AN ANALYSIS OF THE SWISS RIBBONS JUDGMENT By- Muskan Bhardwaj

Abstract

Through this research paper, we try to seek to understand the landmark judgment given by the honourable supreme court of India in the event of Swiss ribbons Pvt. Std. and anr. V. OI wherein the constitutional validity of the insolvency and bankruptcy code, 2016 (the code) has been ratified.

The judgment which was dated 25.january. 2019 has been authored by Justice R.R. Nariman.

  1. Mukul Rohatgi (senior advocate) – on the behalf of one of the petitioner.
  2. KK Venugopal (attorney general of India), Tushar Mehta (solicitor general of India) – on the behalf of Union of India.
  3. Rakesh Dwivedi(senior advocate)- on the behalf of reserve bank of India.

The issues that were argued by the parties were respect to:

  1. Preamble and approach of the code.
  2. NCLT and NCLAT.
  3. Classification into financial creditors and operational creditors.
  4. Notice, hearing, set-off or counterclaim qua financial debts.
  5. Section 12A compared to article 14.
  6. Constitutionality validity of section 29A.
  7. Section 53 compared to article 14.

The insolvency and bankruptcy code 2016 (the code) provides the creditors with a comprehensive solution for recovery of dues from wilful defaulters. On the other hand, legislation is facing many issues and problems from its inception; the proactive approach of the government in amending this liquidation law from time to time has led to its significant implementation.

Further, the Supreme Court decisions in Swiss ribbons v. union of India upholding the constitutionality of the provisions of the insolvency and bankruptcy code, 2016 (IBC or THE CODE) is a landmark in the development of the code.

Upon taking all the aspects and submissions the Supreme Court first decided to discuss the background of insolvency in India. The problems arising due to bankruptcy law were highlighted.

Here, the Supreme Court further tested the need for courts of law to be precautions while connecting with legislation passed especially in social and economic fields. A foremost move was also sought to be made with the bringing of the code. The policy saw a shift from “inability to pay debts” to the verification of default.

Evacuation of application admitted under section 7, 9 or 10 was held to be not violative of Article 14 of the constitution of India.

Another major issue raised by the petitioner was to the constitutional validity of section 29A of the code dealing with a person not eligible to be “resolution applicant”

The provocation to the notion of “related party” read with section 29(j) of code wherein unease as to person related to an incompetent person being further considered incompetent for being a resolution professional due to such link was clarified by the Supreme Court.

A provocation to section 53 of the code was also made by canvasing a scenario wherein, in the event of liquidation operational creditors will receive no payments due to their ranking lower in the scale to other creditors, which would also include other unsecured creditors who happen to be financial creditors.

In the above paragraph, we have discussed the brief for the research paper and the topic will be discussed in detail in this research paper

In this research paper, we will discuss the facts of the case in brief which will help us to outline a brief image of the case held. The issues and arguments raised in this case will be discussed in this research paper and finally the key highlights of the judgment held by the Supreme Court.

Basically, the objective of this research paper is analyses of the judgment given by the honourable Supreme Court of India in the matter of Swiss ribbons Pvt. Ltd. V. Union of India.

Prologue: the pre-existing state of law

Firstly, it is very important to understand the history of the insolvency code, to clear the background of the insolvency code. This code was discussed by bankruptcy law reform committee (BLRC) in its report.1 The insolvency and bankruptcy code, 2016 (IBC) is the bankruptcy law of India which pursue to fuse the existing law by constructing a sole law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was instigated in LokSabha in December 2015. It was proceeded by LokSabha on 5 May 2016 and by RajyaSabha on 11 May 2016. The Code received the approval of the President of India on 28 May 2016. The bankruptcy code is a one-stop solution for reconciling insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to secure the interests of small investors and make the process of doing business less inconvenient.

History: The insolvency and bankruptcy code, 2015 was introduced2 by Arun Jaitley. The code was passed by Lok Sabha and Rajya sabha.it got approved by the president and was notified in the official gazette on 28 May 2017.3

The pre-existing law has been noticed in some of the judgments.

