Menu

Swiss Ribbons Pvt. Ltd. v. Union of India

Case Comment, Publications

AIR (2019) 4 SCC 17

Introduction:

CitationAIR (2019) 4 SCC 17  
Date of Judgment   25 January, 2019
Court  Supreme Court of India
Petitioner  Swiss Ribbons Pvt. Ltd.
RespondentUnion of India  

Facts:

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) is a comprehensive Bankruptcy law that provides a single framework to deal with insolvency and bankruptcy proceedings in India. It applies to companies, individuals, and partnerships. In the instant case, the constitutional legality of several provisions of the Code was in question, which prompted the Supreme Court to examine and assess the constitutionality of the Code. Due to the submission of several writ petitions, including a special leave petition, the court opted not to delve into the specifics of each case. Instead, it immediately addressed the constitutionality of the Code, as all the petitions raised concerns regarding the constitutional legality of various provisions of the Code.

Issues raised-

  1. Whether the members appointed of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) were not in line with the judgment of the Madras Bar Association case[1]?
  2. Whether there is any intelligible differentia (under Article 14) between Financial Creditor and Operational Creditor?
  3. Whether Section 12A of IBC, which provides for a ninety percent voting share of the creditor’s committee to allow withdrawal of the application of insolvency proceeding, was unconstitutional?
  4. Whether Section 29A of the IBC, which bars certain persons from becoming resolution applicants, was unconstitutional?
  5. Whether Section 53 of the IBC was unconstitutional?

Arguments:

Contentions of the Petitioner concerning the aforesaid issues were –

  1. The learned senior advocate for the petitioner argued that the appointment of the members of the National Company Law Tribunal (NCLT) as well as the National Company Law Appellate Tribunal (NCLAT) is not in accordance with the decision in Madras Bar Association case[2] and Madras Bar Association case[3].
  2. It was argued that under Section 7 of the Code, the classification between the financial creditors and the operational creditors was invalid, they were arbitrarily discriminated against in Sections 21 and 24. He further argued that the information utilities set up under the Code were solely profit-driven entities and the information they offer cannot be relied upon.
  3. It was argued that section 12A grants uncontrolled authority to the committee of creditors, a non-judicial authority, thus disrupting the settlement process.
  4. Objections were raised against Section 29A, specifically focusing on clause (c) claiming that Section 29A goes against the main purpose of the Code, which is the swift resolution of insolvency cases. He further argued that Section 29A, unfairly bars individuals who are related to former promoters, thus questioning the term “related party”.

Contentions of the Respondent-         

  1. The respondents argued that before the enactment of the Code, the previous laws did not focus on maximizing the value of the stressed/ troubled assets as effectively as the Code does. To prove this submission they relied upon the objectives, preamble, and various provisions of the Code.
  2. On the point of issue of appointment of the members, the senior counsels argued that the appointment was in line with the precedent set out in the Madras Bar Association case. Emphasizing that the members were appointed after due consideration of the committee consisting of two judges of the Supreme Court and two government officials.
  3. Regarding the differentiation between Financial Creditors and Operational Creditors, they contended that this categorization arises due to differences in the nature of contracts entered with them. This classification aligns with the objectives of the Code.
  4. Responding to Section 29A, it was noted that one of the main objectives of the code is to disqualify individuals deemed undesirable in its provisions from presenting resolution proposals. This limitation might hinder their ability to manage financially troubled corporate borrowers.

Rationale:

The Supreme Court made the following observations and ruled that-

  1. The appointment of the members was not against the judgment in the Madras Bar Association case as the members were appointed by the selection committee set up for the same.
  2. There is intelligible differentia between the financial and operational creditors and thus it is not in violation of Article 14 of the Indian constitution. The court observed the following differences –
  3. Operational creditors are unsecured creditors whereas most of the financial creditors are secured creditors.
  4. There is a difference in the nature of loan agreements with the Financial Creditors from the contracts with the operational creditors for the supply of goods and services.
  5. The quantum of money involved in financial contracts is more compared to operational contracts.
  6. The dispute resolution forum involved in contracts with operational creditors is different.
  7. Unlike operational creditors, financial creditors have stipulated repayment plans, where if a borrower defaults, they can demand full repayment.
  8. Financial creditors evaluate the corporate debtor’s viability, engage in loan restructuring, and reorganize the business of the debtor during financial stress. These tasks are not undertaken by operational creditors.

Thus the classification is not arbitrary nor discriminatory and is in compliance with the objects of the Code.

  1. The requirement of the high threshold of ninety percent of the committee of creditors, to approve a withdrawal was upheld. This high threshold is justified in the Insolvency Law Committee Reports, stating that all financial creditors should collectively agree to withdrawals, ideally through a comprehensive settlement involving all creditors. Also under the provisions of the Code, the committee of creditors does not have a final say, the NCLT, and then again NCLAT has the jurisdiction to overturn the decision.
  2. The term ‘related party’ was interpreted and the court asserted that unless it is demonstrated that such a ‘related person’ is involved in the business or activities of the resolution applicant, they cannot be disqualified under Section 29A.
  3. The section 53 of the Code was held constitutionally valid. The argument regarding the lower ranking of the operational creditors than that of the financial creditors in the event of liquidation. The court clarified that this differentiation between secured financial debts and unsecured operational debts is based on the objects sought to be achieved by the Code. Repayment of financial debts injects capital into the economy, enabling banks and financial institutions to further lend the recovered funds to other entrepreneurs. This is the main intelligible differentia between secured financial and unsecured operational creditors.

Defects of law:

  1. The NCLT and so also the NCLAT should be administratively supported by the Ministry of Law and Justice. However, these tribunals are functioning under the Ministry of Corporate Affairs.
  2. According to the precedent in the Madras Association case, the seat of the NCLAT is only in Delhi which is inconvenient to the aggrieved parties to travel to Delhi, whereas earlier they would have approached the High Court. The Court had to order to set up the seats in different regions.
  3. By keeping out erstwhile promoters, who may present the best resolution plan and outbid others, the law is seen as impairing the objective of maximizing asset value. There are wide criteria for excluding the promoters from the resolution process.
  4. The definition of the term “related / related party” is connected only with the business which causes ambiguity.

Inference:

In the instant case, the Supreme Court’s ruling has significant implications for the insolvency landscape in India. By interpreting the provisions and upholding the constitutionality of the Insolvency and Bankruptcy Code (IBC), 2016, the Court has reinforced the Code’s role in facilitating efficient and effective resolution of insolvencies. The Court’s upholding of the differentiation of creditors into financial and operational categories recognizes the distinct interests and priorities of these two groups. This distinction ensures that the Code’s resolution process is tailored to the specific needs and circumstances of each type of creditor.

The court’s emphasis on prioritizing the financial creditors will ensure economic stability in the business sector. By the ruling of the court, it is evident that the Code is a statute addressing economic nuances and has implications for the nation’s economy. Previous attempts to legislate the insolvency law faced failures and errors, leading to the formulation of the present Code.

Thus, the apex court is right in summing up the decision stating “The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained”, bringing a new era of accountability and transparency in corporate debt resolution.

Anuja Malai

Raja Lakhamgouda law college, Belagavi , Karnataka

[1] Madras Bar Association v. Union of India, (2015) 8 SCC 583 

[2] Ibid

[3] Madras Bar Association v. Union of India, (2014) 10 SCC 1

Name- Anuja. Malai

College- Raja Lakhamgouda Law College, Belagavi.