This article is written by Hardik Nanda Sawant a former student of Certificate Course in IBC and is currently working in Kotak Mahindra Bank as an Assistant Manager. This article has been edited by Ojuswi (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Background

The IBC, 2016 has been instrumental in inculcating the discipline with which the promoters and the boards run the day-to-day affairs of the corporate debtor, emphasizing good corporate governance practices, making them answerable to the authorities for the financial decisions they take in the best interest of the stakeholders. The prime objective of the Code is to ensure the resolution of the corporate debtor with liquidation only as a matter of last resort and that under no circumstances the law is to be referred to as a recovery mechanism.

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Before getting into details, let’s first know the basics as to what led to the Enactment of the “Insolvency and Bankruptcy Code, 2016” (hereinafter referred to as the ‘Code/IBC’) in the first place. The Bankruptcy Law Reforms Committee (BLRC) which was formed under the guidance of the Ministry of Finance on 22nd August 2014 and headed by Mr. T.K. Viswanathan (Former Union Law Secretary and the Secretary General of the Lok Sabha), presented its report on 04/11/2015 stating the conditions of the erstwhile Bankruptcy laws prevailing in the country back then. The wordings in the Report are quoted as follows: 

“The Current state of the Bankruptcy Process for the firms is a very fragmented process. The Powers of the Creditors and Debtors are provided for in the Separate Acts. Given the conflicts of interests between the Creditors and Debtors in the Insolvency resolution, the chances for consistency and efficiency in Resolution are Low when rights are separately defined. The Cases that get decided at Tribunals/Board for Industrial and Financial Reconstruction (BIFR) often come for review to the High Courts of the States. This gives rise to Two kinds of problems in the implementation of the Resolution Framework: 

  1. Lack of Clarity of Jurisdiction
  2. Problems of multiple Judicial Fora.

The uncertainties that these issues bring with them show up in the case laws on matters of Insolvency and Bankruptcy in India. Such an environment gives us poor outcomes.

This calls for a deeper Redesign of the Entire Resolution Process, rather than working on strengthening any one single piece out of it.”

The BLRC report further went on to emphasize that:

“Speed is the Essence for working and effective implementation of the Bankruptcy Code”, for two reasons:

  1. While the ‘Calm Period ’can help an organization to continue operations as a Going Concern, without the full clarity of ownership and control significant decisions cannot be made. Any delay in the process would straightaway lead to the liquidation of the company’s assets.  
  2. The Economic value of the assets of the Corporate Debtor (CD) tends to go down as time passes as the assets suffer from fast Depreciation or Erosion of Value in these cases.

As far as Creditors’ viewpoint is concerned, a good realization of the assets can be obtained if a firm continues as a Going Concern.”

The Introduction of this Code paved the way for a streamlined, time-bound resolution process by incorporating a controlled regime empowering the Financial Creditors with a Right to Vote in and as part of the Committee of Creditors. The Code stands strong with the help of 4 Key Pillars, which are:

  1. The Adjudicating Authority i.e. National Company Law Tribunal (hereafter NCLT) and the National Company Law Appellate Tribunal (hereafter NCLAT) as Appellate bodies;
  2. The Insolvency and Bankruptcy Board of India (IBBI), a dominant supervisory body for the Regulation of the Code;
  3. The Insolvency Resolution Professionals, who are the backbone of the Profession, have a significant role to play in the liquidation of the Assets;
  4. Information Utilities, which maintain the Financial Records of the Corporate Debtor.

An important factor that proved to be beneficial was the Government’s Resolve to tackle the Non-Performing Assets Crisis through the Enactment of this Code, and that the Government has been alive to the problems and has amended the Law time and again to suit the Needs of the future. 

insolvency

A brief on the case study

The Landmark case that we are talking about here is the “Swiss Ribbons Pvt. Ltd. and Anr. Vs. The Union of India and Ors” which deals with the Constitutional Validity of the “Insolvency and Bankruptcy Code, 2016” (hereinafter referred to as the ‘Code/IBC’) that was challenged by applying through 10 separate Writ Petitions including a Special Leave Petition and a combined Order was reserved and passed by the Hon’ble Supreme Court of India on 25th January 2019. 

It was in this particular case that the Apex Court Pressed on the Constitutional Viability of our newly formulated Insolvency Law all over again. The Supreme Court, while rejecting the Arguments which challenged the validity of the Code, gave a well-deserved upper hand to the Legislative intent of the Law. The Court upheld the Preamble of the Code stating that the law does not intend to encourage Liquidation of the Assets of the Corporate Debtor in any manner and treats it as a solution of last resort only in the case where the CD does not receive any feasible resolution plan or if the plan gets dismissed by either the COC or the NCLT itself. The Court also advised that the Code or its pillars should not be used as a Recovery mechanism whatsoever. 

The Hon’ble Court put the Last Nail in the Coffin while passing this Judgement stating that, 

“The Defaulter’s Paradise is lost and, in its place, the economy’s rightful position has been Regained.” 

