Swiss Ribbons Pvt Ltd VS Union Of India (Case Summary)
The Insolvency and Bankruptcy Code, 2016 faced its first major constitutional challenge in Swiss Ribbons Pvt. Ltd. Vs. Union of India (Writ Petition (Civil) No. 99 of 2018). Various provisions of Insolvency and Bankruptcy Code, 2016 were challenged mainly on the ground that they are arbitrary and violative of Article 14 of the Constitution. The Supreme Court held most of these provisions valid and Constitutional.
ISSUES
Following issues were raised before the Supreme Court in the said matter.
- Whether procedure of appointment of members of NCLT are as per judgment of the Supreme Court in Madras Bar Association v. Union of India, (2015) 8 SCC 583?
- Whether classification of Financial Creditor and Operational Creditor is arbitrary?
- Whether 12A of the Code arbitrary?
- Whether Resolution Professional has administrative powers or quasi judicial powers?
- Whether certain clauses of Section 29A are arbitrary?
- Whether Section 53 of the Code is arbitrary?
FINDING OF THE COURT
Whether procedure of appointment of members of NCLT is as per judgment of the Supreme Court in Madras Bar Association v. Union of India, (2015) 8 SCC 583?
The Supreme Court found that there is no infirmity in procedure of appointment of members of NCLT. A selection committee has been constituted as per direction of Supreme Court in Madras Bar Association to appoint the members of NCLT in 2015 itself.
The Supreme Court also directed to make circuit bench of NCLAT within six months.
Whether classification of Financial Creditor and Operational Creditor is arbitrary?
The Supreme Court held that classification of Financial Creditor and Operational Creditor are based on intelligible differentia as Financial Creditors and Operational Creditors have different characteristics. Financial Creditors from the very beginning are involved in assessing the viability of the Corporate Debtor while operational creditors are not.
Whether Section 12 A of the Code is arbitrary?
It has been argued before the Supreme Court that Section 12A is arbitrary as it derails the settlement process by requiring the approval of at least ninety per cent of the voting share of the committee of creditors. Unbridled and uncanalized power is given to the committee of creditors to reject legitimate settlements entered into between creditors and the corporate debtors. The Supreme Court rejected such arguments. The Supreme Court observed that once the Code gets triggered, the proceedings becomes collective proceedings and Committee of Creditors must be consulted before any settlement is arrived.
Whether Resolution Professional has administrative powers or quasi judicial powers?
The Supreme Court held that while the Liquidator has quasi-judicial power under the Code, the Resolution Professional has only administrative powers. The Resolution Professional has no adjudicatory powers.
Whether 29A is constitutionally valid?
Various aspects of 29A have been challenged before the Supreme Court.
Writ Petitioners had questioned that retrospective application of Section 29A on the ground it takes away vested rights of Resolution Applicant. The Supreme Court held the Resolution Applicants who applied under 29A (c) has no vested rights for being considered as Resolution Applicant.
The Supreme Court also did not find period given under 29A (c) as unreasonable as a person who cannot service a debt for the period specified in 29A (c) is obviously a person who is ailing itself. The legislative policy, therefore, is that a person who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant.
The court also dispelled the argument that 29 A (j) is invalid.
Whether Section 53 violates Article 14 of the Constitution?
Section 53 has been also challenged on the ground that in most of the cases operational creditor will not get any thing under the hierarchy given under Section 53 in case of liquidation. The Supreme Court held that intelligible differentia exists between operational debt and financial debt as financial debt infuses capital into the economy.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
