Swiss Ribbons Pvt. Ltd. v. Union of India (2019)

Swiss Ribbons Pvt. Ltd. v. Union of India (2019)

By: Kalyani Tehri

The main focus of this case analysis is to elucidate the judgement of Swiss Ribbons Pvt. Ltd. v. Union of India (2019) in which the constitutional validity of Insolvency and Bankruptcy Code, 2016 (hereinafter mentioned as Insolvency Code) was upheld and also to bring out the issues and its implications. It emphasizes the approach adopted by the Apex Court to deal with the issues challenging the validity of the contemporary insolvency legislation passed in 2016. The Supreme Court of India took a progressive approach in order to give the legislature full autonomy to try out ways to deal with economic and insolvency issues effectively and speedily.

HISTORICAL BACKGROUND

Before the Insolvency Code, there was no single consolidated law in India dealing with insolvency and bankruptcy. There were several provisions envisaged and fragmented under a range of legislation, for example, Sick Industrial Companies (Special Provisions) Act,1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. For dispute resolution, there existed multiple fora like Board of Industrial and Financial Reconstruction (BIFR), Debts Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. The key objective of this code was to unify and bring out an adequate and efficient set of laws for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons to boost the development of credit markets and entrepreneurship. It was in 2015 when principles of this insolvency code were given in UNCITRAL guidelines for the very first time which became the basis of the report of the Bankruptcy Law Reforms Committee Report, highlighting the need and structure of unified insolvency and bankruptcy legislation. Subsequently, in 2016 the Insolvency and Bankruptcy Code was enacted.

FACTS AND THE JUDGEMENT

The issues, in this case, were framed by compiling 10 writ petitions and one special leave petition. The court refrained from entering into the individual facts of all petitions but decided only questions pertaining to various provisions of the code which were in a dispute challenging its constitutional validity. The court deliberated on the following issues to adjudge the constitutionality of the legislation by the generality of its provisions and not by crudities or inequities or by the possibility of abuse of any of its provisions:

  1. APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT: It was contended that the members of the National Company Law Tribunal [NCLT] and National Company Law Appellate Tribunal [NCLAT], apart from the President, have been appointed contrary to this Court’s judgment in Madras Bar Association[2] case. It was held that the appointments made under 2015 advertisement were in compliance with the directions of the Supreme Court and no irregularities were found.
  2. NCLAT BENCH ONLY AT DELHI: On the issue of having only one bench in the national capital, the court directed to establish circuit benches and also gave the reference of the S.P. Sampath Kumar case[3] and L. Chandra Kumar[4] wherein it was held that permanent Benches needed to be established at the seat of every jurisdictional High Court so that aggrieved party could avail its remedies efficaciously.
  3. TRIBUNALS ARE FUNCTIONING UNDER A WRONG MINISTRY: The court emphasized on following its judgement in letters and spirit as it was held in Madras Bar Association case that the administrative support for all the tribunals should be from the Ministry of Law and Justice and still NCLT and NCLAT are functioning under the Ministry of Corporate Affairs.
  4. INTELLIGIBLE DIFFERNTIA IN CLASSIFICATION of Financial Creditors and Operational Creditors: The court brought out a fine difference between both creditors and held that is an obvious intelligible differentia and the classification is reasonable. It was stated that financial creditors are secured creditors whereas operational creditors are unsecured. The nature of loan agreements with the former is also different from the latter. Disputes of operational creditors can also be solved through arbitration clauses. the financial creditor has to prove default as opposed to an operational creditor who merely claims a right to payment of a liability or obligation in respect of a debt which may be due.
  5. CONSTITUTIONAL VALIDITY OF SECTIONS 21[5] AND 24[6]: The bar on operational creditors which abstained them to take part in the Committee of Creditor’s voting was challenged. But the court held that ‘‘financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of the business.’’ The rights of operational creditors are already strengthened under the code. Also, the expert committees formed to assess the working of the code had found not to amend the code in order to give the voting right to operational creditors.
  6. CONSTITUTIONAL VALIDITY OF SECTION 12A[7]: It was contended that Section 12A was contrary to the ratio of Uttara food case and that there is no reasonable classification in allowing the withdrawal of the application by adjudicating authority under section 7, 8, 9 or 10 with the approval of 90 per cent votes of the members of Committee of creditors but same can’t be done at the post-admission stage. It was held that once the application is accepted, the proceeding becomes in rem. The court cleared the air that any time before the committee of creditors is formed, the party can directly approach NCLT which may allow or disallow an application of withdrawal. Court emphasized that ‘‘The main thrust against the provision of Section 12A is the fact that ninety per cent of the committee of creditors has to allow withdrawal. all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantial all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy.’’ If committee arbitrarily rejects a settlement or withdrawal claim then under section 60 of the code NCLT and NCLAT can be approached, with regard to hierarchy.
  7. NO ADJUDICATORY POWER TO RESOLUTION PROFESSIONAL: The court held that even a simple reading of the code makes it clear that the power vested in resolution professional is not adjudicatory, their work is only to verify and determine the claim amount and to maintain a list of creditors containing names of creditors along with amount claimed by each one of them. It was compared with the power of liquidator who has the additional power to reject the claims. The function of the former is only administrative in nature in contrast with the latter whose function is quasi-judicial in nature.
  8. CONSTITUTIONAL VALIDITY OF SECTION 29A[8]: This section deals with the conditions which make the person ineligible to be a resolution applicant. The key objective behind this provision is to make the persons ineligible who are accountable for insolvency. Moreover, the court resorted to its own judgement given in Arcelor Mittal case on the contention that the vested right can’t be taken away, and held that there is no question of the vested right granted to the resolution applicant for approval of the resolution plan as the plan is considered only after analysis of the feasibility of the plan followed by a requisite voting share of 66% by financial creditors.

