India: The Supreme Court Of India's Rejection Of The Challenge To The Constitutional Validity Of The Insolvency And Bankruptcy Code, 2016

Last Updated: 19 February 2019
Article by Chintan Chinnappa

The Supreme Court in Swiss Ribbons Pvt. Ltd. vs. Union of India and Ors. ("Swiss Ribbons")1, rejected the multi-pronged challenge on the constitutional validity of the Insolvency and Bankruptcy Code, 2016 (the "Code"), while consciously harmonizing the legislative intent with the expanse of judicial restraint. 

This article aims to elucidate the basis of the challenge and breakdown the rationale behind the Supreme Court's rejection, while emphasising on the key takeaways.


The Supreme Court in Madras Bar Association v. Union of India, 2 had considered various issues in relation to the constitution of the National Company Law Tribunal ("NCLT"), qualification of the technical members and constitution of the Selection Committee. Upon noticing glaring defects, it laid down several remedial measures for compliance by the Union of India. In this background, it was argued in Swiss Ribbons that Section 412(2) of the Companies Act, 2013 continued to linger in the statute and therefore there was a likelihood of the two Judicial Members of the Selection Committee to be outweighed by the three bureaucrats. However, the Supreme Court while observing that Section 412 had already been amended on 03.01.2018 by the Companies Amendment Act, 2017 to remedy this issue, appeared to be swayed by the affidavit filed by the Ministry of Corporate Affairs, which clarified in no uncertain terms that the Selection Committee was constituted to make appointments of members of the NCLT in the year 2015 itself, in compliance with the judgments of the Supreme Court.


It was averred that as the National Company Law Appellate Tribunal ("NCLAT") only had a seat in New Delhi, it would be unreasonable and obstructive to expect litigants to travel in order to exercise their right of appeal. A similar view had been taken by the Supreme Court in the context of the National Tax Tribunal Act 20053, wherein directions were issued to setup circuit benches so as to neutralise the hardship to litigants. The Union of India was in agreement with the Petitioners and undertook to establish circuit benches. The Supreme Court noted the said undertaking and proceeded to issued directions for establishment of Circuit NCLAT Benches, within a period of 6 months.


The Supreme Court in Madras Bar Association4 had categorically held that the administrative support for all Tribunals should be from the Ministry of Law and Justice and that the Tribunals and members should not be provided with facilities from the parent ministries or departments concerned. Despite the same, it was brought to the notice of the Supreme Court that the NCLT and NCLAT were accessing support from the Ministry of Corporate Affairs. The Supreme Court on noticing that the Union of India had not acted in terms of the said directions since 2010, urged them to act swiftly and comply with the same "in letter and spirit."


The Petitioners contended that there is no intelligible differentia between financial creditors and operational creditors in so far as the object of the Code is concerned. Despite that, the Code treated both classes of creditors differently.

  1. While an operational debtor is given a notice of default and can dispute the genuineness of the claim, a financial debtor is neither entitled to a notice nor to dispute the claim of the financial creditor.
  2. operational creditors have no place in the committee of creditors unless they amount to 10% of the aggregate amount of debt owed.
  3. Nevertheless, in terms of Section 21 and 24 of the Code the operational creditors are not entitled to vote in the committee of creditors.

Hence, in terms of Shayara Bano v. Union of India,5 such classification is discriminatory and manifestly arbitrary.

However, the Supreme Court upheld the distinction between the two classes of creditors after analyzing the nature of their respective debts, financial competence and extent of evidence needed to trigger the insolvency resolution proceedings under the Code. The Supreme Court held that the difference between the two classes of creditors is not only justified but also beneficial and considered, owing to the fact that (1) the operational debts are typically unsecured and smaller, while financial debts are secured and larger; (2) the nature of loan agreements with financial creditors are different from contracts with operational creditors for supplying goods and services; (3) the possibility of disputed operational debts are relatively higher than financial debts; (4) an event of default is far easier to establish and verify for financial creditors as electronic records of the financial creditors are usually filed in the Information Utilities; and (5) financial creditors are better equipped to engage in restructuring of loans as well as reorganization of the corporate debtor's business considering the fact that they are involved in assessing the viability of the corporate debtors from the start.

