NCLAT (04.01.2022) in Ome Prakash Verma (Suspended Director of Neesa Leisure Ltd.) Vs. Amit Jain, RP of Neesa Leisure Ltd. [Company Appeal (AT) (Insolvency) No. 827 of 2020 ] held that;
When an Application under Section 7 cannot be entertained for a debt, which is barred by time and is liable to be rejected, any addition in the claim, which may fall into the category of time barred debt, also cannot be entertained.
Excerpts of the Order;
2. Brief facts of the case and sequence of events necessary to be noted for deciding this Appeal are:
(i) Asset Reconstruction Company (India) Limited – Respondent No.2. filed an Application under Section 7 against the Corporate Debtor M/s Neesa Leisure Limited. Adjudicating Authority by an order dated 24th April, 2019 initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. Section 7 Application was filed on the strength of assignment of debt by ICICI bank in favour of Respondent No.2.
(ii) On 31.05.2019 first Meeting of the Committee of Creditors (CoC) of Corporate Debtor was held. The Asset Reconstruction Company (India) Limited – the Financial Creditor was assigned 23.10% voting share in the constitution of Committee of Creditors.
(iii) After 9th Meeting of CoC held on 11th June, 2020, the Appellant sent an email to the Resolution Professional on 14th June 2020, objecting to the acceptance of delayed claim by ARCIL on account of assignment of debt by United Bank of India in favour of ARCIL.
(iv) On 15th June, 2020, Resolution Professional replied to the Appellant stating that on the basis of document provided by ARCIL, the claim has been provisionally admitted.
(v) The Appellant filed the detailed objection on 19th June, 2020, objecting to acceptance of ARCIL claim on account of assignment from United Bank of India on grounds of limitation. The Appellant stated in the objection that United Bank of India in the year 2015 placed the account of the Corporate Debtor as an NPA. Therefore, period of limitation ended in the year 2018 and hence, the said claim has become barred by limitation.
(vi) The Appellant thereafter filed Application being I.A. No.415 of 2020 before the Adjudicating Authority praying for a direction that the claim of Respondent No.2 as assignee of United Bank of India be held to be time barred.
(vii) The said Application has been rejected by the Adjudicating Authority by the impugned judgment dated 27th July, 2020 observing that the commercial wisdom of the Committee of Creditors cannot be interfered with by the Adjudicating Authority. Challenging the order of the Adjudicating Authority, this Appeal has been filed.
# 3. The learned Counsel for the Appellant submits that assignment of claim of United Bank of India giving rise of voting share of Respondent No.2 to the extent of 8.4% was illegal, since the dues of United Bank of India have become time barred and by virtue of applicability of Section 238A, the Limitation Act is applicable in proceedings under Section 7 of the IB Code and time barred claim could not have been considered or added in the Application. The United Bank of India could not have filed the Application under Section 7 of IB Code against the Corporate Debtor, hence addition of that claim in the claim of Respondent No.2 is impermissible. Learned Counsel for the Appellant submits that the observation of Adjudicating Authority that suspended management has no role to play in the matter is incorrect. The Appellant is objecting to inclusion of time barred claim in claim of Respondent No.2.
# 4. Learned Counsel for Respondent No.1 refuting the submissions made by learned Counsel for the Appellant submits that provisions of Section 238A of the IB Code do not apply to the process before the Resolution Professional and the said provision is applicable only with respect to proceedings before Adjudicating Authority and National Company Law Appellate Tribunal. The Appellant does not have the locus to challenge the admission of claim. The duty of Resolution Professional is only to collect, collate and admit the claim. The Resolution Professional cannot adjudicate on the claim. It is submitted that challenge to admission of claim is not bonafide and has been done with intent to derail the CIRP process. It is submitted that Appellant had challenged the Resolution Plan even before an Application for approval was filed before the Adjudicating Authority, which Application was dismissed with cost of Rs.50,000/-.
# 5. We have heard the learned Counsel for the parties and perused the record.
# 6. We may first notice the statutory scheme with respect to Corporate Insolvency Resolution Process. We need to first notice the duties and functions of the Resolution Professional. Section 18, sub-section (1) (b) enumerates that one of the duties of the Interim Resolution Professional is to receive and collate all the claims submitted by creditors to him. Section 25, sub-section (2)(e) oblige the Resolution Professional to maintain an updated list of claims. The Regulations have been framed namely – The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Regulation 8 provides the manner of submission of claims by Financial Creditors. Regulation 10 deals with ‘Substantiation of claims’, which is as follows:
“10. Substantiation of claims.
