Swiss Ribbons Pvt. Ltd. v. Union of India

Supreme Court of India · 25 January 2019 · 2 judges

The Court upheld the constitutional validity of the challenged provisions of the Insolvency and Bankruptcy Code, 2016, including the financial and operational creditor distinction and Sections 12A, 29A and 53, and directed Circuit Benches of the NCLAT.

Facts

Several writ petitions under Article 32 challenged the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016. The petitioners attacked the appointment of NCLT and NCLAT members, the NCLAT sitting only at New Delhi and the tribunals functioning under the Ministry of Corporate Affairs. They argued that the Code's distinction between financial and operational creditors was discriminatory and manifestly arbitrary, that operational creditors had no vote in the committee of creditors, and that Section 12A, the role of information utilities and resolution professionals, the ineligibility of persons under Section 29A, and the liquidation waterfall in Section 53 were unconstitutional. The Court decided only the questions of constitutional validity and did not go into the individual facts of any case.

Questions before the Court

Is the classification between financial creditors and operational creditors, and the different treatment of them in triggering insolvency and in the committee of creditors, valid under Article 14?
Are Sections 12A, 29A (including clauses (c) and (j)) and 53 of the Code, and the roles of information utilities and resolution professionals, constitutionally valid?
Do the constitution and functioning of the NCLT and NCLAT conform to the Court's earlier judgments on tribunals?

What the Court held

Financial creditors differ from operational creditors: their contracts involve large, well-documented loans, defaults are easily verifiable, and they assess the viability of and can restructure the corporate debtor. This intelligible differentia has a direct relation to the Code's object, so the different treatment, including no vote for operational creditors in the committee of creditors, does not infringe Article 14.
The corporate debtor is served with a Section 7 application and may reply and be heard before admission. Section 12A's ninety per cent threshold for withdrawal is legislative policy subject to review under Section 60, and information utility records are only prima facie, rebuttable evidence of default.
The resolution professional has no adjudicatory powers and is a facilitator overseen by the committee of creditors and the Adjudicating Authority.
Section 29A is valid. A resolution applicant has no vested right to be considered; clause (c) is not limited to malfeasance and its one-year NPA period is a policy matter; 'related party' and 'relative' in clause (j) cover only persons connected with the resolution applicant's business.
Section 53 does not violate Article 14. The Union of India was directed to set up Circuit Benches of the NCLAT within six months, and was told to follow Madras Bar Association (I) on administrative support for tribunals.

Why it matters

The judgment upheld the Insolvency and Bankruptcy Code against a broad constitutional challenge, applying judicial deference to economic legislation. It explains the basis for treating financial and operational creditors differently, describes the resolution professional as a facilitator without adjudicatory power, reads 'related party' in Section 29A(j) narrowly, and holds that the Code, judged by the generality of its provisions, passes constitutional muster.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.”

Page 66 of the judgment

“The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.”

Page 148 of the judgment

“Unlike the liquidator, the resolution professional cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the Code, which can, by a two-thirds majority, replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.”

Page 110 of the judgment

“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. This policy cannot be found fault with. Neither can the period of one year be found fault with, as this is a policy matter decided by the RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset.”

Page 129 of the judgment

Provisions interpreted

Related judgments

Followed in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019)

Case and bench

Parties: Swiss Ribbons Pvt. Ltd. v. Union of India
Case: Writ Petition (Civil) No. 99 of 2018, with connected writ petitions and S.L.P. (Civil) No. 28623 of 2018
Decided: 25 January 2019
Bench: R.F. Nariman, Navin Sinha
Opinions: Unanimous. Judgment of the Court by R.F. Nariman, J.

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