A divisional bench of the High Court of Karnataka in its recent judgement/dated 5 April 2022, dismissed a court application challenging the constitutional validity of Sections 95, 99 and 100 of the Insolvency and Bankruptcy Code, 2016 (“the code“) because she found no merit in the challenge.

Background:

A petition was filed in the Hon’ble National Company Law Tribunal, Bangalore (“NCLT“) by the Financial Creditor (Piramal Capital and Housing Finance Limited)* through the resolution professional under Section 95 of the Code for the initiation of a personal insolvency resolution process against the personal guarantor.

The Honorable NCLT confirmed the appointment of the resolution professional under Section 97 of the Code. The said appointment of the resolution professional was challenged by the personal guarantor by filing a writ petition in the Karnataka High Court, claiming the following:

  • Statement that Section 95(1) of the Code is unconstitutional insofar as it permits filing of claims through the resolution professional.
  • Declaration of unconstitutionality of articles 99 and 100 of the Code because contrary to article 14 of the Constitution.

arguments

The petitioner argued that under section 95 of the Code, an application may be filed to initiate the resolution of insolvency by a creditor through a resolution professional. It has been argued that the same resolution professional filing the application is required to review their own application and submit a report for its rejection or approval. Thus, the whole procedure is unconstitutional, because no one can be judge of his own cause.

The financial creditor, on the other hand, argued that the process prescribed under sections 95 to 100 of the Code was a time-limited process, which was fair and reasonable with sufficient safeguards. We relied on the case of John Zachariah and Ors. vs. UOI & Ors., 2022 SCC Online Ker 849 where the Honorable Kerala High Court upheld the constitutional validity of Sections 95, 97, 99 or 100 of the Code.

Court observation:

The High Court of Karnataka, relying on the judgment of the Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209 dismissed the motion as it found no merit in the challenge. The Court held that the process contemplated under Sections 95 to 100 is a time-limited process, which requires the resolution professional to first of all justify its recommendation. Secondly, the role of the resolution professional is limited to giving his recommendation and there is no element of arbitration on the part of the resolution professional. The contracting authority makes the final decision to accept or reject the application, and is not bound by the resolution practitioner’s recommendation.

The High Court further rejected the claimant’s contention that the appointment of the same resolution professional through whom the application was lodged with the NCLT was arbitrary. The Court observed that the Code provides certain eligibility criteria that a resolution professional must possess, and that there is a code of conduct in place that governs their actions. The Court then observed that a resolution professional has no personal interest in the claim.

In light of the foregoing, the court dismissed the motion filed by the personal guarantor.

*The financial creditor was represented by a team from Dua Associates including Angad Varma, Prashant Kumar, Toyesh Tewari, Nikhil Mehndiratta and Mahima Singh.