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The Arms Act, 1959 governs matters related to acquisition, possession, manufacture, sale, transportation, import and export of arms and ammunition. It defines a specific class of ‘prohibited’ arms and ammunitions, restricts their use and prescribes penalties for contravention of its provisions. Section 7 of the Act forbids the manufacture, sale, and use of prohibited arms and ammunition unless it has been specially authorised by the central government.1 Section 27(3) prescribes that any contravention of Section 7 that results in the death of any person 'shall be punishable with death'.2 Section 27(3) of the Act was challenged in the Supreme Court in 2006 in State of Punjab vs. Dalbir Singh. The final verdict in the case was pronounced last week. The judgment not only affects the Act in question but may have important implications for criminal law in the country. Legislative history of Section 27 When the law was first enacted, Section 27 provided that possession of any arms or ammunition with intent to use the same for any unlawful purpose shall be punishable with imprisonment up to seven years and/ or a fine. This section was amended in 1988 to provide for enhanced punishments in the context of escalating terrorist and anti-national activities. In particular, section 27(3) was inserted to provide for mandatory death penalty. The Judgment The Supreme Court judgment says that Section 27(3) is very 'widely worded'. Any act (including use, acquisition, possession, manufacture or sale) done in contravention of Section 7 that results in death of a person will attract mandatory death penalty. Thus, even if an accidental or unintentional use results in death, a mandatory death penalty must be imposed. The bench quotes relevant sections of an earlier judgment delivered in 1983, in Mithu vs. State of Punjab. In this case, the court had looked into the constitutional validity of mandatory death sentence. The final verdict had ruled that a provision of law which deprives the Court of its discretion, and disregards the circumstances in which the offence was committed, can only be regarded as 'harsh, unjust and unfair'. The judgment goes on to say that the concept of a 'just, fair and reasonable' law has been read into the guarantees under Article 14 (Equality before law) and Article 21 (Protection of life and personal liberty) of the Constitution. A law that imposes an irreversible penalty such as death is 'repugnant to the concept of right and reason'. Therefore, Section 27 (3) of the Arms Act, 1959 is unconstitutional. Section 27(3) is also unconstitutional in that it deprives the judiciary from discharging its duty of judicial review by barring it from using the power of discretion in the sentencing procedure. What happens now? Under Article 13 of the Constitution, laws inconsistent with the Constitution shall be null and void. Therefore, Section 27(3) of the Arms Act, 1959 shall now stand amended. Courts shall have the discretion to impose a lesser sentence. It is noteworthy that the Home Minister had also introduced a Bill in the Lok Sabha on the 12th of December, 2011 to amend the Arms Act, 1959. The Bill seeks to remove the words ‘shall be punishable with death’ and replace these with ‘shall be punishable with death or imprisonment for life and shall also be liable to fine’. This Bill is currently being scrutinized by the Standing Committee. Notes: 1) Section 7 of the Arms Act, 1959: “7. Prohibition of acquisition or possession, or of manufacture or sale, of prohibited arms or prohibited ammunition. No person shall -- (a) acquire, have in his possession or carry; or (b) use, manufacture, sell, transfer, convert, repair, test or prove; or (c) expose or offer for sale or transfer or have in his possession for sale, transfer, conversion, repair, test or proof; any prohibited arms or prohibited ammunition unless he has been specially authorised by the Central Government in this behalf.” 2) Section 27(3) of the Arms Act, 1959: “27(3) Whoever uses any prohibited arms or prohibited ammunition or does any act in contravention of section 7 and such use or act results in the death of any other person, shall be punishable with death.” Sources: Arms Act, 1959; Supreme Court judgment
The Insolvency and Bankruptcy Code, 2016 was enacted to provide a time-bound process to resolve insolvency among companies and individuals. Insolvency is a situation where an individual or company is unable to repay their outstanding debt. Last month, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 amending certain provisions of the Code. The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018, which replaces this Ordinance, was introduced in Lok Sabha last week and is scheduled to be passed in the ongoing monsoon session of Parliament. In light of this, we discuss some of the changes being proposed under the Bill and possible implications of such changes.
What was the need for amending the Code?
