Under-trial Prisoners and their voting rights

This post seeks to present to the readers, a timeline of cases following the landmark judgment passed by the Apex court in the case of Anukul Chandra Pradhan on the issue of voting rights of undertrial prisoners.

The constitutionality of section 62(5) of the RP Act was initially challenged in the case of Anukul Chandra Pradhan v. Union of India ((1997) 6 SCC 1) as being violative of the right to equality under article 14 and the right to life under article 21. The judgment was unanimous and the bench was presided over by Justice J.S. Verma.

The reasoning given was that, article 14 of the constitution permits reasonable classifications and differential treatment according to the rule that same must be treated alike. There must be a rational connection to the objective being sought.

The Court’s view was that the provision was reasonable because it was being done to prevent criminalisation of politics and “maintain probity in elections and that any provision which furthers that aim and promotes the object has to be welcomed as sub-serving a great constitutional purpose”.

Further, the court also went on to cite practical considerations and ruled that additional resources would be required in the form of infrastructure, security and deployment of extra police forces. The court stated that the prisoner was in prison owing to his own conduct and therefore, the deprivation of his liberty during the period of his imprisonment cannot qualify as violation of his freedom of movement, speech and expression when compared to others who are not in prison.

Interestingly, in 2007, Mohd. Shahabuddin, Shibu Soren and Pappu Yadav (voters serving prison sentences or being behind bars as undertrials) also cast their votes in the presidential election, being allowed to do the same by the Supreme Court and High Courts. The logic given by Chief Justice K.G. Balakrishnan was that an incarcerated MP or MLA could not be equated with an ordinary citizen who is barred under section 62(5) of the RP Act. The Bench reasoned that MPs and MLAs are but people’s representatives and disenfranchising them would be tantamount to disenfranchising entire populations within constituencies. The Bench for this purpose had taken cue from an earlier judgment in 1983 where a petition was filed by a Mahendra Kumar Shastri before the apex court.

The court there had decided in favour of retaining the provision since the provision was in public interest and was enacted for the purposes of “maintaining purity in electing people’s representatives and there is no discrimination or arbitrariness involved”.

This reasoning was reiterated in the year 1999 by a 3-judge bench of the Supreme Court in the case of S. Radhakrishnan v. Union of India. However, the provision could not prevent those under preventive custody from casting their vote.

In the 2013 judgment of Chief Election Commissioner v. Jan Chaukidar (Justice A.K. Patnaik and Justice S.J. Mukhopadhyay) the apex court went on to rule that since one of the conditions to be a candidate under the RP Act, 1951, is that the candidate should be eligible to vote, even those in lawful custody cannot contest elections.

It is an established law in India that individuals in lawful custody of the police, undertrials and those serving prison sentences after conviction cannot vote.

Reasoning provided is that the right to vote in India is not a constitutional or fundamental right, but merely, a statutory right. Hence, the legislature can decide the terms on which the right to vote will be enjoyed subject to Articles 325 and 326. Article 326 of the Constitution permits the disqualification of a voter on under the constitution or under law on grounds of “non-residence, unsoundness of mind, crime or corrupt or illegal practice”.

Accordingly, section 62(5) of the RP Act which explicitly lays down that a person is not eligible to vote if “he is confined in the prison, whether under a sentence of imprisonment or transportation or otherwise or is in the lawful custody of the police”. Additionally, the Reference Book on the General Elections (Chapter 43) states that undertrial prisoners are not eligible to vote even if their names are on the electoral rolls. This disqualification however does not extend to those who are out on bail while awaiting trial.

To subvert the implications of this judgment, the Parliament came out with an amendment to the RP Act in September 2013 which restored the right for those in jail to contest even under conditions of detention. This amendment essentially then restored only the right to contest elections but not the right to vote for undertrials.

