Judgment Summaries (High Court) Sree Metaliks Limited & Anr. v. Union of India and Anr.

  March 3, 2022

Case Summary

Sree Metaliks Limited & Anr. v. Union of India and Anr.

W.P. 7144 (W) OF 2017, High Court of Calcutta, Decided on 07.04.2017

 

This petition challenged the constitutionality of Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the related rules, on the ground that Section 7 does not afford an opportunity of hearing to the corporate debtor in a Section 7 petition. Therefore, it violated the principles of natural justice.

In specific, a Section 7 application was moved against the petitioner, which he was not notified of. The National Company Law Tribunal (‘NCLT’) admitted the petition and appointed an interim resolution professional (‘IRP’). The petitioner then moved the NCLAT arguing that the petitioner did not object the admission of the Section 7 petition, but objected the appointment of that particular IRP. The NCLAT in its order, replaced the IRP. Then the petitioner moved the Calcutta High Court challenging the vires of Section 7 on ground that it does not adhere to the principles of natural justice of the right to a fair hearing.

 

Application of principles of natural justice (‘PNJ’) in an NCLT/NCLAT proceeding

  1. Silence of the IBC on following PNJ in S. 7 proceeding

The NCLT and the NCLAT are empowered to hear a Section 7 petition and an appeal against the same, respectively, under the scheme of the IBC. The constitution of the NCLT/NCLAT is derived from the Companies Act 2013 (‘2013 Act’), under which, while disposing of any proceeding before them, they are not bound to follow the procedure under the Code of Civil Procedure 1908 (‘CPC’). They have the liberty to regulate their own procedure, subject to the provisions of the IBC, the 2013 Act and the rules made pursuant to them. The IBC as well as the rules made thereunder are mute on the right of the respondent debtor to be heard on a Section 7 petition. 

  • Adherence to PNJ necessary in light of Section 424, Companies Act.

However, the High Court held that Section 424 of the 2013 Act mandates the NCLT/NCLAT to abide by the principles of natural justice above all. A Section 7 proceeding may result in insolvency declaration of the respondent that may ultimately lead to liquidation. These will have drastic consequences for the respondent debtor; hence, he cannot be condemned unheard.

  • PNJ necessary for the determination of ‘default’ under S. 7

Further, the High Court held that the determination of ‘default’ is crucial for a Section 7 petition to succeed. This requirement necessitates that a reasonable opportunity must be given to the respondent debtor to contest the claim of ‘default’, before the petition is admitted. Pertinently, a Section 7 proceeding is adversarial in nature, so that also necessitates a reasonable opportunity of hearing be given to the respondent debtor.

  • PNJ to be read into a law in absence of express wordings ousting the same

The High Court further held a point of law that the principles of natural justice should be read into a law if (a) the law silent about the right to fair hearing, and (b) it does not expressly oust the principles of natural justice. Applying it to the IBC, the court had already discussed that the IBC is silent on affording a reasonable hearing opportunity to the respondent debtor in a Section 7 proceeding. Further, regarding the second condition, IBC does not also oust the principles of natural justice, as evident from Section 7(4) of the IBC and Rule 4 of the Rules. Rule 4(3) requires the financial creditor bringing in the Section 7 petition to send a copy of the application to the registered office of the respondent debtor. 

  • Adherence to PNJ not necessary in every situation

The High Court further discussed that the NCLT/NCLAT are not, in every situation, required to provide a reasonable opportunity of hearing to the respondent. There may be cases where they pass ex-parte ad-interim orders against a respondent. However, in such situation, the NCLT/NCLAT must record the reasons for not following the principles of natural justice and must thereafter provide that opportunity to the respondent before confirming the ex-parte ad-interim order.

 

Based on the above, the High Court concluded that Section 7 proceedings do not violate the principles of natural justice, and hence are not unconstitutional. Further, on specific facts, the High Court held that the petitioner would be free to approach the NCLT/NCLAT regarding the impugned order of admission and highlight that the NCLT/NCLAT are bound to follow the principles of natural justice. 

 

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