SWISS RIBBONS V. UNION OF INDIA – THE FOUNDATION FOR MODERN BANKRUPTCY LAW

Swiss Ribbons v. Union of India is one of the landmark cases upholding the constitutionality of the provisions laid down under Insolvency and Bankruptcy Code.

The IBC is a major departure from previous insolvency systems in India, and some of its main aspects are new to global standards. The key differentiating features of the IBC are:

• The admission threshold is small- it is based on the factum of default without an insolvency test.
• No class rights – the establishment of a single creditor committee consisting only of financial creditors with secured and unsecured creditors being treated equally to vote. 
• Disqualification of certain bidders from participating in the resolution process.

The Government was able to demonstrate to the Supreme Court that these features have worked and have achieved substantial results in the early years of the law. The government's firm resolve to address the non-performing asset (NPA) crisis through the IBC 's enactment was an important factor in the sustainability of the law, and the government was aware of the problems and amended the law to meet the needs of the situation.

The main implications of the Supreme Court judgement are as follows:

1. The distinction between the promoter/manager and the corporate debtor has been recognized by the courts. Displacement of the promoter or the management of a company by default can now be achieved fairly & easily to protect the company and its properties.
2. Recognizing that insolvency proceedings are not, by their nature, adverse to the corporate debtor. The Supreme Court has concluded that the IBC is a valuable law and is to the advantage of the corporate debtor, and therefore the admittance of a company to the Corporate Insolvency Resolution Process (CIRP) cannot be seen from the traditional lens of the adversarial procedure.
3. As a condition for accepting settlement plans, the Supreme Court introduced equal and equitable care for operating creditors. This was due in large part to changes to the Rules, which clarify that the operating creditors must be paid ahead of the financial creditors (without specifying the amount to be charged). This also advances the law established by the National Company Law Appellate Tribunal (NCLAT) in Binani Industries where it was held that creditors could not be discriminated against. Since the judgment in Binani Industries was (wrongly) interpreted as requiring financial and operational creditors to be treated in the same way, the Supreme Court has provided much-needed clarity as to what is expected of operational creditors. Bankruptcy legislation in other jurisdictions also provides fair and equitable treatment.
4. Also, whilst reading down the list of 'connected parties' to be checked for disqualification under Section 29A, the Supreme Court extended Section 29A in its entirety to those with a business relationship with the Resolution Applicant. It will help to increase the number of participants. It would also help to moderate the level of diligence required in Section 29A by the Resolution Applicant, the Creditors Committee and the Resolution Professional for 'connected persons,' thereby reducing the costs and timelines of the CIRP process.