In the case of Manohar Lal Sharma v. Union of India, the petitioner filed a writ petition challenging the constitutional validity of the Representation of the People (Amendment and Validation) Act, 2013, as being ultra vires the Constitution of India vitiated by mala fides and against the general public interest. The petitioner stated that the sole motive was to protect the vested interests of the political leaders’ interests. The Court reasoned that once it is seen that it is competent for the legislature to enact a law, the motive need not be taken into consideration. The amendment had in fact gone on to broaden the very definition of ‘elector’ to cure the defects in the apex court’s previous declaratory judgment. Since the right to vote is a creature of statute, it can only be exercised subject to conditions laid down under the statute itself. The Court’s view was that “the petitioner’s plea to bar any person who is in jail or in police custody from contesting an election on the ground that it would lead to criminalisation of politics is a case of the remedy being worse than the disease. Extending curtailment of the right to vote of a person in prison to the right to stand in election would, in our opinion, leave the door open for practice of ‘vendetta politics’ by ruling parties. All that a politician/ ruling party-in-power would need to do to prevent rivals from contesting an election, is to ask the police to file a case and to arrest the rivals”. The court also went on to cite Rule 84(2) of the United Nations Standard Minimum Rules for Treatment of Prisoners which mandates that prisoners who have not been convicted should be presumed as innocent and treated as such.

Even NRIs were given the facility of e-ballot voting through the case of Nagender Chindam v. Union of India in 2015.

In April 2016, the Election Commission of India (ECI) had set up a 7 member committee to explore the possibility of lifting the ban on voting for prisoners. The same is currently being headed by Deputy Election Commissioner, Sandeep Saxena.

Examining the Link: Aadhaar and PAN

If you are among the 1.12 billion who have Aadhaar cards and PAN cards, chances are that you might have heard of the dispute behind the mandatory linking of the two. In the hullaballoo of the GST, many seemed to have forgotten the July 1^st deadline, and many others haven’t even heard of this provision. In today’s article, we will break down the various components of this linking into simple parts and explain what it means for you- the ordinary tax-paying Indian.

What is Aadhaar?

Aadhaar is a 12 digit unique-identity number issued to all Indian residents based on their biometric and demographic data. It is issued by the Indian government to every individual resident of India. The Unique Identification Authority of India (UDAI), which functions under the Planning Commission of India, is responsible for managing Aadhaar numbers and Aadhaar identification cards. Though initially regarded as voluntary by the Supreme Court, the Aadhaar Act 2017 passed by the present government seeks to make the card mandatory for essential services like banking, gas, electricity, poverty and unemployment benefit schemes, mid-day meal scheme and now, even to pay taxes.

 

What is PAN?

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any “person” who applies for it or to whom the department allots the number without an application. It is allotted to each taxpayer by the Income Tax Department under the supervision of the Central Board of Direct Taxes. It also serves as an identity proof.

 

What is the Section 139AA of the Income Tax Act, 1961?

This section of the Act makes it mandatory for linking the Aadhaar and PAN numbers to file tax returns. It states that-

“(1) Every person who is eligible to obtain Aadhaar number shall, on or after the 1st day of July, 2017, quote Aadhaar number–

(i) in the application form for allotment of permanent account number;

(ii) in the return of income:

Provided that where the person does not possess the Aadhaar Number, the Enrolment ID of Aadhaar application form issued to him at the time of enrolment shall be quoted in the application for permanent account number or, as the case may be, in the return of income furnished by him.

(2) Every person who has been allotted permanent account number as on the 1st day of July, 2017, and who is eligible to obtain Aadhaar number, shall intimate his Aadhaar number to such authority in such form and manner as may be prescribed, on or before a date to be notified by the Central Government in the Official Gazette:

Provided that in case of failure to intimate the Aadhaar number, the permanent account number allotted to the person shall be deemed to be invalid and the other provisions of this Act shall apply, as if the person had not applied for allotment of permanent account number.

(3) The provisions of this section shall not apply to such person or class or classes of persons or any State or part of any State, as may be notified by the Central Government in this behalf, in the Official Gazette.

Explanation – For the purposes of this section, the expressions –

(i) “Aadhaar number”, “Enrolment” and “resident” shall have the same meanings respectively assigned to them in clauses (a), (m) and (v) of section 2 of the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016 (18 of 2016);

(ii) “Enrolment ID” means a 28 digit Enrolment Identification Number issued to a resident at the time of enrolment.”

 

The deadline for linking was 1^st July 2017, beyond which an unlinked PAN would be invalidated. This was done because the PAN card, according to the legislature, could be “faked” and “issued to anyone”, whereas the Aadhaar card has a long safe procedure. Thus, the linking would wipe out false filing under different accounts, weed out black money, prevent PAN duplicates, discover shell companies and ensure the proper transaction of money to the proper section of society which are in need.