In November 2017, the Insolvency Law Committee was set up to review the Code, identify issues in its implementation, and suggest changes. The Committee submitted its report in March 2018. It made several recommendations, such as treating allottees under a real estate project as financial creditors, exempting micro, small and medium enterprises from certain provisions of the Code, reducing voting thresholds of the committee of creditors, among others. Subsequently, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, was promulgated on June 6, 2018, incorporating these recommendations.
What amendments have been proposed regarding real estate allottees?
The Code defines a financial creditor as anyone who has extended any kind of loan or financial credit to the debtor. The Bill clarifies that an allottee under a real estate project (a buyer of an under-construction residential or commercial property) will be considered as a financial creditor. These allottees will be represented on the committee of creditors by an authorised representative who will vote on their behalf.
This committee is responsible for taking key decisions related to the resolution process, such as appointing the resolution professional, and approving the resolution plan to be submitted to the National Company Law Tribunal (NCLT). It also implies that real estate allottees can initiate a corporate insolvency resolution process against the debtor.
Can the amount raised by real estate allottees be considered as financial debt?
The Insolvency Law Committee (2017) had noted that the amount paid by allottees under a real estate project is a means of raising finance for the project, and hence would classify as financial debt. It had also noted that, in certain cases, allottees provide more money towards a real estate project than banks. The Bill provides that the amount raised from allottees during the sale of a real estate project would have the commercial effect of a borrowing, and therefore be considered as a financial debt for the real estate company (or the debtor).
However, it may be argued that the money raised from allottees under a real estate project is an advance payment for a future asset (or the property allotted to them). It is not an explicit loan given to the developer against receipt of interest, or similar consideration for the time value of money, and therefore may not qualify as financial debt.
Do the amendments affect the priority of real estate allottees in the waterfall under liquidation?
During the corporate insolvency resolution process, a committee of creditors (comprising of all financial creditors) may choose to: (i) resolve the debtor company, or (ii) liquidate (sell) the debtor’s assets to repay loans. If no decision is made by the committee within the prescribed time period, the debtor’s assets are liquidated to repay the debt. In case of liquidation, secured creditors are paid first after payment of the resolution fees and other resolution costs. Secured creditors are those whose loans are backed by collateral (security). This is followed by payment of employee wages, and then payment to all the unsecured creditors.
While the Bill classifies allottees as financial creditors, it does not specify whether they would be treated as secured or unsecured creditors. Therefore, their position in the order of priority is not clear.
What amendments have been proposed regarding Micro, Small, and Medium Enterprises (MSMEs)?
Earlier this year, the Code was amended to prohibit certain persons from submitting a resolution plan. These include: (i) wilful defaulters, (ii) promoters or management of the company if it has an outstanding non-performing asset (NPA) for over a year, and (iii) disqualified directors, among others. Further, it barred the sale of property of a defaulter to such persons during liquidation. One of the concerns raised was that in case of some MSMEs, the promoter may be the only person submitting a plan to revive the company. In such cases, the defaulting firm will go into liquidation even if there could have been a viable resolution plan.
The Bill amends the criteria which prohibits certain persons from submitting a resolution plan. For example, the Code prohibits a person from being a resolution applicant if his account has been identified as a NPA for more than a year. The Bill provides that this criterion will not apply if such an applicant is a financial entity, and is not a related party to the debtor (with certain exceptions). Further, if the NPA was acquired under a resolution plan under this Code, then this criterion will not apply for a period of three years (instead of one). Secondly, the Code also bars a guarantor of a defaulter from being an applicant. The Bill specifies that such a bar will apply if such guarantee has been invoked by the creditor and remains unpaid.
In addition to amending these criteria, the Bill also states that the ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be applicable to persons applying for resolution of MSMEs. The central government may, in public interest, modify or remove other provisions of the Code while applying them to MSMEs.
What are some of the other key changes being proposed?
The Bill also makes certain changes to the procedures under the Code. Under the Code, all decisions of the committee of creditors have to be taken by a 75% majority of the financial creditors. The Bill lowers this threshold to 51%. For certain key decisions, such as appointment of a resolution professional, approving the resolution plan, and making structural changes to the company, the voting threshold has been reduced from 75% to 66%.
The Bill also provides for withdrawal of a resolution application, after the resolution process has been initiated with the NCLT. Such withdrawal will have to be approved by a 90% vote of the committee of creditors.
