India: One Code To Rule Them All: Supreme Court On The Insolvency And Bankruptcy Code

Last Updated: 25 February 2019
Article by Piyush Joshi and Trishna Menon

The Supreme Court of India has clearly protected the Insolvency and Bankruptcy Code, 2016 ('Code') from various constitutional challenges in its much-publicised recent judgment in Swiss Ribbons Pvt. Ltd. & Anr. V. Union of India & Ors. ('SC Judgment').1 The interesting aspect of this judgement is its frank admission that in the present circumstances "the experiment contained in the Code, judged by the generality of its provisions and not by the so-called credulities and inequities that have been pointed out by the petitioners, passes the constitutional muster."2 This statement mentioned in the section titled "Epilogue" in the SC Judgement essentially protects the Code in the present circumstances, and appears to leave the door open to review "the experiment" as circumstances evolve. It is the first time the Supreme Court of India has itself admitted to not having determined an important constitutional issue on purely legal grounds, but essentially in light of what it perceives to be the requirement of the society. The "Epilogue" also states that due to the Code "The defaulter's paradise is lost"3- a statement that further indicates the prism with which the Court has viewed the Code at this time.

The SC Judgement, arguably, is also an explicit admission that the Supreme Court of India is open to protecting "experiments" (as it itself identifies the Code to be) if it perceives such experiments to be the need of the society and the economic circumstances, and that the framework of the law is not the only lens it may use to determine "constitutional validity" of a measure. Seen in this light, each aspect of the SC Judgement clearly does not give any legal determination, but a grant of protection as deemed necessary for the time being by the Supreme Court.

The following is a quick guide on how the SC Judgement has proceeded to deal with the various challenges:

Judicial "Hands Off" Qua Economic Legislation: The SC Judgement has for the first time stated in no uncertain terms that the legislations dealing with economic issues will not be adjudged strictly in terms of constitutionality, but more generally and with flexibility recognising the limitations placed by United States courts on judicial review particularly that 'legislative bodies have broad scope to experiment with economic problems, and this court does not sit to "subject the state to an intolerable supervision hostile to the basic principles of our government".."4 and that "Every legislation, particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be credulities and inequities in complicated economic legislation but on that account alone it cannot be struck down as invalid."5 and "The Court would not have the necessary competence and expertise to adjudicate upon such an economic issue."6.

Classification Between Financial and Operational Creditors Not Discriminatory Not Arbitrary: With its frame of reference firmly established, the Supreme Court has simply applied appropriate corresponding principles to presently protect the Code from challenge. In reference to the main challenge that the difference between financial and operational creditors is arbitrary, the Court formulated the principle that "since equality is only among equals, no discrimination results if the Court can be shown that there is an intelligible differentia which separates two kinds of creditors, so long as there is some rational relation between the creditors so differentiated, with the object sought to be achieved."7 In order to protect the differentiation, the Court pointed to the following differences which it considered sufficient to account as "intelligible differentia" justifying the classification: (i) that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, (ii) financial creditors have different types of contract lending on term loan or working capital making their loan agreements distinct from general contracts that are entered into with operational creditors, (iii) Financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations, and (iv) financial creditors are involved in assessing the viability of corporate debtors and can engage in restructuring of loan as well as reorganisation of the business, thus preserving the corporate debtor as a going concern while ensuring maximum recovery,8 which is different from operational creditors. It is interesting to note that none of these differences are arising from the Code itself but have been formulated by the Court to protect the differences and are based solely on a highly generic discussion of nature of individual transactions by which the corporate debtor acquired the debt. The judgment however does not delve into a discussion or any conclusion on how this difference has a rational nexus with the objective of the Code.