 What is the controversy?

While it may sound ideal in theory, it is not so in practice. The Aadhaar card itself is mired in controversy, and this new rule has fed fuel to the fire.

• According to many leading lawyers, economists and business, Aadhaar violates the Right to Privacy granted under Article 21 of the Constitution of India as the citizens have to mandatorily part with their biometric information (fingerprints and iris scan).
• Initially assured to be safe, it has been shown in 2016 how the data collected about the citizens have been leaked despite best efforts by the government. A letter written by the Ministry of Electronics and Information Technology confirms that the data, which the Government has been carefully guarding, has been leaked online.
• Aadhaar was initially deemed to be voluntary by the Supreme Court. But this was made null and void by the Aadhaar Act, 2017 which made it mandatory for essential service, launching the citizens in a panic to get the card done.
• The privacy issue is pending before a constitutional bench of the Supreme Court. According to the petitioner, until and unless the privacy matter has been resolved, the Aadhaar cannot be made compulsory since the matter is sub-judice.
• However in the wake of the initial controversy, the government introduced this new law. Immediately, various petitions were filed including Binoy Viswam v. Union of India, [W.P. (C) No. 247/2017] & S G Vombatkere and Anr. v. Union of India, [W.P. (C) No. 277/2017], through which the Supreme Court took up the matter.

What happened during the case?

After the judgement is here, there have been allegations of unfair fights and biased verdict against the Supreme Court. This is because the main issue of the right to privacy which makes the case against Aadhaar so strong was not allowed to be put forward in the Binoy Viswam case. However this is not due to some controversy by the Judges or the Government, it is simply a twist of law. Let us understand it in detail.

• The present matter is simply a part of the larger matter of the Right to Privacy pending under the constitutional bench of the Supreme Court.
• The Supreme Court made it clear, multiple times, that it will not be considering any arguments around the right to privacy or Article 21. The reason for this is judicial propriety, where a judicial bench will not adjudicate on matters that are already pending before a larger bench, in this case the Aadhaar-privacy case before the larger Constitution bench.
• The petitioners here were given two options- either to merge the issue with the pending issue or to treat it as a new issue but without the privacy concerns.
• A constitutional bench takes longer to be constituted and decide since the matters discussed are crucial and involve a substantial question of law. This would have been detrimental to the interest of the petitioners as the 1^st July deadline would have been crossed.
• The petitioners decided to go along with the latter option. The apex court thus only considered arguments based on a violation of other fundamental rights, namely the right to equality (Article 14), and the right to freedom of profession (Article 19(1) (g)). Considering that the main concern with Aadhaar is the violation of privacy (Article 21), the case was considerably weakened as privacy concerns was the main matter here.
• Even though the petitioners’ counsel made elaborate arguments on the issues of how Section 139AA violates the right to privacy and dignity, the Court declined to go into these, preferring to leave it to the Constitution Bench to address. This is because if the Aadhaar is the problem (as alleged by the petitioners) it makes sense to have the entire Aadhaar law and scheme up for discussion before the court to judge its constitutional validity, as opposed to one use case.
• Along with naming its limitations with hearing privacy based arguments, the Supreme Court also brought to notice another restriction it faced. Courts have limited powers of reviewing a law. A contention was that the Act violates the Constitution, such as a violation of the fundamental rights. However, Section 139AA passed the tests of the right to equality and the right to freedom of profession, though the test based on the right to life and liberty remains.
• As the grounds for judicial review are limited, arguments on other grounds, like unreasonableness or arbitrariness of the act (unless this results in unconstitutionality) will not be considered.
• The Court, also, cannot question the Parliament’s motives behind passing a law. For instance, it cannot be argued that the Aadhaar Act was enacted with a dishonest or underlying motive, such as to enable surveillance. It can, however, be argued that the all-pervasiveness of Aadhaar in effect enables surveillance, thus resulting in a violation of people’s right to life and liberty. This, it is to be remembered, is an argument which can only be brought up before the Constitution Bench in the Aadhaar-privacy case.

 

What was the judgement?

The Court on 9^th June 2017 upheld Section 139AA of the Income Tax Act, 1961 while providing limited relief to those without Aadhaar cards. There were minor alterations to the penalties made to suit those without Aadhaar cards and the limited time left to link it.