The interim resolution professional or the resolution professional, as the case may be, may call for such other evidence or clarification as he deems fit from a creditor for substantiating the whole or part of its claim.”
# 7. Next important Regulation to be looked into is Regulation 12, which deals with ‘Submission of proof of claims’. Regulation 12 is as follows:
“12. Submission of proof of claims.
(1) Subject to sub-regulation (2), a creditor shall submit proof of claim on or before the last date mentioned in the public announcement.
(2) A creditor, who failed to submit proof of claim within the time stipulated in the public announcement, may submit such proof to the interim resolution professional or the resolution professional, as the case may be, till the approval of a resolution plan by the committee.
(3) Where the creditor in sub-regulation (2) is a financial creditor, it shall be included in the committee from the date of admission of such claim:
Provided that such inclusion shall not affect the validity of any decision taken by the committee prior to such inclusion.”
# 8. Regulation 13 deals with ‘Verification of claims’. We may also notice Section 60 of the IB Code. Section 60, sub-section (2) & (5), which are relevant are as follows:
“60(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor shall be filed before the National Company Law Tribunal.
(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of –
(a) any application or proceeding by or against the corporate debtor or corporate person;
b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.
# 9. When we look into the Regulation and Section 60 of the IB code as above, it is apparent that as per Section 18 of the IB Code, one of the duties of Interim Resolution Professional is to receive and collate all the claims submitted by the creditors to him. Similarly, the Regulations empowers the Resolution Professional to call for such other evidence or clarification as he deems fit from the creditors for substantiating the whole or part of the claim. Regulation 12, sub-regulation (3) uses the expression ‘submission of proof of claims’. Resolution Professional has to thus receive and collate all the claims, call for such other evidence, ask for any information from the creditors to substantiate their claims. Regulation 13(b) provides for ‘verification of claims’. The above duties and functions are administrative in nature while accepting, collating and verifying the claim, the Resolution Professional is to be prima-facie satisfied that claim, which is submitted by a creditor is made out from the documents submitted. The Resolution Professional does not enjoy the adjudicatory functions.
# 10. In Swiss Ribbons Private Limited and Anr. vs. Union of India and Ors. (2019) 4 SCC 17 Hon’ble Supreme Court has held that the Resolution Professional has no adjudicatory powers. In paragraph 88, following has been laid down:
“88. It is clear from a reading of the Code as well as the Regulations that the resolution professional has no adjudicatory powers. Section 18 of the Code lays down the duties of an interim resolution professional as follows: . . . . .
# 11. As per Section 60 and sub-sections (2) and (5) an Application can be filed before the Adjudicating Authority regarding any claim made by or against the Corporate Debtor to any proceeding by or against the Corporate Debtor. In this case, an Application was filed by the Appellant under Section 60, sub-section (2) and (5) of the IB Code being I.A. No.415 of 2020. The Adjudicating Authority has complete jurisdiction to adjudicate on the claim, which was filed against the Corporate Debtor. The Adjudicating Authority rejected the Application of the Appellant by making the following observation:
“RP is an appointee of the Court and he has to collate all the information and submit the same before the COC. The COC based on its commercial wisdom is to decide the matter. Hon’ble Supreme Court of India in its judgment passed in Civil Appeal no.8766-67 of 2019 – Committee of Creditors of Essar Steel India limited through Authorise Signatory vs. Satish Kumar Gupta & Ors. observed that the commercial wisdom of the Committee of Creditors cannot be interfered into by the Adjudicating Authority. In that event the Suspended Management has no role to play.”
# 12. The Adjudicating Authority has rejected the Application observing that in view of the judgment of the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited through Authorise Signatory vs. Satish Kumar Gupta & Ors. (2020) 8 SCC 531, the commercial wisdom of the Committee of Creditors cannot be interfered into by the Adjudicating Authority.