Since the financial creditors are usually banks and financial institutions, they are best equipped to assess viability and feasibility of the business of the corporate debtor. Most of them carry out techno-economic valuations and financial projections at the time of granting the loans. On the other hand, operational creditors, are primarily interested in recovery and are neither concerned with nor equipped to assess viability and feasibility of a business.  Nevertheless, the check and balances are already in place as a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than the liquidation value.

The Supreme Court also clarified that the notice to a financial debtor is unnecessary considering the debtors are usually aware of the loan structure and the defaults made. On the other hand, the notice of default in case of an operational debt will not only prevent premature initiations but will also facilitate negotiations and settlements between the parties.

Additionally, disputes raised by financial debtors are not gone into at the outset because the evidence of financial debts are contained in the documents of information utilities, banks, and financial institutions and set-off and counterclaims by financial debtors are very rare. Nevertheless, financial disputes may be raised at the stage of filing of claims, once the resolution process has commenced. To the contrary, the corporate debtor is served with a copy of the application filed and has the opportunity to file a reply and be heard, before an order is made admitting the said application so as to protect and prevent the corporate debtor from being dragged into the corporate insolvency resolution process malafide. In addition, corporate debtors are not prevented from filing counter claims in other judicial fora.


The Supreme Court recognised the significant change in the trigger mechanism for a financial creditor's application under the Code. Financial creditors are now only required to establish that the debtor had a financial obligation to pay the debt and failed to do so, as against having to prove that the debtor is unable to pay its debts in terms of the repealed Section 433 (e) of the Companies Act. In this context the Supreme Court accounted for the difference between a "claim", "debt" and "default" and relied on this difference to justify the reasons that a "financial creditor has to prove default as opposed to an operational creditor who merely claims a right to payment of a liability or obligation in respect of a debt which may be due".

The four reasons  for the change in approach are (1) predictability and certainty; (2) admission into the insolvency resolution process aims to protect and not prejudice the interests of the corporate debtor; (3)  protecting the economic interests of the corporate debtor is more important than the cause of default; and (4) liquidation is resorted to only in case of failure of the resolution process.


Section 12A of the Code pertaining to the withdrawal mechanism of an admitted application was one of the primary grounds of challenge. It was contended that "Unbridled and uncanalized power is given to the committee of creditors" to reject legitimate settlements and there is a requirement of an approval of at least ninety percent of the voting members of the committee of creditors. In addition, though withdrawal may be permitted prior to admission, there is no provision to permit withdrawal after admission of the application.

The Supreme Court considered these grounds of challenge in the context of the objective of the Code which endorses the participation of all key stakeholder in the negotiation process. It was held that once the resolution process commences, the proceedings are no longer between the applicant creditor and debtor but it is one which involves all creditors. This is solely to prevent settlements to the exclusion of the other creditors. Hence, the high threshold of ninety percent approval. However, it was also clarified that withdrawals would be permissible, in exercise of the inherent powers of the NCLT6,  at any stage where the committee of creditors is not yet constituted.

Nevertheless, the committee of creditors do not have unbridled powers owing to the appeal provision under the Code to the NCLT and thereafter the NCLAT.


The Petitioners also challenged the role of the information utilities under the Code and equated the certificate of the information utility, in so far as it relates to the occurrence of a default to a preliminary decree, which is issued without any hearing or adjudication.

The Supreme Court analysed the Information Utilities Regulations, Regulations 20 and 21 to hold that the evidence is merely prima facie evidence of default, which can be rebutted by the corporate debtor.