Though it might seem that the judgment is entirely a victory for the government, with little hope for those against Aadhaar, it is on the other hand, both a victory and a setback, equally for the government and the anti-Aadhaar advocates. The judgment makes it clear that Section 139AA is yet to survive the more stringent test – of the right to life and liberty under Article 21. This point is reiterated as many as four times in the judgment.

The implications of this are clear, Section 139AA is legal and binding, but only for now. The decision of the Constitution Bench in the Aadhaar-privacy case will decide the final fate, of both Aadhaar as well as Section 139AA.

What does it mean for you?

Now that the basic facets of the issue have been examined, let us see the implication of the judgement for the ordinary taxpayer.

• If you are filing income tax returns after 1^st July 2017, you must mention your Aadhaar or enrolment number on the form. This requirement stems from sub-section (1) of Section 139AA, which has been upheld fully by the court.
• If you have an Aadhaar number, you must link it to your PAN before 1^st July 2017. This requirement under sub-section (2) of Section 139AA has been upheld by the court.
• If you do not have an Aadhaar number, you do not need to link it to your PAN in the foreseeable future. This proviso to sub-section (2) of Section 139AA has been “read down” due to the main Aadhaar case pending before the Constitution Bench, but only for those who do not have an Aadhaar card yet.
• If you have an Aadhaar number and do not link it to your PAN before 1^st July 2017, your PAN will be invalidated. The Supreme Court has “read down” this proviso to sub-section (2) to Section 139AA to make the consequence of invalidation apply prospectively, and not retrospectively.
• Keep in mind that Section 139AA imposed two different obligations:
  1. To quote the Aadhaar number in Income Tax Returns/PAN applications filed after 1 July 2017
  2. To link the Aadhaar number with the PAN, irrespective of when you file the returns, by 1 July 2017.
• Much confusion has resulted in people conflating these two obligations, but the court has dealt with the two separately. Different consequences follow.
• The failure to mention your Aadhaar number in your ITR or PAN application will mean your ITR or PAN application is returned as “defective”. This, the Court has no problem with.
• The failure to link your Aadhaar with your PAN was supposed to result in retroactive invalidation of the PAN – this the Court has found disproportionate and excessive to the stated aim of the law, and therefore, a violation of Article 19(1) (g) read with Article 19(6). Consequently, the proviso has been “read down” to make this consequence prospective for those who presently have an Aadhaar number and do not link it to their PAN by 1 July.

 

Conclusion

The implication of this judgement is clear- if you have an Aadhaar card, link it with your PAN. If you don’t, you still have the right to wait for the privacy issue to be decided. While many feel that this judgement is a huge setback to anti-Aadhar advocates and the right to privacy of citizens, Section 139AA and the Aadhaar Act are yet to stand a lot more stringent test – that of Article 21. While a lot banks on the effectiveness of the right to privacy arguments, the final word on Aadhaar is yet to come.

 

~Sayanti Chatterjee~

All the hubbub behind the National Education Policy

A new education policy is likely to be in place soon! The government has already constituted a panel of experts comprising of nine members, including the chairperson, across several sectors, all of them widely recognized in their own fields. This panel is set to be headed by K Kasturirangan, the former chairman of ISRO; an eminent scientist and recipient of the prestigious Padma Shri, Padma Bhushan and Padma Vibhushan. The rest of them include,

• The Vice Chancellor of SNDT University, Mumbai, Dr. Vasudha Kamat. An academic with over 25 years of experience, Kamat has played a great role in the development of instructional designs for online courses and is highly qualified in the field of education technology.
• J. Alphons Kannanthanam, a retired civil servant who has played an instrumental role in achieving 100% literacy in the districts Kottayam and Ernakulam in the state of Kerala. He is also known for his role in the demolition drive against illegal encroachments in Delhi when he was serving as the head of the Delhi Development Authority in the 1990.
• Manjul Bhargava, professor at the Princeton University who has previously been the recipient of the prestigious field medal owing to his contribution in the Gauss Number Theory. He is the first person of Indian origin to receive the medal. He has constantly been in touch with academics at the Tata Institute of Fundamental Research and the Indian Institutes of Technologies.
• MK Shridhar, the former executive director of Karnataka Knowledge Commission (KKC), former member secretary of Karnataka Innovation Council and a present member of Central Advisory Board of Education (CABE).
• Mazhar Asif, professor of Persian at the Gauhati University.
• TV Kattamani, Vice Chancellor of the Indira Gandhi National Tribal University, an accomplished researcher and writer who was previously the dean of mass communication and journalism department at the Maulana Azad University.
• Krishna Mohan Tripathy, previously chairman at the UP High School and Intermediate Examination Board and also associated with the implementation of the Sarva Shiksha Abhiyaan, and
• Ram Shankar Kureel, Vice Chancellor of Baba Saheb Ambedkar Unviersity of Social Sciences, Madhya Pradesh, who has written a number of articles on the inclusion and upliftment of the marginalized sections in education and development.