# 13. The law laid down by the Hon’ble Supreme Court in the above case is clear and is to be followed by all. The observation made by the Adjudicating Authority as stated above, however, does not apply in the facts of the present case. The present is a case where Appellant was complaining about the addition of certain claims of the Financial Creditor – Respondent No.2, consequent upon assignment by United Bank of India had become barred by time. Section 7 Application was filed by Respondent No.2 on the ground of default as mentioned in the Application. The Respondent No.2 has filed the Application on the basis of inclusion of assignment by ICICI Bank. The objection raised by the Appellant is with regard to assignment by United Bank of India, which objection has been specifically taken in email dated 14th June, 2020 as well as in the Application being I.A. No.415 of 2020 filed by the Appellant. The Appellant’s grievance was that there has been increase in the voting shares of Respondent No.2 consequent to admitting assignment of United Bank of India by which voting shares increased by more than 8.4%. The case of the Appellant was that the United Bank of India placed the account of Corporate Debtor as NPA in the year 2015 and the limitation of three years came to an end in the year 2018, hence, the said claim stood barred by time.
# 14. Hon’ble Apex Court in (2019) 11 SCC 633 – B.K. Educational Services Private Limited vs. Parag Gupta and Associates while considering the question of applicability of the Limitation Act, 1963 in the IBC proceedings has held that an Application filed under Section 7 after the Code has come into force, time barred debt cannot be revived.
# 15. We may at this stage refer to Report of the Insolvency Law Committee submitted to the Government of India on 26th March, 2018, with regard to application of Limitation Act, 1963 in paragraph 28.1 and 28.2 following was stated:
“28.1 The question of applicability of the Limitation Act, 1963 (“Limitation Act”) to the Code has been deliberated upon in several judgments of the NCLT and the NCLAT. The existing jurisprudence on this subject indicates that if a law is a complete code, then an express or necessary exclusion of the Limitation Act should be respected. In light of the confusion in this regard, the Committee deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time-barred. This requires being read with the definition of ‘debt’ and ‘claim’ in the Code. Further, debts in winding up proceedings cannot be time-barred, and there appears to be no rationale to exclude the extension of this principle of law to the Code.
28.2 Further, non-application of the law on limitation creates the following problems: first, it re-opens the right of financial and operational creditors holding time-barred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR one lakh. The purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”. Though the Code is not a debt recovery law, the trigger being ‘default in payment of debt’ renders the exclusion of the law of limitation counter-intuitive. Second, it re-opens the right of claimants (pursuant to issuance of a public notice) to file time-barred claims with the IRP/RP, which may potentially be a part of the resolution plan. Such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force as per section 30(4) of the Code.”
# 16. Referring to the above mentioned Insolvency Law Committee Report in B.K. Educational Services Private Limited (supra), the Hon’ble Supreme Court laid down following in paragraph 34:
34. It is important to remember that interpretation is the art of matching the text with the context. In a slightly different context, under Section 86 of the Electricity Act, this Court, in A.P. Power Coordination Committee v. Lanco Kondapalli Power Ltd. [A.P. Power Coordination Committee v. Lanco Kondapalli Power Ltd., (2016) 3 SCC 468] , refused to apply the principle of these cases stating: (SCC p. 497, paras 30-31)
“30. … In the absence of any provision in the Electricity Act creating a new right upon a claimant to claim even monies barred by law of limitation, or taking away a right of the other side to take a lawful defence of limitation, we are persuaded to hold that in the light of nature of judicial power conferred on the Commission, claims coming for adjudication before it cannot be entertained or allowed if it is found legally not recoverable in a regular suit or any other regular proceeding such as arbitration, on account of law of limitation. We have taken this view not only because it appears to be more just but also because unlike labour laws and the Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view.