Heads of arguments that were contested in the petitions

Order for the establishment of circuit benches, appointments of the members of the NCLTs/NCLATs, and concerned ministries responsible for providing assistance to the tribunals – be as per the rulings of Madras Bar Association Vs. Union of India

The Petitioners in our case of Swiss Ribbons Pvt. Ltd. contended that the Lone Seat of NCLAT, as an Appellate Tribunal, at New Delhi, was not in line with the order of the Apex Court in Madras Bar Association Vs. Union of India (hereinafter referred to as MBA) where the Court decided that it is unreasonable to expect the aggrieved parties to travel to apply their right to Appeal, hence the court, in an attempt to reduce the hardship, directed the Centre to establish a bench in the Jurisdiction of every High Court or at least a Circuit bench in every state to efficiently render remedy to the Distressed within 6months of the Order so passed.

The case precedent, MBA, also highlighted the issues relating to the constitution of the NCLT and NCLATs, the constitution of the Select Committee, and the qualifications of the Technical Members. The Apex Court further directed the Centre (Union) to rectify the differences in the number of executive and judicial members appointed to the Select Committee which was two Judicial and three Executive members and held that this issue was already considered under Section 412(2) of the Companies (Amendment) Act, 2017 which shall result into equity in their numbers.

The Court in its Order also addressed the issue of who should provide the required Assistance to the Tribunals and directed the Union of India to adhere to the guidelines in Letter and Spirit of the previous order given in this regard. It was pronounced that the Aid to the Tribunal should only be extended by the Ministry of Law and Justice and not by any other Ministry or Department of the Government for that Matter.

The differential treatment of the financial and operational creditors and its constitutional validity

It was argued that the treatment given to the Financial and Operational Creditors in the Code was unjust, discriminating, and does not conform to Section 14 of the Constitution. The Hon’ble Court in this case examined the 2015 Report by BLRC in detail with the related regulations and judgments and reserved the fact that classification between the types of Creditors depends on the nature of their Debt, their Competency in the Financial Terms, and the adequacy of the evidence required by them to initiate the Insolvency Process against the CD. The court while observing the following points held that the differential treatment does not form the basis for discrimination and is in conformity with Article 14 of the Constitution:

  1. Most Financial Creditors (hereinafter referred to as FCs), Banks, and Financial Institutions are Secured Creditors whereas Operational Creditors (OCs) are Unsecured. The payments meant for Goods and Services purchased or sold or even the Workmen’s Compensation do not require Mortgage Financing.
  2. The Nature of loan Agreements with the FCs is different from the agreements for the supply of Goods and Services made with the OCs. FCs provide Finance on a Terms Loan or for Working Capital purposes to help run the companies as a going concern and/or Set up a new business and support its operations.
  3. The Number of FCs is generally less but the Contracts they enter into with their Debtors involve large sums of Money whereas it is exactly vice versa for the Operational Creditors.
  4. Deals with the FCs involve Repayment Schedules and Debt Covenants as part of their Financing Agreements, which if violated, may result in a complete recall of the Debt in question, failing which may further result in the CD getting dragged into Insolvency Courts. It is not the case with the Operational Creditors.
  5. In addition to checking the financial viability of CDs they are dealing with, FCs can also review their Credit Scores periodically to ensure their viability; they may also request the restructuring of loans if they perceive any financial stress coming up or at the request of the CD. Again, this is due to the ambition and power of OCs citing their dependence on the CD.

A ’Claim’ gives rise to a ‘debt’ only when it becomes ‘due’; a ‘default’ occurs only when a ‘debt’ becomes ‘due’ and ‘payable’, but is not paid by the Debtor. This is the reason why FCs need to ‘prove’ the default and OCs can merely ‘claim’ the sums owed to them and are at the Mercy of decisions of CoC as their Claim shall be considered only if it exceeds 10% of the total Debt of the CD.

Allowance for withdrawal of the applications filed under Secs 7,9 or 10: Section 12A of the Code upheld

In order to withdraw an application filed by any of the parties under sections 7,9 or 10 of the Code, the Committee of Creditors must approve it with a 90% majority as stipulated in section 12A. This high threshold for Withdrawal has been contested on the basis that it allows the CoC to dominate the proceedings of the committee while exercising a large extent of powers and can reject the proposal for withdrawal if 90% of all the voters present in the Meeting vote against the same.

Nevertheless, Section 60 of the Code undermines the CoC’s dominance in such a way that if the CoC rejects the Valid and Viable Resolution Plan, the NCLT and even the NCLAT have the authority and power to set that decision aside, balancing the powers and maintaining the Constitutionality of the Code.

Resolution professional : administrative or quasi-judicial powers?

In this well-known Writ Petition, it was also contested that the Resolution Professional seems to be having Quasi-judicial powers as against the recommended Administrative or the role of a Facilitator. On examination of Regulations 10 through 14 and 35A of the IBBI (CIRP) Regulations, and held that the Resolution Professional acts as a ‘Facilitator’ in the Resolution Procedure and is under continuous Supervision of the CoC and the Tribunal; it also reiterated the fact that the Resolution Professional is subjected to be replaced by Approval of 2/3rds of the Voting majority of the CoC in the event where the Committee is not satisfied by the Services of the Resolution Professional during the process.

