The Apex Court's decision affirming the IBC's constitutional legitimacy is
the subject of the current case study. The Court found that the Preamble of the
IBC does not attempt to liquidate a corporate debtor's assets in any way. The
IBC views asset liquidation as a last resort when the resolution professional
receives no resolution plan or when the resolution plan is not approved by the
committee of creditors or the NCLT.
It's worth noting that the IBC has undergone multiple amendments since its
inception, and that an ordinance was enacted to protect corporate debtors'
rights during the COVID-19 pandemic. The case analysis critically examines the
Supreme Court's holding and interpretation of IBC regulations, before
summarizing the post-Swiss Ribbons implications for India's bankruptcy
resolution process. The case study finishes with suggestions for improving
Factors involved in the filing of the case
In 2018, the IBC's constitutional legitimacy was put into question. A Special
Leave Petition under Article 136 along with 10 writ petitions were filed at the
Hon'ble Apex Court of India, challenging the constitutional validity of the
Insolvency Code. The petition argued that Sections 7, 12A, 29A, and 53 of the
Indian Constitution do not pass the legality test and are therefore in violation
of Article 14 of the Constitution.
The judgement, which was issued on January 25, 2019, answered all of the
petitioners' claims as well as offering a full explanation of the legislation,
which is now recognized as its complete foundation.
Critical Analysis of The Issues In Detail
The critical assessment of the judgment on the issues that emerged for
consideration in the present case is dealt under various headings:
Order for the Establishment of Circuit Benches in Consonance with the Madras
Bar Association Ruling
In this case, the petitioners successfully argued that the NCLAT's sole seat as
an appellate tribunal in New Delhi conflicts with Supreme Court's pronouncement
in "Madras Bar Association v. Union of India
", in which the Court, in
deciding on the constitutionality of the NCLT/NCLAT under the National Tax
Tribunal Act, 2005, held that:
"it is obstructive and unreasonable to expect aggrieved parties to travel for
exercising their right to appeal."
As a result, having a single bench would negate the remedial method in and of
itself, as people would be obliged to travel to New Delhi from all over the
country. Invoking precedent, the Supreme Court ordered the Union to build
circuit benches within six months of the judgment's date.
Appointment of Members of NCLT and NCLAT is as per the Madras Bar Association
In the case of "Madras Bar Association v. Union of India", the Supreme Court
addressed issues such as the constitution or establishment of the NCLT/NCLAT,
the appointment of the Select Committee, and the qualification of technical
members. The Apex Court emphasized on other multiple defects relating to the
procedure for establishment of NCLT/ NCLATs and also issued directions to the
It was one of the arguments in Swiss Ribbons that S. 412(2) of the Companies Act
is a conflicting provision because of the difference in the number of executive
and judicial members so appointed in the Select Committee which is three and two
respectively. The Supreme Court pointed out that the Companies (Amendment) Act
of 2017 had already addressed the Section 412 disparity, bringing their numbers
The Differential Treatment of Financial and Operational Creditors is not
Against the Constitutional Spirit but Instrumental to Meet the Ends of Justice
After thoroughly scrutinizing the "Bankruptcy Law Reforms Committee Report
2015, the Insolvency Law Committee Report 2018", and various other decisions and
regulations, the Supreme Court of India categorically classified both types of
creditors based on the nature of their debt, their financial competency, and the
adequacy of evidence required of them to initiate resolution proceedings against
the corporate debtor. The Supreme Court concluded that the disparate treatment
is not discriminatory or arbitrarily applied, as required by Article 14 of the
Financial creditors are tiny banks, whereas operational creditors are major
businesses that offer goods and services, with the former being mostly secured
and involving significant sums of money, and the latter being mostly unsecured
and involving lesser sums of money, according to the Supreme Court. According to
the Supreme Court, the nature, method of operation, quantity of monetary value
engaged in firm activities, and resources and security of both types of
creditors are all different.
Financial creditors have access to everything from the beginning of the
transaction since they provide working capital, while operational creditors
deliver products and services purchased using the same working capital provided
by the financial creditors.
The Court highlighted that the bankruptcy resolution mechanism has evolved from
"inability to pay the debt" to "finding of the default" un regard to the
financial debtor's inability to fight the financial creditor's claim. The Court
went on to define the terms "claim," "debt," and "default," ruling that
financial creditors must prove a default by the corporate debtor in repaying
their loan, whereas operational creditors must merely assert their entitlement
to the amount due.
The Supreme Court ruled that requiring a financial creditor to send notice to a
financial debtor prior to the start of bankruptcy proceedings is unnecessary
because they are often aware of their loan agreement and default in repayment.
Furthermore, with the information utilities in place, the debtor has access to
relevant information. In the case of the operational creditor, notifying the
operational debtor prior to submitting the claim prevents insolvency procedures
from being initiated before the claim is submitted, which may benefit him
through a settlement between the parties.
A copy of the financial creditor's application before the adjudicating authority
must also be provided to the corporate debtor, who may file a counterclaim if
the creditor's claim is fraudulent and absurd, according to Section 7(5) of the
The Validity of Section 12A Upheld
In this case, Section 12A of the IBC, which governs the procedure for withdrawal
of applications, was challenged on the grounds that it empowers CoC to control
the proceedings by giving it unrestricted and unbridled powers, including the
ability to reject such withdrawals if they are not approved by at least 90% of
CoC's voting members. Furthermore, once an application has been accepted by the
adjudicating authority, there is no way to retract it.
