This article is written by Ram Kumar, student of Chanakya National Law University, Patna.
Swiss Ribbons Pvt Ltd. vs Union of India deals with the constitutional validity of the various existing provisions in the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC Code). The case has been finally decided by the Supreme Court on 25 January 2019. Since the enactment of the IBC Code, it is continuously changing and amendments were made many times to add key changes to ease the resolution process. The latest Amendment has been made in 2020. This is the fourth Amendment being made to the Insolvency and Bankruptcy Code, 2016. The Supreme Court, in this case, held the IBC Code to be constitutionally valid in its entirety. The Court takes into consideration various economic factors of the country in order to determine its validity in the present case. The present case comprises many cases transferred from various High Courts like Calcutta and Gujrat.
The Court relied on the reports of the Bankruptcy Law Reforms Committee (2016), Joint Parliamentary Committee (2016), Insolvency Law Committee (2018) and the Statement of Objects and Reasons on multiple occasions to decide the present case. The Court also relied on the introductory speech of the Finance Minister while moving the IBC (Amendment) Ordinance, 2017 and recommendations of the Siddiqui Working Group, 1999 on Credit Information Companies and the statistics of the effectiveness of the IBC code since its enactment before giving the final judgment in this case.
Assessment of the case
The whole judgment does not deal with facts of the case but deals with the constitutional validity of the various provisions of the IBC Code. The appellants in the case argued for the validity of various provisions of the IBC Code. The first argument put forth by the appellant is that members appointed to the National Company Law Tribunal (NCLT) and National Company Appellate Law Tribunal (NCLAT) were not in consonance with the provisions of the Constitution. There were two judicial members and three bureaucrats. Further, all the administrative support is given by the Ministry of Corporate Affairs (MCA). The Supreme Court relied on the Companies (Amendment) Act, 2017 and said that as per the Amendment Act two judicial members along with two executive members should be appointed at NCLT and NCLAT and it is valid. In respect of the issue that NCLT and NCLAT get support from the Ministry of Corporate Affairs, the Supreme Court held that it is in consonance with the Constitution.
Another issue raised by the appellant is that before the establishment of NCLT/NCLAT, the appellant had the chance to present the case before the High Court in their respective States, but the same cannot be possible now because now NCLAT has a seat only in New Delhi. The Supreme Court directed the government to establish circuit benches if it is not possible to establish permanent benches in every High Court jurisdiction. It is to be noted here that, Insolvency and Bankruptcy Code was enacted in 2016 to put a rest on the difficulty arising due to multiplicity of forums and tribunals.
This Code designates NCLT /NCLAT and Supreme Court as the designating and appellate authority and not mention the High Courts and since then the tussle between the jurisdiction of High Courts under Article 226 of the Constitution and NCLT/NCLAT going on. The tussle starts with Anthony Raphael case, in which the division bench of Bombay High Court held that despite the provisions in the IBC Code which establish NCLT/NCLAT as the adjudicating authority, the High Court can also exercise its jurisdiction under Article 226 of the Constitution and can intervene in the cases of NCLT/NCLAT on appeal. On appeal of this case to the higher bench in the Bombay High Court, the Court said that the High Court had no ground to intervene as the provisions i.e., Section 60 and 61 provide proper ground to appeal before NCLT/NCLAT.
The issue of High Court jurisdiction to decide IBC matters is then taken by the Supreme Court in the Embassy Property Development case and held that the High Court can intervene in IBC cases as the judicial power flows from the Constitution and NCLT/NCLAT is merely a quasi-judicial body. Finally, the Supreme Court in 2019 in the Swiss Ribbons case held that if the High Court were allowed to intervene in the IBC cases, then it will open the floodgate and will hamper the time-bound insolvency process under IBC Code. Hence, the Supreme Court puts a rest on the argument of the appellant and holds that NCLT/NCLAT are the adjudicating authority and an appeal can lie to the Supreme Court only.
Third, the most important argument is given that the differentiation between Financial creditors and operational creditors is violative of Article 14 of the Constitution of India. Further, Section 12A of the Code requires the approval of at least 90% of the total voting share of the committee of the creditors (COC) before initiating the settlement process between creditors and corporate debtors. Thus, unlimited power is given to the COC which may allow them to misuse it. The Supreme Code made a microscopic analysis to determine the constitutional validity of the IBC Code. The treatment made to the operational creditor under the IBC Code under the Corporate Insolvency Resolution Process (CIRP) where they have no right to say and same lies at the mercy of committee of creditors (COC) was challenged on the ground that the same is violative of Article 14.