Education is an investment. Educated Indians will only add on the number of people paying taxes and in turn bring in a higher standard of living for all. The scope OECD says has moved beyond this to the acquiring of quality competencies. Medium term plans keeping in mind the returns from those educated most be formulated. The Indian government strived for the upliftment of this sector right after independence, wherein the Planning Commission had identified the Universalization of Elementary Education; not only primary but also at pre-primary stages where healthcare plays a major part in let’s say, preventing drop-out rates due to sickness. The number of children in the village area are prepared often by taking help from the local panchayats and these are not mere statistical information. Serious planning in Primary education has ensured that children avail the luxury of learning in a quiet and conducive atmosphere. The number of habitations having primary schools within a kilometer, has seen a considerable increase along with enrollment number and following a decrease in gender disparity. The government has focused on Universal Access, Enrolment, Retention and Achievement. Secondary and Higher secondary education has been clearly differentiated as opposed to the system in the past where they were a part of college education or termed as ‘intermediate stages’. Since a lot of drop-outs take place at this level, vocationalization right from the secondary education stage can provide students with practical on-field skills.

The National Education Policy since its inception has been revised a couple of times (1968 under Indira Gandhi, 1986 under Rajiv Gandhi and 1992, under PV Narasimha Rao). The first NEP started with a resolution moved by Congress MP Siddheshwar Prasad who lamented the state of education at that point of time. Consequently, the then Education minister, MC Chagla agreed that a national coordinated policy must be put in place. A 17 member commission was set up headed by DS Kothari. The policy called for a National School System were education would be accessible to all. It also advocated that in the initial years the use of mother-tongue for purposes of teaching would be a must. Moreover it sought to strengthen university level research. The 1986 policy saw a considerable thrust to issues like women empowerment and adult literacy along with development especially for a selected few colleges and autonomy in institutions. During the first implementation, Education was a State subject, where the Centre had little or no participation. Meanwhile, in 1976 Education as a subject was transferred to the Concurrent list, where the Centre had a major role in formulation. The use of three-language scheme in schools, the 10+2+3 formula and several initiatives such as the Sarva Shiksha Abhiyaan, Mid-day meal scheme, National Literacy Mission, are all results of the 1986 scheme. Also, the period saw establishment of the NCERT and its state-level counterpart, UGC, to determine education standards.

The scheme was sought to be revised most recently in the year 2016 that too after almost three decades. The government has acknowledged that the previous policies have not provided enough to promote research and innovation in the country. Education sector has not made much headway in the vocational training and professional courses either. Moreover, the quality of education has been dismal. The Government through its presence on social media has often solicited views from the citizens on improvements that may be incorporated into the current framework. It had during the tenure of Smriti Irani as the Union Minister for Human Resource and Development, already identified 33 key themes to be worked upon, where 13 themes were specific to school-level education while the rest 20 were specific to higher education. Later on however, the ministry maintained that the report was in fact merely a set of recommendations and not the Framework For Action (FFA) as initially proposed in the official release.