31. We have taken the aforesaid view to avoid injustice as well as the possibility of discrimination. We have already extracted a part of para 11 of the judgment in State of Kerala v. V.R. Kalliyanikutty [State of Kerala v. V.R. Kalliyanikutty, (1999) 3 SCC 657] wherein the Court considered the matter also in the light of Article 14 of the Constitution. In that case the possibility of Article 14 being attracted against the statute was highlighted to justify a particular interpretation as already noted. It was also observed that it would be ironic if in the name of speedy recovery contemplated by the statute, a creditor is enabled to recover claims beyond the period of limitation. In this context, it would be fair to infer that the special adjudicatory role envisaged under Section 86(1)(f) also appears to be for speedy resolution so that a vital developmental factor — electricity and its supply is not adversely affected by delay in adjudication of even ordinary civil disputes by the civil court. Evidently, in the absence of any reason or justification the legislature did not contemplate to enable a creditor who has allowed the period of limitation to set in, to recover such delayed claims through the Commission. Hence, we hold that a claim coming before the Commission cannot be entertained or allowed if it is barred by limitation prescribed for an ordinary suit before the civil court.” (emphasis supplied)
This case is most apposite. As in the present case, and as is reflected in the Insolvency Law Committee Report of March 2018, the legislature did not contemplate enabling a creditor who has allowed the period of limitation to set in to allow such delayed claims through the mechanism of the Code. The Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim, leading to the drastic consequence of instant removal of the present Board of Directors of the corporate debtor permanently, and which may ultimately lead to liquidation and, therefore, corporate death. This being the case, the expression “debt due” in the definition sections of the Code would obviously only refer to debts that are “due and payable” in law i.e. the debts that are not time-barred. That this is the case has already been held by us in Innoventive Industries Ltd. [Innoventive Industries Ltd. v. Icici Bank, (2018) 1 SCC 407 : (2018) 1 SCC (Civ) 356] as follows: (SCC pp. 438-39, paras 28 & 30)
# 17. When an Application under Section 7 cannot be entertained for a debt, which is barred by time and is liable to be rejected, any addition in the claim, which may fall into the category of time barred debt, also cannot be entertained. The Appellant having objected to the addition of claim consequent to assignment by United Bank of India, it had every right to agitate the issue and pray for adjudicatory orders from the Adjudicating Authority, which he did by filing an Application being I.A. No.415 of 2020. The Adjudicating Authority by misplaced observation rejected the Application without considering the merits of the claim.
# 18. We, thus, are of the view that order impugned is unsustainable and deserve to be set aside. The Adjudicating Authority having not considered the claim on merits, ends of justice would be met in directing for fresh consideration of I.A. No.415 of 2020 by the Adjudicating Authority. This direction shall, however, subject to one condition, that is, the Resolution Plan has not yet been approved by the Adjudicating Authority.
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Blogger’s Contra view; This is with particular reference to “Debts due and payable” in context to Claims filed by creditors with IRP/RP in response to public announcement.
A. Definitions under Section 3 of the Code;
# Section 3(6) “claim” means; –
(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;
(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
# Section 3(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;
# Section 3(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;
# Section 238A. Limitation. – The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.
What is conspicuous by its absence in this Section (238A) are the expressions “under this Act” or “subject to the provisions of this Act”. Thus Section 238A restricts the application of The Limitation Act to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal only.
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B. Important SCI judgements on Limitation & debts due and payable.
i). SCI (20.12.1957) in Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay & Ors. (Civil Appeal No. 167 of 1954) held that;
“ . . . On this, the question arises for consideration whether a debt which is time-barred can be the subject of transfer, and if it can be, how it can benefit the Board to take it over if it cannot be realised by process of law. Now, it is the settled law of this country that the statute of Limitation only bars the remedy but does not extinguish the debt. Section 28 of the Limitation Act provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. And the authorities have held-and rightly, that when the property is incapable of possession, as for example, a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto. Under S. 25(3) of the Contract Act, a barred debt is good consideration for a fresh promise to pay the amount. When a debtor makes a payment without any direction as to how it is to be appropriated, the creditor has the right to appropriate it towards a barred debt. (Vide s. 60 of the Contract Act). It has also been held that a creditor is entitled to recover the debt from the surety, even though a suit on it is barred against the principal debtor. . . .”
ii). Hon’ble SCI (20.04.1992) Punjab National Bank And Ors vs Surendra Prasad Sinha (Criminal Appeal No. 254 of 1992.) held that;
“. . . . The rules of limitation are not meant to destroy the rights of the parties. Section 3 of the Limitation Act 36 of 1963, for short "the Act" only bars the remedy, but does not destroy the right which the remedy relates to. The right to the debt continues to exist notwithstanding the remedy is barred by the limitation. Only exception in which the remedy also becomes barred by limitation is that right itself is destroyed. For example under s.27 of the Act a suit for possession of any property becoming barred by limitation, the right to property itself is destroyed. Except in such cases which are specially provided under the right to which remedy relates in other case the right subsists. Though the right to enforce the debt by judicial process is barred under S.3 read with the relevant Article in the schedule, the right to debt remains. The time barred debt does not cease to exist by reasons of S.3. That right can be exercised in any other manner than by means of a suit. The debt is not extinguished, but the remedy to enforce the liability is destroyed. What S.3 refers is only to the remedy but not to the right of the creditors. Such debt continues to subsists so long as it is not paid. It is not obligatory to file a suit to recover the debt. It is settled law that the creditor would be entitled to adjust, from the payment of a sum by a debtor, towards the time barred debt. It is also equally settled law that the creditor when he is in possession of an adequate security, the debt due could be adjusted from the security in his possession and custody. . . .”
