Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. [2019 SCC Online SC 73]

Introduction

In the present case, the Supreme Court was hearing writ petitions challenging the validity of the 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.

Overview of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.

The Supreme Court opted not to consider the particular facts of the case because it is concerned with the constitutionality of the Insolvency and Bankruptcy Code, which was the subject of the writ petitions in the current case.

Following were the challenges put before the court in writ petitions-:
The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) members were appointed in violation of the ruling in Madras Bar Association v. Union of India, the first and most important argument made.

As a result, all orders made by these members are in violation of this Court’s ruling in the aforementioned case and should be reversed. It was also suggested that the Ministry of Law and Justice, rather than the Ministry of Corporate Affairs, should provide administrative assistance for tribunals.

Furthermore, it was argued that NCLAT only has a seat in New Delhi with regard to the tribunals. If the High Court loses its authority, people from all over the nation will find it more convenient to go to the High Court in their own state rather than travelling to New Delhi.

The second issue is related to Section 7, which states that there is little to no distinction between operational creditors and financial creditors. The section was argued to be arbitrary and in breach of article 14 of the Indian Constitution. An operational debtor was said to be able to contest the validity of the claim in addition to receiving notice of the default. On the other hand, a financial debtor receives no notice and is not permitted to contest the financial creditor’s assertion.

Because operational creditors lack even a single vote in the committee of creditors, which has crucial duties to carry out in the resolution process of corporate debtors, Sections 21 and 24 of the Code are discriminatory and obviously unjust. If the total amount owed to the corporate debtor is 10% or more, the operational creditors are not considered participants under Section 24 of the IBC Code. Due to their failure to meet the requirements of “participant,” they are also denied the chance to get a copy of the resolution plan.

The constitutionality of Section 12A was also contested. Before beginning the settlement procedure between creditors and corporate debtors, Section 12A of the Code stipulates that at least 90% of the COC’s total voting share must consent. As a result, the COC is granted unrestricted power, which they may abuse. It was further argued that the procedure changes from being an individual proceeding to a collective proceeding once the Adjudicating Authority accepts a creditor’s claim.

It was asserted that section 29A targets individuals who are otherwise unable to govern the corporate debtor, such as undischarged insolvents and individuals who have been removed as directors, in addition to those who have engaged in acts of misconduct. Furthermore, it was claimed that the clause is not intended to punish wrongdoing but rather to disqualify individuals who are unwanted in the broadest sense of the word, that is, individuals who are unqualified to take over the management of a corporate debtor.

Analysis of Judgement: Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.

Looking upon the object of the code the court stated that the primary focus of the legislation is to ensure the 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 beneficial legislation which puts the corporate debtor back on its feet, not being 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 the 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 was 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 the difference between financial creditors and operational creditors, the court in its judgement elaborating on the difference between both observed that preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors is 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 a 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 the constitutional validity of section 29A, the court by purposive interpretation of the legislative provision given in the Arcelor Mittal case and using an interpretation of the Salomon case said that the principles regarding separate corporate entities 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 the implementation of the resolution plan.

Thus, the court held that The Insolvency Code is 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 the corporate debtors with debt and better judge the resolution plan in the circumstances of CIRP. The same, however, is not true in the case of an operational creditor.

The court has tried to achieve the objective of the code by preserving the primary intention of the legislation by pointing out the difference between both financial creditors and operational creditors. The court’s opinion on NCLT and NCLAT has given clarity to the role of the resolution professional. By giving constitutional validity to the IBC, the court has affirmed the stance of the legislation in bringing back the economy to its rightful position.

This article has been submitted by Anurag Singh, a student from Bharati Vidyapeeth, New Law College, Pune.