The previous panel headed by former Cabinet Secretary TSR Subramaniam, comprised of former Chief Secretary of Delhi government Shailaja Chandra, former Home Secretary, Delhi government Sevaram Sharma, former Chief Secretary, Gujarat Sudhir Mankad and former Director, NCERT J S Rajput. The following are some of the important recommendations:-

• The Right to Education (RTE) act must be extended to cover secondary education to increase education coverage.
• Open schooling facilities will be further increased to cover drop-outs and working children.
• The committee has recommended an increased spending of 6% of the GDP on education sector.
• A National Fellowship Fund will be developed to cater to the needs of the Economically Weaker Section (EWS) students, which is likely to benefit around 10,00000 students with regards to fees and other material and travel expenses.
• National Talent Scholarships will be evolved to reward meritorious students in all subject areas.
• An autonomous body will be set up to oversee Open and Distance Learning (ODL) and Massive Open Online Courses (MOOCs) will also be in place for better access and participation.
• The Curriculum will experience an overhaul to include goals of social cohesion and unity and religious harmony. Emphasis will be placed on both English as well as the regional language. Sanskrit as a mandatory subject has also been proposed.
• Multi lingual education to benefit tribal students will be in place.
• Students with special learning requirements will be identified and supported by the Centre. Professional Counsellors and helpline numbers along with Aptitude tests will take care of the same.
• Disability studies will be augmented through research for disability access.
• Alternate schools are being proposed for children who are migrating or are deprived to ease mobility.
• Pre school education for children in the age group of 4 to 5 will be considered as a right.
• The Mid Day Meal program should also be extended to secondary school students as a number of them suffer from malnourishment and anaemia.
• For entry to B.Ed. courses, a student must have secured atleast a 50% in his or her graduate studies. Also, the Teacher Entrance Tests (TETs) should be made compulsory for recruitment purposes. The Centre and the States should jointly decide on the qualifications to be possessed by prospective teachers.
• Teachers at all levels of education will be provided with insights into child rights and what may amount to a violation of their training programs.
• The no detention policy must not be continued beyond the fifth grade and at the upper primary stage detention shall be restored subject to remedial classes and the child taking at least two extra chances of proving his mettle.
• The UGC must give way to a better law for the purposes of education management. The institution must also engage itself in providing scholarships and fellowships.
• There must be compulsory licensing/ certification of teachers at both government and private institutes. The same must be renewed every ten years by an external testing body.
• For science subjects, more emphasis would be placed on its practical aspects. A common curriculum for subjects like English, Science and Mathematics would be put in place while the other subjects would be partially common with a few changes being made by the States.

 

The new Panel formed under the guidance of K. Kasturirangan marks a positive shift. The composition itself speaks volumes since the members are accomplished academicians across several spheres as opposed to the previous Subramaniam Committee where the panel comprised only of Bureaucrats. Zonal, district and tehsil level meetings held in all the States among the respective stakeholders such as educationists, teachers, experts and students have allowed constructive formulation. The Subramaniam Committee had also identified the restructuring of the University Grants Commission (UGC) and the All India Council of Technical Education (AICTE) along with internationalization of education. The new committee will substantially draw policies from the previous committee while framing the policy. It remains to be seen what the new policy will unfold!

~Ishita Chakrabarty~

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code of 2016 happens to be a game-changer for the insolvency and bankruptcy resolution process. The major idea behind introducing this code was to consolidate the laws and procedures for both, Insolvency and Bankruptcy into one. The bill became an act after it received the president’s assent on 28 May, 2016.

It is important to keep in mind that both the terms are not synonymous or interchangeable! Insolvency does not necessarily result in bankruptcy. That is to say, before turning into bankruptcy, the situation may be halted through processes such as debt restructuring for instance by changing the interest rate chargeable upon credit advanced, selling of assets or through restructuring of the company by let’s say changing the management or processes of mergers and so on.

Insolvency occurs when the liabilities and debts of a person or company are greater than the assets (‘balance sheet’ method) or when the person or company is unable to repay its creditors when they are due (‘cash flow’ method). It is not necessary that both these conditions must be met. There may be cash flow insolvency without balance sheet insolvency where the individual/firm may possess non cash assets that are surplus as compared to the debts. Again, there may be balance sheet insolvency without cash flow insolvency wherein the individual/firm is able to fulfill its immediate financial obligations by relying on its revenues.

Bankruptcy occurs when the person or the company approaches the appropriate court to declare himself or the company as bankrupt. It can therefore be deduced that bankruptcy amounts to an official recognition of the lack of an individual’s or a company’s to meet his or its financial obligations. Accordingly, bankruptcy proceedings may be started against the bankrupt individual or company and appropriate procedures such as liquidation may be taken up after a proper assessment. Remember liquidation can occur both in and outside the bankruptcy. Where it takes place outside bankruptcy, usually after repayment of debts to the creditors, the shareholders get whatever is left. On the contrary, when liquidation takes place in bankruptcy, the shareholders often end up getting nothing.