It was argued by the appellant that the same treatment should be given to operational creditors as financial creditors. In order to determine its validity, the Court sees the provision of the IBC Code through the lens of the legislative intent behind its enactment. The Supreme Court held that the classification is not violative of Article 14 of the Constitution of India. The Court observed that financial creditors are in a better position than corporate debtors to assess the viability and feasibility of the business. Financial creditors such as banks and financial institutions are involved in lending money, whereas operational creditors which deal with only goods and services and dues occurred with it are not in a position to assess the business.
Another contention raised was that the adjudicating power must vest with the proper authorities, not to the resolution professional which were the non-judicial bodies and hence this provision is violative of the IBC Code. The Supreme Court in this regard said that on careful examination of Section 18 read with Regulations 10,12,13 and 14 of CIRP Regulation, certain safeguards have been introduced and resolution professionals cannot act arbitrarily in many matters without the approval of the committee of the creditors (COC) and COC with the two-third majority can replace the resolution professional. Thus, the resolution professional acts as a facilitator.
The same line of arguments has been put forth by appellant i.e., Section 29A of the Code vests right to the promoters to participate in the debt recovery process is arbitrary as it has the retrospective effect. This provision makes certain persons such as corporate debtors, their relatives, undischarged insolvent, one prohibited under the SEBI Act et al to be ineligible for the resolution applicant. The Supreme Court by purposive interpretation of the legislative provision given in the ArcelorMittal case and using an interpretation of the Salomon case said that the principles regarding separate corporate entity cannot be applied, and all those persons who acted jointly or in concert to drag the company to a stage of a resolution shall be disqualified from being the resolution applicant.
During the process of liquidation, operational creditors were not allowed to get anything because they were ranked below the other creditors as per Section 53 of the IBC Code and the same is said to be violative of constitutional provisions. The Supreme Court said that financial creditors were put at a higher pedestal as the payment of their debts helps in infusing money back to the economy and further it meets the object sought by the Code, whereas the debts of operational creditors were given back to the government. Based upon this reasoning, the Supreme Court held that Section 53 of the IBC Code is not in violation of Article 14 of the Constitution and intelligible differentia is applied while differentiating both Financial creditors and Operational creditors.
The contract with financial creditors usually involves large amounts of money giving rise to different relations as the debt given helps to set up business as well as getting loans whenever there is financial stress. Same kind of relationship not established between operational creditors whose debts helps in running day to day business. Although there is an effort made by the Supreme Court to differentiate between both financial and operational creditors based on intelligible differentia, there are still many existing loopholes in the Code which treats operational creditors unfairly.
It is to be noted that as per Section 24 of the IBC Code, the operational creditors were not under the definition of ‘participant’ under Section 24 if the total debt due to the corporate debtor is 10% or more. This further takes away the right to receive the copy of ‘Resolution Plan’ as they fail to meet the criteria of ‘participant’. The Supreme Court while dealing with this issue relied on Regulation 38, which states that the amount due to operational creditors should be given the priority to financial creditors. There clearly seems to be no nexus between the reasoning given and the issue raised by the appellant. The Supreme Court further relied on the Binani Industries case, where it was held that if the situation arises where the operational creditors need to be paid immediately then, financial creditors can change their existing provisions and make a haircut in their payments.
Finally based upon the reasoning given by the Supreme Court and various directions given in this case, it was held that the IBC Code is constitutionally valid.
The Supreme Court considers the Lochner doctrine established in the Lochner case to declare socio-economic legislation unconstitutional if it does not pass judicial scrutiny. On the contrary, the Court relied on the R.K Garg case and held that judicial restraint should be exercised by the Court in considering the Constitutional validity of any Code, as there is no straight formula to solve the economic problems. So far considering that operational creditors should be treated as par with financial creditors, the Supreme Court tries to move away from Binani judgment which provides that both financial and operational creditors should be treated in the same manner.
