CASE ANALYSIS- SWISS RIBBONS PRIVATE LIMITED v. UNION OF INDIA: ANJALI TRIPATHI

FACTS

 

Swiss Ribbons Private Limited is based out of Surat, Gujarat. Incorporated in 2003, the non-government company is in the business of supplying ribbons and laces, tassels and trimmings in the Indian market. It has been in the textile business for over 17 years and has emerged as one of the market leaders with Rs. 50 Lakh as capital, privately held by shareholders[1].

 

The writ petition filed by the company was entertained by the Supreme Court of India. It was tagged along with various other writ petitions and special leave petitions which were pending before the apex court. The matter dealt with the constitutional validity of the provisions of the Insolvency and Bankruptcy Code, 2016 (hereafter referred to as the ‘Code’). The divisional bench of Justice Rohinton Fali Nariman and Justice Vineet Saran didn’t dwell on the individual facts of the matter since they were judging a question of law and the same wasn’t mentioned in the judgement as well. 

 

ISSUES

 

The following issues were raised by the petitioner in the matter:-

 

Procedural Issues  

1. That the appointment of members to the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) is contrary to the rulings of the apex court. 
2. That NCLAT has only a single seat in Delhi which makes the remedy inefficacious since the parties would choose to approach the High Courts of their respective states rather than coming to Delhi for appeal.

 

Substantive Issues 

 

1. That the legal scheme given under Section 7 of the Code doesn’t provide any real and identifiable difference between financial creditors and operational creditors. 
2. That the sole purpose behind the establishment of information utilities under the Code is to make profits. 
3. That the requirement of 90% vote of the committee of creditors for the settlement process gives unbridled and uncanalized power to the committee.
4. That the grant of adjudicatory powers to the resolution professional, who is a non-judicial authority, is against the basic aspect of access of justice and dispensation of justice. 
5. That the Section 29A of the Code is invalid and unconstitutional. 
6. That Section 53 of the Code is invalid and unconstitutional. 

 

RULING 

 

The Hon’ble Supreme Court of India gave the following judgement on the issues mentioned above, thereby disposing of the matter:

1. Appointment of Members to NCLT and NCLAT: The amendment made to the Companies Act 2013 in 2017, as per the directions of the apex court given in the cases of Madras Bar Association v. Union of India in 2010 and 2015 respectively, provides for two judicial and two technical members. It was evident that compliance of the ruling of the court had happened and the same was evident in the application invited to post the 2015 judgement. The court, thus, didn’t bother itself further with this issue. Additionally, relying on the Union of India v. R. Gandhi, President, Madras Bar Association (2010), the court directed the Union government to provide all the technical support to the Tribunals through the Ministry of Law and Justice. 

 

2. NCLAT Bench Only at Delhi: The court, in the light of Madras Bar Association v. Union of India (2014), directed the Union government to set up circuit benches of NCLAT within 6 months from the date of judgement. 

 

3. Difference Between Financial Creditors and Operational Creditors (Section 7):The court ruled that Section 7 of the Code isn’t discriminatory. It is not violative or arbitrary of Article 14 of the Indian Constitution. The court deduced that a financial creditor is one who is involved in assessing the viability of corporate debtor from the very start and thus, he can engage in loan reconstruction and reorganization of corporate debtor’s business during times of financial stress. This can’t be done by operational creditors. This differentiation creates an intelligible differentia between the two which has a direct bearing on the subject that the code seeks to achieve. 

Concerning notice to a financial creditor, the court said that the information utility makes available all necessary information of debts incurred by the financial debtor. If information is false, penalization provisions are there. Additionally, Section 7(5) prescribes for giving the financial creditor a copy of the application filed with adjudicatory authority and he is also given time to reply.

Since the trigger of financial creditor’s application is non-payment of dues arising under the loan agreement and legislative idea has shifted from ‘inability to pay’ to ‘determination of default’, which arises in event of non-repayment of due and payable debt, the financial creditors need to prove default. 

The court was of the view that operational creditors are given fair and equitable rights because, despite their possible inability to access viability and feasibility of the business, the NCLAT makes sure that operational creditors get roughly the same treatment as financial creditors (adhering to the UNCITRAL Guidelines) and if not, resolution plans are rejected or modified. Section 30(20)(b) read with Section 31 states that a resolution plan cannot pass unless minimum payment is made to operational creditors, being not less than liquidation value. Regulation 38 also strengthens the same resolve. 

 

4.     Information Utilities- The court said that the information utility makes available all necessary information of debts incurred by the financial debtor and gives him the chance to correct any misinformation. If information is false, penalization provisions are there under Section 75. The information utility doesn’t substitute the adjudicating authority and merely makes sure that all relevant information about the financial debtor, according to Form I of 2016 rules are available in a consolidated manner. 

5. The validity of Section 12A- The court ruled that Section 12A isn’t violative of Article 14. A withdrawn application under Regulation 30A(1) of CIRP Regulations can be allowed in exceptional cases, even after issue of invitation expressing interest under Regulation 36A. The Code gets triggered by the admission of a creditor‘s petition under Sections 7 to 9 when the collective proceeding in rem in pending before the adjudicating authority. Thus, it becomes necessary that the body overseeing the resolution process shall be consulted before any individual corporate debtor is allowed to settle its claim. The reason behind the high threshold of 90% can be found in the Insolvency Law Committee report, 2018 which states that financial creditors to together allow such withdrawals and a settlement involving all creditors ought should be entered into. Nonetheless, the provision for 90% voting power is in within the domain of legislative policy. Furthermore, the committee of creditors do not decide finally and NCLT and NCLAT can set aside the same under Section 60 of the Code.
6. Resolution Professional’s Powers: Supreme Court observed that Section 18 of the Code read with Regulations 10, 12, 13 and 14 of the CIRP Regulations provide for administrative powers for resolution professional, as against quasi-judicial powers. the resolution professional needs to take the approval of the committee of creditors under Section 28 of the Code, unlike liquidator. Also, he can be replaced by a two-thirds majority. The resolution professional is merely a facilitator whose administrative powers and functions are controlled by the committee of creditors and by the adjudicating authority

 

7. The validity of Section 29A: The Court observed that the retrospective application of Section 29A doesn’t affect any vested right as Section 29A(c) doesn’t give a resolution applicant any vested right for being considered as a resolution applicant. The erstwhile promoter of a corporate debtor has no vested right to bid for the immovable and movable property during liquidation. 

For Section 29A(c), according to the Supreme Court, where an erstwhile manager is not guilty of malfeasance or of acting contrary to the interests of the corporate debtor, he shouldn’t be kept away from the resolution process.

Concerning barring of relatives of the erstwhile promoters under Section 29A(j), “persons who act jointly or in concert with others” are “connected” with the corporate activities of the resolution applicant. The relatives, for being barred, should have a business relationship with the resolution applicant. If such a connection is failed to be established, no bar or disqualification applies to such a person.

 

8. The validity of Section 53:Section 53, in the view of the court, doesn’t violate Article 14 of the Constitution. The reasonable differentia between financial debts, which are secured and operational debts, which are unsecured, is important to achieve the objectives of the Code. In any case, workmen’s due are placed above most debts despite being unsecured. Also, financial debt repayments infuse capital in the economy and help achieve the objectives of the Code. Thus, since there are various types of unsecured debts and till the time legitimate interests are protected and the objective of the Code is achieved, the section cannot be said to be called ultra-vires to Article 14.

 

The court ruled in favour of the constitutional validity of the Code. 

 

ANALYSIS

 

Swiss Ribbons is a landmark case which adjudicated and upheld the constitutionality of the Insolvency and Bankruptcy Code. The court critically examined the overall code and the various provisions keeping in mind the current and anticipated effect of the code on the economy. The court dwelled into the growing problem of bad debts and considered the same while delivering the judgement. Various disputes about the differentiation between operational and financial creditors were conclusively put to rest. Greater clarity was provided on the role of resolution professional and their objectives and powers were finally defined and balanced for the brevity of corporate debtor and creditors. 

 

The court also stepped in to ensure that applicability and feasibility of the Code can be extended to the masses and directed the Union Government to provide for circuit benches. The regime of corporate governance was shone greater light by this judgement. The court rightfully furthered the spirit of its previous judgement like in Arcelor Mittal case and the Madras Bar Association cases. 

 

Justice Rohinton Fali Nariman quoted 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.” The apex court gave importance to the objectives that the Code seeks to achieve and endorses the constitutionality of the Code. It won’t be wrong to say that the IBC is much-needed legislation which has already been implemented by India’s international peers. Thus, the Court wisely sided with the validity of the Code, keeping in mind the requirement and purpose of this economic legislation. However, the court didn’t side-line the fact that those responsible for insolvency should not regain control of the company and thus, the court compartmentalized between the culprits and the innocent employees of corporate debtors.

 

The questions surrounding the validity of the code and the connected disputes were finally and conclusively disposed of. The court interpreted the legislation liberally and rationally, reiterating its contribution to the growth of the economy and in tackling the prevalent economic issues. 

 

WAY FORWARD

 

The sanction of the validity of the Code by the apex court has paved the way for the legislative reforms which are likely to boost the economic growth. However, since the economy is volatile, the legislations and its amendments should be able to keep up with the growth. The problems of stressed assets and bad debts have been ever-rising and we certainly cannot expect the government to be able to tackle them in the short term. However, the long-term positive effects of the legislation can be predicted and will, hopefully, be witnessed in future. Immense efforts and reforms are still required on the part of the government to increase the ease of doing business and pump-up the economy, especially after the wave of depression caused by COVID-19. 

 

We can expect to witness some fruitful economic reforms and effects of present legislations in future which will help India achieve its targets of economic growth.

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[1]Economic Times, Swiss Ribbons Private Limited, Economic Times (12^th August, 13:52 PM) https://economictimes.indiatimes.com/company/swiss-ribbons-private-limited-/U17119GJ2003PTC042006.