Facts of the Case
The introduction of the Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the “IBC Code”) bought along a lot of new changes to the existing Insolvency & Bankruptcy laws, which had previously proved to be ineffective due to the long periods it took to resolve such issues that would almost always certainly result in a company being liquidated. The huge time misutilisation and the same verdict in every case defeated the purpose of the previous laws, which aimed to polish and smooth over the existing infrastructure relating to Insolvency & Bankruptcy, which led to the introduction of this new Code. However, the induction of the IBC Code into the existing legal framework was not as easy as the legislature hoped it would be. Several petitions were filed in the court questioning and challenging the constitutional validity of the various provisions of the IBC Code, like Section 8(4)[1], which differentiated between a financial and operational creditor, and Section 20(8)[2], which laid down the adjudicatory power of the Insolvency Resolution Professional, or Section 29A(9)[3], which lays down the requirement to be a resolution applicant. In response, the Supreme decided to weigh upon and answer the question related to the constitutionality validity of the IBC Code in the present case.
Issue of the Case
- Whether the order for the establishment of Circuit Benches (the tribunal was only being built in Delhi) aligned with the Madras Bar Association Ruling[4]?
- Whether the appointment of members of NCLT and NCLAT is as per the Madras Bar Association Ruling?
- Whether the administrative assistance to the NCLT/NCLAT should be provided by the Ministry of Law and Justice instead of the Ministry of Corporate Affairs?
- Whether the differential treatment of Financial and Operation Creditors under the IBC Code is against the Constitutional spirit and whether Sections 12A[5], 29A[6], and 53[7] of the IBC Code are valid?
- Finally, whether the IBC passed the test of constitutional validity under the existing framework?
Arguments Presented by the Petitioner to the case
The counsel for the Petitioners contended before the Hon’ble Court by laying down the following arguments –
- The members of the NCLT and the NCLAT being appointed under the IBC Code go against the precedence of the court.
- The tribunals established under the Code should be under the Ministry of Law and Justice instead of the Ministry of Corporate Affairs as was established in the Madras Bar Association case.
- Unfair discrimination has been established by the Code regarding Financial and Operational Creditors under Sections 7[8], 21[9], 24[10], and 53[11].
- Section 12A[12] provides unlimited and unchecked power to the Committee of Creditors who have the power to reject legitimate settlement agreements entered between creditors and corporate debtors.
- Section 29A[13] is invalid as it goes against the objective of speedy resolution of insolvency established by the Code.
Arguments Presented by the Respondent to the case
The counsel for the Respondent presented their side before the Hon’ble Court by laying down the following counters to the arguments presented by the counsel for the petitioner
- Previous legislation based on Insolvency and Banking issues had failed to prove effective once they had been enacted by the authorities, but the new IBC Code seeks to address this same problem by resolving the insolvency of corporate debtors in a time-bound manner.
- The members selected for the NCLT and NCLAT are carefully selected by a committee formed of two Supreme Court judges and two administrative officers (bureaucrats), which adheres to the precedence set by the Court in an earlier judgment.
- The differentiation established by the Code between Financial and Operational Creditors is completely justified because such differentiation arises out of necessity and logic. The financial creditors are less in number as compared to the operational creditors and each individual is owed significantly more when compared to the operational creditors. Therefore, this differentiation is not discriminatory in nature.
- Section 29A[14] does not subvert the objectives of the Code but seeks to remove undesirable individuals rendered unable to submit resolution plans who are mentioned in the clauses so that they do not interfere with the speedy resolution of the insolvency.
