Supreme Court Upholds Key Provisions of Insolvency and Bankruptcy Code, 2016 in Swiss Ribbons Pvt. Ltd. vs. Union of India (25 January 2019)

Case Background

The case arose from a series of writ petitions challenging the constitutional validity of several provisions of the Insolvency and Bankruptcy Code, 2016. The petitioners raised concerns about the appointment of tribunal members, the classification of creditors, and the eligibility criteria for resolution applicants. The core issue was whether the IBC, in its design and implementation, infringes upon fundamental rights and constitutional principles.

The petitioners, including Swiss Ribbons Pvt. Ltd., argued that the IBC’s provisions were discriminatory, arbitrary, and violated the principles of natural justice. They specifically challenged the differential treatment of financial and operational creditors, the composition of the Committee of Creditors (CoC), and the restrictions imposed on promoters.

Timeline

Course of Proceedings

The judgment notes that the court is not going into the individual facts of any case but is deciding only questions relating to the constitutional validity of the Code. However, the court notes the arguments made by the various parties.

The petitioners challenged the appointment of members of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), arguing they were not in accordance with previous Supreme Court judgments. They also raised issues regarding the location of the NCLAT benches, the classification of creditors, and the powers of the resolution professional.

Legal Framework

The Supreme Court examined several key provisions of the Insolvency and Bankruptcy Code, 2016, including:

• Section 5(7) and 5(8): Defining “financial creditor” and “financial debt.” “financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money.”
• Section 5(20): Defining “operational creditor.” “operational creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”.
• Section 7: Initiation of corporate insolvency resolution process by a financial creditor.
• Section 8 and 9: Initiation of corporate insolvency resolution process by an operational creditor.
• Section 12A: Withdrawal of application admitted under Section 7, 9, or 10.
• Section 21: Composition of the Committee of Creditors (CoC).
• Section 24: Meetings of the Committee of Creditors (CoC).
• Section 28: Approval of committee of creditors for certain actions.
• Section 29A: Persons not eligible to be resolution applicant.
• Section 30(4): Approval of resolution plan by the committee of creditors.
• Section 31: Approval of resolution plan by the Adjudicating Authority.
• Section 53: Distribution of assets in liquidation.
• Section 60(5)(c): Jurisdiction of the NCLT to entertain any question of priorities.
• Section 65: Fraudulent or malicious initiation of proceedings.
• Section 75: Punishment for false information furnished in application.
• Section 214(e): Obligations of information utility.
• Section 420: Orders of Tribunal under the Companies Act, 2013.
• Section 412(2) of the Companies Act, 2013: Selection of Members of Tribunal and Appellate Tribunal.
• Section 240A: Application of the Code to micro, small, and medium enterprises.

The court also considered the relevant regulations under the IBC, such as the CIRP Regulations and the Information Utilities Regulations.

Arguments

The petitioners, led by Shri Mukul Rohatgi, raised several arguments against the validity of the IBC:

• Tribunal Appointments: They contended that the appointment of NCLT and NCLAT members was contrary to the Supreme Court’s judgments in the Madras Bar Association cases.
• NCLAT Benches: The lack of NCLAT benches outside Delhi was argued to be a violation of the principle that remedies should be as convenient as before the creation of the tribunal.
• Classification of Creditors: The distinction between financial and operational creditors was challenged as arbitrary and discriminatory.
• Committee of Creditors: Operational creditors not having voting rights in the CoC was seen as discriminatory.
• Information Utilities: The establishment of private information utilities was criticized for lacking adjudicatory powers.
• Section 12A: The requirement of 90% approval from the CoC for withdrawal of applications was deemed to be excessive.
• Resolution Professional Powers: The grant of adjudicatory powers to the resolution professional was challenged as a violation of the principles of justice.
• Section 29A: The retrospective application and blanket ban on promoters were argued to be arbitrary and against the objectives of the Code.

