Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors.

Decided on: 25 January 2019

Court: Supreme Court of India

Bench: Justice R.F. Nariman and Justice Navin Sinha

The decision in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. is one of the most significant constitutional rulings in Indian insolvency jurisprudence. The case examined the constitutional validity of several provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), a relatively new economic legislation aimed at resolving corporate insolvency in a time-bound manner.

A large number of writ petitions and a special leave petition were filed before the Supreme Court challenging different aspects of the Code. Since the issues raised related to the constitutional framework of the IBC itself, the Court did not confine itself to individual factual disputes but addressed broader questions concerning equality, classification of creditors, powers of insolvency professionals, and the structure of insolvency institutions.

The judgement reaffirmed the legislative intent behind the IBC and played a decisive role in stabilising India’s insolvency regime by upholding the constitutionality of the Code in its essential features.

Background of the Insolvency and Bankruptcy Code, 2016

Before the enactment of the IBC, India’s insolvency framework was fragmented and spread across multiple legislations. Different laws governed sick industrial companies, recovery of debts, winding up, and enforcement of security interests. This multiplicity resulted in overlapping jurisdictions, prolonged litigation, and poor recovery outcomes for creditors.

The Bankruptcy Law Reforms Committee (BLRC), constituted in 2014 under the Ministry of Finance, studied these deficiencies in detail. Its report highlighted that the insolvency resolution process in India suffered from lack of clarity of jurisdiction, multiple judicial forums, and excessive delays. These structural issues often led to erosion of asset value and liquidation without meaningful revival.

The Insolvency Bankruptcy Code was enacted to address these problems by introducing a unified, creditor-driven, and time-bound insolvency resolution framework. The primary objective of the Code is resolution of the corporate debtor as a going concern, with liquidation being treated strictly as a last resort. The Code was never intended to operate as a mere recovery mechanism.

Facts of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. Case

Several petitions were filed before the Supreme Court challenging the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016. The petitioners included corporate entities, operational creditors, and other stakeholders affected by the insolvency framework.

Since the Supreme Court was examining the validity of the statutory provisions themselves, it observed that the individual facts of each petitioner’s case were not material for adjudication. Instead, the focus was on whether the structure, classifications, and procedural mechanisms under the IBC complied with constitutional principles, particularly Article 14 of the Constitution of India.

Issues Before the Court

The Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. considered the following major issues:

1. Whether the appointment of members of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) was in accordance with earlier judgements in Madras Bar Association v. Union of India.
   
2. Whether the classification between financial creditors and operational creditors under the IBC is discriminatory, arbitrary, and violative of Article 14 of the Constitution.
   
3. Whether Sections 21 and 24 of the IBC are unconstitutional because operational creditors do not have voting rights in the Committee of Creditors.
   
4. Whether Section 12A of the IBC, which allows withdrawal of insolvency proceedings with 90% approval of the Committee of Creditors, violates Article 14.
   
5. Whether the resolution professional exercises adjudicatory or quasi-judicial powers under the Code.
   
6. Whether the liquidation waterfall mechanism under Section 53 of the IBC violates Article 14 of the Constitution.
   

Relevant Legal Provisions

The Court examined, among others, the following provisions:

• Section 21, IBC: Establishes the Committee of Creditors and restricts participation to financial creditors, excluding related parties.
  
• Section 24, IBC: Governs meetings of the Committee of Creditors.
  
• Section 12A, IBC: Allows withdrawal of insolvency proceedings with approval of 90% of the Committee of Creditors.
  
• Section 53, IBC: Prescribes the priority order for distribution of assets during liquidation.
  
• Article 14, Constitution of India: Guarantees equality before law and equal protection of laws.
  

Contentions of the Petitioners

The petitioners raised multiple constitutional challenges. They argued that the structure of the NCLT and NCLAT violated earlier judicial directions regarding tribunal independence and composition. The presence of bureaucratic members in selection committees and the functioning of tribunals under the Ministry of Corporate Affairs were criticised.

A significant challenge was directed at the classification between financial and operational creditors. It was contended that both categories essentially provide value to the corporate debtor, either in the form of money or goods and services, and therefore should be treated equally. The exclusion of operational creditors from voting rights in the Committee of Creditors was argued to be discriminatory and arbitrary.

The petitioners also challenged Section 12A on the ground that requiring 90% approval of the Committee of Creditors for withdrawal of proceedings gave excessive power to financial creditors. Additionally, concerns were raised that resolution professionals exercised powers that were quasi-judicial in nature without adequate safeguards.