Operational Creditors Not Being Discriminated Even Though Without any Voting Rights: One of the main challenges in the case before the Supreme Court, was that of discrimination and arbitrariness against Operational Creditors on the reasoning that operational creditors do not have any voting rights in the Committee of Creditors. The SC Judgement holds that the lack of voting rights for Operational Creditors in Committee of Creditors is not discriminatory because: (i) financial creditors are in the business of money lending and are best equipped to assess viability and feasibility of a corporate debtor while operational creditors are only seeking to recover their dues9, (ii) NCLAT while looking into validity of resolution plans has been testing the plans against the benchmark that a resolution plan cannot pass muster under s. 30(2)(b) r.w. s. 31 unless a minimum payment is made to operational creditors being not less than liquidation value10 and (iii) Regulation 38(1-A) has mandated that a resolution plan must include a statement as to how it has dealt with the interests of all stakeholders including financial creditors and operational creditors, of the corporate debtor11.

Requirement of 90% Creditor Consent for Withdrawal Not Arbitrary: Another main challenge to the process under the Code was that s. 12-B stipulates that for withdrawal of any proceedings, the approval of entities having 90% voting share of the Committee of Creditors is needed. The Court simply relied upon the reasoning provided in the Insolvency Law Committee ("ILC") Report that accompanied the amendment that introduced the requirement which was essentially that once CIRP process is initiated, it is no longer a proceeding only between the applicant creditor and corporate debtor but is a proceeding involving all creditors and further that the intention of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors12. The Court accepted the reasoning of ILC Report and held that the figure of 90%, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which the Court would not go into.13

Resolution Professional Only Given Administrative and not Quasi-judicial powers: It was also argued that the grant of adjudicatory power, under the Code and Regulations, to a non-judicial authority, the Resolution Professional, is violative of basic aspects of dispensation of justice and access to justice resolution professional. The Court held that the resolution professional has been given only administrative powers and not quasi-judicial powers14. Under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations'), the resolution professional has to vet and verify claims made, and ultimately, determine the amount of each claim. The Court specifically referred to Regulations 10, 12, 13 and 14 to confirm that the resolution professional is given administrative as opposed to quasi-judicial powers.

Section 29A of the Code – Ineligibility of Persons to be Resolution Applicants: The petitioners had argued that the retrospective application of Section 29A impaired the vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor. The Court considered the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors15, in which it had observed that a resolution applicant has no vested right for consideration or approval of its resolution plan and the objective of enacting s. 29A was in "larger public interest"16. This being the case, no vested right is taken away by the application of Section 29A17.

Issue of NCLT and NCLAT Reporting into Parent Ministry (Ministry of Corporate Affairs): Accepted But Sidestepped: The petitioners had argued that the members of the National Company Law Tribunal ('NCLT') and certain members of the National Company Law Appellate Tribunal ('NCLAT'), apart from the President, were appointed by a committee in which judicial members were outweighed by bureaucrats contrary to the Supreme Court's judgment in Madras Bar Association v. Union of India,18 and therefore, all orders passed by such members ought to be set aside. However, this challenge was sidestepped by the Supreme Court by simply noting that the Ministry of Corporate Affairs ('MCA') had filed an affidavit which submitted that although the first selection committee had been constituted in 2015 but then it was reconstituted in 2017 to make further appointments, in compliance with the Supreme Court's directions. The Court decided to rely on the affidavit and did not go into the issue any further.19

It was also argued that the administrative support for all tribunals should be from the Ministry of Law and Justice; whereas the administrative support currently provided to the NCLT and NCLAT function under the MCA. The Court determined this to be the case but merely directed that this needs to be rectified at the earliest20.

Footnotes

1. 2019 SCC OnLine SC 73.

2. See Para 118 of the SC Judgement

3. See Para 119 of the SC Judgement

4. See Para 13 of the SC Judgement

5. See Para 18 of the SC Judgement

6. See Para 19 of the SC Judgement

7. See Para 30 the SC Judgement

8. See Para 44 and 45 SC Judgement

9. See Para 69 SC Judgement

10. See Para 71 SC Judgement

11. See Para 71-72 SC Judgement

12. See Para 75 SC Judgement

13. See Para 80 SC Judgement

14. See Para 87 SC Judgement

15. Civil Appeal Nos. 9402-9405/2018, decided on 04.10.2018.

16. See Para 94-95 SC Judgement

17. See Para 97 SC Judgement

18. (2015) 5 SCC 583.

19. See Para 22 and 23 SC Judgment

20. See Para 26-29 SC Judgment

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