Madras High Court: Every Claim Of Operational Creditors Includes Right To Their Property Under Article 300A Of The Constitution

Background Facts:

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, was under the Corporate Insolvency Resolution Process under Section 7 of Insolvency and Bankruptcy Code, 2016 ('IBC') due to its failure to service the loan obtained from the Indian Overseas Bank.

From June 2019, the petitioner also failed to pay the electricity charges due to Tamil Nadu Generation and Distribution Corporation Limited ('TANGEDCO'). On 19.01.2022, TANGEDCO issued a Demand Notice claiming Rs. 32 Lakhs as unpaid electricity charges.

The petitioner contended that since the CoC under its commercial wisdom passed the Resolution Plan which also received the NCLT approval, all the outstanding claims or liabilities, not covered by the Plan are extinguished.

The petitioner filed the writ of certiorari and mandamus to quash the Demand Notice issued by TANGEDCO and to further direct it to provide the electricity connection.

Observations by the High Court:

The Madras High Court dismissed the writ petition and highlighted a key point that every claim by operational creditors involves a right to their property under Article 300A of the Constitution of India.

Article 300A of the Constitution providing a constitutional right towards the Right to property reads as follows:

300A. Persons not to be deprieved of property save by authority of law

No person shall be deprieved of his property save by authority of law.

The High Court observed the right to property under Article 300A of the Constitution has been recognized the Supreme Court in its decisions in Lalaram vs. Jaipur Development Authority, Tukaram Kana Joshi vs. MIDC, and Vidya Devi vs. State of H.P. as a facet of human rights, integral to the right to life under Article 21.

The single-judge bench observed that the interpretation by the Supreme Court includes the right to enforce or secure property rights, known as the right of action. Therefore, an individual with a claim has the right to enforce it before a neutral arbiter, such as a court or tribunal, both of which are impartially positioned between opposing claims.

The High Court observed that it is the duty of the Interim Resolution Professional ('IRP') and the Resolution Professional ('RP') to recognize that public notice is just one method of gathering information about creditors. They must ensure diligence towards all the details of the Corporate Debtor including details related to its creditors and conduct a thorough investigation to uphold creditors' constitutionally protected rights to property under Article 300A.

The Court illustrated that the IRP or RP should investigate whether the corporate debtor's premises are rented or owned, check for any rental arrears or litigation, and meet with suppliers listed in the corporate debtor's accounts.

It also highlighted that discussions with the corporate debtor's auditors and checks on statutory liabilities, such as property taxes, ESI contributions, EPF remittances, electricity charges, and corporate taxes, are necessary. Further, consideration of the Corporate Debtor's pending litigation during the insolvency process is also essential as it can provide valuable information about the corporate debtor's assets and liabilities.

It observed that such a level of due diligence does not require any extraordinary intelligence or educational background but only common sense and basic prudence. Failure to perform these tasks demonstrates a lack of professionalism and due diligence.

In conclusion, the Madras High Court observed that the IRP and RP must conduct proper due diligence while formulating the Information Memorandum at the initial stage to protect and safeguard the rights of all its stakeholders, particularly the operational creditors, and uphold their constitutional right to enforce their property.

Case Title: National Sewing Thread Co. Ltd. vs Superintending Engineer, TANGEDCO and Anr.

Case No.: W.P. No.29845 of 2022 and WMP.No.29233 of 2022

Counsel for Petitioner: Mr. E. Omprakash, Senior Counsel assisted by Mr.Imayavaramban for M/s.Ramalingam & Associates

Counsel for Respondents: Ms.Keerthana R.Shenoi for Mr.V.Venkata Seshaiya, Standing Counsel for TANGEDCO

Date of Judgment: 07^th June, 2024

Click Here To Read/Download Order or Judgment