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Swiss Ribbons Pvt. Ltd. v/s Union of India
Writ Petition (Civil) No.99 of 2018
Dated: 25th January 2019
Introduction:
The Supreme Court, on the 25th of January 2019, passed its judgment on the Swiss Ribbons Pvt. Ltd. v. Union of India which was concerned with whether some of the provisions under the Insolvency and Bankruptcy Code, 2016 were constitutionally valid or not. Ever since the enactment of the Insolvency and Bankruptcy Code, its provisions have been through numerous amendments to help with the process of resolution. The most recent of these amendments are coming in 2020. The 2020 amendment was, in total, the 4th such amendment implemented into the Insolvency and Bankruptcy Code, 2016.
During the course of the Swiss Ribbons case, the Supreme Court, while discussing the constitutional validity of the Insolvency and Bankruptcy Code, held it to be so in its entirety. In coming to this conclusion, the Supreme Court relied on several economic factors of India.
Facts:
The present case is concerned with whether several provisions of the Insolvency and Bankruptcy Code, 2016 are constitutionally valid or not. And as the Supreme Court will be discussing this question of law, there is no need to review any individual facts surrounding the case.
Contentions from the appellants:
Swiss Ribbons Private Limited (the appellants in the present case) contended that the several provisions under the Insolvency and Bankruptcy Code, 2016 were constitutionally valid. To substantiate this contention, Swiss Ribbons Private Limited initially argues that the appointments (2 judicial members and 3 bureaucrats) made by the National Company Law Tribunal (NCLT) and the National Company Appellate Law Tribunal (NCLAT) were not keeping in line with several provisions of the Indian Constitution. To add to this, the Ministry of Corporate Affairs (MCA) provided all administrative support required. Taking reference to the Companies (Amendment) Act, 2017, the Supreme Court held that the appointments made were valid pursuant to the Amendment Act. And with regards to the NCLT and NCLAT receiving administrative support from the MCA, the Supreme Court also concluded that it was constitutionally valid.
Furthermore, the appellants contended that before the NCLT/NCLAT came into existence, they had the option to present their arguments before High Courts in their respective states, however, since their establishment, this was no longer possible. Answering this contention, the Supreme Court passed the order that the government should form circuit benches if the establishment of permanent benches in every high court jurisdiction was not possible. A notable point here is that the Insolvency and Bankruptcy Code, 2016 was enacted as a solution to fix the issue of rising difficulty due to the existence of multiple forums and tribunals.
The Insolvency and Bankruptcy Code, 2016 provided that the NCLT/NCLAT and the Supreme Court would be the designating and appellate authority, leaving out the High Courts. This has led to the long drawn-out struggle between the High Court’s jurisdiction under Article 226 of the Indian Constitution and the jurisdiction of the NCLT/NCLAT. One can pinpoint the advent of this struggle from the Anthony Raphael Case, where the Bombay High Court’s division bench concluded that the High Court also has the power, under Article 226 of the Indian Constitution, to intervene in NCLT/NCLAT cases on appeal, even though the Insolvency and Bankruptcy Code recognizes the NCLT/NCLAT as the designated authority. When this decision was appealed to the Bombay High Court’s higher bench, the Court held that pursuant to Section 60 and 61 of the Insolvency and Bankruptcy Code, the High Courts were not in a position to intervene in NCLT/NCLAT cases.
This problem of whether the High Court has jurisdiction to preside over matters dealing with the Insolvency and Bankruptcy Code was subsequently put before the Supreme Court in the Embassy Property Development Case wherein it was established that the High Court can, in fact, preside over cases concerning the Insolvency and Bankruptcy Code as its judicial power is provided for in the Indian Constitution. Furthermore, the Supreme Court also noted that the NCLT/NCLAT is simply a quasi-judicial body. However, the Supreme Court in the 2019 Swiss Ribbons case, established that allowing the High Court to interfere with Insolvency and Bankruptcy Code cases will lead to the obstruction of the time-bound insolvency procedure under the Code. Therefore, as a result of the judgment passed in this case, the Supreme Court established that it is the NCLT/NCLAT that is the designating authority and that the High Court must not be included under this category.