The challenge against the constitutionality of Section 29A of the code: eligibility to be a bonafide resolution applicant to present a viable resolution plan 

  1. The Provisions under Section 29A of IBC which deals with the Eligibility/Disqualifications of Resolution Applicants have been a contentious matter right since the inception of the Code. The issue raised in the Court was that the provision so laid down in the Code treats unequal with equals and that a Good Management cannot be lumped in favour of the Bad Erstwhile Managers due to whom the Corporate Debtor is in trouble in the first place. 
  2. A Complete Ban on the Promoters of the Corporate Defaulter to act as the Resolution Applicant without Exceptions for eligible and efficient Promoters would render the Section Controversial leading to further delays in the CIRP Processes. 
  3. The Bench, rejecting the Plea in this regard, held that the Ban does not restrict to mere malfeasance and also that the ambit of the proviso includes the categories of persons who have fallen foul to the law in some way and persons who are unable to pay their debts even in the grace period allowed, hence being prohibited from buying assets of the CD whose debts they have wilfully defaulted upon or haven’t been able to pay. This applies not only to Resolution Applicants but also to the Liquidation Proceedings.
  4. The Court further clarified the definition of the ‘Related Party’ which was also contested in one of the petitions stating: that the mere fact that somebody happens to be a relative of the ineligible person cannot be a reason good enough to keep him/her out from being a potential Resolution Applicant if he/she is otherwise qualified. The Court is of the View that the persons who act jointly or in concert with others are connected with the Business Activity of the Resolution Applicant; this being said, the persons categorically mentioned under the head ‘Related Persons’ need to have a connection with the business activity of the Resolution Applicant.

Implications of the case and the way forward

Before the orders passed in the case of Swiss Ribbons, two more such contentious cases, also challenging the validity of the Code, were decided upon by the Hon’ble Supreme Court and the Code has been amended accordingly. The IBC, 2016, despite having its shortcomings, is still an effective part of Indian Legislations so far and it also facilitated the enhancement of a new form of Profession and a sought Career Choice for young Advocates giving employment opportunities in the area. 

The Third Amendment which amended 8 Sections of the Code was ratified in the Parliament on 5th August 2019 after Deliberate considerations by the Court and the Law Makers on the matter. On the other hand, while pronouncing the judgments in the Essar Steel Case or Arcelor Mittal India Pvt. Ltd. Vs. Satish Kumar Gupta and Ors, the court acknowledged the Intent of the Code being that of a Speedy Resolution and, simultaneously observed also that the word ‘mandatorily’ is not in conformity with Articles 14 and 19 of the Constitution of India. The Court maintained that the Ordinary Resolution Process should be completed within the time limit stipulated under amended Section 12 (330 Days) failing which, the CD in question shall be subject to Liquidation, more time will be granted only in Exceptional Cases.

The 4th Amendment made was on 13th March 2020, wherein in 11 sections were amended and a New Section was added this time – Section 32A which provided a Conditioned rather than Absolute Protection to new Promoters from being accountable and responsible for Hidden Liabilities or Legal Malfeasance which did not come into light while under CIRP. This new provision aids in a conducive environment for the Hassle-free resolution of the CDs.

Conclusions 

In the erstwhile Controversial “Ease of Doing Business Report”-2020, India climbed to 63rd position from the previous mark of 77, out of total 190 Countries, and further, as a result of the successful Roll-out of our Insolvency and Bankruptcy Code, 2016, under Insolvency Regime Parameter of the same report, India marked and Exponential Growth from 108th to 52nd Position. The Code consolidated India’s Pre-existing, Obsolete, Laggard Laws. Bringing the much-needed change in the prevalent Insolvency Regime of the country at the time, which was plagued by the mushrooming of Non-Performing Assets (NPAs) with less or no recoveries for the Creditors was Necessary. 

In this instance, the case of Swiss Ribbons Pvt. Ltd. and Anr. V. Union of India and Ors, which solidifies the Foundation and Intent of the Code to safeguard and prioritize the best interests of the Economy, the Creditors, and also the Corporate Debtor in various circumstances in a highly systematic manner is a rather Applaudable Achievement. The Law-changing decisions made by the Hon’ble Supreme Court of India followed by the 4 rounds of Amendments brought by the Legislature paved the way to form a new Foundation for the Code. The SC focused on its objective of Resurrecting the Corporate Debtor and the vital role that it plays in the Economy by eliminating laxity caused by Bad Debts. 

The System of Checks and Balances has to be implemented in a Balanced Manner with the Primary Objective of enhancing Economic Growth rather than slowing down the same while doubting its Constitutional Efficiency. The Judgments of Swiss Ribbons and Essar Steel-ArcelorMittal resulted in Successful Resolutions and Settlements in pre as well as post Insolvency situations. To add the Cherry on the Cake, the Government has been quick in addressing the issues regularly as the Code hits any such Roadblocks and helps keep pace with problems faced by the Business World. 

References

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