Finally, Section 53 was challenged for placing operational creditors lower in the liquidation hierarchy, allegedly violating the principle of equality.

Contentions of the Respondents

The Union of India defended the constitutionality of the IBC by emphasising the failures of the pre-IBC insolvency regime. It was argued that the Code was enacted to maximise the value of assets and ensure timely resolution, rather than prolonged litigation.

The respondents submitted that financial creditors and operational creditors are fundamentally different in terms of the nature of their contracts, the size of their exposure, and their ability to assess business viability. Therefore, differential treatment was justified and had a rational nexus with the objectives of the Code.

It was also argued that the resolution professional performs only administrative functions under the supervision of the Committee of Creditors and the adjudicating authority. The liquidation waterfall, according to the respondents, was based on well-established principles distinguishing secured and unsecured debts.

Analysis and Findings of the Court

Appointment of Members of NCLT and NCLAT

The Court examined the constitution of the selection committees and the appointment process of tribunal members. It found that the appointments were made in compliance with earlier directions issued in the Madras Bar Association cases. Advertisements were issued, and judicial members were adequately involved in the selection process.

Accordingly, the Court held that the appointments of members of the NCLT and NCLAT were not unconstitutional.

Classification Between Financial and Operational Creditors

The Supreme Court undertook a detailed analysis of the differences between financial and operational creditors. It observed that most financial creditors, particularly banks and financial institutions, are secured creditors, whereas operational creditors are generally unsecured.

The nature of financial contracts involves lending for time value of money, with structured repayment schedules and detailed documentation. Financial creditors are also involved in assessing the viability of the corporate debtor and may engage in restructuring during financial stress.

Operational debts, on the other hand, arise from supply of goods and services, are often recurring, and are more prone to genuine disputes regarding quality or performance. These differences, the Court held, constitute an intelligible differentia that has a direct nexus with the objectives of the IBC.

The classification was therefore held to be neither arbitrary nor violative of Article 14.

Voting Rights in the Committee of Creditors

With respect to Section 21 and Section 24, the Court noted that financial creditors are better equipped to evaluate resolution plans because of their expertise in financial assessment and restructuring. Operational creditors are primarily concerned with recovery of dues and may not be in a position to assess long-term business viability.

The Court also took note of regulatory safeguards, particularly Regulation 38, which protects the interests of operational creditors by ensuring fair and equitable treatment in resolution plans.

Accordingly, the exclusion of operational creditors from voting rights was upheld as constitutionally valid.

Validity of Section 12A of the IBC

The challenge to Section 12A was based on the requirement of 90% approval of the Committee of Creditors for withdrawal of insolvency proceedings. The Court referred to the Insolvency Law Committee Report, which explained that such a high threshold ensures that settlements are comprehensive and involve all stakeholders.

The Court further noted that the Committee of Creditors does not have absolute power, as the NCLT and NCLAT can intervene under Section 60 if a settlement is rejected arbitrarily. Therefore, Section 12A was held not to violate Article 14.

Powers of the Resolution Professional

The Supreme Court clarified that the resolution professional does not exercise adjudicatory powers. The role is administrative and facilitative in nature, subject to continuous oversight by the Committee of Creditors and the adjudicating authority.

The resolution professional can be replaced by the Committee of Creditors if performance is unsatisfactory, which further reinforces the absence of independent adjudicatory authority.

Constitutionality of Section 53

While examining the liquidation waterfall under Section 53, the Court reiterated that secured financial debts play a critical role in the economy by enabling further lending and business activity. The differentiation between secured financial creditors and unsecured operational creditors was found to have a rational basis.

The Court also observed that workmen’s dues, though unsecured, have traditionally been given priority. As long as the classification serves a legitimate legislative objective, Article 14 is not violated. The challenge to Section 53 therefore failed.

Conclusion

The Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code, 2016 in its essential features. It held that the appointment of tribunal members was lawful, the classification between financial and operational creditors was reasonable, and the procedural mechanisms under the Code did not violate Article 14 of the Constitution.

The judgement reaffirmed that economic legislation must be granted a degree of judicial deference unless it is manifestly arbitrary. By validating the IBC, the Court strengthened India’s insolvency framework and reinforced the principle that resolution, not liquidation, lies at the heart of the Code.

The decision in Swiss Ribbons laid a strong constitutional foundation for the effective implementation of the IBC and continues to guide insolvency jurisprudence in India.

Note: This article was originally written by Anurag Singh (Bharati Vidyapeeth, New Law College, Pune) and first published on 5 Nov 2022. It was subsequently updated by the LawBhoomi team on 16 December 2025.