In a landmark judgement delivered on Friday,
Supreme Court upheld the constitutional validity of the two-year-old Insolvency and Bankruptcy Code (IBC) in its entirety.
The two-judge bench headed by Justice Rohinton Nariman dismissed ten petitions, including one from Sanjay Singhal of Bhushan power, challenging the code on various provisions such as the timelines prescribed, jurisdiction of National Company Law Tribunal (NCLT), validity of section 29A that bars defaulting promoters from bidding for their companies, and the like.
The Insolvency and Bankruptcy Code is India’s first consolidated bankruptcy law and was passed in 2016. It replaced a gaggle of dated laws and gave public sector banks room to resolve the burgeoning problem of bad debts.
The 150-page order on the bankruptcy law cited biblical references and ended with an epilogue, which read “... the defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.”
Related Party Clause And Section 29A
The most important clarification coming from the Supreme Court ruling in the matter was perhaps on the ‘related party’ clause of the code. In his arguments, senior counsel Mukul Rohatgi, appearing on behalf of Sanjay Singhal, had trained his gun on section 29A(j) of the code, and stated that persons who may be related parties in the sense that they may be relatives of the erstwhile promoters are also debarred, despite the fact that they may have no business connection with the erstwhile promoters who have been rendered ineligible by section 29A.
To this argument, the top court clarified that the categories of persons who are collectively mentioned under the caption “relative” obviously need to have a connection with the business activity of the resolution applicant. In the absence of showing that such person is connected with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under section 29A(j).
For what is clearly the most contentious provisions of all under the IBC, the Supreme Court set aside any questions relating to the validity or applicability of section 29A, and also its retrospective application.
Financial versus Operational Creditors
On the much-debated subject of parity between different classes of creditors, the court rejected the petitioners’ plea challenging section 53 of the IBC, which deals with distribution of assets.
Petitioners had argued that in the event of liquidation, operational creditors never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. This, according to them, rendered section 53 discriminatory and manifestly arbitrary and thus, violative of Article 14 of the constitution of India.
To this, the court opined that the reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Insolvency Code.
It said the repayment of financial debts infuses capital into the economy with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts, said the court, adding that it found the classification between financial and operational creditor neither discriminatory, nor arbitrary, nor violative of Article 14 of the constitution.
Withdrawal Under Section 12A
With respect to section 12A of the code, which allows for withdrawal of insolvency proceedings with the consent of 90 percent of the creditors, the court said that under section 60 of IBC, the committee of creditors do not have the last word on the subject.
If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the National Company Law Appellate Tribunal (NCLAT) can always set aside such decision under section 60 of the code. For all these reasons, it opined, that section 12A also passes constitutional muster.
Evaluation of IBC experiment
In its epilogue, the court noted that in the working of IBC, the flow of financial resource to the commercial sector in India increased exponentially as a result of financial debts being repaid. Approximately 3,300 cases have been disposed of by the Adjudicating Authority based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over Rs 1,20,390 crore, read the order.Further, it said the amount realised from the resolution process is in the region of Rs 60,000 crore, which is over 202 percent of the liquidation value. The court deduced that this had helped increase credit flow in the economy, which pointed to the fact the experiment conducted in enacting IBC was proving to be largely successful.