The constitutional validity of the IBC upheld by the Apex Court

Sharing a summary of a landmark Judgement of Hon’ble Supreme Court (dated 25.1.2019) in Swiss Ribbons Pvt Ltd & Anr. vs. Union of India & Ors. The Constitutional validity of the Insolvency and Bankruptcy Code, 2016 (the Code or the IBC) was challenged by 10 writ petitions and an SLP. All these are disposed of off, holding that the IBC is constitutionally valid.;

The Judgement sets a wonderful background of the status of Lochner doctrine in the US before deciding on the Constitutional validity of IBC. 

It also in a way recognises observations of US Supreme Courts that 

(i) Legislative bodies have broad scope to experiment with economic problems. 
(ii) We refuse to sit as a super legislature to weigh the wisdom of legislation. 
(ii) we emphatically refuse to go back to the time when courts used the Due Process Clause ―to strike down state laws, regulatory of business and industrial conditions, because they may be unwise, improvident, or out of harmony with a particular school of thought. 

Some of the these and other observations are clearly drawing a line between Legislature and Judiciary and some of the Judgements of India holding that: 
(i) 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 
(ii) laws, including executive action relating to economic activities, should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. 

Summary of the Decision:
1. Considering the composition of selection committee set-up in 2015 for appointment of members of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as well as amendment brought in 2018 to Section 412 of the Companies Act 2013, held appointment of members of NCLT and NCLAT to be valid.

2. Directs the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months. 

3. Administration of IBC shall be transferred from MCA to the Ministry of Law and Justice. 

4. Classification between financial creditor and operational Creditor neither discriminatory, nor arbitrary, nor violative of article 14 of the Constitution Of India.

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. 
The trigger for a financial creditor‘s application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. The legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”.

Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy. First is predictability and certainty. Secondly, the paramount interest to be safeguarded is that of the corporate debtor and admission into the insolvency resolution process does not prejudice such interest but, in fact, protects it. Thirdly, in a situation of financial stress, the cause of default is not relevant; protecting the economic interest of the corporate debtor is more relevant. Fourthly, the trigger that would lead to liquidation can only be upon failure of the resolution process. 

5. Section 12A passes the constitutional muster, for the reasons stated hereafter. Where before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional. The Judgement makes it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case. 

If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. 

6. Evidence provided by private Information Utilities is only prima facie evidence of default, which is rebuttable by the corporate debtor.

7. Resolution Professional has no adjudicatory powers (He has administrative powers as opposed to quasi-judicial powers), whereas Liquidator has quasi-judicial powers in determining the claims filed with her/him against the Corporate Debtor in liquidation. 

8. Re-confirm its findings in ArcelorMittal’s case that a resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant. The basis for one year under Section 29A(c) is the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 01.07.2015. And after account becoming NPA, one more year is allowed before the account is to be treated as Doubtful Asset. And thus passes constitutional muster.

9. There is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation, as section 29A is applicable to liquidation also – per the proviso to section 35(1)(f) of the Code. 

10. On Section 29A(j), held that the expression “related party” and “relative” contained in the definition Sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I to Section 29A, and so read, would include only persons who are connected with the business activity of the resolution applicant. 

Also, an argument that the expression “connected person” in Explanation I, clause (ii) to Section 29A(j) cannot possibly refer to a person who may be in management or control of the business of the corporate debtor in future. This would be arbitrary as the explanation would then apply to an indeterminate person. This contention is also repelled by holding that the Explanation I seeks to make it clear that if a person is otherwise covered as a “connected person”, this provision would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan. Therefore, any such person is not indeterminate at all but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during the implementation of the resolution plan.

11. Section 53 of the Code is valid. An argument has been made by the petitioners that in the event of liquidation, operational creditors will never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. And hence would render Section 53 and in particular, Section 53(1)(f) discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India. Held that differentiating between secured and unsecured debt is an Internationally accepted practice. Further, repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, 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 which are unsecured, which is directly related to the object sought to be achieved by the Code. In any case, workmen‘s dues, which are also unsecured debts, have traditionally been placed above most other debts. Thus, it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted. For these reasons, the challenge to Section 53 of the Code must also fail.