Innoventive Industries(supra)

“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. As per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). The World Bank‘s Ease of Doing Business Index, 2015, ranked India as country number 135 out of 190 countries on the ease of resolving insolvency based on various indicia”.

Introduction

Swiss Ribbons Pvt. Ltd. & Anr.   …..Petitioners

VERSUS

Union of India &Ors.     …..Respondents

R.F. NARIMAN, J.

The present petitions charge the constitutional validity of various Provisions of the Insolvency and Bankruptcy Code, 2016 [Insolvency]

Shri Mukul Rohatgi, learned Senior Advocate, appearing in Writ Petition (Civil), has first and foremost argued that the Members of the National Company Law Tribunal [NCLT] and certain Members of the National Company Law Appellate Tribunal [NCLAT]

Arguments and issues (brief)

  • Argument 1:ShriRohatgi has contended that contrary to the judgments in Madras Bar Association (I) (supra) and Madras Bar Association (III) (supra), Section 412(2) of the Companies Act, 2013 continued on the statute book, as a result of which, the two Judicial Members of the Selection Committee get outweighed by three bureaucrats
  • . Argument 2:   Scheme of the law distinguishing between financial and operational creditors is not based on intelligible criteria, and is, therefore, discrimination.
  • Argument 3: Information utilities can be given the power to certify the existence of a default.
  • Argument 4: Sec 12A allows COC members to continue to dominate proceedings even if the corporate debtor has settled with the creditor who is not paid
  • Argument 5: RP has powers of adjudication – which is violative of the basic principles of the dispensation of justice
  • Argument 6: Several issues on a sec. 29A
  • Retrospective application of sec. 29A
  • 29A is contrary to the objective of a speedy resolution
  • Blanket bar on all promoters without distinguishing between those who are unscrupulous, and others, is bad in law
  • Relatives without having any relation with the promoters have been ousted from bidding.

Key highlights on Supreme Court ruling

Court verdict

  1. APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT NOT CONTRARY TO THIS COURT’S JUDGMENTS.

Under this argument, Shri Rohatgi had argued that contrary to the decision in MADRAS BAR ASSOCIATION (I)  and MADRAS ASSOCIATION (III), Section 412(2) of the Companies Act, 2013 proceed on the

Statute book, as an outcome of which, the two Judicial Members of the

Selection Committee gets more significant by three bureaucrats

Section 412 of companies act, 2103 was amended as follows:

Section 412- the members of tribunals and appellant tribunal members are appointed on the recommendation of CJI of India or his nominee- Chairperson, a senior judge of Supreme Court, chief justice of the high court, Secretary in the Ministry of Corporate Affair, Secretary in the Ministry of Law and Justice.

Further in 2015, a selection committee was set up for the appointment of members of the NCLT and was reconstituted4 to make further appointments.

  • Classification between financial creditors and operational creditors.

Here, the petitioner argued that there is no intelligible differentia between financial creditors and operational creditors. It was said that since IBC gives a distinction between the financial creditors and operational creditors, it is ultimately leading to a violation of article 14 of the Indian Constitution.

Article 14 of the Indian Constitution says that “right to equality is a fundamental right, and equal peoples should be treated equally, unequal should be treated unequally. And if differentiation is made among the class then there should be intelligible differentia and reasonable nexus between the two then it will not be considered as violative of Article 14”.

After many judgments and cases in EP Royappa v. state of Tamil Nadu5 case; it has been held by this Court that the basic principle which informs both Articles 14 and 16 is equality and inhibition against discrimination.

After many interpretation and analysis the two dimensions of article 14 of Indian Constitution in its application to legislation are now well recognized now i.e. (1)discrimination, based on an impermissible or invalid classification, and (2) excessive delegation of powers; conferment of unanalyzed and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders. If anything is done without guidance, check or control, it will be violative of Article 14 of the Indian constitution.

So we are here going to discuss the difference between financial creditors and operational creditors.

