Case analysis: Swiss Ribbons Vs Union of India

Swiss ribbons Vs. Union of India was a constitutional litmus test for the Insolvency and Bankruptcy Code, 2016. The IBC is considerably different from its previous regimes in India. Furthermore, some of the key features of the code are novel even when compared globally. The key features of the IBC compared with other nations are:

1. Low admission threshold.

2. No class rights –the constitution of a single creditors committee consisting of only financial creditors with secured and unsecured creditors being treated equally for voting.

3. Participation of certain bidders is barred in the resolution process.


FACTS

The petitioner filed a writ in the Supreme Court of India challenging the constitutionality of various provisions of insolvency bankruptcy code, 2016. Where the Supreme Court upheld the validity of the 2016 IB Code. Along with this several writ petitions were also filed before the Supreme Court regarding the same issue by others, since, the judgment dealt only with the question of law, individual facts were not provided.


ISSUE RAISED

The following contentions raised by the petitioners –

1. Whether the appointment of members of NCLT and NCLAT was in contradiction with the judgment of the Madras Bar Association.

2. Whether the classification of financial creditors and operational creditors is violative of Article 14.

3. Weather Section 12 A of the code is Constitutional.

4. Whether section 29A of the Code is constitutional as the vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor have been impaired by retrospective application of Section 29A?

5. The NCLT as an appellate court has an only seat in Delhi would render the remedy inefficacious.

6. Whether section 53 of the Code is Constitutional?


REASONING BY THE JUDGE

The appointment of members of NCLT and NCLAT.

The Hon’ble Supreme Court after hearing the respondent settled on the fact that none of the members of the NCLT or the NCLAT was appointed contrary to the judgments of this Court in Union of India v. R. Gandhi, President, Madras Bar Association. As the respondents have presented before the Hon’ble Court the affidavits which support that all members of NCLT and NCLAT were appointed by a Committee which consisted of two Supreme Court Judges and two bureaucrats which are in accordance with the Madras Bar Association.


Differential treatment between 'financial creditors' and 'operational creditors'.

It was the petitioner's main argument that there is no intelligible differentia between financial and operational creditors. Since nowhere in this world the distinction has been made between the two, the petitioners claimed that this distinction is discriminatory in nature.


However, the Supreme Court held that the distinction between the two is not discriminatory, arbitrary or contrary to Article 14 of the Constitution of India. The rationale behind giving this decision was that the financial creditor before lending a huge amount to the corporate debtor will have a better understanding of his or her business and viability.

To summaries this argument we can say that the Hon'ble Supreme Court sufficiently found the intelligible differentia between the operational and financial creditor and concluded:

"it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted. For these reasons, the challenge to Section 53 of the Code must also fail".


Section 12A passing test of constitutionality.

Section 12A permits the withdrawal of the CIRP application by the applicant post-admission, provided the Committee of Creditors approves such withdrawal by a voting share of ninety per cent.

Before section 12A was inserted to the IB code, the position was such that one an insolvency application is admitted by the court the corporate debtor was left with either to continue the sale of the business( fully or partly) or wind up and liquidate the assets of the company in order to pay off the creditors and the stakeholders.

The Hon'ble Supreme Court held that once an insolvency application is admitted, the CIRP becomes “in-rem” and is no longer an individual proceeding but a collective proceeding. Furthermore, the Supreme Court elaborated that, all stakeholders hold in interest in the matter and not just the corporate debtor. There are instances where settlements were allowed however the settlement was amongst the corporate debtors along with its creditors.

In the judgment court also highlighted the BLRC Report which stated:

"all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution."