Swiss Ribbons Pvt. Ltd v. Union of India: Constitutionality of IBC upheld

Introduction:

In Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.[i], the Supreme Court upheld the constitutionality of various provisions of The Insolvency and Bankruptcy Code, 2016. The judgement backs up all of the arguments by establishing the premise on which it is based. The application of such situations to the interpretation of the provisions clarifies the vision of the created law and aids in its successful execution. The Hon’ble court’s ruling laid down the foundation for modern bankruptcy laws.

Facts:

The petitioner challenged the validity of various provisions of the 2016 Insolvency and Bankruptcy Code before the Supreme Court of India. The legitimacy of the 2016 IB Code was confirmed by the Supreme Court. Several writ petitions were also brought before the Supreme Court on the same matter by others, because the verdict solely dealt with a legal question and no specific facts were presented.

Issues:

The following contentions raised by the petitioners-

  1. Whether the appointment of members of the NCLT and NCLAT was in conflict with the Madras Bar Association’s judgment?
  2. Is the distinction between financial and operational creditors in violation of Article 14?
  3. Is section 12A of the code constitutional?
  4. Whether section 29A of the Code is lawful since retrospective application of Section 29A has harmed the vested rights of former promoters to participate in the recovery procedure of a corporate debtor?
  5. The remedy would be rendered ineffective because the NCLT, as an appeal court, has just one seat in Delhi.
  6. Is section 53 of the Code constitutional?

Judgment of the case:

After hearing the respondent, the Hon’ble Supreme Court decided that none of the members of the NCLT or NCLAT were selected in violation of this Court’s decisions in Union of India v. R. Gandhi, President, Madras Bar Association[ii]. According to the affidavits produced before the Hon’ble Court, all members of the NCLT and NCLAT were appointed by a committee consisting of two Supreme Court Judges and two bureaucrats in compliance with the Madras Bar Association.

The distinction between financial and operational creditors was upheld by the Supreme Court. The Court cited the Code’s provisions, as well as the Bankruptcy Low Reforms Committee report and the Insolvency Low Committee report, 2018, to conclude that there is a clear distinction between the classification and the Code’s goal. The classification is constitutionally valid and does not contradict any article of the Constitution due to the differences in the nature of operations, viability, and ability of financial and operational creditors to assess and restructure debt.

As Corporate Insolvency Resolution Process (CIRP) is a procedure in rem, it cannot be terminated by a single creditor, Section 12A of the Code was affirmed. Furthermore, Section 60 of the IBC specifies that the Committee of Creditors (CoC) has no last word and that the decision might be overturned by the Tribunals. Despite the fact that Resolution Professional is just a facilitator of the bankruptcy resolution process, with the CoC overseeing the major functions, the Court found that Resolution Professional’s powers are not in violation of the principles of justice.

The Hon’ble Supreme Court ordered the Union of India to set up Circuit Benches of the NCLAT within six months of the judgment’s issuance. In the case of S.P. Sampath Kumar v. Union of India[iii], a similar aspect was considered and the court declared that permanent benches should be established at the seat of renowned High Courts, and if that is not practicable, a circuit bench should be established where a person can exercise his legal remedy.

The Court stated that Section 29A is not retrospective in character and is constitutionally valid. This is because the resolution applicant has no vested right to have their resolution plan considered or approved. As a result, the Section’s legitimacy was upheld. Apart from misconduct, the Court stated that Section 29A of the Code provides various other grounds for ineligibility to participate in the process. As a result, the issue of treating unequals as equals would be avoided.

The Supreme Court maintained the constitutionality of Section 53 of the Code, while reiterating its previous concerns. There are intelligible differentia that warrant the grouping of two creditors, owing to the relative importance of the two categories of debt. The goal was acceptable because the recovery of financial obligations feeds capital into the banks, which eventually improves the economy.

Personal view:

This judgment, in my opinion, was the first step toward rebuilding the economy. In this decision, the Supreme Court not only recognized the Code’s constitutional legality, but also undertook an overall study of its contents and looked into the economic implications. By putting financial creditors first, the court has come a step closer to fulfilling the goal of the law, which is to restore the economy to its proper place by permitting debt recovery. Its goal is to boost the economy’s debt recovery rate. The code not only provides a way for the defaulter to revive, but also ensures that the process is fair and efficient. The tribunals’ authority simply serves to make the process more equitable and righteous. As a result, it is true that the code restores the economy to its proper position while depriving a defaulter of a paradise that existed before to the code.

Conclusion:

The case will have a significant impact on the interpretation of the code, and the impact of this judgement will be clear in the number of pre-insolvency settlements and resolutions. Additionally, the judgement will improve bidders’ and investors’ confidence in acquiring assets through the IBC, thereby increasing the ease of doing business in India.

References:


[i] Swiss Ribbons Pvt. Ltd v. Union of India, AIR 2019 SC 739.

[ii] Union of India v. R. Gandhi, President, Madras Bar Association, (2010) 11 SCC 1.

[iii] S.P. Sampath Kumar vs Union Of India & Ors, 1987 SCR (3) 233.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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