Delhi High Court Issues Notice On Plea Challenging Constitutionality Of S.95 IBC

The Bench comprising of Justice Manmohan and Navin Chawla has issued notices to the Respondents including the Central Government, the Reserve Bank of India, the Insolvency and Bankruptcy Board and a Committee of Creditors. 

The Petitioners have alleged that Section 95 of the Code is not consistent with the amendments introduced by the 2018 Amendment Act. As a result, the Petitioners have been deprived of their exclusive right to propose a Resolution Plan to a Corporate Debtor under Section 240A, read with Section 29A(h) of the Code, as Section 95 proceedings have been initiated against them.

The Petitioners have pleaded the following issue for consideration before the Court:

Whether Section 95 of the IBC violates Article 14 of the Constitution of India for failing to recognize Personal Guarantors of a MSME Corporate Debtor as a separate class and treats them at par with Personal Guarantors of a Non-MSME, especially in view of the right created in favour of such Personal Guarantors under Section 240A read with Section 29A of the IBC, 2016?

The interplay of the IBC provisions

The IBC (Second Amendment) Act 2018 introduced Sections 29A and 240A to the IBC Code 2016. Per the Exception to Section 240A(1) read with Section 29A(h), Personal Guarantors of a Micro Small and Medium Enterprise (MSME) has been granted the right to propose a Resolution Plan for the insolvency resolution of the Corporate Debtors.

Section 240A(1) provides for the initiation of the Resolution Process for MSME. It cites Section 29A(h), indicating that a personal guarantor is saved as an exception of the persons not eligible to be a resolution applicant for a corporate debtor.

Section 95 of the IBC Code 2016 vests the right to a creditor to initiate the resolution process against the debtor. Section 101 of the Code imposes a moratorium regarding all Debts as soon as the proceedings under S. 95 are started.

The Petitioners are challenging the general bar imposed via Section 95 read with Section 101 as excluding the benefits inured to it by the 2018 Amendments, giving it the rights to propose a Resolution Plan for an MSME Corporate Debtor.

In this case, the Petitioners allege that the Corporate Debtor, being an MSME, being subject to Corporate Insolvency Resolution Proceedings, was subject to the creditors' Insolvency Resolution Process. However, one creditor, Siemens Financial Services Pvt. Ltd., initiated Section 95 proceedings against the Petitioners, being the personal guarantors for loans and credit facilities to the Corporate Debtor. Thus, the Petitioners were restrained from advancing credits for a Resolution Plan to revive the Corporate Debtor.

This, they allege, presents a mismatch, as the Personal Guarantor of an MSME was placed on par with Personal Guarantor on a Non-MSME Corporate Debtor, in violation of Article 14 Right to Equality under the Constitution. In light of the stated legal position, the Petitioners pray to restrain the Respondents from initiating any proceedings under Section 95 of the Code.

The matter will now be heard on 11.2.2022.

The Petitioners are represented by Lextone Chambers Advocates Rajiv K. Virmani, Abhinav Agrawal, Swati Bhardwaj, and Shivankar Rao.

Case Title: Varun Jajoo & Ors. V. Union of India & Ors.