Shreya Taneja – Amity Law School Delhi, IPU
Kavya M – SOEL
Mansi Bagh – Gitam School of Law, Gitam University
Meghaa G., TNNLU
Swiss ribbons Pvt Ltd & Anr. (Petitioners)
Union of India & Ors (Respondents)
Date of Judgment: 25 January, 2019
Bench : Justice Rohinton F Nariman and Justice Navin Sinha
The Insolvency and Bankruptcy Code, 2016 (herein after referred as ‘the Code’) furnishes the creditors with an extensive solution for recovery of due from deliberate defaulters. While the legislation has been facing difficulty and incompatibility since its formation, the dynamic approach of the Government in revising this liquidation law from time to time has led to notable judgments.
II. BACKGROUND OF THE CASE:
This case has laid down a strong foundation for bankruptcy and upheld the Constitutional validity of the Code. The Hon’ble Supreme Court thus stated in this case,
“The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.”
The issue pertaining to constitution validity of the Code has been raised by various stakeholders from time to time. It is alleged that Code is violative of Article 14 of Indian Constitution and is discriminatory in nature. In an excess of applications made to various National Company Law Tribunal and High Courts, the petitions have been claiming that classification of creditor as operational creditors and financial creditor is arbitrary. Further there is no intelligible differentia applied by the legislator making such distinction. After the 2017 Amendment of the Code, being subsequently amended by 2018 Amendment, another provision led to massive hue and cry, putting a bar on promoters from bidding for their own company under Section 29A. The Code forced the sale of the Company to new bidders only leading to the argument of being against fundamental right of the promoters. Additionally, it was argued that Section 29A was arbitrary as it excludes relatives of an ineligible person, who is otherwise a qualified applicant.
III. RELATED PROVISIONS:
1. Under Indian Constitution:
a) Article 14: Equality before law
“The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”
2. Under Insolvency and Bankruptcy Code, 2016:
a) Section 12A: Withdrawal of application admitted under section 7, 9 or 10:
“The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the Committee of Creditors, in such manner as may be specified.”
b) Section 29A: Person not eligible to be Resolution Applicant:
Section 29A(c): “at the time of submission of the resolution plan has an account,] or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor.”
Section 29A(j): “has a connected person not eligible under clauses (a) to (i)”
c) Section 53: Distribution of assets:
“1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following:(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following: -(i) any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date;(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners”
IV. MAJOR ISSUES and ARGUMENTS BEFORE COURT:
1. Petitioner: -
i. Differential treatment of both Financial creditor and Operational creditor:
Principle Argument by the petitioners was that there is no intelligible differentia in relation to object which was to be achieved by the Code differentiating between the financial and operational creditor.
The petitioners argued that classification between financial and operative creditors is violative of Article 14 of the Indian Constitution as it being discriminatory and arbitrary. As per the Code, the operational debtor is not only served a notice but is also entitled to dispute the genuineness of the claim. However, on the other hand with respect to the financial debtors, neither he is served with any notice nor is he entitled to dispute the genuineness of the claim.
Further, unless operational creditors amount to 10% of the debt owed, they have no say in the Committee of Creditors. Under Section 21 and 24 of the Code, operational creditors do not stand up with even a single vote Committee of Creditors.
ii. Powers of Resolution Professional:
It was challenged that the adjudicatory power granted to the resolution professionals (which is a non-judicial body) is being violative of the basic aspect of dispensation of justice and access to justice.
iii. Section 12A: Passing Constitutional muster
In the present case, it was argued that absolute power is given to the Committee of Creditors to reject a legitimate settlement entered into by both the creditors and the corporate debtors, since it is an individual proceeding between the parties to the settlement. This is such because section 12 A of the Code enables the settlement process by requiring approval of at least 90% of the voting share of the Committee of Creditors.
iv. Constitutional validity of Section 29A:
Certain Constitutional challenges were unveiled against section 29A in present case on following grounds:
a. Vested Right of the former promoters participating in recovery process of corporate debtor being impaired by retrospective application of Section 29A.
b. Blanket ban on participation of all promoter without differentiating between fraudulent and sincere promoters.
c. Asset Maximization is an important goal to be achieved in resolution process to which Section 29A is contrary.
d. A person’s account may be categorized into Non-Performing Asset in accordance with RBI guidelines even if he is not a willful defaulter.
e. Person being relative of former promoter is also debarred even if they have no business connection with such promoter being rendered ineligible by Section 29A.
v. Constitutional validity of Section 53:
In the present case, Section 53 was challenged by the petitioner arguing that in the liquidation period operational creditor will not be receiving the payment as they are ranked lower in comparison to other creditors including the financial creditors who happens to be unsecured creditors.
