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Swiss Ribbons Pvt. Ltd. vs Union of India

Case Comment, Publications

AIR (2019) 4 SCC 17

  • Harshit Pandey

University of Petroleum & Energy Studies

Facts

Under the careful eye of the Supreme Court, a few writ petitions and exceptional leave petitions were filed in an effort to scrutinise the sacred legality of several Code provisions. The judgement did not take into account the unique circumstances of any case because it dealt with a legal issue pertaining to the established legitimacy of the Code. On behalf of the petitioner contesting the constitutionality of the statute, one of the Senior Advocates presents. Ten civil writ petitions, including an SLP, presided over it. On January 25, 2019, the supreme court issued a consolidated order dismissing each of these petitions. Since numerous lawsuits regarding the constitutionality of the Code had already been brought before S.C., the court decided against digging into the details and addressing the problems right away. After receiving the entries, the court decided it was appropriate to clarify any questions regarding Indian insolvency laws. It was also mentioned that the Eradi Committee Report was helpful in addressing the significance of the Sick Industrial Companies Act of 1985.

Issued Raised

  1. Whether the nclt and class are administered in accordance with Madras Bar Affiliation?
  2. Whether Sections 29A and 53 of the IBC legal under the Constitution?
  3. Whether the 90% threshold of voting shares required by Section 12A of the Code to be admissible for the committee of creditors to withdraw their application for adjudication?
  4. Whether councils should operate at the service of the law’s supreme authority?
  5. Whether it violates Article 14 of the constitution for financial leasers and operational loan managers to be separate?

Contention

Contention of the Petitioner:

  • The petitioner’s arguments related to the National Company Law Tribunal and National Company Law Appellate Tribunal’s appointment process, stating that it is inconsistent with court precedent.
  • The Information Utilities were contested on the grounds that their lack of regulation compromises the veracity of the information they offer. Financial and operational debtors and creditors are treated differently under Sections 7, 21, 24, and 53 of the IBC, which violates Article 14 of the Constitution.
  • The appellant further added that Section 29A violated the goal of the legislation to achieve a swift resolution of insolvency and that its Clause C limits the involvement of all promoters of corporate debtors.

Contention of the Respondent:

  • Respondents said that rules prior to the IBC were ineffective because they solely focused on the revival of corporate debtors, neglecting the underlying goal of maximising asset value.
  • Regarding appointment, they argued that the members of NCLT and NCLAT had been chosen after consideration by the committee. Two justices from the Supreme Court and two officials made up the committee, which was mindful of the precedent that should be followed in such cases.
  • In reaction to Section 29A, it was considered that one of the code’s main goals is to ignore the fact that anyone mentioned as being undesirable in any of its provisions is ineligible to submit ideas for resolution. This will limit their ability to manage corporate borrowers who are under stress.

RATIONALE

By referring to the rule outlined in Article 14 of the Indian Constitution, the Supreme Court noted that both creditors are separate from one another. The Court provided a noteworthy viewpoint while addressing the problem of the distinction between financial and operational creditors by pointing out the purpose of the law, which is to maintain the corporate debtor as a growing concern while assuring the greatest recovery for all creditors. The Supreme Court examined a number of issues in the case of Madras Bar Association v. Union of India[1], including the creation of NCLT and NCLAT and the qualifying of members with technical competence.

The court used the R.K. Garg case[2] to emphasise the necessity for judicial restraint that courts must use when evaluating the constitutional legitimacy of any Code. The Court clarified that the reason for setting such a high limit is clearly stated in the Insolvency Law Committee Reports as every money lender is expected to focus when permitting such withdrawal while dealing with the issue against Sec. 12A and the manner in which 90% of board of trustees of lenders are supposed to permit withdrawal. When addressing the constitutionality of Section 53 of the Code in the event of a company winding up, the court held that operational creditors have the smallest chance of receiving anything because they rank below all other creditors, including unstable lessees who pose as money lenders.