CASE ANALYSIS

In 2014, it was reported by the World Bank that the average time taken for the resolution of insolvency dispute in India is 4years in comparison to 0.8years in Singapore and 1 year in London. Insolvency laws in India existed in fragmented forms and having various separate fora for a single settlement was the main reason for the delayed decision in such cases. So, the Apex Court realized the fact that the current state of affairs demands a deeper redesign of the resolution process and significant changes were the immediate need. ‘‘One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.’’ It was held that solutions to social and economic conditions need experimentation. There is no straight-jacket formula to rein in the socio-economic issues.

A broad view was adopted by the court in this case by restricting only to check the constitutionality of the code and not beyond, that was going into the wisdom, need and appropriateness of the legislation. The court resorted to many case laws to support their view of not adhering to the doctrine that prevailed in Lochner, Coppage, Adkins, Burns, and like cases. ‘‘Legislative bodies have broad scope to experiment with economic problems, and this Court does not sit to, subject the state to an intolerable supervision hostile to the basic principles of our government and wholly beyond the protection which the general clause of the Fourteenth Amendment was intended to secure [Sproles v. Binford, 286 U.S. 374, 388 (1932)].’’

“It is now settled that States have the power to legislate against what are found to be injurious practices in their internal commercial and business affairs, so long as their laws do not run afoul of some specific federal constitutional prohibition, or of some valid federal law [Lincoln Federal Labor Union, etc. v. Northwestern Iron & Metal Co., 335 U.S. 525, 536 (1949)].”

Also, Lochner Doctrine was overruled in Ferguson v. Skrupa and in India, it was done in R.K.Garg v. Union of India[9] in which it was held that the court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved.

It can’t be denied that economic legislations are enacted to deal with practical problems and it would be unfair to expect a sure shot solution to the problem. The court should allow the experimentation, by not quashing the provisions altogether provided that they are consistent with the constitution. This approach was well adopted by the court in the case in hand. This legislation is open to all the changes and four amendments in a span of four years speak for its flexibility.

The court can step in the very moment it feels that some of the provisions are palpably arbitrary, unjust or glaringly unconstitutional. But striking down some key provisions at the very onset would have worsened the situation as there is no dubiety that such problems demand hit and trial approach. The judicial restraint shown by the court is really appreciable. It was an apt approach to deal with the constitutionality of the Insolvency and Bankruptcy Code, 2016. The Hon’ble court has referred to it as beneficial legislation and a successful experiment. In the epilogue of judgement, the data shows the success rate of this legislation as it was mentioned that “Approximately 3300 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 INR 1,20,390 crores. Eighty cases have since been resolved by resolution plans being accepted. Of these eighty cases, the liquidation value of sixty-three such cases is INR 29,788.07 crores. However, the amount realized from the resolution process in the region of INR 60,000 crores, which is over 202% of the liquidation value.”

The code successfully passed the test of constitutionality and the enactment of this code is a righteous direction for the nation to deal with insolvency and bankruptcy cases.

FOOTNOTES

  1. https://indiankanoon.org/doc/17372683/
  2. Madras Bar Association vs Union Of India & Anr (2015)
  3. S.P. Sampath Kumar vs Union Of India & Ors (1987)
  4. L. Chandra Kumar vs Union Of India And Others (1997)
  5. https://ibclaw.in/section-21-committee-of-creditors/
  6. http://ca2013.com/section-24-meeting-committee-creditors/
  7. https://www.taxmanagementindia.com/visitor/detail_act.asp?ID=32528
  8. https://taxguru.in/corporate-law/analysis-section-29a-insolvency-bankruptcy-code.html
  9. R.K. Garg And Ors. vs Union Of India (UOI) And Ors. (1981)

REFRENCES

  1. https://indiankanoon.org/doc/17372683/
  2. https://corporate.cyrilamarchandblogs.com/2019/02/swiss-ribbons-v-union-india-  foundation-modern-bankruptcy-law/
  3. https://cbcl.nliu.ac.in/insolvency-law/swiss-ribbon-pvt-ltd-v-union-of-india-the-ibc-case/
  4. https://www.mondaq.com/india/insolvencybankruptcy/781154/swiss-ribbons-and-its-implications–the-supreme-court-on-the-constitutionality-and-key-provisions-of-the-insolvency-bankruptcy-code

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