  • Role of financial creditors and operational creditors
Financial creditors Operational creditors
Secured creditors Unsecured creditors
Lend finance on a term loan Relatable to the supply of goods and services
Involves a large sum of money Generally involves less sum of money
Specifies repayment schedules, and defaults entitle financial creditors to recall a loan in Totality. It does not have any such conditions.
Involved with assessing the viability of the corporate debtor. But operational creditors are not engaged in these types of activities.

By analyzing some key differences between financial creditors and operational creditors we can sum up and say that there is intelligible differentia between the two which has an undeviating relation to the object sought to be attained by the code.

The Supreme Court held that the distinction is “neither discriminatory, nor arbitrary, nor violative of Article 14 of the Constitution of India

In summary, the SC found sufficient intelligible differentia rationalize the differential treatment accorded to financial and operational creditors and concluded: “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 thing sought to be attained by the statute in question, Article 14 does not get misconducted. For these reasons, the summons to Section 53 of the Code must also fail.

  • No voting rights.

When dealing with the issue of operational creditors not having voting rights in the Committee of Creditors (‘COC’), the SC referred to the Report of the Bankruptcy Law Reforms Committee and the Report of the Insolvency Law Committee and observed that financial creditors, i.e., banks and financial institutions, are best equipped to evaluate the viability and feasibility of the business of the corporate debtor; whereas operational creditors are only involved in the recovery of amounts and are typically unable to assess the viability and feasibility of the business.

  •   Notice and Hearing

On the concern of notice and hearing, the SC cites to various provisions of the Code and its judgment in Innoventive Industries Ltd. v. ICICI Bank6 The SC observed that a corporate debtor is served with a copy of the application with the resolution authority and has the opportunity to file a reply and be heard. The Code prescribes penalties for furnishing false information and for fraudulent or malicious initiation of proceedings. Further, a financial creditor has to prove ‘default’ as opposed to an operational creditor who has to merely ‘claim’ a right to payment of liability or obligation in respect to the debt which may be due.

In the judgment of Swiss ribbons Pvt. Ltd. Supreme Court in its paragraph 38 of the judgment differentiated “claim”, “debt” and “default” as follows: 

[i]Whereas a “claim” gives rise to a “debt” only when it becomes “due”, a default occurs only when a “debt” becomes “due” and payable and is not paid by the debtor. It is for this reason that a financial creditor has to prove default as opposed to an operational creditor who merelyclaims a right to payment of a liability or obligation in respect of a debt which may be due. When this aspect is borne in mind, the differentiation in the triggering of insolvency resolution process by financial creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code become clear.

Upon bearing this aspect in mind, the difference between triggering an insolvency resolution process by financial creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code becomes clearer”.

  •   Safeguards for Operational Creditors

The SC further noted that while looking into the viability and feasibility of resolution plans that are approved by the COC, tribunals always examine:(i)- whether or not the operational creditors were given roughly the same treatment as the financial creditors and (ii)- whether plans have been modified such that the rights of the operational creditors are safeguarded. Further, the operational creditors are required to be paid liquidation value at the minimum. The amended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 further intensify the rights of operational creditors by furnishing priority in payment over financial creditors.

For all the preceding reasons, it was found that operational creditors are not discriminated and are not violative of Article 14 of the Indian Constitution. The above analyzing is not against article 14. They are discriminated on the grounds of intelligible differentia and had a reasonable nexus between them.  

  • Section 12A is not violative of Article 14.

Section 12A was inserted by insolvency and bankruptcy act, 2018 which states that

“12-A. Withdrawal of application admitted under Section 7, 9 or 10. – The Adjudicating Authority may allow the withdrawal of application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified”.

Explanation: Section 12A prerequisite permits the removal of the CIRP application by the applicant post-admission; assign the Committee of Creditors (the “CoC“) approves such withdrawal by a voting share of ninety per cent. The section itself is open and silent on the situations when this provision could be brought into play.

