PLEA BEFORE DELHI HC CHALLENGING THE VALIDITY OF SECTIONS 95 AND 101 OF IBC

The Delhi High Court was hearing a petition moved by the suspended directors of an MSME named Emkay Automobile Industries Limited, challenging the constitutional validity of Sections 95 and 101 of the Insolvency and Bankruptcy Code (IBC). In view of the same, the Division Bench of Justices Manmohan and Navin Chawla issued notices to the Central government, the RBI, the IBC Board, and a Committee of Creditors (CoC). 

Section 95 of the IBC provides for initiating the insolvency resolution process after application by a group of creditors. 

The petition contended that Section 240A of IBC permits the guarantor of a Micro, Small, and Medium Enterprise (MSME), against whom Corporate Insolvency Resolution Process proceedings have been initiated, to propose a resolution plan. However, the same is not allowed by Section 95. The section violates Article 14 of the Constitution for failing to determine guarantors of an MSME Corporate Debtor as a separate class and treats them as personal guarantors of a non-MSME. 

The plea further said that once the resolution process is started against the Petitioners under Section 95 of the IBC, they would not be allowed to deal with their assets under Section 101 and thus would be unable to provide the funds for the insolvency resolution of the corporate debtor which in result would prevent the petitioners from filing a resolution plan so as to restore the corporate debtor.

Lastly, the petitioners sought a declaration holding Section 95 of the IBC violative of Article 14.

Author: Papiha Ghoshal