The Hon’ble Supreme Court of India while dismissing a writ petition under Article 32 of the Constitution of India, upheld the constitutional validity of section 327(7) of the Companies Act, 2013.
The petition prayed that Clause 19(a) of the Eleventh Schedule to Insolvency and Bankruptcy Code, 2016, (‘IBC’) pursuant to Section 255 IBC, be declared as unreasonable and violative of Article 14 of the Constitution of India; as Clause 19(a) of the Eleventh Schedule to IBC inserts sub-section (7) in Section 327 of the Companies Act, 2013, which puts statutory bar on the application of sections 326 and 327 of the Companies Act, 2013, to the liquidation proceedings under IBC.
The Hon’ble Supreme Court noted that the object and purpose of amending the 2013 Act and to exclude Sections 326 and 327 in the event of liquidation under IBC is that there may not be two different provisions with respect to winding up/liquidation of a company. The Hon'ble Court further stated that the enactment of Insolvency and Bankruptcy Code, 2016 necessitated to exclude the applicability of Sections 326 and 327 of the 2013 Act which cannot be said to be arbitrary.
The Apex Court observed that sub-section (7) of Section 327, shall be applicable in case of liquidation of a company under IBC. Meaning thereby, in case of liquidation of a company under IBC, the provisions of Section 53 IBC and other provisions of IBC shall be applicable as the company is ordered to be liquidated or wound up under the provisions of IBC.
While deciding so the Hon’ble Supreme Court highlighted that while examining the question of the constitutional challenge, it must be significant so as to not frustrate the objective and purpose of the Insolvency and Bankruptcy Code, 2016 which completely replaces the then existing framework for insolvency and bankruptcy resolution that was inadequate, ineffective and guilty of causing undue delays.
Moser Baer Karamchari Union v. Union of India
(2023) 9 SCC 499
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