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Case Analysis of Swiss Ribbons v/s Union of India

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 governance structures.

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[1]", 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 Ruling

In the case of "Madras Bar Association v. Union of India",[2] 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 Union Government.

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 closer together.

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 Constitution.

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 Code.

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,[3] 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 claim.

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.,[4] 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 and Non-discriminatory

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."

Suggestions:
Through this critical analysis of the case, these are some suggestions and recommendations that can be incorporated in the Code:
  1. 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.
  2. 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.
  3. 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.

Conclusion

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 issues.

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.

End-Notes:
  1. (2014) 10 SCC 1.
  2. (2015) 8 SCC 583.
  3. National Company Law Tribunal Rules, 2016, rule 11.
  4. Civil Appeal Nos.9402-9405 Of 2018 & Civil Appeal No.9582 Of 2018.

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