KEY HIGHLIGHTS ON Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors.- Mukund Rawat
Background
The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, trial having led to repeated errors‘, ultimately led to the enactment of the Code. However, in numerous matters[1] the Constitutional validity of the various provisions of the Insolvency and Bankruptcy Code, 2016 have been challenged. These numerous attacks challenging the validity of the Code as well as the constitutional validity of the National Company Law Tribunal (“NCLT”) prompted the Apex Court to direct the Gujarat High Court to not to enter the debate pertaining to the validity of the Code or the constitutional validity of the NCLT.
Finally with the Swiss Ribbons Pvt. Ltd. v. Union of India,[2] the Supreme Court has finally settled the challenges which mounting against the constitutional validity of the Code.
1. Difference between Financial Creditor and Operational creditor
The Legislative scheme that is contained under Section 7 of the Code was challenged for the fact that there is no intelligible differentia between the financial and the operational creditor in Code, regard being had to the object sought to be achieved by the Code, namely, insolvency resolution, if that is possible, then ultimately, liquidation. As, only the financial creditor have the place in the Committee of creditors (“COC”) and hence it was contented that this legislative design amounted to discrimination under Article 14 of the Constitution of India. The Supreme Court upheld the Constitution validity stating in Para 28 of the judgment which also tried to resolve the dichotomy between the Financial creditor and the Operational Creditor.
1. “Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor‘s business when there is financial stress, which are things operational creditors do not and cannot do. 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.”
BLRC report was also discussed while delivering the judgment for discussing the rationale behind the distinction between the Operational and the financial creditor. The Supreme Court in Para 27 also distinguish between the Financial Creditor and the Operational Creditor stating:
27. “Financial Creditor generally lend finance on a term loan or working capital that enables the corporate debtor to set up the business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money By way of contrast, operational contracts have dues whose quantum is generally 65 less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business”
The Apex Court noted that the Operational Creditor or their representatives can be present in the COC if the amounts of their aggregate dues was not less than ten per cent of the debt. Furthermore, it was observed that there is no conclusive data to suggest that the Operational Creditors are adversely affected by being included from the COC. Further, Supreme Court noted that the NCLTs, while having a look on viability and feasibility of resolution plans should always go into whether Operational Creditor are given roughly the same treatment as the Financial Creditors, and if they are not, such plans are either modified or rejected in order to safeguard the rights of the operational creditor.
2. Constitutionality of Section 12A
Constitutionality of Section 12A[3] of the Code was challenged in the present case stating that the threshold of 90% of the COC for allowing the withdrawal of application is unreasonable. However, Supreme Court upheld the Constitutionality of the said section, while discussing the ILC report[4] that explained the reason for this high threshold the Apex Court was of the view that they did not see any difficulty in the need for such high threshold for the withdrawal as the proceeding under the code is the collective proceedings. Supreme Court in Para 53 of the case held that the COC do not have the last word on the subject. As, under Section 60 of the Code if the COC arbitrarily rejects the withdrawal claim the NCLT/NCLAT can always set aside such decision. And thus Section 12A passes the Constitutionality.
It was also held 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.
3. Constitutional Validity of Section 29A
a) Retrospective Effect
Constitutionality of Section 29A[5] of the Code was also challenged. Section 29A list down the person who are not eligible to be a resolution applicants. The First issue which came into picture was whether there was a Retrospective Application of the Section 29A. it was contented that Section 29A of the Code had retrospectively violate the rights of the erstwhile promoters to participate in the recovery process for the Corporate Debtor.