The respondents, represented by the Attorney General for India and the Solicitor General for India, defended the IBC by arguing:

• Tribunal Appointments: They submitted affidavits showing that all members were appointed by a committee in compliance with Supreme Court judgments.
• NCLAT Benches: They assured the court that circuit benches would be established soon.
• Classification of Creditors: The distinction between financial and operational creditors was justified based on the nature of their contracts and involvement in the corporate debtor’s viability.
• Committee of Creditors: The exclusion of operational creditors from voting was defended based on their different interests and capabilities.
• Information Utilities: They argued that the utilities only collect and authenticate information, and do not have adjudicatory powers.
• Section 12A: The 90% approval requirement was justified as the proceeding becomes a collective one after admission.
• Resolution Professional Powers: They clarified that the resolution professional has no adjudicatory powers.
• Section 29A: They argued that the section does not disturb vested rights and serves the important objective of keeping undesirable persons out of the resolution process.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the appointment of members of the NCLT and NCLAT was in accordance with the judgments of the Supreme Court.
2. Whether the location of NCLAT benches only at Delhi is in violation of the principles of justice.
3. Whether the classification between financial and operational creditors is discriminatory or arbitrary.
4. Whether the exclusion of operational creditors from voting in the CoC is violative of Article 14 of the Constitution.
5. Whether the establishment of private information utilities is valid.
6. Whether Section 12A of the IBC is constitutional.
7. Whether the resolution professional has adjudicatory powers.
8. Whether Section 29A of the IBC is constitutionally valid.
9. Whether the one-year period in Section 29A(c) is arbitrary.
10. Whether the definition of related party is valid.
11. Whether Section 53 of the code is violative of Article 14.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities:

The Court also made reference to the following statutes:

• The Insolvency and Bankruptcy Code, 2016
• The Companies Act, 2013
• The Banking Regulation Act, 1949
• The Micro, Small and Medium Enterprises Development Act, 2006
• The Indian Succession Act, 1925
• The Bankers Books Evidence Act, 1891

The Court also relied on the following reports:

• Report of the Bankruptcy Law Reforms Committee (BLRC)
• Report of the Insolvency Law Committee (ILC)
• Report of the Joint Parliamentary Committee
• UNCITRAL Legislative Guide on Insolvency Law

Judgment

The Supreme Court, after considering all submissions, upheld the constitutional validity of the key provisions of the Insolvency and Bankruptcy Code, 2016. The court’s findings can be summarized as follows:

The court also analyzed the authorities cited by both parties.

Authorities viewed by the Court:
The court considered several precedents, including its ownjudgments in the Madras Bar Association cases, and found that the appointments of tribunal members were in compliance with the guidelines laid down. It also relied on the Innoventive Industries judgment to understand the scheme of the Code. The court distinguished the case of Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem, stating that the present case is not about withdrawal of applications.

Economic Legislation:
The court emphasized that economic legislation should be viewed with judicial restraint, citing R.K. Garg v. Union of India and Bhavesh D. Parish v. Union of India. It also noted that the government has the right to modify economic schemes, as per DG of Foreign Trade v. Kanak Exports. The court referred to the failure of previous insolvency laws, as discussed in Madras Petrochem Ltd. and Anr. v. Board for Industrial and Financial Reconstruction and Ors.

Manifest Arbitrariness:
The court discussed the principle of manifest arbitrariness as defined in Shayara Bano v. Union of India, and found that the provisions of the IBC do not suffer from this defect. The court also referred to other cases such as Gopal Jha v. The Hon’ble Supreme Court of India, Indian Young Lawyers Associations and Ors. v. State of Kerala and Ors., Joseph Shine v. Union of India, K.S. Puttaswamy v. Union of India, Navtej Singh Johar and Ors. v. Union of India, Lok Prahari v. State of Uttar Pradesh and Ors., and Nikesh Tarachand Shah v. Union of India and Ors.

Retrospective Application:
The court held that Section 29A did not disturb vested rights and that the retrospective application of the section was not unconstitutional. The court cited State Bank’s Staff Union (Madras Circle) v. Union of India and Ors., Ritesh Agarwal and Anr. v. SEBI and Ors., K.S. Paripoornan v. State of Kerala and Ors., Darshan Singh v. Ram Pal Singh and Anr., Pyare Lal Sharma v. Managing Director and Ors., P.D. Aggarwal and Ors. v. State of U.P. and Ors., and Govind Das and Ors. v. Income Tax Officer and Anr.

Doctrine of Nexus:
The court applied the doctrine of nexus, as discussed in Attorney General for India and Ors. v. Amratlal Prajivandas and Ors., to find that the classification of creditors was reasonable.

