Challenging the Constitutionality of the Insolvency and Bankruptcy Code: Swiss Ribbons Pvt. Ltd vs. Union of India

The Insolvency and Bankruptcy Code of 2016, (further, The Code) was passed as a response to the grave uncertainty and delay surrounding insolvency procedures in the country. Before the Code, corporate insolvency resolution process was mitigated with the simultaneous application of multiple statutory codes. These statutory instruments were invoked to mitigate outstanding liabilities through a disparate procedure for debt realisation and asset valuation. The uncertainty in the legal forum disseminated to prolonged litigation and a massive stack up of non-performing assets, causing creditors to wait indefinitely to recover their claims. To reform such difficulties, the new regime aimed to introduce a time-bound procedure to facilitate efficient disposal of resolution cases, for both individual and corporate bodies. The Code introduced regulations, to form a unified law to enforce the statutory assertions of creditors while preventing them from raising multiple resolution claims against debtor companies. This enabled the debtor company to retain its debt status while protecting the rights of the creditors efficiently. 

The constitutionality and validity of the Code were challenged in Swiss Ribbons Pvt. Ltd vs. Union of India and the said code was alleged to be violative of Section 14 of the Constitution of India. One of the primary contention raised was premised on Section 7, asserting that there was no intelligible differentia between operational creditors and financial creditors as both creditors extend funds either in the form of money or equivalent goods and services. Further, even if the distinction is held to be valid, the petition claimed that there is grave arbitrariness faced by the operation creditors. The instances included the contention that operation creditors inherited no stand in the committee of creditors unless they retained 10% of the total aggregated amount of the debt as per Section 20 and 21 of the Code. Accordingly, there was blatant discrimination against the operation creditors involved in the resolution process. Additionally, contentions were also raised challenging the validity of Section 29A and Section 12A of the Code.

The Apex Court bench consisting of RF Nariman and Navin Sinha, JJ, dismissed the appeal and confirmed the constitutional validity of the Code. The impugned provisions were held to pass the conditional standards and the Code has continued to develop the creation and movement of financial resources in the commercial sector of the country. The object of the code was to enable the corporate debtor to mitigate his financial crunches either develop his entity or enter into official liquidation, as such, it was not merely legislation intended for the creditors to recover their debts. 

On the concern of Financial Creditors, the court clarified that there exists an intelligible differentia between operational and financial creditors which portrays a direct relation to the object of the Code. These differences were elaborated by the court and included the following 

1. Financial creditors, primarily banks and other institutions, are often secured creditors. Contrarily, operational creditors include payment made towards goods and services and the like that are unsecured. 
2. Financial creditors generally extend substantial amounts of funds, whereas operation creditors are involved with less quantum of money.
3. Financial contracts are drafted with specified time stimulations with clauses which enable the creditor to recall the loan in case of default. Such stipulations are generally not included in operational contracts.
4. Financial creditors involve in continues assessments of the corporate debtor's financial position. Based on their viability, the creditors alter and restructure their loan and the organisation. Operation creditors are generally not involved in such activities. 

On the validity of Section 29A, the court upheld its legitimacy by stating that any individual who is not able to service his/her debt within the granted grace period, will not be eligible to be appointed as an applicant in the resolution procedure. Further, on the concern of Section 53 where financial debts (secured) and operational debts (unsecured) are differentiated, the court held that this differentia is vital to achieving the objects of the Code. In its reasoning, the court stated that the intelligible differentia occurs because the repayment of financial debts reimburses financial capital into the market i.e., when financial institutions and banks are paid their debts, they become capable of lending out more funds to other investors and institutions. 

Conclusively, the Code was developed to assist in ensuring efficient insolvency proceedings in the economy with minimum negative repercussions. It is, therefore, a vital source of infusing capital funds back into the economy for further reinvestment in the economy. The figures and data relating to the application of the Code have reflected promising results in this concern. As such, the Apex Court took a positive step towards ensuring that the Code remains valid and is within the ideals of Constitutional principles.