2. Respondent: -
The Respondents rejected the allegations of the Appellant and based on the precedents and reports of the committee, submitted that it is not violative of Article 14 of Indian Constitution and the Code is constitutionally valid.
1. Financial Creditors and Operational Creditors vis-à-vis Article 14 of Indian constitution:
Based on the Code, Regulations and Bankruptcy Law reforms Committee Report, the distinction of Financial Creditors and Operational Creditors is not arbitrary and thus it is not violation of Article 14 of Indian Constitution.
Though Financial Creditors have more rights than Operational Creditors, it is essential to achieve the objectives of the code and thus Supreme Court stated,
“Thus, Preserving the Corporate Debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the code, Financial Creditors are clearly different from operational Creditors”.
To strengthen the operational creditors right Regulation 38 was also amended which incorporated the principle of Fair and Equitable in payments to Operational Creditor.
2. Powers of Resolution Professional:
Resolution Professional is a facilitator and has only administrative power and not quasi-judicial power, unlike Liquidator who has quasi-judicial power. As per Section 28 of the Code, for certain actions the Resolution Professional has to get the approval of Committee of Creditors.
3. Section 12A – Passing Constitutional muster:
After initiation of Corporate Insolvency Resolution Process (herein after referred as ‘CIRP’), after Committee of Creditors is constituted, the insolvency proceedings become proceedings in rem, and it cannot be withdrawn by single creditor. Before constitution of Committee of Creditors, the party can approach the National Company Law Tribunal (herein after referred as ‘NCLT’) which has inherent powers to allow or reject the application for withdrawal or settlement.
If Committee of Creditors arbitrarily rejects or accepts the withdrawal application, as per Section 60 of the code, the NCLT or NCLAT can always set aside the decisions. Thus, this Section 12A of the code passes constitutional muster.
4. Section 29A – Constitutional Validity:
The Apex court upheld the retrospective effect of this section and stated that since the Resolution applicant under this section has no vested right to be considered as resolution applicant, their vested right will not affect the retrospective effect of this section.
With regard to relative party under Section 29A(j), the Court held that only when the related party is connected with the business activity of Resolution Professional, he is disqualified under Section 29A.Thus Section 29A is constitutionally valid.
5. Section 53 – Constitutional validity:
Section 53 is challenged and the Supreme Court held that,”repayment of financial debt infuses capital into the economy in as much as banks and financial institutions are able, with the money that has been paid back”. Article 14 is not infringed as this method of repayment is to protect the legitimate interest to achieve the objectives of the code, and Section 53 was upheld.
Insolvency and Bankruptcy Code, 2016 is one of the most important development in the Indian Financial laws. Thus, the Supreme Court by this case strongly validated the implementation of the Insolvency and Bankruptcy Code, 2016 in its entirety. By passing “constitutional musters” it became one of the significant laws of land. It is considered as landmark step for better economy and it provides confidence to the investors.
 Swiss Robinson Pvt.Ltd. & Anr. Vs Union of India & Ors. writ petition(civil) no.99,100,115,459,598 & ors of 2018(para 86).  INDIA CONST. art. 14.  Insolvency and Bankruptcy Code, 2016, section 12A.  Insolvency and Bankruptcy Code, 2016, section 29A.  Swiss Robinson Pvt.Ltd. & Anr. Vs Union of India & Ors. writ petition(civil) no.99,100,115,459,598 & ors of 2018(para 28).  Insolvency and BankruptcyBoard of India(Insolvency Resolution Process for Corporate Persons) Regulations, 2016.  Rule 11, National Company Law Tribunal Rules, 2016(India).  Arcelor Mittal vs Satish Kumar gupta & others,Civil Appeal no.9402-9405 of 2018.  Swiss Robinson Pvt. Ltd. & Anr. Vs Union of India & Ors. writ petition (civil) no.99,100,115,459,598 & ors of 2018(para 84).