Case Details
Case Name: Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors.
Court: Supreme Court of India
Bench: 2-Judge Bench — Justice R.F. Nariman and Justice Navin Sinha
Date of Judgment: January 25, 2019
Citation: (2019) 4 SCC 17; AIR 2019 SC 739; 2019 INSC 88
Introduction
The judgment of the Supreme Court of India on Swiss Ribbons Pvt. Ltd. v. Union of India, is momentous for having laid down the foundational principles to contemporary insolvency jurisprudence. The said ruling arose out of a Constitutional challenge to the Insolvency and Bankruptcy Code, 2016 (IBC) and had far reaching implications on the very framework of Indian corporate law.
In the present petition, various petitioners comprising mainly of old promoters, directors, and operational creditors, had approached the Court with a Constitution Bench to quash certain provisions of the IBC. The impugned provisions pertained to the resolution process of financial debtors, including provisions of the Insolvency Resolution Process and Exit. The Constitutional validity of the Code was challenged before a division bench comprising of Justice R.F. Nariman who finally concluded that there was no ground for challenging the provisions on economic policy. It was further observed that the very essence of the IBC lies in promoting corporate resurrection and business development and not recovery of debts and liquidation.
Facts of the case
Following the commencement of the Insolvency and Bankruptcy Code, 2016 (IBC), a large number of Corporate Insolvency Resolution Processes (CIRP) were triggered against defaulting corporate debtors across the country. As the promoters of such companies lost control over the management of their companies under section 17 of the IBC, and were unable to propose any resolution plan under section 29A of the IBC leading to the filing of several writ petitions directly in the Supreme Court under article 32 of the constitution.
After the Insolvency and Bankruptcy Code, 2016 came into force, a number of Corporate Insolvency Resolution Processes (CIRP) were initiated against defaulting corporate debtors.
Thereby depriving the erstwhile promoters of their managerial position under section 17 of the IBC and their entitlement to propose a resolution plan under section 29A of the IBC, number of writ petitions have been directly filed before the Supreme Court under Article 32 of the Constitution.
The challenges included in specific section as regards the constitutional validity of NCLAT; the difference between a financial and operational creditor; the powers/duties of the resolution professional; the embargo placed on promoters under Section 29A (absolute restriction on promoters); and the prohibitively high standards/rigor under Section 12A for withdrawal.
Issues before the court
- Whether the dichotomy between “Financial Creditors” and “Operational Creditors” under IBC is impermissibly vague and thus in violation of Article 14.
- Whether Section 29A debarring prior promoters/associated parties from filing a resolution plan is an ultra vires violation of the constitution under Article 19(1)(g) of being over-restrictive and arbitrarily and unduly curtailing the right of private property and freedom of occupation.
- It is indeed arbitrary that 90% majority shareholdings of the Committee of Creditors is needed to bring back the application to withdraw the insolvency petition for consideration.
- Whether Section 17 conferring sweeping administrative and managerial powers to Resolution Professionals is in the teeth of the established constitutional parameters of judicial function.
- Whether the creation and powers/functioning of NCLT and NCLAT measure up to the constitutional standards of independence of the judiciary previously enshrined by rulings concerning tribalization.
Petitioner’s Arguments
- Discriminatory Distinction: The petitioners claimed that the differential treatment of financial creditors as opposed to operational creditors – exactly by denying voting rights to operational creditors in CoC—is contrary to Article 14.
- Blanket Exclusion of Promoters: It was submitted that the provisions of Section 29A punishes evil promoters as well as innocent promoters because of reasons beyond their control.
- Arbitrary Withdrawal Threshold: The petitioners claimed that the 90% threshold stipulated in Section 12A for voting is in itself bad legislation by giving excessive power to financial creditors.
- Unregulated Power to RPs: It was argued by the counsel that the resolution professionals perform quasi-judicial functions without the judicial guidelines.
Respondent’s Arguments
- Economic trials: The state contended that the courts should conduct restrained analysis of economic legislation, providing the legislature a great deal of leeway regarding policy experimentation.
- Distinguishable difference: The union stated that financial creditors (banks/FIs) determine viability and provide funding whereas operational creditors supply materials and services, hence their classification is logical and directly relevant to the purpose of the IBC to ensure swift resolution.
- Prevention of obstinate promoters: The title was defended under section 29A as a crucial filter to avoid defaulter companies purchasing29 distressed assets at a discount without settling their obligations.
Judgement
On 25th January 2019, the Supreme Court passed a Comprehensive Judgment which dismissed all Writ Petitions as well as upheld the IBC in entirety.
- In the first place, the Supreme Court upheld the constitutional validity of the IBC provisions that have come under challenge.
- Secondly, the acceptance of the principle of non-interference in the economic affair by the court was seen when the court held, “the legislature shall possess wide discretion in systemic market failures”.
- Cleanliness of resolution process- it was said that the “29A” is an important provision for maintaining cleanliness of the resolution process by preventing unscrupulous defaulting persons from taking part in the bidding.
Reasoning of the Court
• Rational Classification (Financial vs. Operational Creditors):
Judge Nariman has argued that financial contracts deal with large amounts, involve extensive risk analysis and commitments over a long term while operational contracts relate to short-term supply of goods or services. As financial creditors are the ones who are in the best position to examine the viability of a debtor’s business, limiting the voting rights of the CoC to the financial creditors has a reasonable and direct link to the goal of reviving businesses.
- Reason for Justifying Section 29A:
According to the Court, Section 29A is an important provision for protection. Allowing the same people responsible for the corporate debtor’s problems to take back control at a lower price would defeat the purpose of the Code. The restriction in Section 29A has been viewed as justifiable restriction under Article 19(6) in the interest of society.
- Functioning of the Resolution Professional:
The court further held that the RP is an operator for running affair of business of the financial failure and gather information regarding such.
It was also noted here that there’s no adjudicative power of resolution professional as all decision will be taken by COC & Adjudicating authority (NCLT).
- Section 12A and Judicial Review:
The 90% of voting under section 12A to withdraw an application was discussed by the court as well. It said if the application for admission of insolvency has been granted then it will become proceedings in rem affecting all the creditors and even if CoC rejected such proposal on arbitrary grounds the Applicant can also approach the NCLT/NCLAT by way of Judicial Review.
Significance of the judgement
- Stabilization of Insolvency Regime: Settling all constitutional doubts at once through the case brought immense amount of legal stability before investors, banks, resolution applicants, and foreign markets.
- Transition From Recovery to Resolution: The ruling also emphasized on the fact that main object of IBC was ‘Reorganization & Continuation’ of Corporate Debtor rather than Debt recovery only.
- Reviving Banking sector’s Recovery Process: The judgement helped in preventing previous defaulting promoters to benefit from these resolutions hence fast tracking of non-performing assets (NPAs) clean-up process within the Indian banking sector.
Conclusion
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) was a landmark ruling on the subject of commercial law in India.
The Supreme Court’s rejection of structural challenges to the Insolvency and Bankruptcy Code (IBC) reaffirmed the need for economic reforms and showed deference to legislative policy making.
The Swiss Ribbons case was successful in transforming the credit culture of India by focusing on corporate resolution, maximizing assets and instilling credit discipline.
References
- Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17; AIR 2019 SC 739.
- https://indiankanoon.org/doc/17372683/
- Insolvency and Bankruptcy Code, 2016 (Sections 7, 12A, 17, 21, 29A, and 53).
- Constitution of India, 1950 (Articles 14, 19(1)(g), 21, and 32).
- Shayara Bano v. Union of India, (2017) 9 SCC 1.
- https://lawarticle.in/shayara-bano-v-union-of-india-2017/
