Authors: Akansha Mittal, Amity University, Kolkata
Mahip Mayank, Faculty of Law, DU
Rahul Sodhi, The NorthCap University
Editor: Dyuthi Sutram, SLS,Pune
One of the landmark judgements within the ambit of insolvency and bankruptcy laws is the Swiss Ribbons Supreme Court Ruling. This judgement reiterated and validated the foundations of bankruptcy law, and within its judgement declared – “the defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained”
While the judgement tackles a vast array of issues and principles behind the validity of bankruptcy law, this particular case analysis aims to analyze the contentions related specifically to the constitutional validity and powers accorded by the Insolvency and Bankruptcy Code, 2016. Specifically, the following issues will be elaborated upon –
1. Whether the Classification between Financial and Operational Creditors is Violative of Article 14?
2. Whether Section 5 of the code violates article 14?
3. Whether Section 29A is constitutionally valid?
4. Whether the Resolution Professional has adjudicatory powers?
WHETHER THE CLASSIFCATION BETWEEN FINANCIAL AND OPERATIONAL CREDITORS IS VIOLATIVE OF ARTICLE 14
As per the setup of the Insolvency and Bankruptcy Code, 2016, there was a distinction between the types of creditors. The definitions of financial and operational debt intuitively imply that the difference is with regard to a debt accrued via providing of financial services, for the former, or a claim accrued in respect of provision of goods or services.
One of the major contentions put forward was that there being no intelligible differentia between Financial Creditors and Operational Creditors, not only were the Operational Creditors’ claims were vulnerable to disputes, they did not have any voice in the Committee of Creditors unless they amounted to 10% of the aggregate of the debt and even then, they lacked the right to vote.
The bone of contention raised in this aspect was that these legislative schemes U/s 7, 8, 9, and further U/s 21 and 24 of the code were not only discriminatory but also manifestly arbitrary and hence violative of Article 14 of the Constitution.
The tests in determining if a legislation is violative of Article 14 are (i) Discrimination; and (ii) Excessive Delegation of Powers. From a positivistic point of view, equality is antithetic to arbitrariness. As settled by the Supreme Court, a legislation is fit to be set aside on the grounds that it is arbitrary in nature if it is done by the legislature capriciously, irrationally and/or without adequate determining principle.
On this issue, the Supreme Court opined that equality is only among equals. It was stated that the possibility of a dispute was much higher in the case of Operational Creditors. Further, their insolvency initiation proceeding differs to ensure that creditors with smaller debts do not initiate the insolvency proceedings immaturely. Additionally, the Financial Creditors are better equipped in engaging in the restructuring of the loan as well as the reorganization of the business in financial stress, which are things operational creditors do not and cannot do. Additionally, while financial creditors may engage in viability studies and may restructure debt, operational creditors are unwilling to do the same.
The reconstruction of businesses being a direct object sought to be achieved by the Code, the Financial Creditors have naturally been given more powers regarding the initiation and handling of the insolvency proceedings, there being an intelligible differentia between the two types of creditors. Therefore, it is established that the enactments of the code are not arbitrary or discriminatory and hence, not violative of Article 14.
WHETHER SECTION 53 OF THE CODE VIOLATES ARTICLE 14
Another one of the contentions argued on by the learned counsel was that according to the hierarchy of recovery, the Operational Creditors were ranked below most other lenders involved with the company including unsecured financial creditors if they happen to be financial creditors which according to them, renders Section 53 and Section 53(1)(f)  discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India.
Regarding this topic, the apex court has said that Financial Creditors – secured and unsecured, are given more importance, even placed higher than the Central and State Governments as in the long run, this would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth which would further increase Government Revenue. According to the suggestions of the Bankruptcy Law Reform Committee Reports, the dues of the workmen, who are unsecured creditors are traditionally placed above most other debts ranking only below the costs of the Interim Resolution Professional and liquidation. Additionally, for intelligible differentia, the Court observed the following:
“We have already seen that repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses.”
While the same is not true for operational creditors. Thus, it is seen that the reason for differentiating between the Secured Creditors and Unsecured Creditors is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the insolvency code. Therefore, it can be observed that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, Article 14 is not violated. For these reasons, the challenge to Section 53 of the Code also failed.
CONSTITUTIONAL VALIDITY OF SECTION 29A
The contention that have been heard by the court for the constitutional validity of section 29 A of IBC, 2016. The four fold contentions that are against the validity of the section was heard by the court.
The petition claimed that vested rights of promoters to participate in the recovery process of a corporate debtor have been impaired by retrospective application of Section 29A.
Furthermore, A blanket ban on participation of all promoters, without differentiating between unscrupulous and sincere promoters is manifestly arbitrary and "treats unequals as equals".
Additionally, the possibility of a person’s account classification as a non performing asset (NPA) despite him not being a willful defaulter.
Lastly, that the relatives of the promoters who are within the eligibility criteria are barred from participating in the resolution process.