LokhandwalaKataria Construction Pvt. Ltd. v. Ninus Finance & Investment Manager LLP7 Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limited8 Uttara Foods and Feeds Private Limited v. Mona Pharmacy9

 The SC’s inherent jurisdiction was entreated to manufacture a third option, which was to allow promoters the chance to arrive at a settlement and seek withdrawal of the CIRP. In exercise of its powers under Article 142 of the Constitution, the SC passed orders permitting the withdrawal of applications even after creditors‘ applications had been admitted by the NCLT or the NCLAT. Thereafter, on the guidance of the Insolvency Law Committee, the new section 12A was initiated in June 2018.

So, in conclusion, we can state that the court upheld the entrance of 90% recognizing that once a proceeding is commenced, it is an allied proceeding in rem. Therefore, any withdrawal of such proceedings has to be effectuated only with all the financial creditors have put their heads together. Though it could be argued that ‘90%’ is an unarranged choice and is arbitrary, however, this does not fulfil the threshold of Article 14 – manifest arbitrariness. The Court went on to refer to Section 60 of the Code to set that the mechanism is free from possibilities of unfair removal as the NCLT is the final accepting authority, whose decision can be further challenged in the NCLAT.

Evidence provided by private information utilities: only prima facie evidence of default

ShriMukulRohatgi attacked the ground that private information utilities that have been set up are not governed by proper norms.  Also, the evidence by way of loan default contained in the records of such utility cannot be conclusive evidence of what is stated therein.

The Court considered the rule of credit information companies, followed by the information utilities to appreciate the purpose of reducing information irregularly, improving credit risk evaluation and pace up the resolution process. The Court then considered the Information Utilities Regulations, 2017 to appreciate the accelerate mechanism for verification and authentication of information. However, the Government conceded in favour of the petitioners, and the Court ruled that the information is only presumed evidence of default, which can be denied.

Resolution professional has no adjudicator powers

Adjudicatory power of resolution professionals was challenged and  It was held that the powers of the interim resolution professional under Section 18 of the Code and CIRP Regulations, 2016 are solely administrative in nature and confined to the intention and verification of the amount of claim. It is the adjudicating authority who can determine and prompt the appropriate relief based on the IRP’s report. To clarify the difference between administrative and quasi-judicial powers, the Court cited to the powers of the liquidator under the Code. The intention of the value of the claim by the liquidator is in the nature of a ‘decision’, thus plead lies against such determination.

In summary, we can state that:

  1. The Supreme Court has clasped that the resolution professional does not have any power to adjudicate, decrease or reject the claims of the operational creditors.
  2. The Court clasped that, as opposed to a liquidator who has been conferred particular powers under sections 38 to 40 of the Code to determine and decide the claims, a function that is quasi-judicial in nature and with appeal provided against its decisions, no such particular powers to decide are provided to the resolution professional.
  3. The resolution professional does not have the power to act independently as is evident from section 28 of the Code and can be restored by the committee of creditors under section 27 of the Code.
  • The constitutional validity of section 29A

The constitutional validity of section 29A was challenged by stating that who all are ineligible to be a resolution applicant

Section 29A was first introduced by insolvency and bankruptcy code ordinance 2017, to disqualify corporate debtors, their relatives, undischarged insolvent, one prohibited under the SEBI Act, from acting as resolution applicant to facilitate effective corporate governance.

For coming on the conclusion the court interpreted many cases and referred its judgment in Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Ors10 to hold that the principles of Salomon v. A. Salomon and Co. Ltd11 regarding separate corporate entity cannot be registered, and all those persons who acted together or in concert to haul the company to a stage of resolution, shall be barred from being the resolution entrant

Likewise in the case of Chitra Sharma v. Union of India the court observed that:

“The provisions of Section 29A are intended to ensure that among others, persons responsible for the insolvency of the corporate debtor do not participate in the resolution process”

Retrospective application

There is already a law which is settled in the case State Bank‘s Staff Union (Madras Circle) v. Union of India and Ors12 a statute is not retrospective merely because it affects existing rights; nor is it retrospective merely because a part of the necessity for its action is drawn from a time antecedent to its passing.

In ArcelorMittal which it is clear that no vested right is taken away by the application of Section 29A.Since a resolution applicant who applies under Section 29A(c) has no confer right to apply for being considered as a resolution applicant, this point is of no profit.

