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Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India, 2019

Swiss Ribbons Pvt. Ltd. & Another Vs. Union of India, 2019

By Dikshikha Priyadarshani

On 25th January, 2019 The Honourable Supreme Court of India in case of Swiss Ribbons Pvt. Ltd. Vs. Union of India, declared the Insolvency and Bankruptcy Code, 2016 constitutionally valid, and does not violates Article 14 of the Constitution of India. The Adjudicating Authorities under this Code i.e. NCLT, NCLAT, DRT, DRAT are according to the law of India.

Before the Insolvency and Bankruptcy Code, 2016 there was debtor in possession who can initiate the procedure of insolvency i.e. voluntary winding up of company. But after this Code. voluntary winding up of company is ended. There was different procedure provided for the insolvency process in different Acts, rights of creditors and debtors were also given in different Acts. This causes delay in adjudication of cases, numbers of appeals filed before court in different Act which again burdened the judiciary. Therefore, on 4th November, 2015 Bankruptcy Law Reform Committee discussed in its report this matter which led to the enactment of Code.

After passing the Insolvency and Bankruptcy Code, 2016, there are many issues related to the IBBI, creditors, debtors and other Insolvency professionals raised before court in different parts of India. All these petitions and appeals involve question of law and constitutionality of IBC, 2016. Therefore, The Honourable Supreme Court of India in the same case has decided only constitutional validity of the IBC, not the individual facts of the case.

The Judgement is delivered by the Divisional Bench consisting Justice R.F. Nariman and justice Navin Sinha and the judgement of court is delivered by R.F. Nariman, J.

There are some issues which are discussed before the Honourable Court:

·      Classification between financial creditors and operational creditors is discriminatory, arbitrary and violative of Article 14 of the Constitution or not?

·      Appointment of members of the NCLT and the NCLAT is contrary to the judgment in the case of Madras Bar Association (I) and Madras Bar Association (III)[1].

·      Section 12A of IBC, 2016 is violative of Article 14 of the Constitution or not?

·      Constitutional validity of Section 29A of IBC, 2016 challenged.

·      Section 53 of IBC, 2016 violative of Article 14 of the constitution or not?

 

Appointment of members of the NCLT and the NCLAT is contrary to the judgment in the case of Madras Bar Association (I) and Madras Bar Association (III)[2].

In the case Shri Rohtagi argued that contrary to the judgement in above cases Section 412 pf the Companies Act, 2013 continued on the statute book, as a result of which, the two judicial members of the Selection committee get outweighed by three bureaucrats. After the Companies Amendment Act, 2017, Section 412 of Companies Act was amended which provides selection of members of tribunal and appellate tribunal. In the Selection Committee Chief Justice of India or his nominee, Senior judge of Supreme Court or Chief Justice of the High Court, Secretary in the ministry of home affairs and Secretary in the ministry of Law and Justice. Therefore, it is not contrary to the judgment in above mention cases.

The Honourable Court held that resolution professionals are not adjudicating authority. Under the Code resolution professionals are given some adjudicating powers which can opposed to the quasi- judicial powers. Under section 35A after determination he can only apply to Adjudicating Authorities for relief.

The Honourable Court held that "Unlike the liquidator, the resolution professional cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the Code, which can, by a two-thirds majority, replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority."[3]

 

Classification between financial creditors and operational creditors is discriminatory, arbitrary and violative of Article 14 of the Constitution or not?

The honourable Supreme Court held that classification between financial creditors and operational creditors is not discriminatory, not arbitrary and not violative of Article 14 of the Constitution. It is a reasonable classification between two. Financial creditor is not same as to the operational creditors. Financial creditor are secured creditor and operational creditors are mostly unsecured. By differentiating between financial and operational creditor The Honourable Court held that “A perusal of the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, and 'operational debt' would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority."

 

Section 12A of IBC, 2016 is violative of Article 14 of the Constitution or not?

The Honourable Supreme Court upheld the Constitutional Validity of Section 12 A of Code. Section 12 A of Code is about the withdrawal of application admitted under section 7,9, or 10 of the Code. This provision added after the Insolvency and Bankruptcy (Amendment), 2018 with retrospective effect from the date of 6th June, 2018. In the concluding of this issue the Court held that "The main thrust against the provision of Section 12A is the fact that ninety per cent of the committee of creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, 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 Report (supra). 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 102 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."

 

Constitutional validity of Section 29A of IBC, 2016 challenged.

Section 29 A of the Code deals with the Persons not eligible for to be resolution applicant. In this issue the Court relied upon the case State Bank’s Staff Union (Madras Circle) vs. Union of India[4] and Arcelor Mittal case. Court held that Section 29A has been enacted in larger public interest and to facilitate corporate governance. Policy matter in the code is to be decide by the RBI and therefore one-year period in section 29A is not bad in law. This section does not only apply to resolution applicant but also liquidators.

 

Section 53 of IBC, 2016 violative of Article 14 of the constitution or not?

The Honourable Supreme Court upheld the Constitutional Validity of Section 53 of the Code. Section 3 of the code tells about the distribution of assets. The argument made by the petitioner is that the operational creditor, ta the time of liquidation, hey will not get anything as they rank below all the other creditors, including other unsecured creditors who happen to be financial creditors. But the honourable Court held that there is some legitimate interest protected for the operational creditors and reasonable object has been achieved by the statue, hence it is not violative of Article 14[5] of the Constitution of India


[1] (2015) 8 SCC 583

[2] (2015) 8 SCC 583

[3] https://www.livelaw.in/top-stories/supreme-court-validity-of-insolvency-bankruptcy-code-142379

[4] (2005) 7 SCC 584

[5] Right to equality

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