Swiss Ribbons Pvt. Ltd. vs Union Of India, (2019)- IBC Is Constitutionally Valid In Its Entirety, Defaulter’s Paradise Is Lost

DATE: 25th January, 2019

JUDGES

• R. Nariman
• Navin Sinha

PARTIES

• Swiss Ribbons Pvt. Ltd. (PETITIONER)
• Union of India (RESPONDENT)

SUBJECT: The present judgement deals with the constitutional validity of Insolvency and Bankruptcy Code, 2016. Several questions were put before the court concerning sections 21, 24, 12A, 29A, 53 of the code.

AN OVERVIEW

• In the present case the Supreme Court was hearing writ petitions challenging the validity of Insolvency and Bankruptcy Code and since the Court is concerned with the question of the validity of the said code, it decided not to look upon the individual facts of the case.
• Following were the challenges put before the court in writ petitions-:

1. The first and foremost argument put forward was that the appointment of members of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) is contrary to what has been said in Madras Bar Association v. Union of India, therefore, all orders that are passed by such members are contrary to the judgment of this Court in the aforesaid case and thus,ought to be set aside. It was further argued that administrative support for tribunals should be from the Ministry of Law and Justice rather than Ministry of Corporate Affairs. Concerning the tribunals, it was further contended that NCLAT has a seat only New Delhi. If the power High Court is taken away, it is not convenient for people all over the country to move to New Delhi for appeal as it is to move to High Court in their own state.

2. The second contention was regarding section 7 according to which there is no real difference between financial creditors and operational creditors. It was contended that the section is arbitrary and in violation of article 14 of the Constitution of India. It was argued that an operational debtor is not only given notice of default, but is entitled to dispute the genuineness of the claim. A financial debtor, on the other hand, is given no notice and the is not entitled to dispute the claim of the financial creditor.

3. Sections 21 and 24 of the Code are discriminatory and manifestly arbitrary in that operational creditors do not have even a single vote in the committee of creditors which has very important functions to perform in the resolution process of corporate debtors. As per Section 24 of the IBC Code, the operational creditors were not under the definition of ‘participant’ 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’.

4. Section 12A was also challenged on the grounds of constitutional validity. 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. It was further contended that once an application by a creditor is admitted by the Adjudicating Authority, the proceeding becomes a proceeding in rem and is no longer an individual proceeding but a collective proceeding.

5. Concerning section 29A it was argued that the section is not aimed at only persons who have committed acts of malfeasance, but also persons who are otherwise unfit to be put in the saddle of the management of the corporate debtor, such as undischarged insolvents and persons who have been removed as directors. It was further alleged that the section is not aimed at malfeasance but at rendering ineligible persons who are undesirable in the widest sense of the term, i.e., persons who are unfit to take over the management of a corporate debtor.

IMPORTANT PROVISIONS

INSOLVENCY AND BANKRUPTCY AND CODE

• Section 7- Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with [other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

[Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.]

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution professional; and
(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

[Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.]

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or
(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor,within seven days of admission or rejection of such application, as the case may be.

• Section 12A- 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 prescribed.
• Section 24- Meeting of committee of creditors.

(1) The members of the committee of creditors may meet in person or by such electronic means as may be specified.

(2) All meetings of the committee of creditors shall be conducted by the resolution professional.

(3) The resolution professional shall give notice of each meeting of the committee of creditors to—

(a) members of 1[committee of creditors, including the authorised representatives referred to in sub-sections (6) and (6A) of section 21 and sub-section (5)];
(b) members of the suspended Board of Directors or the partners of the corporate persons, as the case may be;
(c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent. of the debt.

(4) The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings:

Provided that the absence of any such direct or, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting.

(5) [Subject to sub-sections (6), (6A) and (6B) of section 21, any creditor] who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor in a meeting of the committee of creditors:

Provided that the fees payable to such insolvency professional representing any individual creditor will be borne by such creditor.

(6) Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.

(7) The resolution professional shall determine the voting share to be assigned to each creditor in the manner specified by the Board.

(8) The meetings of the committee of creditors shall be conducted in such manner as may be specified.

• Section 29A- A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—

(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;
(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 issued under the Banking Regulation Act, 1949 [or the guidelines of a financial sector regulator issued under any other law for the time being in force,] 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:

Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan;

Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

(d) has been convicted for any offence punishable with imprisonment –

(i) for two years or more under any Act specified under the Twelfth Schedule; or
(ii) for seven years or more under any law for the time being in force:
Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment :

(e) is disqualified to act as a director under the Companies Act, 2013;

(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;

(g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;
Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;

(h) has executed [a guarantee] in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code [and such guarantee has been invoked by the creditor and remains unpaid in full or part];

(i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
(j) has a connected person not eligible under clauses (a) to (i).

Explanation- For the purposes of this section, “financial entity” shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely:—

(a) a scheduled bank;

(b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding;

(c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999 (42 of1999);

(d) an asset reconstruction company register with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(e) an Alternate Investment Fund registered with Securities and Exchange Board of India;

(f) such categories of persons as may be notified by the Central Government.

ISSUES: The issues addressed in the present case were as follows-:

• Whether NCLT and NCLAT is in accordance with Madras Bar Association ruling?
• Whether the Tribunals should not be working under the administrative control of the Ministry of Law?
• Whether 29A is contrary to the objective of speedy resolution?
• Whether the differentiation between financial creditors and operational creditors is violative of Article 14 of the Constitution of India.?

ANALYSES O THE JUDGEMENT

• Looking upon the object of the code the court stated that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management.
• Answering the first issue regarding appointment of members to NCLT and NCLAT, the court relying on the Companies (Amendment) Act, 2017 observed 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.
• Referring to L. Chandra Kumar v. Union of India in which it was held that permanent Benches needed to be established at the seat of every jurisdictional High Court. And if that was not possible, at least a Circuit Bench required to be established at every place where an aggrieved party could avail of his remedy, the court stated that this judgment will be followed and Circuit Benches will be established as soon as it is practicable and directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months.
• Answering the issue of difference between financial creditor and operational creditor, the court in its judgement elaborating the difference between both observed that 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 and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.
• Referring to the issue of section 12A being violative of article 14 the court observed that the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the ILC Report . Also, it is clear, that under Section 60 of the Code, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. For all these reasons, we are of the view that Section 12A also passes constitutional muster.
• Answering to question of constitutional validity of section 29A, the court the 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. The court further observed that the expression “connected person” would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan, thus, any such person is not indeterminate at all, but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during implementation of the resolution plan.
• Thus, the court held that The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. The experiment conducted in enacting the Code is proving to be largely successful. The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.

CONCLUSION

• This judgement of the Supreme Court has turned out to be a landmark judgement where insolvency and bankruptcy in India is concerned. Financial creditors provide corporate debtor with debt and better judge the resolution plan in circumstances of CIRP. The same, however, is not true in case of operational creditor. The court has tried to achieve the objective of the code by and preserve the primary intention of the legislation by pointing out the difference between both financial creditor and operational creditor.
• The court’s opinion on NCLT and NCLAT has given clarity to what the role of resolution professional is.
• By giving constitutional validity to the IBC, the court has affirmed the stance of the legislation in bringing back the economy in its rightful position.

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