Krishna. G
1. FACTS
Supreme Court Examines Insolvency and Bankruptcy Code Constitutionality
The Supreme Court bypassed the specific details of a case to focus on the constitutionality of the Insolvency and Bankruptcy Code (IBC). Challengers to the code raised several key points:
- Tribunal Appointments: The petitioners argued that appointments to the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) violated past court rulings. They requested these appointments be reviewed and administrative support for tribunals be shifted to the Ministry of Law and Justice.
- Creditor Equality: The second challenge addressed the distinction between operational and financial creditors under Section 7. Petitioners argued this violated the Constitution’s equal protection clause (Article 14) as operational creditors lacked the same rights as financial creditors in contesting claims and participating in the resolution process.
- Committee of Creditors (COC) Power: Sections 21 and 24 were challenged for allegedly discriminating against operational creditors. These creditors lacked voting rights in the COC, which plays a crucial role in resolving corporate debtor issues. Additionally, operational creditors holding less than 10% of the total owed amount were excluded from being considered “participants” and denied access to resolution plans.
- Collective vs. Individual Proceedings: Section 12A, requiring 90% COC approval before initiating a settlement process, was contested. Petitioners argued this gave the COC excessive power and shifted proceedings from individual to collective, potentially neglecting individual creditor rights.
- Disqualification of Individuals: Section 29A, disqualifying specific individuals from involvement in corporate debtor management, was challenged for targeting not only those who committed misconduct but also those deemed “unwanted” without proper justification.
The Supreme Court’s decision on these challenges will have a significant impact on the application of the Insolvency and Bankruptcy Code in India.
2. ISSUES RAISED
The Supreme Court is considering several key questions regarding the Insolvency and Bankruptcy Code (IBC):
- Tribunal Appointments: Did the government follow the Constitution when appointing members to the NCLT and NCLAT?
- Tribunal Locations: Should NCLAT establish branches in other regions beyond its current headquarters in New Delhi?
- Jurisdictional Conflicts: Can the High Courts intervene in matters already handled by NCLT or NCLAT?
- Creditor Equality: Does the Code unfairly differentiate between financial and operational creditors, potentially violating equal protection rights?
- Committee of Creditors (COC) Power: Does Section 12A grant the COC excessive authority, potentially allowing them to abuse their power in the resolution process?
3. CONTENTION
A company, Swiss Ribbons Pvt. Ltd., argued in court that the location of a key decision-making body (NCLAT) was unfair. They cited a previous court case (MBA) where judges ruled that requiring people to travel long distances to appeal decisions is unreasonable. In that case, judges ordered the government to set up branches of the decision-making body in more places to make the process easier for everyone.
The Swiss Ribbons case also raised other issues about how the decision-making bodies were set up, including who chooses the members and what qualifications they need. The judges in this case agreed with some of the points raised in the MBA case, such as the need for a more balanced number of decision-makers with different backgrounds.
Finally, the judges ruled that only a specific government department (Ministry of Law and Justice) should provide support to the decision-making bodies. They said that other government departments should not be involved.
A legal argument claimed the code unfairly discriminates between financial and operational creditors, violating the constitution’s equal protection clause. The court, after examining a relevant report and past judgements, disagreed. Their reasoning focused on the inherent differences between these creditor types:
- Security: Financial creditors often have secured loans backed by assets, unlike operational creditors relying on unsecured transactions.
- Loan agreements vs. Daily Business: Financial creditors extend loans for various purposes like running the business or starting a new one, while operational creditors deal in everyday purchases and services.
- Number and Size of Claims: Financial creditors are typically fewer but hold larger claims, while operational creditors are more numerous with smaller individual claims.
- Loan Management: Financial agreements involve repayment schedules and violation consequences. Operational creditors lack such control.
- Monitoring and Restructuring: Financial creditors can monitor a company’s health and potentially restructure loans. Operational creditors have less ability to influence the situation.
- Burden of Proof: Financial creditors need to prove a loan default, while operational creditors simply claim what they’re owed. Their claims also require exceeding a certain threshold for consideration.
The court concluded that these inherent differences justify the different treatment in the code and do not violate the constitution’s equal protection principle.
4. RATIONALE
The Supreme Court disagreed with the idea (Lochner’s doctrine) that economic laws are unconstitutional if they don’t meet a strict legal test. They cited the RK Garg case, saying courts should use their judgment based on the Constitution, not try to solve economic problems directly.
The Court also considered the purpose of the Code (debtor company revival) established in the Innoventive Industries case. On the issue of court authority, they agreed with the R Gandhi case that corporate department jurisdiction was unlawful. However, they also accepted the applicant’s argument (referencing the Delhi International Airport case) that business rule allocation between departments can be authorized.
In conclusion, the Supreme Court allowed the NCLT and NCLAT tribunals to continue functioning under UN guidance.
5. DEFECTS OF LAW
The passage exposes some potential weaknesses in the legal framework surrounding corporate insolvency in India, although it doesn’t explicitly criticize the law itself. Here’s a deeper look at the issues raised:
- Clashing Judicial Doctrines: The case highlights a conflict between two legal philosophies:
- Lochner’s Doctrine: This outdated doctrine suggests courts can strike down economic regulations if they don’t meet a strict legal test. The Supreme Court rejects this idea, indicating a potential weakness in how some might interpret the law to hinder economic regulations.
- Judicial Review based on Constitution: The Court emphasizes the RK Garg case, where legal limitations are applied based on the Constitution’s principles. This suggests a need for clearer legal guidelines within the Constitution to effectively evaluate economic regulations.
- Uncertain Jurisdictional Authority: The case reveals a debate about the Department of Corporation’s authority in insolvency proceedings. The R Gandhi case is cited as a precedent against such jurisdiction. This ambiguity creates uncertainty in the legal process.
- Balance Between Company Revival and Legal Scrutiny: The Court acknowledges the Code’s purpose of reviving debtor companies, established in the Innoventive Industries case. However, the debate over departmental jurisdiction raises a question: is there sufficient legal oversight to ensure the Code is applied fairly and effectively while achieving its goals?
Overall, the case highlights potential weaknesses in the legal framework surrounding corporate insolvency:
- Outdated doctrines like Lochner’s might be used to challenge necessary economic regulations.
- Unclear jurisdictional boundaries can create confusion and delay proceedings.
- Balancing company revival with proper legal scrutiny requires careful consideration.
While the law itself isn’t explicitly criticized, the case highlights areas where the legal framework could be strengthened to ensure efficient and fair handling of corporate insolvency.
6. INFERENCE
I had the opportunity to work on a few cases before the Swiss Ribbons decision that challenged the Insolvency and Bankruptcy Code (IBC). It was clear the code had some issues, but it’s definitely a valuable part of Indian law. In fact, it’s even created a whole new career path for young lawyers like myself!
There have been a few amendments to the code since then. The third one, ratified in August 2019, tweaked eight sections. It seems like the courts and lawmakers were working together to iron out some kinks. For example, in the Essar Steel case, the court emphasized the importance of speedy resolutions but also shot down a provision that used the word “mandatorily.” They seemed concerned that this might violate some fundamental rights. The new amendment basically says companies need to get their ordinary resolutions done within a set timeframe, with some wiggle room for exceptional cases.
The most recent amendment, in March 2020, was even more extensive. They changed 11 sections and even added a whole new one! This new section (32A) seems to offer some protection for new promoters taking over troubled companies. It sounds like they’re trying to make things easier for these companies to get back on their feet, as long as there aren’t any hidden nasty surprises lurking around.