Purpose of Section 29A:
The court referred to Chitra Sharma v. Union of India, to reiterate the purpose of Section 29A.

Directory Nature of Regulations:
The court referred to Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors., to state the directory nature of Regulation 30A(1).

Ratio Decidendi

The ratio decidendi of the judgment can be summarized as follows:

• Constitutional Validity of IBC: The Insolvency and Bankruptcy Code, 2016, is a constitutionally valid law enacted to resolve insolvency and maximize asset value.
• Tribunal Appointments: The appointments of members to the NCLT and NCLAT were made in accordance with the guidelines laid down by the Supreme Court.
• NCLAT Benches: The establishment of circuit benches of the NCLAT is necessary to ensure access to justice and expediency of remedy.
• Classification of Creditors: The distinction between financial and operational creditors is based on an intelligible differentia and has a rational nexus to the object of the Code.
• Exclusion of Operational Creditors: The exclusion of operational creditors from voting in the Committee of Creditors is justified, as financial creditors are better equipped to make decisions related to the viability of the corporate debtor.
• Information Utilities: The establishment of private information utilities is valid, as they only collect and authenticate information and do not have adjudicatory powers.
• Section 12A: The requirement of 90% approval from the CoC for withdrawal of applications is valid, as the insolvency proceeding becomes a collective one after admission.
• Resolution Professional Powers: The resolution professional does not have adjudicatory powers and only acts administratively.
• Section 29A: Section 29A is constitutionally valid and serves the purpose of keeping undesirable persons out of the resolution process.
• Retrospective Application of Section 29A: The retrospective application of Section 29A does not disturb vested rights and is not unconstitutional.
• One-Year Period in Section 29A(c): The one-year period for declaring a non-performing asset is valid as it is based on RBI guidelines.
• Definition of Related Party: The definition of related party must be read in context of the business activity of the resolution applicant.
• Section 53 of the Code: The prioritization of financial debts in the distribution of assets is valid and linked to the objective of the Code.

Obiter Dicta

While the core of the judgment lies in upholding the constitutionality of the IBC, the court made certain observations that can be considered as obiter dicta:

• Economic Legislation and Judicial Restraint: The court emphasized the need for judicial restraint in matters of economic legislation, stating that courts should not interfere with the wisdom of the legislature in such matters.
• Experimentation in Social and Economic Fields: The court acknowledged that laws in the social and economic fields are often experimental and subject to change, and that the legislature should have the freedom to experiment with different approaches.
• Importance of the IBC: The court highlighted the importance of the IBC in the Indian economic landscape, emphasizing its role in resolving insolvency and maximizing asset value.
• Role of Information Utilities: The court clarified the role of information utilities as primarily data collectors and authenticators, not adjudicators.
• Need for Circuit Benches: The court stressed the need for establishing circuit benches of the NCLAT to make the remedy as convenient as before the creation of the tribunal.

Conclusion

The Supreme Court’s judgment in Swiss Ribbons Pvt. Ltd. vs. Union of India is a landmark decision that has affirmed the constitutional validity of the Insolvency and Bankruptcy Code, 2016. By upholding the core structure and key provisions of the Code, the court has provided much-needed clarity and stability to the insolvency resolution framework in India. The judgment has addressed several critical issues raised by the petitioners and has clarified the scope and application of various provisions of the IBC.

The court’s emphasis on judicial restraint in economic matters and the need for experimentation in social and economic fields is significant. The decision has also reinforced the importance of the IBC in the Indian economic landscape and its role in resolving insolvency and maximizing asset value. The direction to establish circuit benches of the NCLAT will ensure that the remedy is as convenient as before the creation of the tribunal.

The judgment has had a significant impact on the insolvency resolution process in India. It has provided clarity on the roles and responsibilities of various stakeholders, including financial and operational creditors, resolution professionals, and the Committee of Creditors. The decision has also reinforced the importance of the IBC in the Indian economic landscape and its role in resolving insolvency and maximizing asset value.

Overall, the judgment in Swiss Ribbons Pvt. Ltd. vs. Union of India is a significant milestone in the evolution of insolvency law in India and is likely to have a lasting impact on the country’s economic landscape.