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.
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.
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."
Primarily for these reasons, the SC held that section 12A is constitutional and violative of any rights enshrined in the constitution.
The constitutional validity of Section 29A
Section 29A basically sets out ineligibility differentia for resolution applicants under the Code. It was first brought in by Insolvency and Bankruptcy (Amendment) ordinance 2017 and thereafter it was included in the code by the way of an amendment. The object behind enacting section 29A was to bring effective corporate governance in the country.
At that time the government thought it was necessary to not only bring changes to the Code but to also enforce the enactment with retrospective effect.
Section 19 A incorporates a list under which was challenged by the petitioners, on the following contentions:
1. The retrospective application of section 29A impairs the Vested rights of erstwhile promoters to participate in the recovery process;
2. A blanket ban on participation of promoters, without differentiating between unscrupulous and sincere promoters is arbitrary in nature;
3. One year period provided for classification of NPA is arbitrary in nature;
4. The ambit of section 29A was challenged as persons who may be relatives of the erstwhile promoters were debarred, even though they have no business connection with the erstwhile promoters.
The Supreme Court had dealt with a similar contention (Contention 1) in the case of Arcelor Mittal India Pvt. Ltd. Vs. Satish Kumar Gupta, and following the judgement held that the promoters don't possess “vested rights” in order to be considered as resolution applicants.
The contention no. 2 that there is a blanket ban on all promoters was rejected by the court as there exist numerous classifications under the section and being a criminal is no ground that should be restricted.
The Supreme Court rejected the third contention and held that there does not exist any fault with this policy as it is a legislative policy which was in itself decided by the Reserve Bank of India. Furthermore, an account can only be classified as a Non-Performing Asset post the expiry of 1 year period and 3 month grace period.
In the fourth contention, the Hon'ble Supreme Court held that the section 29A will only come into the picture when a particular person will be in connection with the business of the resolution applicant.
The NCLT as an appellate court has an only seat in Delhi.
The petitioners argued that as per the Code, the NCLAT will have the only seat in the Capital City of India and therefore the litigating assessee would not only have to bear the cost of coming and staying in Delhi but also the mental hardship of travelling. Furthermore, they might also incur uncalled expenses. Adding further to it it can be extremely difficult and impractical for a litigant assessee from a distant State to look for an Advocate who would represent him in the Tribunal.
The similar aspect was considered by the court in the matter of S.P. Sampath Kumar v. Union of India, where the court held that permanent benches had to be established at the seat of respected High Courts and it is not possible to establish a permanent bench then at least a circuit bench shall be set up where a person could invoke his legal remedy.
Therefore, the Hon'ble Supreme Court directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from passing of this judgement.
Section 53 dealing with the distribution of assets not discriminatory
The petitioner argued before the Hon'ble Supreme Court that in the event of liquidation, operational creditors will never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. This would render Section 53 and in particular, Section 53(1)(f) discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India.
The Supreme held that It will be seen that the reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Insolvency Code.
The Hon'ble Supreme Court held that when a financial debt is a repaid capital is added into the economy as both have a direct connection with each other. Once capital is infused into the economy the banks and the financial institutions become able, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts.
Furthermore, in any circumstances, the dues of workmen, which are also called as unsecured debts, have traditionally been placed above most other debts. Thus, it can be seen that section 53 of the code is not violative of Article 14 of the constitution
According to me, this judgment was the first step towards reviving the economy. The Supreme Court in this case not only upheld the constitutional validity of the Code but also conducted an overall analysis of its provisions and looked into the economic aspects behind it as well.
By prioritizing financial creditors, the court has taken a step further towards achieving the objective of the code i.e. putting the economy back in its rightful position by allowing repayment of financial debt. By pointing out intelligible differential between the operational and financial creditors, the code ensures the preservation of the intent of the economic legislation. It seeks to increase the rate of recovery of debts in the economy.
The code not only provides a mechanism to the defaulter to revive but ensures a fair and efficient procedure facilitates it. The power granted to the tribunals only makes the process or just and righteous. Preserving interest of all the stakeholders is the objective of the code and the judgment only affairs strongly
Hence it is indeed true that the code is putting the economy into the rightful position and depriving a defaulter of a paradise that was available before the code.
The decision of this court will definitely have a remarkable impact on the ease of doing business. The Supreme Court in this judgment has beautifully drafted all the rationale behind upholding the legislation having economic issues and the thing which was laudable was how it approached to explain the case of Lochner Doctrine of the United States, wherein the cases pertaining to economics are not entertained by the Supreme Court of United States as per their “Due Process Clause”
The Supreme Court has also supported the information utilities along with the other aspects of the Insolvency and Bankruptcy Code. Furthermore, it has made it clear that resolution professionals do not carry a quasi-judicial power but an administrative power. Without a doubt, the ruling given by the Supreme Court, in this case, was important at that time in order to resolve the issues pertaining to the Insolvency and Bankruptcy Code.