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In the concluding part of our exploration into the 2023 insolvency landscape, Part 5 delves into two significant cases that shape the dynamics of the Insolvency and Bankruptcy Code (IBC), offering insights into constitutional challenges and the treatment of properties acquired through auction sales.
On 9-11-2023, the Supreme Court addressed over 350 writ petitions challenging the constitutional validity of Sections 95 to 100 in Part III of the Insolvency and Bankruptcy Code (IBC). These sections relate to the insolvency resolution process for individuals and partnership firms.
Allegations included violations of natural justice and arbitrariness in imposing interim moratorium and appointing a resolution professional (RP) without a personal hearing.
Unequal treatment between Part II (corporate debtors) and Part III of IBC in terms of moratorium imposition.
Sections 95 to 100 held constitutionally sound, not infringing Article 14 of the Constitution.
The authority granted to the adjudicating authority at Section 97 is confined to RP appointment. Adjudicatory function begins at Section 100.
Introducing personal hearing for jurisdictional questions before Section 100 would disrupt IBC timelines.
RP's role is facilitative, compiling information and seeking further details related to the application.
Right to representation provided in Section 99(2) during RP's role. Adverse consequences only arise at Section 100, ensuring principles of natural justice.
Information sought must be connected to the application and not a broad inquiry.
Judicial adjudication under Section 100 must provide a personal hearing and adhere to natural justice principles.
IBC timelines crucial; distinct structures for corporate entities and individual/partnership firms.
Interim moratorium under Section 96 applies only to "debt" for the debtor's benefit.
The Supreme Court upheld the constitutionality of Sections 95 to 100 in Part III of IBC, emphasizing the differentiation between corporate entities and individual/partnership firms in the legislative framework. The court affirmed the RP's facilitative role and the right to representation during the process, ensuring adherence to natural justice principles. The confirmation of the constitutional validity of the challenged provisions would eliminate uncertainty regarding the enforceability of regulations related to the insolvency resolution of individuals.
With this recent judgment, any doubts regarding the applicability and enforceability of Part III of the IBC are now addressed, particularly in anticipation of its extension to encompass all categories of individuals and partnership firms. This validation of the constitutionality of Part III is expected to embolden creditors, prompting them to make use of the available remedy under Part III of the IBC in instances of default by individuals and partnership firms.
The appellant acquired properties through an auction-sale conducted under the SARFAESI Act, and a sale certificate was issued on 19-8-2019. The properties were mortgaged by the defaulting borrower, leading to the auction-sale due to non-repayment. The appellant completed the payment on 16-8-2019. Subsequently, a moratorium was declared under the IBC on 20-8-2019, initiated by an operational creditor.
The Supreme Court referred to precedent and established that the registration mandate under the Registration Act, 1908 only required the bank's authorized officer to hand over a validated sale certificate to the auction purchaser. The Supreme Court held that there was no basis to invalidate the auction purchase. Consequently, the properties acquired by the appellant were excluded from the liquidation proceedings and deemed outside the scope of liquidation assets under the IBC.
The Supreme Court referred to the judgment of Esjaypee Impex Private Limited -vs- Assistant General Manager and Authorised Officer, Canara Bank [(2021) 11 SCC 537].
The NCLT and NCLAT deemed the sale certificate and property handover illegal, considering the property as a continuing asset of the Corporate Debtor.
The Supreme Court overruled the NCLAT order, stating it was based on the incorrect assumption that the sale was not concluded.
Citing the precedent, the Supreme Court established that the sale was not illegal, and the NCLAT's decision was flawed.
Consequently, the Supreme Court held that the properties acquired through the auction were not part of the liquidation assets under the IBC.
As we conclude our deep dive into the 2023 insolvency regime, these cases highlight the nuanced legal aspects and constitutional challenges shaping the dynamics of the IBC. Stay tuned for more insights into the evolving landscape of insolvency laws.