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Challenging the Insolvency Ordinance

While the intention of the Ordinance is praiseworthy, if one looks at the fineprint, it may have been too sweeping, making it liable to be challenged in a court of law.

Abir Roy | December 1, 2017 | Updated 14:12 IST
Challenging the Insolvency Ordinance

The recently promulgated ordinance barring promoters from bidding for their companies under the Insolvency Code has created an enormous buzz. It, some say, seeks to end promoter raj in the country. If one looks at the objective of the Ordinance, it seeks to prohibit certain persons from submitting a resolution plan who, on account of their antecedents, may adversely impact the credibility of the processes under the Code. As such, it must be noted that this is an Ordinance under Article 123 of the Constitution of India and must be ratified by the Parliament of India in the Winter session, If not, it shall lapse.

Having said that, while it exists, the Ordinance has the same weight as an Act of Parliament and hence, it is immune from constitutional challenges, including but not limited to Article 14,19 and 21 of the Constitution. While there may be legitimate prohibitions and reasonable restrictions are permitted under the scheme of the Constitution of India, it has to meet the touch stone to show that the Act is not arbitrary in nature and has a reasonable causal nexus with the objective that it seeks to prevent/prohibit. While the court may not go into economic issues like the valuation of the bids, affecting competitive bidding, it would definitely test the Ordinance on the basis of arbitrariness.

As mentioned above, the avowed objective is to ensure that the promoters do not game the system. There are also certain restrictions that a person who has executed an enforceable guarantee in favour of a creditor (be it financial, operational or any other creditor) for the corporate debtor is prohibited from submission of a resolution plan. With this clause alone, most of the promoters have been ousted from the CIRP (corporate insolvency resolution process).

It must be noted that the Code gets triggered on default of Rs 1 lakh or more and not on the erstwhile criterion of erosion of net worth/inability to pay debts, hence technically the CIRP may be initiated when the promoter is not a wilful defaulter and can settle the debts since the company is a solvent company. Further, the Ordinance is vast and sweeping and does not consider the reasons for the default: whether the default was promoter-driven or market-driven? The narrative of the Ordinance seems to have been driven by the large accounts which were referred by the RBI, but as per market reports, there have already been more than 350 cases where the company is under the CIRP process and this Ordinance would affect all the said promoters. In addition, the Ordinance can be promulgated only in exceptional circumstances and, thus, the same can be challenged in courts whereby the Union can be put to notice to explain the reasons which justified such exceptional circumstances.

Thus, we see that while the intention of the Ordinance is praiseworthy, if one looks at the fineprint, it may have been too sweeping, making it liable to be challenged in a court of law. There are newspaper reports to suggest that some of the promoters are planning to challenge the Ordinance and the grounds above may be agitated before the Supreme Court/High Court.

(The author is a partner at the law firm Lakshmikumaran and Sridharan)

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