The Supreme Court, in its decision in the case of Swiss Ribbons vs. Union of India, upheld the constitutional validity of the Insolvency and Bankruptcy Code, 2016, which became a landmark in the development of the Code.

The judgment, dated 25th January 2019, has been rendered by a Bench comprising Justice RF Nariman and Justice Navin Sinha and has been authored by the former. The Bench heard this matter along with various petitions, including that of High Courts of Calcutta and Gujarat, thereby by way of transfer, challenging the validity of the Code. The bunch of petitions were moved primarily contending that the three-year-old law was discriminatory, unfair, and arbitrary to operational creditors as against financial creditors.

The Supreme Court, upon hearing all the submissions and before passing the judgment, gave a brief background of the Insolvency Law in India. The problems with the old law were highlighted, the lack of clarity of jurisdiction and the need for a single forum for adjudication of matters were emphasized. It said that the old law was fragmented, and hence prone to perverse judicial decisions. It was further realised that there was a need for an amalgamation of laws governing the field into one insolvency procedure.

The significant parts of the judgment are highlighted below:

1. Differential treatment of financial and operational of creditors justified.

The intelligible differences between the two types of creditors have a direct relation to the object being sought by the Code.

Parameter

 Financial Creditors

 Operational Creditors

Security

 Secured

 Unsecured (payments to workers, or for goods and services not secured by mortgaged documents)

Nature of loan agreements

 Generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business

 Relatable to supply of goods and services in the operation of a business

Money involved

 Generally involve large sums of money

 Quantum is generally less

Repayment

 Have specified repayment schedules, and defaults entitle them to recall a loan in totality

 No such system

Assessing the viability of the debtor

 Engaged in the restructuring of the loan as well as a reorganization of the corporate debtor’s business when there is financial stress

 Cannot, and do not do the same

1. Withdrawal of application filed under Section-7, 9 or 10- Section 12A of the Code Upheld.

The issue with Section 12A is that 90% of the committee of creditors has to allow a withdrawal. This has been explained in the Insolvency Law Committee Reports, as has been upheld by the Bench, that all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into.

1. Insolvency Resolution Professional has only administrative and no adjudicatory powers.

The Bench observed that under the Code, the Resolution Professional only has administrative, and not quasi-judicial or judicial powers. It added that, even when the Resolution Professional is to make a ‘determination’ under Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018, he is only to apply to the Adjudicating Authority for appropriate relief based on the determination.

1. Section 29A of the Code held constitutionally valid.

Section 29A deals with eligibility of persons to be a resolution applicant. The petitioners were of the view that this section treats un-equals as equals, and a good former manager cannot be lumped with a bad one, and keeping the good ones out of the process will be contrary to the object of the Code. The Bench said that this ineligibility is not restricted to malfeasance, but also includes any persons who have fallen foul of the law or are unable to pay their debts. The provision prohibits any such persons from purchasing assets of the corporate debtor whose debts they have either wilfully not paid or have been unable to pay.

1. Section 53 not violative of Article 14 of the Constitution.

As a challenge to Section 53, in case of liquidation, operational creditors are at the lowest stage of receiving anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. The Bench observed that the reason that differentiation is created between financial (secured) and operational (unsecured) debts is the relative importance of both the types. Repayment of financial debts leads to an infusion of capital in the economy, which further helps more entrepreneurs to borrow money for their businesses.

Conclusion:

The Supreme Court has strongly validated the provisions under the Insolvency and Bankruptcy Code of 2016. Upholding of the constitutionality of the statutes, this judgment has laid a strong foundation for the efficient implementation of the Code. It has iterated that the function of the Code is to resolve and revive a corporate debtor and, thereby, significantly reinforce the efforts of the creditors and other stakeholders to achieve such end. This decision boosted the confidence and morale of creditors as well as debtors through the Code, as well as generally improved the ease of doing business in India.