In order to prevent misguided promoters from proposing a resolution scheme and buying back stressed assets, Section 29A of the IBC Code was added in 2017. Contrary to Section 29A of the IBC Code, Section 391 of the Companies Act of 1956 applies. Section 230 of the Companies Act, 2013, has completely superseded Section 391 of the Companies Act, 1956 as a result of a change made by the government. According to Section 230, a resolution plan may be proposed by the liquidator appointed in accordance with the Insolvency Code. One should take a look at the Sekaran case, where it was determined that such errant promoters, who are otherwise unqualified under Section 29A of the IBC Code, can make a back-door entry to adopt a scheme of arrangement in the resolution plan.

Additionally, the scheme of arrangement must be finished in 90 days. This could be a prudent move to ensure that the liquidation procedure doesn’t get postponed. In a separate ruling in the Meghal case, the Supreme Court confirmed the legality of Sections 230 of the Companies Act of 2013 and 391 of the Companies Act of 1956. The resolution plan is placed under more emphasis in this judgement than corporate liquidation, however it is still unclear how Section 29A of the IBC Code and Section 230 of the Companies Act, 2013 can work together. The IBC Code’s main goal is to help the corporate debtor get back on its feet rather than seek liquidation. Finding buyers for such arrangements for companies that are close to going out of business is challenging in India. Both of these clauses call for clarification from the Supreme Court, but the Swiss case left them unresolved.

Defects of Law

  • Madras Bar Association v. Union of India[3] set the precedent that tribunals should report to the Ministry of Law rather than the Ministry of Corporate Affairs.
  • Instead of forcing displeased parties to go to Delhi each time they needed a hearing, the benches were to be erected in various locations to make the remedy easily and effectively accessible to them.
  • In the definition sections, “related party” and “relative” exclusively refer to those involved in the resolution applicant’s commercial endeavours.
  • It is acceptable to distinguish between operational and financial creditors since operational creditors are simply concerned with getting their money back, whilst financial creditors are better able to assess the viability of the corporate debtor’s firm.

Conclusion

On January 25, 2019, the Supreme Court of India upheld the legality of the Insolvency and Bankruptcy Code in the case of Swiss Ribbons Pvt. Ltd. v. Union of India. The Code was defended by the Court as “useful legislation” that addressed economic challenges from a wider viewpoint.

The Court upheld the idea of “judicial hands-off qua economic legislations,” referring to the law as a “successful experiment” that had put an end to the defaulter’s paradise. Since it reduces the challenges a corporate debtor faces and facilitates the settlement process, the Court could be seen as acting as a “rescue” operator.

It is true that a financial creditor is the best judge of the legitimacy and viability of a corporate debtor. They receive debt from creditors, who also help them make wiser decisions. The strategy for dealing with a CIRP. Unfortunately, an operational creditor’s case does not involve a situation like this.

The Court has advanced the Code’s goal of “restoring the economy to its proper place” by giving financial creditors priority, which will make it easier for people to pay off their debts and allow money to flow into the business sector. The Code ensures that the objective of the economic legislation is maintained by highlighting obvious distinctions between operational and financial creditors. Its objective is to quicken the economy’s debt recovery.

Honourable Justice Nariman claims It is true that the Code returns the economy to its rightful position while denying a defaulter of a paradise that predated the Code. “The economy has been restored to its proper position and the defaulter’s paradise is lost,”

Suggestions

  1. The Government must raise the threshold of default set forth in the Code in order to start the CIRP, but it must do so without affecting the rights of operational creditors and small-time vendors.
  2. When the resolution process lasts longer than expected, there is a lot of commotion. As a result, if the adjudicator fails to provide sufficient justification for the delay, a provision should be included to the Code that holds him accountable.
  3. Making “cross-border disputes” more “fair, equitable, and speedy” will help to protect the interests of foreign debt holders and will make conducting business easier.

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

[2] R.K. Garg & Ors. v. Union of India, AIR (1981) 4 SCC 675.

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