Before the enactment of this law, there were several authorities with overlapping jurisdiction through different pieces of legislations such as, the Companies Act of 2013, the Sick Industrial Companies Act (‘SICA’), 1985, the Micro Small and Medium Enterprises Development Act, 2006, the Recovery of Debts due to Banks and Financial Institutions Act (‘RDDBFI’), 1993 and the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (‘SARFAESI’). Also there were several shortcomings like, the RDDBFI and SARFAESI act applies only banks as creditors and does not take account of other stakeholders and the main motive behind these two enactments was recovering debt rather than evaluating the prospect of sustaining the business. Meanwhile, the SICA applied only to ‘industrial’ companies having a minimum of fifty workers. Bankruptcy procedures against individuals and partnerships (other than limited liability partnerships) were possible under two archaic acts; the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

Previously, the ongoing proceedings under different acts meant a considerable depreciation of assets the entire time adding on to the credit strain. This piece of legislation ensures that where viable, appropriate action be undertaken and where un-viable, resolution proceedings are completed within the time framework directed. The act recognizes the collective rights of all stakeholders at a single forum. It realizes that business and ventures cannot be put on hold merely because of the claims of a few lenders. Also, creditors cannot be left running from pillar to post to get back their dues. It also provides options for easy exits to startups and new ventures and brings all entities; Individuals, partnership firms, companies, MSMEs, under its ambit.

The Procedure for Individuals and Partnerships (other than LLPs) is different from that of the Companies.

Under the code, either the debtor or the creditors and other stakeholders such as the workmen and employees other than the workmen, can initiate the resolution process against a valid claim by approaching the appropriate authority mentioned under the act. The authority in case of individuals and partnerships (other than an LLP) is the Debt Recovery Tribunal (DRT) whereas in case of a company, is the National Company Law Tribunal (NCLT) set up under the Companies Act. In case of default of a valid claim, an application before the appropriate authority with proof and name of a proposed Resolution Professional may be sought.

In case of a company, the NCLT may decide to either accept or reject the application within 14 days. The default amount in case of companies is a minimum of Rs. 1 lakhs which may be revised by the Central Government, but may not be higher than Rs. 1 crore. This is the criteria for Financial Creditors. However, for operational creditors, where the debtor company is unable to pay the amounts claimed within ten days of notice on due, the criteria for filing the application is met. In case the application is accepted, within 30 days, the Resolution Professional’s appointment has to be confirmed.

Now, it is mandatory for the entire resolution process to be completed within 180 days. A further extension of up to a maximum of 90 days may be provided where the procedure appears complex. This time period is supposed to be a moratorium during which no proceedings may be instituted against the individual/company by lone creditors. The moratorium period is supposed to provide an opportunity to both the parties to carry out effective negotiations regarding their line of action or evolving of a Resolution Plan. Of course, the plan is drafted after considering the viability of running the business. The entire negotiation process is overseen by the Resolution Professional also termed as an Interim Resolution Professional (IRP). The IRP constitutes the Committee of Creditors (which includes Financial creditors or those to whom financial debt is owed and Operational creditors or those who provide goods and services such as the employees) and acts as its agent by suspending the powers of the board or management and assuming them. The Committee will comprise of a maximum of 18 largest operational creditors. Thus, it is in fact the Committee of Creditors that takes over the management and indirectly runs the affairs through the IRP. The regime has therefore changed from a ‘debtor in possession’ to one of ‘creditor in control’.

However, this process ends either by efflux of time or when the stakeholders fail to make any headway in the resolution. The Resolution Plan also when evolved must be accepted by 75% of the creditors (operational creditors do not enjoy voting powers) BY VALUE and subsequently presented before the appropriate authority such as the NCLT.  If the resolution plan is rejected either by the NCLT or fails to garner the approval of 75% of the creditors by value, or there is no headway made or the time period comes to an end, Liquidation proceedings commence.

