One of the objects of the Insolvency and Bankruptcy Code, 2016 (the “Code”) is stated to be “balancing the interests of all stakeholders”. The preamble of the Code reads as follows:
“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
This object and purpose has recently been subject matter of judicial interpretation as well as arguments in some of the significant resolution cases undertaken under the provisions of the Code. One of the questions raised in this context has been to judicially review the terms of a resolution plan to confirm whether a resolution plan “balances the interests of all stakeholders” or not?
The issue to be deliberated is whether the National Company Law Tribunal is required to review the terms of a resolution plan in reference to this objective as if it was a substantive provision of the Code, especially when the judicial review under section 31 of the Code circumscribes it to compliance with section 30(2) of the Code. Evidently, section 30(2) does not mention any such parameter? Even the regulations framed pursuant to section 30(2)(f) only require a resolution plan to clearly state as to how it deals with each of the stakeholders interests and not require “balancing” of such interests.
On a closer look, it appears that the Code itself in its framework “balances the interests of all stakeholders” by creation of a statutory platform for insolvency resolution before liquidation, where different stakeholders have been given different roles, responsibilities and rights under the Code, to achieve a balance in the interest of all stakeholders. For instance, the Code, entitles financial and operational creditors including workmen, employees and government, as operational creditor as well as corporate debtor to initiate corporate insolvency resolution process against the corporate enterprise. When it comes to granting authority to make commercial decision to either resolve or move towards liquidation, that right has been given to all financial creditors, whether secured or unsecured, while keeping operational creditors out of the decision making process in this regard. However, to counter-balance the same, a safeguard of minimum payment of liquidation value to operational creditors has been built in to the statute. Finally, if insolvency resolution was to fail, and the corporate was to go into liquidation the balance is sought to be achieved by de-prioritising the government dues to priority no. 5 and bringing unsecured financial creditors above rest of the unsecured operational creditors. Thus, it is the ecosystem created by the statute which achieves the object of “balancing the interest of all stakeholders” and each of the aforesaid provisions under the statute itself is a balancing act.
Thus, the object of the Code to balance the interest of all stakeholders is achieved through the ecosystem of mutual rights, responsibilities and role allocated amongst different stakeholders under the Code itself and not by imposing an obligation either on the resolution applicant or the committee of creditors to seek to achieve the same by way of a commercial proposal in a resolution plan beyond the parameters prescribed under Section 30(2) of the Code.
The principles of statutory interpretation in this respect are well settled, and it is well established that while an object or preamble of a statute may be used as a tool for interpretation, the same does not substitute the substantive provisions of the statute itself. The Supreme Court of India, in Tribhuban Parkash Nayyar vs The Union of India, 1970 AIR SC 540 explained this principle as follows:
“A preamble is a key to open the mind of the legislature but it cannot be used to control or qualify precise and unambiguous language of the enactment. It is only when there is/ a doubt as to the meaning of a provision that recourse may be had to the preamble to ascertain the reasons for the enactment and hence the intention of the Parliament. If the language of the enactment is capable of more than one meaning then that one is to be preferred which comes nearest to the purpose and scope of the preamble. In other words, Preamble may assist in ascertaining the meaning but it does not affect clear words in a statute. The courts are thus not expected to start with the preamble for construing a statutory provision nor does the mere fact that a clear and unambiguous statutory provision goes beyond the preamble give rise, by itself, to a doubt on its meaning.”
In this view of the matter, introducing an excessively discretionary requirement into validity of a resolution plan by adding to or supplanting substantive provisions into section 30(2) by requiring the resolution applicants and/or the committee of creditors to “balance the interests of all stakeholders” either through equal or almost equal treatment to each of the class of creditors would be contrary to express provisions of the statute rather than aid in achieving the object of the Code.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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