The Supreme Court said Binani judgment has been wrongly interpreted. The Court also relied on the objective of the preamble of the Code as interpreted in the decision of Innoventive Industries Ltd case to achieve corporate resolution of the debtor and to avoid liquidation. On the issue that adjudicating authority should function under the Ministry of Law and Justice, the Court accepted the view that the functioning of the adjudicating authority under the Ministry of Corporate Affairs is contrary to the jurisprudence laid down in the R Gandhi case. But, the Supreme Court at the same time accepted the argument put forth by the petitioner that allocation of rules of business among various ministries is mandatorily decided in the Delhi International Airport case. Thus, finally, the Court came to the conclusion that NCLT and NCLAT should continue to function under the Ministry of Corporate Affairs.
Section 29A of the IBC Code was inserted in 2017 to bar the errant promoters to propose a resolution scheme and buy back the stressed assets. Section 391 of the Companies Act, 1956 works in contrast to Section 29A of IBC Code. An amendment has been made by the government and Section 391 of the Companies Act, 1956 has now been totally replaced by Section 230 of the Companies Act, 2013. Section 230 provides that the liquidator appointed under the Insolvency Code is eligible to propose a resolution scheme. One should give a look in the Sekaran case where it was held that such errant promoters can make a back-door entry to introduce a scheme of arrangement in the resolution plan, who are otherwise ineligible under Section 29A of IBC Code.
Further, the scheme of arrangement should be completed within 90 days. This may be a good direction so the liquidation process should not be delayed. In another judgment given in Meghal case, the Supreme Court upheld both Section 391 of the Companies Act, 1956 and Section 230 of the Companies Act, 2013 to be valid. This judgment gives more stress on the resolution plan than the liquidation of the company, but still, there is no clarity that how both the provisions i.e., Section 29A of IBC Code and Section 230 of the Companies Act, 2013 can go together. The whole objective behind the IBC Code is to not seek liquidation rather revive the corporate debtor. However, in India, it is difficult to find buyers for such schemes of arrangements for companies who are on brink of liquidation. Both these provisions require clarity from the Supreme Court which has been left untouched in the Swiss case.
The Swiss case decision by the Supreme Court in 2019 is the landmark development in the Insolvency regime of India. The Court relied on the statistics of the resolutions and settlement happens post-IBC Code. The IBC Code has proven in tackling non-performing crises as well as continuous amendments made in the Code helps in improving ease of doing business ranking. The Court recognized that it is a beneficial piece of legislation and thus cannot be set aside. In order to reach the conclusion, the court had taken into consideration the pre-Insolvency code which fails in many aspects.
Further, in a very short span of time many amendments have been introduced by the government to keep pace with changing investment. This judgment shows that the Supreme Court should intervene only in cases where the exercise of any legislative enactment prima facie seems to be arbitrary. The intention of the legislature behind the enactment of the Insolvency Code and primary objective should be taken into consideration. The Court tries to hold its constitutional validity by giving economic reasons. The Court relies on the fact that if various provisions held to be unconstitutional then the same have a drastic impact on the overall Code. This judgment gives the much-needed relief to the investors, creditors and other stakeholders involved in the insolvency process.
This judgment has further made the foundation of the Insolvency Code stronger with certain directions to implement it. The court tries to protect the creditors as they are in the frontline in the war to revive corporate debtors. One needs to wait for some more years until the various judgments guide the directions in which this Code should work. Statistics speak clearly that the Insolvency Code of India works better in comparison with Insolvency laws in other countries. A number of settlements and resolutions itself clearly indicates how successful the Insolvency Code works.
This judgment further helps to mitigate the looming fears among investors in acquiring assets through this Code. Still, there is a long way to go and further amendments need to be made regarding cross-border insolvency, resolution of financial service providers and resolution of stressed assets. Finally, the Supreme Court fails to bring the much-needed clarity on the issue of back-door entry of errant promoters and conflict arises between Section 29A of IBC Code and Section 230 of the Companies Act, 2013. The judgment in its entirety fails to fulfil the loopholes which treat operational creditors unfairly. It is to be well noted that the recent move made by the government to establish the Circuit bench at Chennai shows the impact of the Swiss case, but IBC Code still needs a long way to go and many more amendments in the existing provisions need to be made.
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