Swiss Ribbons Pvt. Ltd. and Another v. Union of India and Others
"The Insolvency and Bankruptcy Code is valid: its object is the resolution of the corporate debtor rather than recovery, and its differential treatment of financial and operational creditors, the 90% threshold for withdrawal under Section 12A and the ineligibility provisions of Section 29A rest on intelligible differentia rationally related to that object."
Issues Before the Court
- (i)
Whether the Insolvency and Bankruptcy Code, 2016, including its different treatment of financial and operational creditors, Section 12A (withdrawal of an admitted application) and Section 29A (persons not eligible to submit a resolution plan), is constitutionally valid?
- (ii)
Whether the constitution and administration of the National Company Law Tribunal and the National Company Law Appellate Tribunal, and the location of the Appellate Tribunal only in Delhi, were consistent with the Court's earlier directions on tribunals?
Law & Rules Applicable
- (i)
Insolvency and Bankruptcy Code, 2016, Sections 7, 9, 12A, 21, 29A, 30, 53 and 61.
- (ii)
Constitution of India, Article 14 (equality and reasonable classification), and the latitude given to economic legislation.
Application to Facts & Circumstances
Soon after the Code came into force, petitioners challenged several of its provisions, and the structure of the tribunals that administer it, under Article 32.
Writing for the Court, Nariman J. held that the primary focus of the Code is the revival and continuation of the corporate debtor, protecting it from its own management and from corporate death by liquidation; it is not a mere recovery law. Economic legislation is viewed with greater latitude, as it is essentially empirical and based on experimentation, and the Court will interfere only if it is manifestly arbitrary.
The classification between financial and operational creditors rests on an intelligible differentia with a rational relation to the Code's objects. Financial creditors are mostly banks and financial institutions, involved from the outset in assessing the debtor's viability and able to restructure the loan; operational creditors are many, with generally smaller dues. Operational creditors are protected because a resolution plan must pay them at least what they would receive on liquidation.
Section 12A, which requires approval by 90% of the committee of creditors to withdraw an admitted application, was upheld, because admission makes the proceeding a collective proceeding in rem. Section 29A was upheld as well: a resolution applicant has no vested right to have its plan considered, and the provision legitimately keeps out persons unfit to be put back in charge of the corporate debtor, including those connected with defaulting promoters.
On the tribunals, the Court directed that circuit benches of the Appellate Tribunal be set up within six months, so that litigants across the country would have convenient access, and urged the Union to follow its earlier judgments on the administration of tribunals in letter and spirit.
Conclusion & Ruling
- (i)
The challenges were rejected and the Code was upheld in its entirety, subject to the directions concerning the tribunals.
- (ii)
The differential treatment of financial and operational creditors, the 90% threshold under Section 12A and the ineligibility provisions of Section 29A are valid; the Code aims at resolution, with liquidation as a last resort.
- (iii)
The judgment's description of the Code as a law for resolution rather than recovery, and its deference to economic legislation, are relied on in later decisions such as Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta.
Authorities Cited
Full texts open on Indian Kanoon in a new tab.
- Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531Case brief →Full text of Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta on Indian Kanoon