The most notable argument out of the appellant’s contentions is that the separation between financial creditors and operational creditors is in violation of Article 14 of the Indian Constitution. In addition to this, Section 12 (A) of the Insolvency and Bankruptcy Code requires the approval of a minimum percentage of 90% of the complete voting share of the committee of the creditors before the initiation of the settlement process between the creditors and corporate debtors. As we can see here, there is no cap on the power limits that the committee of creditors possesses which may lead to an abuse of this power.
In the present case, the Supreme Court went to extreme lengths to properly assess whether the provisions under the Insolvency and Bankruptcy Code are constitutionally valid or not. Furthermore, the Supreme Court also questioned the treatment shown to the operational creditor under the Insolvency and Bankruptcy Code through the Corporate Insolvency Resolution Process (CIRP) where they are at the mercy of the committee of creditors, stating that it was in violation of Article 14 of the Constitution.
The appellants further contested that the above-mentioned treatment must also be meted out to the operational creditors as financial creditors. The Supreme Court, to assess the constitutional validity of the Insolvency and Bankruptcy Code decided to view its provisions while keeping in mind the legislative intent behind its enactment. The court concluded that this categorization is not in violation of Article 14 of the Indian Constitution. It further noted that financial creditors are in a more favorable position to determine the viability and practicability of their business than corporate debtors. Financial creditors such as banks and financial creditors are involved in lending money, whereas operational creditors (which deal with only goods and services and the dues that occurred with them) are in a less favorable position to determine the practicability of the business.
An additional contention raised by the appellants was that the proper authorities must possess the adjudicating power and that this power must not lie with the resolution professional (non-judicial bodies). The Supreme Court answered this contention by carefully examining Section 18 of the Insolvency and Bankruptcy Code and reading it along with Regulations 10, 12, 13, and 14 of the CIRP Regulation. The Court observed that through this reading it was clear to see that certain safeguards have been introduced and resolution professionals cannot act arbitrarily in various matters without first obtaining permission from the committee of creditors (COC). Therefore, the Supreme Court concluded that the resolution professional, essentially, acts as a facilitator.
The appellant contended that Section 29 (A) of the Insolvency and Bankruptcy Code vesting rights to the promoters to participate in the debt recovery process is arbitrary in nature due to its retrospective applicability. It was argued that this provision will render particular groups like corporate debtors, their relatives, undischarged insolvent, one prohibited under the SEBI Act ineligible for the resolution applicant. The Supreme Court by purposive interpretation of the provisions provided for in the ArcelorMittal case and using an interpretation from the Salomon case held that the principles surrounding a separate corporate entity cannot be applied, and all those persons who acted together to bring the company down to a stage of the resolution shall be barred from being the resolution applicant.
During the process of liquidation, operational creditors were not allowed to receive any amount due to them being of a lower rank than other creditors, pursuant to Section 53 of the Insolvency and Bankruptcy Code, and the same is said to be in violation of constitutional provisions. The Supreme Court observed that financial creditors were put on a higher priority as the payment of their debts aids in infusing funds back into the economy and further fulfills the object and purpose of the Insolvency and Bankruptcy Code. On the other hand, the debts incurred by the operational creditors are handed over back to the government. As a result of such an observation, the Supreme Court concluded that Section 53 of the Code is not violative of Article 14 of the Indian Constitution and intelligible differentia is applied while differentiating both financial creditors and operational creditors.
The contract with financial creditors usually involves large amounts of funds leading to different relations as the payment of the debt assists in setting up a business as well as getting loans whenever there is financial stress. This relationship, however, is not established with operational creditors where the payment of debt assists in funding day-to-day businesses. Despite the Supreme Court making substantial efforts to differentiate between both financial and operational creditors based on intelligible differentia, there exist several loopholes within the Code which result in operational creditors being subjected to unfair treatment.
An important point to be noted is that pursuant to Section 24 of the Insolvency and Bankruptcy Code, the operational creditors do not qualify as “participants” under Section 24 if the total debt is to be paid to the corporate debtor exceeds 10%. This further takes away the right to acquire a copy of the “Resolution Plan” as they fail to qualify as a “participant”. The Supreme Court whilst dealing with this issue referred to Regulation 38 which ordered that the debt due to be paid to operational creditors should be prioritized over the debt due to be paid to financial creditors. It was observed that there exists no nexus between the reasoning provided and the contentions raised by the appellants. The Supreme Court also placed reliance on the Binani Industries case which established that if the situation where the operational creditors need to be paid immediately arises then, the financial creditors can change their existing provisions and make a cut in their payments.