Essentially, Section 29A sets out ineligibility criteria for resolution applicants under the Code. The court found no merit in the following contentions. In the previous cases of Chitra Sharma and Arcelor Mittal, the Supreme Court had extensively concluded that the promoters have no vested rights to be classified as resolution applicants. Hence, no fundamental vested right had been impaired by the retrospective application.
The Court held that section 29A does not warrant the claim of “unequals being treated as equals”. Section 29A lists a variety of disqualifiers and is not based on a requirement to evidence malfeasance.
As for the third contention, the Supreme Court concluded that as it is a legislative policy, rigorous references to RBI guidelines on income recognition and classification in identifying NPAs and their treatment were made. A person who is unable to service his own debt beyond the grace period of one year and three months (at which stage it is classified as a doubtful asset), is unfit and cannot be an eligible resolution applicant. Neither can this policy be found fault with, nor can the period of one year be questioned, as this is a policy matter decided by the RBI.
The Court applied the principle of sui generis to understand the definitions of related party, relative and connected person and held that:
“persons who act jointly or in concert with others are connected with the business activity of the resolution applicant...In the absence of showing that such person is "connected" with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under Section 29A(j)”
Hence, it was sufficiently concluded that the section was constitutionally valid.
WHETHER THE RESOLUTION PROFESSIONAL HAS ADJUDICATORY POWERS?
With respect to resolution professionals, the third contention was the challenge towards the adjudicatory power of Resolution Professionals was challenged.
It was held that the powers of the interim resolution professional under Section 18 of the Code and CIRP Regulations, 2016 are solely administrative in nature and confined to the intention and verification of the amount of claim.
It has come to light that, in many cases, the resolution professional was reducing, rejecting or refusing to admit the claims of the operational creditors. Further, by the time operational creditors were informed about this decision or could have approached adjudicating authority, the resolution plan was to be passed under section 31 of the Code, making it binding on all concerned. Once approved, successful resolution applicants claim that under the plan the debt of the operational creditor has been rejected or reduced and, therefore, the operational creditor is only entitled to the admitted claim amount or no amount.
The Supreme Court has held that the resolution professional does not have any power to adjudicate, reduce or reject the claims of the operational creditors. The Court held that, as opposed to a liquidator who has been conferred specific powers under sections 38 to 40 of the Code to determine and decide the claims, a function that is quasi-judicial in nature and with appeal provided against its decisions, no such specific powers to decide are provided to the resolution professional.
The resolution professional does not have the power to act independently as is evident from section 28 of the Code and can be replaced by the committee of creditors under section 27 of the Code. Thus, the resolution professional is merely a facilitator with administrative powers. This decision and finding is in favour of the operational creditors; however, this leaves a vacuum and a question, i.e. in such circumstances where the claims of the operational creditor has not been admitted, what is the recourse available to the operational creditors especially when section 31 of the Code.
While the Insolvency and Bankruptcy Code, faced several inconsistencies and challenges since it’s origin, the Swiss Ribbons case laid down the basis for the validity and the development of the insolvency laws. The Court reiterated that ‘matters of policy are best left to the wisdom of the legislature, and in policy matters, the accepted principle is that the courts should not interfere’. The Courts conclusively held that the experiment contained in the Code passes the constitutional muster.
 Swiss Ribbons Pvt. Ltd. vs Union of India, 2019 SCC OnLine SC 73  Section 5(7), Insolvency and Bankruptcy Code, 2016  Section 5(20), Insolvency and Bankruptcy Code, 2016  Section 8, Insolvency and Bankruptcy Code, 2016  Section 21, Insolvency and Bankruptcy Code, 2016  Section 24(c), Insolvency and Bankruptcy Code, 2016  Shayara Bano v. Union of India, (2017) 9 SCC 1  Section 5(20) , Insolvency and Bankruptcy Code, 2016  Section 53, Insolvency and Bankruptcy Code, 2016  Section 53(1)(f) , Insolvency and Bankruptcy Code, 2016 (reads “any remaining debts and dues”. Operational Creditors are included in this clause. )  Section 5(7) , Insolvency and Bankruptcy Code, 2016  Swiss Ribbons Pvt. Ltd. vs Union of India, 2019 SCC OnLine SC 73  Defined Section 29A of IBC(Insolvency and bankruptcy code 2016)  Bhavesh D. Parry v. Union of India Swiss Ribbons And Its Implications - The Supreme Court On The Constitutionality And Key Provisions Of The Insolvency & Bankruptcy Code -https://www.mondaq.com/india/insolvencybankruptcy/781154/swiss-ribbons-and-its-implications--the-supreme-court-on-the-constitutionality-and-key-provisions-of-the-insolvency-bankruptcy-code (Last Visited Jul 4, 2020)  Swiss Ribbons Pvt. Ltd. vs Union of India, 2019 SCC OnLine SC 73