iii). SCI (11.10.2018) in B.K. Educational Services Private Limited Vs. Parag Gupta and Associates [Civil Appeal No.23988 of 2017] observed as under;
# 19. Shri Dholakia also referred to and relied upon Section 60 and 61 of the Contract Act which are set out hereunder:
“60. Application of payment where debt to be discharged is not indicated.—Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits.
61. Application of payment where neither party appropriates.—Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.”
These Sections also recognize the fact that limitation bars the remedy but not the right. In the context in which Section 60 appears, it is interesting to note that Section 60 uses the phrase “actually due and payable to him….” whether its recovery is or is not barred by the limitation law. The expression “actually” makes it clear that in fact a debt must be due and payable notwithstanding the law of limitation. From this, it is very difficult to infer that in the context of the Contract Act, the expression “due and payable” by itself would connote an amount that may be due even though it is time-barred, for otherwise, it would be unnecessary for Section 60 to contain the word “actually” together with the later words, “whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits”.
# 20. Shri Dholakia went on to cite Bhimsen Gupta v. Bishwanath Prasad Gupta, (2004) 4 SCC 95, and In re Sir Harilal Nemchand Gosalia, AIR 1950 Bom 74 for the proposition that debts “due and payable” must be differentiated from debts “due and recoverable”. . . . . .
Similarly, in Sir Harilal Nemchand Gosalia (supra), the expression used is “amount of debts due and owing from the deceased, payable by law out of the estate” which appeared in the third schedule of the Court Fee Act, 1870. It was held that an executor of a will is entitled to pay time-barred debts and cannot be confused with a creditor who may sue the executor in relation to those debts. The creditor would fail in his action because although the debt subsists, the remedy has been extinguished due to the law of limitation. Since the executor is duty bound to pay the amounts due and owing under the will without going to Court, he is entitled to pay a time-barred debt. This, the Court held, is made clear by Section 323 of the Succession Act, 1925, which made no exception in case of time-barred debts. It is in this context that the Court noted the difference between “payable” and “recoverable”.
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C. In light of the definition of the “claim” & other provisions of the Code read with the observations of the Hon’ble Supreme Court of India in various judgements mentioned supra above, it can be safely deduced that the claims received during CIRP are "Debts Due and Payable", irrespective of limitation.
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D. NCLAT (31.07.2019) in Sunil Kumar Aggarwal vs. New Okhla Industrial Development Authority & Ors. [Company Appeal (AT) (Insolvency) No. 775 of 2019] held that;
‘we find that the ‘Interim Resolution Professional’ is already directed to examine the claim of the NOIDA, who is the Applicant before the Adjudicating Authority and no final decision has been taken and the Adjudicating Authority has made it clear that the claim of the NOIDA cannot be rejected on the ground that it is time barred or the claim is by an entity other than the ‘financial Creditor’
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“The Doctrine of “Binding Precedent”.
Constitution Bench of Hon’ble SCI (1989.05.16) in Union of India v. Raghubir Singh [(1989) 2 SCC 754], held that:
Taking note of the hierarchical character of the judicial system in India, it is of paramount importance that the law declared by this Court should be certain, clear and consistent. It is commonly known that most decisions of the courts are of significance not merely because they constitute an adjudication on the rights of the parties and re- solve the dispute between them, but also because in doing so they embody a declaration of law operating as a binding principle in future cases. In this latter aspect lies their particular value in developing the jurisprudence of the law. The doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transaction forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a Court. But like all principles evolved by man for the regulation of the social order, the doctrine of binding precedent is circumscribed in its governance by perceptible limitations, limitations arising by reference to the need for re- adjustment in a changing society, a re-adjustment of legal norms demanded by a changed social context.
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