Contentions from the respondents:
As the present case is concerned with whether several provisions of the Insolvency and Bankruptcy Code, 2016 are constitutionally valid or not, and as the Supreme Court will be discussing this question of law, there is no need to go into the details of the contentions raised by the respondents.
Summary of the judgment:
The Supreme Court considers the Lochner Doctrine introduced in the Lochner case to declare that unless it passes careful judicial review and scrutiny, socio-economic legislation will be deemed unconstitutional. On the other hand, the Court referred to the R.K. Garg case to establish that judicial restraint should be exercised by the Court to assess whether the provisions of any code, for that matter, is constitutionally valid or not as there is no singular method to solve economic issues. So far considering that operational creditors should be treated as equals with financial creditors, the Supreme Court tries to move away from the Binani judgment which established that equal treatment should be meted out to both financial and operational creditors. The Supreme Court observed that the Binani judgment was subjected to an inaccurate interpretation.
Furthermore, the Supreme Court also placed reliance on the objective of the preamble of the Insolvency and Bankruptcy Code as interpreted in the Innoventive Industries Limited case to achieve corporate resolution of the debtor and to avoid liquidation. On the issue that adjudicating authority should function under the Ministry of Law and Justice, the Court agreed with the view that the functioning of the adjudicating authority under the Ministry of Corporate Affairs is in contradiction to the jurisprudence established in the R. Gandhi case. The Supreme Court, however, at the same time agreed with the petitioner’s argument that the allocation of rules of business among various ministries is compulsorily decided in the Delhi International Airport case. Therefore, the Supreme Court reached the conclusion that NCLT and NCLAT should continue their functioning under the Ministry of Corporate Affairs.
Conclusion in Swiss Ribbons Case:
The Supreme Court in the Swiss Ribbons case set the foundation for landmark development in the Insolvency regime in India. The court placed heavy reliance on the statistics of the resolutions and settlements that took place after the enactment of the Insolvency and Bankruptcy Code. The Code has proved itself useful in solving non-performing crises as well as assisting in the improvement of the ease of business ranking due to the continuous amendments it undergoes. The Supreme Court recognized that the Insolvency and Bankruptcy Code is too beneficial to be set aside. In order for the court to reach this conclusion, it had to take into consideration the aspects that the pre-insolvency code failed to address.
Furthermore, in a very short period of time, several amendments have been enacted by the government to keep up with the pace of the volatile investment scenario. The judgment made by the Supreme Court in the Swiss Ribbons case is an indicator that the apex court should only preside over cases where the exercise of any legislative enactment is, prima facie, arbitrary. One should also take into consideration the intention of the legislature when they enacted the Insolvency and Bankruptcy Code as well as its primary objective and purpose. The Supreme Court observed that the deeming of several provisions of the code to be constitutionally invalid will inevitably lead to a drastic impact on the overall code. The judgment in the Swiss Ribbons case provides a long-deserved relief to the investors, creditors, and other stakeholders involved in the insolvency process.
In addition to this, the Supreme Court further strengthened the foundation of the Insolvency and Bankruptcy Code by introducing specific instructions on how to implement them. The court is essentially attempting to protect the creditors as they are in the frontline trying to revive corporate debtors. The Swiss Ribbons case helps in removing the fears surrounding the investors in receiving assets through the Insolvency and Bankruptcy Code.
Statistics clearly indicate that the Insolvency and Bankruptcy Code functions more efficiently in India than in comparison with other Insolvency laws in other countries. A plethora of settlements and resolutions clearly show the success rate of the Insolvency Code. There is, however, still a long way to go, and additional amendments that need to be enacted on matters such as cross-border insolvency, resolution of financial service providers, and resolution of stressed assets. Some of the issues that the Supreme Court in their judgment failed to properly address are:
- The Court failed to bring a much-needed clarification on the back-door entry issue of errant promoters,
- The Court failed to address the conflict rising between Section 29 (A) of the Insolvency and Bankruptcy Code and Section 230 of the Companies Act, 2013,
- The Court failed to plug in the loopholes which result in unfair treatment being meted out to operational creditors.
An important point to note here is the impact that the Swiss Ribbons case has had which is evident from the government’s recent decision to form a circuit bench in Chennai. Although these are positive signs, the Insolvency and Bankruptcy Code, 2016 still has a long process ahead and several more amendments to be made to iron out the various shortcomings that it currently has.