The Supreme Court negatived the challenge to the powers of resolution professional, which the Petitioners deemed were quasi-judicial in nature and not merely adjudicatory. It was held, upon relying on the CIRP Regulations7 that the resolution professional is only a "facilitator of the resolution process," whose administrative functions are subject to the supervision of the committee of creditors and by the Adjudicating Authority. Even when he is required to make a determination, he is only to apply to the Adjudicating Authority for appropriate relief on the basis of the determination. To the contrary, the liquidator has quasi-judicial powers under the Code as he has to consolidate, verify and adjudicate claims


The Petitioners also launched a four-fold challenge on the recently incorporated Section 29-A of the Code which lays down the categories of persons who are ineligible from submitting a resolution plan. Firstly, it was averred that the retrospective application of the provision would impair the vested rights of erstwhile promoters and would lead to multiple litigations and delay of the resolution process. Secondly, a blanket ban on all promoters of the corporate debtors, without incorporating certain exceptions to protect the efficient promoters would be manifestly arbitrary. If an erstwhile promoter proposes a resolution plan that is far better than all the other applicants, then the same should be considered, as maximization of value of assets is a primary objective of the code. Thirdly, it was averred that an account may be classified as a NPA, despite him not being a wilful defaulter and that the period of one year had no basis or rationality. Lastly, relatives of erstwhile promoters are also ineligible under Section 29 A (j), even though they have no business connection with the erstwhile promoters. 

The Supreme Court relied upon ArcelorMittal8 to hold that the resolution applicant does not possess a vested right for consideration or approval of its resolution plan and therefore Section 29A isn't really retrospective as it does not take away any vested right. The Supreme Court also held that it is wholly justified to prevent a person who is unable to service his own debt to participate in the resolution process. Further, the one-year period was also judicious considering the fact that the RBI Master Circulars classify a loan as an NPA only after sufficient grace period is given to the defaulter. Also, during such grace period the said defaulter is permitted to bid with the other resolution applicants to manage the corporate debtor.

In so far as the argument that relatives of erstwhile promoters are also ineligible to participate under Section 29A(j), the Supreme Court held that such a restriction would apply only if the said resolution applicant was connected to the business activity of the resolution applicant.

The exemption of MSME under Section 29A was also not found fault with as the Supreme Court perceived the business of an MSME to attract interest from a promoter of an MSME and may not be of interest to other resolution applicants. Therefore, if MSME's aren't exempted then other resolution applicants may not come forward and it would lead to a liquidation of the MSME instead of resolution.


The Petitioners contended that Section 53 is discriminatory and manifestly arbitrary and violative of Article 14 of the Constitution as operational creditors rank below all other creditors, including other unsecured creditors who happen to be financial creditors and are not likely to receive any part of the proceeds of the sale of liquidation assets.

The Supreme Court negatived this challenge on the ground of the relative importance of the two types of debts i.e. financial debts which are secured and operational debts which are unsecured. Recovery of financial debts infuse additional capital into the economy as banks and financial institutions are able to use that money to lend to other entrepreneurs and business entities. This creates sufficient intelligible differentia in order to justify a differential treatment in the distribution of assets. Hence, Article 14 is not attracted.


The continual failures of the Sick Industrial Companies (Special Provisions) Act, 1985, The Recovery of Debts due to Banks and Financial Institutions Act, 1993 and The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 coupled with the underlying-principle that the judiciary ought to maintain sufficient restraint in matters relating to economic regulation, form the backdrop to this decision of the Supreme Court in upholding the constitutional validity of the Code. The Supreme Court was sensitive to the fact that the legislature and the government ought to be permitted to experiment in order to foster change in the economy. A denial of the same by adoption of rigid methodologies by the courts, would not only prevent growth but will also result in adverse and grave consequences to the nation. Economic problems being relatively complex, the Legislature cannot be expected to enact a water tight legislation, which contemplates all possible problems and abuses. Therefore, merely because there may be a possibility of certain inequities, the Supreme Court rightly held that legislation cannot be struck down as unconstitutional.


1 Writ Petition (Civil) No. 99 of 2012, judgement dated 25 January 2019

2 (2015) 8 SCC 583

3 Madras Bar Association v. Union of India, (2014) 10 SCC 1

4 Madras Bar Association (2010) 11 SCC 1

5 (2017) 9 SCC 1

6 Rule 11 of the NCLT Rules, 2016

7 Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

8 ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors., Civil Appeal Nos. 9402-9405/2018 [decided on 04.10.2018]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions