Arguments and the Apex Court’s Ruling in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.(Writ Petition (Civil) No. 99 Of 2018 dated 25.01.2019)
(Landmark judgment by Apex Court under Insolvency and Bankruptcy Code(IBC), 2016)
(See full judgment)

Summary of arguments makes during the hearing the Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors case as under:

Ground of the case:

The present petitions assail the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016.

 1. THE RAISON DÊTRE FOR THE INSOLVENCY AND BANKRUPTCY CODE

It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor‘s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.

2. APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT NOT CONTRARY TO THIS COURTS JUDGMENTS

Argument: Shri Rohatgi has argued 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.

The Court’s verdict: This was brought into force by a notification dated 09.02.2018. However, an additional affidavit has been filed during the course of these proceedings by the Union of India. This affidavit is filed by one Dr. Raj Singh, Regional Director (Northern Region) of the Ministry of Corporate Affairs. This affidavit makes it clear that, acting in compliance with the directions of the Supreme Court in the aforesaid judgments, a Selection Committee was constituted to make appointments of Members of the NCLT in the year 2015 itself. Thus, by an Order dated 27.07.2015, (i) Justice Gogoi (as he then was), (ii) Justice Ramana, (iii) Secretary, Department of Legal Affairs, Ministry of Law and Justice, and (iv) Secretary, Corporate Affairs, were constituted as the Selection Committee. This Selection Committee was reconstituted on 22.02.2017 to make further appointments. In compliance of the directions of this Court, advertisements dated 10.08.2015 were issued inviting applications for Judicial and Technical Members as a result of which, all the present Members of the NCLT and NCLAT have been appointed. This being the case, we need not detain ourselves any further with regard to the first submission of Shri Rohatgi.

 

3. NCLAT BENCH ONLY AT DELHI

Argument: It has been argued by Shri Rohatgi that since the NCLAT, as an appellate court, has a seat only at New Delhi, this would render the remedy inefficacious inasmuch as persons would have to travel from Tamil Nadu, Calcutta, and Bombay to New Delhi, whereas earlier, they could have approached the respective High Courts in their States. This again is directly contrary to Madras Bar Association v. Union of India, (2014) 10 SCC 1 [Madras Bar Association (II)], and to paragraph 123 in particular.

Court’s verdict: The learned Attorney General has assured us that this judgment will be followed and Circuit Benches will be established as soon as it is practicable. In this view of the matter, we record this submission and direct the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from today.

 

4. THE TRIBUNALS ARE FUNCTIONING UNDER THE WRONG MINISTRY

Argument: It is argued that the administrative support for all tribunals should be from the Ministry of Law and Justice. However, even today, NCLT and NCLAT are functioning under the Ministry of Corporate Affairs. This again needs to be corrected immediately.

Court’s verdict: Shri Mukul Rohatgi argued that in Madras Bar Association (I) (supra), paragraph 120(xii) specifically reads as follows:

120 We may tabulate the corrections required to set right the defects in Parts I-B and I-C of the Act:
xxx xxx xxx
(xii) The administrative support for all Tribunals should be from the Ministry of Law and Justice. Neither the Tribunals nor their members shall seek or be provided with facilities from the respective sponsoring or parent Ministries or Department concerned.
xxx xxx xxx “

Even though eight years have passed since the date of this judgment, the administrative support for these tribunals continues to be from the Ministry of Corporate Affairs. This needs to be rectified at the earliest.

However, the learned Attorney General pointed out Article 77(3) of the Constitution of India and Delhi International Airport Limited v. International Lease Finance Corporation and Ors., (2015) 8 SCC 446, which state that once rules of business are allocated among various Ministries, such allocation is mandatory in nature. According to him, therefore, the rules of business, having allocated matters which arise under the Insolvency Code to the Ministry of Corporate Affairs, are mandatory in nature and have to be followed. 45

It is obvious that the rules of business, being mandatory in nature, and having to be followed, are to be so followed by the executive branch of the Government. As far as we are concerned, we are bound by the Constitution Bench judgment in Madras Bar Association (I) (supra). This statement of the law has been made eight years ago. It is high time that the Union of India follow, both in letter and spirit, the judgment of this Court.

 

5. CLASSIFICATION BETWEEN FINANCIAL CREDITOR AND OPERATIONAL CREDITOR NEITHER DISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OF ARTICLE 14 OF THE CONSTITUTION OF INDIA

Argument: Shri Rohatgi assailed the legislative scheme that is contained in Section 7 of the Code, stating that there is no real difference between financial creditors and operational creditors. According to him, both types of creditors would give either money in terms of loans or money‘s worth in terms of goods and services. Thus, there is no intelligible differentia between the two types of creditors, regard being had to the object sought to be achieved by the Code, namely, insolvency resolution, and if that is not possible, then ultimately, liquidation. he argued that such classification will not only be discriminatory, but also manifestly arbitrary, as under Sections 8 and 9 of the Code, an operational debtor is not only given notice of default, but is entitled to dispute the genuineness of the claim.

Court’s verdict: The tests for violation of Article 14 of the Constitution of India, when legislation is challenged as being violative of the principle of equality, have been settled by this Court time and again. Since equality is only among equals, no discrimination results if the Court can be shown that there is an intelligible differentia which separates two kinds of creditors so long as there is some rational relation between the creditors so differentiated, with the object sought to be achieved by the legislation. This aspect of Article 14 has been laid down in judgments too numerous to cite, from the very inception.

it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its 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 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. Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable.

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.

6. NOTICE, HEARING, AND SETOFF OR COUNTERCLAIM QUA FINANCIAL DEBTS

Argument: Shri Rohatgi then went on to assail the establishment of information utilities that are set up under the Code. According to him, under Section 210 of the Code, there can be private information utilities whose sole object would be to make a profit. Further, the said information utility is not only to collect financial data, but also to check whether a default has or has not occurred. Certification of such agency cannot substitute for adjudication. Thus, the certificate of an information utility is in the nature of a preliminary decree issued without any hearing and without any process of adjudication.

It is clear from section 3(9)(c) read with section 214(e) of the Code ) that information in respect of debts incurred by financial debtors is easily available through information utilities which, under the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 [Information Utilities Regulations], are to satisfy themselves that information provided as to the debt is accurate. This is done by giving notice to the corporate debtor who then has an opportunity to correct such information.

A conjoint reading of the Rules Rule 4 (3), Section 420 of the Companies Act, 2013 and Rules 11, 34, & 37 of the National Company Law Tribunal Rules, 2016 makes it clear that at the stage of the Adjudicating Authority‘s satisfaction under Section 7(5) of the Code, the corporate debtor is served with a copy of the application filed with the Adjudicating Authority and has the opportunity to file a reply before the said authority and be heard by the said authority before an order is made admitting the said application.

Another argument: In the case of a financial debtor, on the other hand, no notice is given and the financial debtor is not entitled to dispute the claim of the financial creditor. It is enough that a default as defined occurs, after which, even if the claim is disputed and even if there be a set-off and counterclaim, yet, the Code gets triggered at the behest of a financial creditor, without the corporate debtor being able to justify the fact that a genuine dispute is raised, which ought to be left for adjudication before ordinary courts and/or tribunals.

Court’s Verdict: What is also of relevance is that in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process malafide, the Code prescribes penalties(Section 65 of 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. Legislative policy now is to move away from the concept of ―inability to pay debts to ―determination of default. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. 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.

 

7. DIFFERENTIATE BETWEEN CLAIM, DEBT AND DEFAULT

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 merely claims 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 becomes clear.

 

8. SECTIONS 21 AND 24 AND ARTICLE 14: OPERATIONAL CREDITORS HAVE NO VOTE IN THE COMMITTEE OF CREDITORS 

Argument: Shri Rohatgi then argued that assuming that a valid distinction exists between financial and operational creditors, there is hostile discrimination against operational creditors. First and foremost, unless they amount to 10% of the aggregate of the amount of debt owed, they have no voice in the committee of creditors. In any case, Sections 21 and 24 of the Code are discriminatory and manifestly arbitrary in that operational creditors do not have even a single vote in the committee of creditors which has very important functions to perform in the resolution process of corporate debtors.

Court’s verdict: Under the Code, the committee of creditors is entrusted with the primary responsibility of financial restructuring. They are required to assess the viability of a corporate debtor by taking into account all available information as well as to evaluate all alternative investment opportunities that are available. The committee of creditors is required to evaluate the resolution plan on the basis of feasibility and viability. It is important to bear in mind that once the resolution plan is approved by the committee of creditors and thereafter by the Adjudicating Authority, the aforesaid plan is binding on all stakeholders.

Since the financial creditors are in the business of money lending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since 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 business.

The NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the committee of creditors, always gone into whether operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors‘ rights are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value. Further, on 05.10.2018, Regulation 38 has been amended. The amended Regulation further strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors‘ rights, together with priority in payment over financial creditors.

For all the aforesaid reasons, the Court do not find that operational creditors are discriminated against or that Article 14 has been infracted either on the ground of equals being treated unequally or on the ground of manifest arbitrariness.

 

9. SECTION 12A IS NOT VIOLATIVE OF ARTICLE 14

Argument: Shri Rohatgi next argued that Section 12A of the Code is contrary to the directions of this Court in its order in Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem, Civil Appeal No. 18520/2017 [decided on 13.11.2017], and that instead of following the said order, Section 12A now derails the settlement process by requiring the approval of at least ninety per cent of the voting share of the committee of creditors. Unbridled and uncanalized power is given to the committee of creditors to reject legitimate settlements entered into between creditors and the corporate debtors.

Court’s verdict: Section 12A was inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018. Before this Section was inserted, this Court(Supreme Court), under Article 142, was passing orders allowing withdrawal of applications after creditors‘ applications had been admitted by the NCLT or the NCLAT.

This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors., SLP (Civil) No. 31557/2018, has stated that Regulation 30A(1) is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36A.

It is clear that once the Code gets triggered by admission of a creditor‘s petition under Sections 7 to 9, the proceeding that is before the Adjudicating Authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim.

A question arises as to what is to happen 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). We make 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.

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. This high threshold has been explained in the ILC Report as 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 substantially 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, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the committee of creditors do not have the last word on the subject. 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. For all these reasons, we are of the view that Section 12A also passes constitutional muster.

 

10. EVIDENCE PROVIDED BY PRIVATE INFORMATION UTILITIES: ONLY PRIMA FACIE EVIDENCE OF DEFAULT

 Argument: Shri Mukul Rohatgi argued on 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 setting up of information utilities was preceded by a regime of information companies which were referred to as credit information companies [CICs], as recommended by the Siddiqui Working Group in 1999.

Court’s verdict: The Information Utilities Regulations, in particular Regulations 20 and 21, make it clear that on receipt of information of default, an information utility shall expeditiously undertake the process of authentication and verification of information.

Regulations 20 and 21 also make it clear that apart from the stringent requirements as to registration of such utility, the moment information of default is received, such information has to be communicated to all parties and sureties to the debt. Apart from this, the utility is to expeditiously undertake the process of authentication and verification of information, which will include authentication and verification from the debtor who has defaulted. This being the case, coupled with the fact that such evidence, as has been conceded by the learned Attorney General, is only prima facie evidence of default, which is rebuttable by the corporate debtor, makes it clear that the challenge based on this ground must also fail.

  

11. RESOLUTION PROFESSIONAL HAS NO ADJUDICATORY POWERS

Argument: Shri Rohatgi then argued that the resolution professional, having been given powers of adjudication under the Code and Regulations, grant of adjudicatory power to a non-judicial authority is violative of basic aspects of dispensation of justice and access to justice.

Court’s verdict: It is clear from a reading of the Code as well as the Regulations that the resolution professional has no adjudicatory powers. Section 18 of the Code lays down the duties of an interim resolution professional. Under the CIRP Regulations, the resolution professional has to vet and verify claims made, and ultimately, determine the amount of each claim.

It is clear from a reading of 10, 12, 13 & 14 of CIRP Regulation that the resolution professional is given administrative as opposed to quasi-judicial powers. In fact, even when the resolution professional is to make a determination‖ under Regulation 35A, he is only to apply to the Adjudicating Authority for appropriate relief based on the determination made.

As opposed to this, the liquidator, in liquidation proceedings under the Code, has to consolidate and verify the claims, and either admit or reject such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by way of contrast between the powers of the liquidator and that of the resolution professional.

It is clear from these Sections that when the liquidator ―determines‖ the value of claims admitted under Section 40, such determination is a ―decision‖, which is quasi-judicial in nature, and which can be appealed against to the Adjudicating Authority under Section 42 of the Code.

Unlike the liquidator, the resolution professional cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the Code, which can, by a two-thirds majority, replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.

12. CONSTITUTIONAL VALIDITY OF SECTION 29A & RETROSPECTIVE APPLICATION

Argument: A four-fold attack was raised against Section 29A, in particular, clause (c) thereof. First and foremost, Shri Rohatgi stated that the vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor have been impaired by retrospective application of Section 29A.

In particular, so far as Section 29A(c) is concerned, a blanket ban on participation of all promoters of corporate debtors, without any mechanism to weed out those who are unscrupulous and have brought the company to the ground, as against persons who are efficient managers, but who have not been able to pay their debts due to various other reasons, would not only be manifestly arbitrary, but also be treating unequals as equals. Also, according to Shri Rohatgi, maximization of value of assets is an important goal to be achieved in the resolution process. Section 29A is contrary to such goal as an erstwhile promoter, who may outbid all other applicants and may have the best resolution plan, would be kept out at the threshold, thereby impairing the object of maximization of value of assets.

Court’s verdict: Section 29A was first introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, which amended the Insolvency and Bankruptcy Code on 23.11.2017. It is settled law that a statute is not retrospective merely because it affects existing rights; nor is it retrospective merely because a part of the requisites for its action is drawn from a time antecedent to its passing [See State Bank‘s Staff Union (Madras Circle) v. Union of India and Ors., (2005) 7 SCC 584 (at paragraph 21)]. In ArcelorMittal (supra), this Court has observed that a resolution applicant has no vested right for consideration or approval of its resolution plan.

 In our judgment in ArcelorMittal (supra), we have already held that resolution applicants have no vested right to be considered as such in the resolution process. Shri Mukul Rohatgi, however, argued that this judgment is distinguishable as no question of constitutional validity arose in this case, and no issue as to the vested right of a promoter fell for consideration. We are of the view that the observations made in ArcelorMittal (supra) directly arose on the facts of the case in order to oust the Ruias as promoters from the pale of consideration of their resolution plan, in which context, this Court held that they had no vested right to be considered as resolution applicants. Accordingly, we follow the aforesaid judgment. Since a resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant, this point is of no avail.

 According to learned counsel for the petitioners, Section 29A(c) treats unequals as equals. A good erstwhile manager cannot be lumped with a bad erstwhile manager. Where an erstwhile manager is not guilty of malfeasance or of acting contrary to the interests of the corporate debtor, there is no reason why he should not be permitted to take part in the resolution process. After all, say the counsel for the petitioners, maximization of value of the assets of the corporate debtor is an important objective to be achieved by the Code. Keeping out good erstwhile managers from the resolution process would go contrary to this objective.

This objection by the petitioners was countered by the learned Attorney General and Solicitor General, stating that the various clauses of Section 29A would show that a person need not be a criminal in order to be kept out of the resolution process. For example, under Section 29A(a), it is clear that a person may be an undischarged insolvent for no fault of his. Equally, under Section 29A(e), a person may be disqualified to act as a director under the Companies Act, 2013, say, where he has not furnished the necessary financial statements on time [see Section 164(2)(a) of the Companies Act, 2013].

13. RETROSPECTIVE APPLICATION OF SECTION 35(1)(F)

Argument: The learned counsel for some of the petitioners have also argued that the proviso to Section 35(1)(f) that was added by the Insolvency and Bankruptcy Code (Amendment) Act, 2017 [dated 19.01.2018] with retrospective effect from 23.11.2017 is manifestly arbitrary and violative of Article 14 of the Constitution of India.

 Court’s verdict: According to the learned counsel for the petitioners, when immovable and movable property is sold in liquidation, it ought to be sold to any person, including persons who are not eligible to be resolution applicants as, often, it is the erstwhile promoter who alone may purchase such properties piecemeal by public auction or by private contract. The same rationale that has been provided earlier in this judgment will apply to this proviso as well – 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. Further, given the categories of persons who are ineligible under Section 29A, which 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 wilfully not paid or have been unable to pay. The legislative purpose which permeates Section 29A continues to permeate the Section when it applies not merely to resolution applicants, but to liquidation also. Consequently, this plea is also rejected.

 

14. RELATED PARTY

Argument: Shri Rohatgi argued on Section 29A(j), and stated that persons who may be related parties in the sense that they may be relatives of the erstwhile promoters are also debarred, despite the fact that they may have no business connection with the erstwhile promoters who have been rendered ineligible by Section 29A.

A constitutional challenge has been raised against Section 29A(j) read with the definition of related party. Related party‖ is defined in the  Sec. 5(24) of the Code. What is argued by the petitioners is that the mere fact that somebody happens to be a relative of an ineligible person cannot be good enough to oust such person from becoming a resolution applicant, if he is otherwise qualified.

Court’s verdict: 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(24A) 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). All the categories in Section 29A(j) deal with persons, natural as well as artificial, who are connected with the business activity of the resolution applicant. 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, and so read, would include only persons who are connected with the business activity of the resolution applicant.

An argument was also made 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 also needs to be repelled as 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 implementation of the resolution plan. This disposes of all the contentions raising questions as to the constitutional validity of Section 29A(j).

 Exemption of micro, small, and medium enterprises from section 29a

 The rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because qua such industries, other resolution applicants may not be forthcoming, which then will inevitably lead not to resolution, but to liquidation.

 

15. SECTION 53 OF THE CODE DOES NOT VIOLATE ARTICLE 14

Argument: An argument has been made by counsel appearing on behalf of 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. This, according to them, 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.

Court’s verdict: 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 achieved by the Insolvency Code. We have already seen that 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.

 

Conclusion:

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. 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. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the 149

Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.

We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid. 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 is in the region of INR 60,000 crores, which is over 202% of the liquidation value. As a result of this, the Reserve Bank of India has come out with figures which reflect these results. Thus, credit that has been given by banks and financial institutions to the commercial sector (other than food) has jumped up from INR 4952.24 crores in 2016-2017, to INR 9161.09 crores in 2017-2018, and to INR 13195.20 crores for the first six months of 2018-2019. Equally, credit flow from non-banks has gone up from INR 6819.93 crores in 2016-2017, to INR 4718 crores for the first six months of 2018-2019. Ultimately, the total flow of resources to the commercial sector in India, both bank and non-bank, and domestic and foreign (relatable to the non-food sector) has gone up from a total of INR 14530.47 crores in 2016-2017, to INR 18469.25 crores in 2017-2018, and to INR 18798.20 crores in the first six months of 2018-2019. These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained. The result is that all the petitions will now be disposed of in terms of this judgment. There will be no order as to costs.

 

Summary of the case

Source(https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jan/Swiss%20Ribbons_2019-01-27%2019:08:24.pdf)

 

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