Supreme Court on constitutional validity of the Insolvency and Bankruptcy Code, 2016

swiss-ribbons-private-limited-vs-union-of-India

Status as on- 15/06/2021

Brief Facts of the case:

  1. The entire judgement is concerned with the constitutional validity of the various provisions of the IBC Code, rather than the facts of the case.
  2. The appellants argued the constitutionality of various provisions of the IBC Code. The appellant’s first argument was that the members of the National Company Law Tribunal (NCLT) and National Company Appellate Law Tribunal (NCLAT) were not appointed in accordance with the provisions of the Constitution.
  3. The appellant’s further contended that before the establishment of NCLT/NCLAT, there was a chance to present the case before the High Court in their respective States, but the same cannot be possible now because now NCLAT has a seat only in New Delhi.
  4. The most important issue raised by the appellant was that the differentiation between Financial creditors and operational creditors is violative of Article 14 of the Constitution of India.
  5. The appellant also contended that the adjudicating power must vest with the proper authorities, not to the resolution professional which were the non-judicial bodies and hence this provision is violative of the IBC Code and that Section 29A of the Code vests right to the promoters to participate in the debt recovery process is arbitrary as it has the retrospective effect.

Held:

  1. The Supreme Court of India in the case of Swiss Ribbons Private Limited and Another v. Union of India and Others (decided on January 25, 2019) upheld the constitutional validity of the Insolvency and Bankruptcy Code, 2016.
  2. Appointment of members of the NCLT and the NCLAT: There were two judges and three bureaucrats on the panel. Furthermore, the Ministry of Corporate Affairs provides all administrative support (MCA). The Supreme Court relied on the Companies (Amendment) Act, 2017, and stated that the Amendment Act requires two judicial members, as well as two executive members, to be appointed to the NCLT and NCLAT, and that this is valid. Concerning the issue of NCLT and NCLAT receiving support from the Ministry of Corporate Affairs, the Supreme Court ruled that it is constitutional.
  3. Prior to the establishment of NCLT/NCLAT, the appellant had the opportunity to present the case before the High Court in their respective States, but this is no longer possible because NCLAT now only has a seat in New Delhi. The Supreme Court directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from the date of the judgement.
  4. Following a thorough examination of the provisions of the Code, the Bankruptcy Law Reforms Committee report, the Insolvency Law Committee report, 2018, and the Regulations, the Supreme Court decided that the classification between financial creditor and operational creditor does not violate Article 14 of the Indian Constitution.

“financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor’s business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.”

  1. Examining Section 18 of the Code in conjunction with Regulations 10, 12, 13, and 14 of the CIRP Regulations, the Supreme Court concluded that the resolution professional is given administrative rather than quasi-judicial powers. Hence, “the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the adjudicating authority.”
  2. Based on its previous decision in ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others (decided on October 4, 2018), the Supreme Court observed that because a resolution applicant who applies under Section 29A(c) has no vested right to apply for consideration as a resolution applicant, their vested rights were not affected by the retrospective application of Section 29A of the Act. When examining Section 29A(c) of the Code, the Supreme Court observed that if an ex-manager is not guilty of malfeasance or acting against the interests of the corporate debtor, there is no reason why he should not be allowed to participate in the resolution process. An ex-promoter of a corporate debtor has no vested right to bid on the corporate debtor’s immovable and movable property in liquidation. The legislative purpose that pervades Section 29A continues to pervade the section when it applies to liquidation as well as resolution applicants.
  3. The Supreme Court stated that when the Code is triggered by the admission of a creditor’s petition under Sections 7 to 9 of the Code, the proceeding before the adjudicating authority, which is a collective proceeding, is a proceeding in rem. Because this is a proceeding in rem, the body tasked with overseeing the resolution process must be consulted before any individual corporate debtor is permitted to settle its claim.

Impact of the case

With specific directions for implementation, this judgement has strengthened the foundation of the Insolvency Code. The court tries to protect creditors because they are on the front lines of the battle to resurrect corporate debtors. It will be some years before the various judgments guide the directions in which this Code should work. Statistics show that the Indian Insolvency Code performs better than other countries’ insolvency laws. The sheer number of settlements and resolutions demonstrates how effective the Insolvency Code is.

This decision helps to alleviate investors’ concerns about acquiring assets through this Code. Still, there is a long way to go, and additional changes are required in the areas of cross-border insolvency, financial service provider resolution, and stressed asset resolution. It should be noted that the government’s recent decision to establish a Circuit Bench in Chennai demonstrates the impact of the Swiss case, but the IBC Code still has a long way to go and many more amendments to the existing provisions are required.

Conclusion

While upholding the Code’s constitutionality, the Supreme Court conducted an overall analysis of its provisions as well as an examination of the economic aspects behind it. While noting that the bad debt problem was steadily worsening and that reform was required, the Supreme Court finally put to rest vexing issues such as the disparity in treatment of operational and financial creditors.

Stating that the Code is economic legislation and that when it comes to economic legislation, flexibility should be given to the legislature because no economic law can be fool proof at its inception. The Supreme Court has established the tone and tenor for future economic legislation interpretation by saying that:

“there may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid”

Source- Swiss Ribbons Private Limited and Another v. Union of India and Others, 2019 SCC Online SC 73

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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