While deciding for the Retrospective application of a statute Supreme Court referred the Judgment of Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Ors.,[6] while holding that resolution applicants have no vested right to be considered as such in the resolution process. Therefore, the Supreme Court observed that a statute is not retrospectively applicable merely because it affects the existing rights. A resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant and thereby holding that Section 29A is not retrospective in nature.
b) Section 29A(c) Not Restricted To Malfeasance
It was also challenged on the basis that it treats unequal with equals and thus it violates Article 14 of the Constitution. It was contended that a good erstwhile manager cannot be lumped with a bad erstwhile manager in the case where an erstwhile manager is not guilty of malfeasance or of acting contrary to the interest of the corporate debtor, there is no reason why he should not be permitted to take part in the resolution process. The Supreme Court held that there is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable/movable property of the Corporate Debtor in liquidation. It noted in Para 60 of the judgment that the legislative purpose of Section 29A is such that it “includes persons who are malfeasant, or persons who have fallen foul of the law in some way, and persons who are unable to pay their debts in the grace period allowed are further, by this proviso, interdicted from purchasing assets of the corporate debtor whose debts they have either willfully not paid or have been unable to pay.”
c) Related Party
Constitutionality of Section 29A (j) read with definition of “Related party” under section 5 (24A) of the Code was challenged. It was contended that mere fact that somebody happens to be a relative of an ineligible person cannot be a good enough reason to oust such person from becoming a resolution applicant, if he is otherwise qualified. Supreme Court while relying on Attorney General for India and Ors. v. Amratlal Prajivandas and Ors.[7], for doctrine of Nexus held that:
75. “We are of the view that persons who act jointly or in concert with others are connected with the business activity of the resolution applicant. Similarly, all the categories of persons mentioned in Section 5(24)A) show that such persons must be “connected” with the resolution applicant within the meaning of Section 29A(j). This being the case, the said categories of persons who are collectively mentioned under the caption “relative” obviously need to have a connection with the business activity of the resolution applicant. In the absence of showing that such person is “connected” with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under Section 29A (j)…”
The Apex Court observed that all the persons mentioned in Section 5 (24A) of the Code clearly shows that such category of persons must be connected with the resolution applicant within the meaning of section 24A(j) of the Code. Section 29A(j) deals with the category of persons who are connected with the business activity of the resolution applicant. Therefore, Supreme Court held that the expression “Related Party”, therefore, and “relative” contained in the definition sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I, which would include only person who are connected with the business activity of the resolution applicant. The Court held that in the absence of showing that such person is connected with the business of the resolution applicant cannot disqualify such person under Section 29A (j).
Conclusion
Justice Rohinton Fali Nariman while delivering the verdict patently stated that, “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.” Therefore, the Code has passed the constitutional validity which will certainly put rest to some of the vexed questions surrounding the interpretation of the provisions of the Code. The Judgment reiterates the contribution of the Code in increasing the flow of the financial resources to the commercial sector as a result of repayment of financial debt. Also, the direction to Union of India to set up circuit benches of the NCLAT in different cities within the period of 6 months from the day of Judgment in order to ensure quicker disposal of appeals
[1] Anandram Developers Private Limited v. National Company Law Tribunal, W.P. No. 29084 and 29085 of 2017, decided on November 17, 2017 (Madras); See also Sree Metaliks Limited v. Union of India, W.P. No. 7144 (W) OF 2017, decided on April 7, 2017 (Calcutta); and Akshay Jhunjhunwala v. Union of India, W.P. No. 672 of 2017, decided on February 2, 2018 (Calcutta).
[2] Swiss Ribbons Pvt. Ltd. v. Union of India, Writ Petition (Civil) No. 99 of 2018, decided on January 25, 2019.
[3] Inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, No. 40. Acts of Parliament, 1992 (India).
[4] Report of the Insolvency Law Committee, March 26, 2018.
[5] Inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, No. 40. Acts of Parliament, 1992 (India).
[6] Arcelor Mittal India Private Limited v. Satish Kumar Gupta & Ors., Civil Appeal Nos. 9402-9405/2018, decided on October 4, 2018.
[7] Attorney General for India & Ors. v. Amratlal Prajivandas & Ors., (1994) 5 S.C.C. 54.