Section 29A(C) not restricted to malfeasance

 The disqualification of a corporate debtor to act as resolution applicant whose assets have been declared as NPAs in accordance with the guidelines of the Reserve Bank of India, and remained such for the time of one year, was challenged. The pertinent guidelines declare an account as an NPA only if defaults made by a corporate debtor are not resolved within 3 months. The Court held that if a person is incompetent to service his own debt within the period of 15 months, then he cannot be allowed to become a resolution applicant. The said grace period is a query of legislative policy, which is not worth impede.

Related party

“A constitutional challenge has been raised against Section 29A (j) interpret with the definition of related part”.

The argument was articulated requisite as an act of legislative overreach – the mere certainty that somebody happens to be a relative of an ineligible person cannot be good in law to expel such person from becoming a resolution applicant if he is otherwise qualified. The SC, however, found that in the scheme of the Code, the definitions of “related party“, “relative” and the explanation of “connected person“, when read together balanced in reference to each other; dispel any notion of any arbitrary forcing of disbarment.

Shri Viswanathan in particular, to apply the doctrine of nexus(connection) that is well known and that has been applied by this Court in several cases in other legal contexts, moreover, in Attorney General for India and Ors. v. AmratlalPrajivandas and Ors13 it was held that there ought to be the connecting nexus between those properties and the convict, the burden of disproving which, as present above, is upon the relative/associate. In this view of the matter, the fear and contention of the petitioners in this behalf must be held to be based upon a mistaken premise. The bringing in of the relatives and associates or of the persons mentioned in clause (e) of Section 2(2) is thus neither discriminatory nor incompetent apart from the protection of Article 31-B.

The SC therefore in that matter of Swiss ribbons judgment held that:

Persons who act jointly or in concert with others are connected with the business activity of the resolution applicant. In the absence of showing that such a person is “connected” with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under Section 29A (j).”

This disposes of all the contentions raising problems as to the constitutional validity of Section 29A (j).

Section 53 of the code does not violate article 14

It will be seen that the reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be attained by the Insolvency Code. We have already seen that repayment of financial debts imbue capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back; to additionally 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 straightly 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 settled above most other debts. Thus, it can be seen that unsecured debts are of diverse kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be attained by the statute in question, Article 14 does not get infracted. For these rationales, the challenge to Section 53 of the Code must also abandon.

Conclusion

The judgment is a vivid light in the regime of corporate governance. By upholding the constitutional sustainability of the Code, the Court has validated its purpose and given more pace to the simplicity of doing business

“The intent of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such person, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It would also improve the simplicity of Doing Business, and facilitate more investments leading to towering economic growth and development. ”

Before parting, we appreciate the approach of the Court in writing the judgment. The Court has resorted to the reports of the Bankruptcy Law Reforms Committee (2016), Joint Parliamentary Committee (2016), and Insolvency Law Committee (2018) and the Statement of Objects and Reasons on multiple occasions. The introductory speech of the Finance Minister while moving the IBC (Amendment) Ordinance, 2017 and endorsement of the Siddiqui Working Group, 1999 on Credit Information Companies were also resorted to once. This shows that the Court is moving from the strict elucidate mechanism to the purposive interpretation mechanism, trying best to uphold the aim of the legislature and increasing synergy between the two organs of the Government. We hope that such an approach continues to overcome.

1Report dated 04.11.2015
2Lok Sabha on 21 December 2015.
3http://www.indiacode.nic.in/acts-in-pdf/2016/201631.pdf.
422.02.2017
5(1974) 4 SCC 3 : 1974 SCC (L&S) 165
6(2018) 1 SCC 407
7Civil Appeal No. 9279 of 2017
8Civil Appeal No. 9286/2017
9Civil Appeal No. 18520/2017
10Civil Appeal Nos. 9402-9405/2018.
11[1897]
12(2005) 7 SCC 584 (at paragraph 21)
13(1994) 5 SCC 54

Leave a Comment