Liquidation can also commence voluntarily when the decision is taken so at a general meeting by a special resolution. During the process of liquidation, the Resolution Professional assumes the role of the Official Liquidator usually appointed by the High Courts or the Debt Recovery Tribunals. The Insolvency Resolution Professionals act as trustees in the process who will consolidate the assets and verify and evaluate the value of the claims. Appeals from the NCLT and the DRT orders are possible to their respective appellate authorities NCLAT and DRAT.

The Liquidation and repayment of claims takes place on a priority basis in the following order;

• The first priority is given to the costs incurred under the Insolvency Resolution Process, such as the costs incurred by the Resolution Professional while managing the affairs of the corporate debtor,
• the second priority is given to both secured creditors (who hold collaterals) and workmen’s salary for the past 24 months prior to liquidation,
• the third priority is given to salaries of employees other than workmen for the past 12 months prior to the initiation of liquidation,
• the fourth priority is given to unsecured creditors,
• the next priority is given to dues owed to the state or central governments for the past 24 months prior to liquidation and unpaid dues to the secured creditors after realization from the collateral amount,
• finally, if the assets remain after discharging all debts and dues, the rest will be distributed between the shareholders.

It is important to note that the act under Chapter IV also provides for a fast track corporate insolvency resolution process for less complex companies; where the assets and income of the corporate debtor are below a level specified by the central government or where the central government notifies that a particular class of corporate debtors must undertake the fast track process for resolution, the same route may be undertaken. Here, the moratorium period is fixed at 90 days and only under certain circumstances with the consent of 75% of the value votes from the committee of creditors can the time period be extended by another 45 days.

While considering the insolvency situation of individuals and partnership firms (Except LLPs) the minimum amount of default must stand at Rs.1000 which may be revised to a higher amount by the Central Government but not more than Rs.1 lakh. Here, there are two procedures. First, the Fresh Start Process and second the process mentioned above. The Debtor may make an application to the DRT for a fresh start, i.e. for discharge of his debt subject to such acceptance by the DRT, again within 14 days. This acceptance is contingent on factors like whether he has been issued a Fresh Start order previously, whether his aggregate debts are more than Rs. 35,000, whether his aggregate assets exceed Rs. 20,000, whether his gross anual income exceeds Rs. 60,000 and certain other declarations supplanted in his affidavit. The debtor in case of a partnership firm may initiate insolvency proceedings through an application jointly made by all or majority of the partners in the firm.

The Act contemplates the setting up of an Information Utility (IU) to prevent asymmetry of information. Multiple IUs are contemplated under the act which possess information regarding the indebtedness of a company. Simply speaking they are databases storing lending-borrowing information. While making any application before the NCLT, the financial creditor will be required to furnish evidence of such indebtedness that are on record with the IUs.

The Act also contemplates the setting up of Insolvency Professional Agencies (IPAs) for the purpose of training the IRPs and vesting in them the required qualifications and ethics. However the question here lies whether the government has been able to bring about the required infrastructure in place?

Further, the act envisages the Insolvency and Bankruptcy Board of India (IBBI) which acts as a regulator over the other bodies and is also involved in accrediting IPAs and IRPs and the emplyoment of IRPs. The IBBI also enacts model bye-laws for the functioning of these institutions.

The legislation also provides for cross border insolvency cases, as in where the assets of a debtor under bankruptcy proceedings lies in another country, the central government can execute agreements and treaties with the governments of foreign countries for purposes of enforcing the code. The Adjudicating authority may send a letter of intent to a court of competent jurisdiction in such country where the property is located.

There are several provisions regarding penalties for offences such as wrongful trading- where the director of the company did not take due diligence in minimising losses to the creditors in spite of knowing that a Insolvency Resolution Process was in the way, and fradulent trading where the persons who are party to the debtor’s business (which is in fact a broad term) fradulently carry on their business to defraud the creditors. While the punishment for defaulting companies are a maximum of 5 years imprisonment or fine of up to Rs. 1 crore or both, that for defaulting individuals involve an imprisonment sentence up to a maximum of 6 months or fine upto Rs. 1 lakhs or both.

Finally, it remains to be said that under all conditions of insolvency and bankruptcy, this act has an overriding effect over all other legislations meanwhile acts like the SICA and both the acts regarding individual insolvency have been repealed.

 

~Ishita Chakrabarty~