTEE AND OTHERS´, AIR 2011 SC 3711.

4. We have considered the submission made by learned counsel for the petitioner. From perusal of the report of resolution professional, it is evident that the insolvency proceedings initiated against the personal guarantor under the Code is a time bound process. The aforesaid procedure contains filing of application under Section 95 of the Code for appointment of resolution professional by the Adjudicating Authority under Section 99 of the Code, submission of the report by the resolution professional under Section 99 of the Code recording reasons for recommending the request for acceptance or rejection of the application and finally the admission or rejection of the application by the Adjudicating The resolution professional is required to give reasons in support of its recommendation. The Adjudicating Authority is the body, which takes the final decision on the recommendation submitted by the resolution professional. The Adjudicating Authority is not bound by the recommendation made by the resolution professional. There is no element of adjudication on the part of the resolution professional. Therefore, the contention raised by the petitioner that the impugned provisions are arbitrary as no person can be allowed to be a judge in his own case is misconceived. The Supreme Court in GUJURAT  URJA VIKAS NIGAM LTD. VS AMIT GUPTA (2021) 7 SCC 209 has negative the contention of the petitioner and has held that the role of Adjudicating Authority is that of a rubber stamp in the context of Section 95, 97, 99 and 100 of the Code. It has further been held by the Supreme Court that Section 95, 97, 99 and 100 of the Code do not suffer from any illegality or any unconstitutionality. As per the procedure prescribed under Section 95 to 100 of the Code, the role of resolution professional is limited to make the appropriate recommendation to the Adjudicating Authority and the final decision of the admission or rejection of the application referred to under Section 95 solely lies with the Adjudicating Authority. It is also pertinent to note that Section 5(27) of the Code read with the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 defines the expression  `resolution  professional’.  The  aforesaid  rule  lays down the guidelines for appointment of insolvency professionals including their eligibility criteria and a code of conduct to be followed by insolvency professional. Second application has been made through the resolution professional. It is pertinent to note here that he does not have any personal interest in the application. Therefore, the contention of the petitioner that subsequent appointment of the same resolution professional is arbitrary cannot be accepted. The procedure prescribed under the provisions is fair, rational and reasonable and same cannot be termed to be violative of Article 14.

For the aforementioned reasons, the challenge made to the validity of the provisions as contained in Section 95 to 100 of the Code is hereby repelled. For the aforementioned reasons, we do not find any merit in this writ petition. The same fails and is here by dismissed.