The Supreme Court said that once insolvency procedures are initiated by a
creditor's petition under sections 7 to 9 of the IBC, the case becomes a
collective proceeding that cannot be stopped by a single creditor. Furthermore,
the Supreme Court stated that it might grant or deny the NCLT's application
under Rule 11 of the NCLT Rules 2016, regardless of whether NCLT was seeking
withdrawal or settlement prior to the formation of the CoC. The Supreme Court
further held that the NCLT has the ability to set aside the CoC's order if the
CoC arbitrarily dismisses a reasonable and impartial settlement or withdrawal
Section 29A is Prospective and Constitutionally Valid
The Apex Court referenced its judgement in Arcelor Mittal India Pvt. Ltd. v.
Satish Kumar Gupta and Ors.
, in which it concluded that resolution
petitioners lacked competence to offer resolution plans under section 29A. (c).
As a result, Section 29A of the IBC's retrospective application had no effect on
their given rights. Because it changes existing rights or because some of the
criteria for its effect are drawn from temporal period prior to its
implementation, a statute cannot be deemed to inhibit retrospective forces.
Furthermore, the Court responded to argument that Section is arbitrary because
it imposes a blanket ban on all promoters and lumps both unethical and honest
promoters together, stating that it did not find the argument pragmatic because
the disqualification condition is not solely based on malfeasance. Excluding a
person who is unable to service his own debts from offering a settlement plan,
according to the Court, is quite reasonable.
The resolution process is intended to maximize asset value, and section 29A is
incompatible with that purpose, according to this section. The Supreme Court
ruled that the disqualified person's bar applies to both resolution and
liquidation. Furthermore, in response to the contention that relatives are
ineligible, Supreme Court stated that Section 29A(j) prohibits relatives from
participating unless they have a business tie with the resolution applicant.
Section 53 Passed the Litmus Test of Constitutionality for being Unarbitrary
Section 53 of the IBC, which gives creditors priority in debt repayment during
asset distribution, is said to be in violation with Article 14 of the
Constitution, according to the petitioners in this case. Operational creditors,
they said, are placed at the bottom of the priority list in the case of asset
liquidation, ranking below all other creditors, including unsecured creditors
who are also financial creditors.
"When evaluating the Code's purpose, the Supreme Court highlighted that the
distinction between financial debts, which are secured debts, and operational
debts, which are unsecured debts, is critical. According to the Court, the
repayment of financial debts diffuses the flow of capital into the economy
because banks and other financial institutions can lend the repaid money to
other businesses and entrepreneurs.
This gives creditor classification and asset distribution a true and legitimate
reason. Workmen's dues, a type of unsecured debt, have traditionally taken
precedence over other sorts of debt. An intelligible differentia can be
established as long as there is a plausible relationship between the grouping
produced and the goal wanted to be reached by this Code. There will be no more
violations of Article 14."
Through this critical analysis of the case, these are some suggestions and
recommendations that can be incorporated in the Code:
- The Government shall increase the threshold limit of default which is
set in the Code in order to trigger CIRP although the Government should not
affect the rights of the small-time vendors and operational creditors.
- There is lot of hustle when the resolution process continues beyond the
stipulated time. Hence, a provision should be inserted in the Code that can
make adjudicator liable for the delay in the resolution process, if he does
not give adequate reasons for the delay.
- The "Cross-Border disputes" should be made more "fair, equitable and
speedy" so that the interests of the foreign debt holders can be protected,
that will in turn facilitate the ease of doing business.
In the case of Swiss Ribbons Pvt. Ltd. v. Union of India
, the Supreme
Court of India confirmed the Insolvency and Bankruptcy Code's constitutionality
on January 25, 2019. The Court used a broader perspective to defend the Code's
legitimacy, referring to it as "useful legislation" dealing with economic
The Court affirmed the concept of "judicial hands-off qua economic
legislations," calling the legislation as a "successful experiment" that had
ended the defaulter's paradise. The Court might be considered as a "rescue"
operator since it limits the obstacles that a corporate debtor has and makes the
settlement procedure go smoothly.
True, the best evaluator of a corporate debtor's validity and viability is a
financial creditor. Creditors provide them debt and assist them in making better
judgments. The resolution plan in the event of a CIRP. Unfortunately, a similar
circumstance does not exist in the case of an operational creditor.
By prioritizing financial creditors, the Court has moved a step closer to the
Code's purpose of "restoring the economy to its proper place" by facilitating
financial debt repayment and the flow of financial resources into the commercial
sector. By emphasizing visible differences between operational and financial
creditors, the Code ensures that the economic legislation's goal is preserved.
Its purpose is to increase the pace of debt recovery in the economy.
According to Hon'ble Justice Nariman "The economy has been restored to its
proper position and the defaulter's paradise is lost," it is true that the Code
restores the economy to its proper position while depriving a defaulter of a
paradise that existed before to the Code.
- (2014) 10 SCC 1.
- (2015) 8 SCC 583.
- National Company Law Tribunal Rules, 2016, rule 11.
- Civil Appeal Nos.9402-9405 Of 2018 & Civil Appeal No.9582 Of 2018.
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