Judgment
The new IBC Code was introduced by the legislature to help with the speedy resolution of insolvency and banking matters, which prior to the IBC Code, were stuck for years in the court pending resolution and when they were finally resolved, none of the parties was left happy with the outcome due to the inordinate delay which usually resulted in significant losses. Therefore, the IBC Code was seen as a better alternative to the other legislations which were in effect previously. Therefore, following the aforementioned line of thought, the two bench judges of the Supreme Court gave a decision in favour of the Respondents, which supported the Code’s constitutional validity. First, the court held that under the precedence established in the Madras Bar Association case, tribunals must fall under the authority of the Ministry of Law and Justice. Therefore, in the present case, NCLT and NCLAT must operate under the banner of the Ministry of Law and Justice rather than the MCA. Next, the court opined on one of the issues stated by the counsel for the petitioner in their submission. The court held that the location of NCLT and NCLAT in just Delhi subverted the cause of easily accessible and effective remedy, which occurred because the tribunals were only established in the National Capital. People in different states would be forced to travel to Delhi in pursuit of justice and remedy, which would inconvenience them and undermine the effectiveness of the tribunals. Therefore, in pursuance of this, the court ordered the NCLT and NCLAT tribunals to be built in places other than Delhi too. The court also upheld the validity of Section 29A[15] by referring to the cases of Arcelor Mittal India Pvt Ltd v. Satish Kumar Gupta & Ors[16], Chitra Sharma v. Union of India[17], and Salomon v. A. Salomon & Co Ltd[18].
The biggest issue arising out of this case was the constitutional validity of Sections 7[19], 21[20], 24[21], and 53[22], all of which created a differentiation between Financial and Operational Creditors. Financial Creditors are those whose relationship with the entity arises because these creditors invested (or financed) the entity, whereas Operational Creditors are those individuals whose debt arises due to the operational activity of the entity (like a supplier of raw materials whose dues haven’t been cleared by a company). The petitioners cited the case of EP Royappa v. State of Tamil Nadu[23] as their grounding case, wherein the Court has held that the principles of Article 14[24] and 16[25] are equality and inhibition against discrimination. The court accepted the argument presented by the counsel for the Respondent, wherein they claimed that the differentiation was justified because such distinction arises out of necessity and logic. The financial creditors are less in number as compared to the operational creditors and each individual is owed significantly more when compared to the operational creditors. Therefore, this differentiation is not discriminatory in nature and necessary for the proper investors to protect themselves and recover their funds. Weak investor protection policies result in less investment, leading to less growth in the economy and a reduced GDP. The court also observed financial creditors are better equipped than operational creditors in assessing the viability of a business venture and whether it deserves to be revived or liquidated for its assets. Therefore, all the differentiation done between the two types of creditors is valid and the Sections are constitutional in nature.
Case Comment
Analysing all the arguments put for by both the Petitioner and Respondent and the judgment given by the court, we can observe that the judiciary is in firm favour of enacting and implementing the IBC. Any problems that were caused by the enactment of the Code have been resolved by the Court, like the establishment of the tribunals in places other than Delhi. The Court has also upheld the constitutional validity of the various provisions of the IBC that were previously challenged before the Apex Court by approving those provisions as necessary elements needed according to logic. Prima facie, this differentiation established by the IBC Code between the two types of creditors may seem to be discriminatory, but in reality, this differentiation has been created to streamline the insolvency resolution process. The approval of the court goes on to show that the Insolvency and Bankruptcy Code 2016 has successfully passed the litmus test of constitutional validity and has the full power and authority of the law behind it. The induction of this new Code has been very beneficial to the Indian economy. Faster and timely resolution of Corporate Insolvencies has proved to be beneficial for both the creditors (operational and financial included) and the debtors themselves, who are able to maximise their gains and minimise their losses due to the clear structure laid down by the IBC Code.
Author(s) Name: Indrayudh Chowdhury (Bennett University, Greater Noida)
References:
[1] Insolvency and Bankruptcy Code 2016, s 8(4)
[2] Insolvency and Bankruptcy Code 2016, s 20(8)
[3] Insolvency and Bankruptcy Code 2016, s 29A (9)
[4] Madras Bar Association v Union of India (2015) 8 SCC 583.
[5] Insolvency and Bankruptcy Code 2016, s 12A
[6] Insolvency and Bankruptcy Code 2016, s 29A
[7] Insolvency and Bankruptcy Code 2016, s 53
[8] Insolvency and Bankruptcy Code 2016, s 7
[9] Insolvency and Bankruptcy Code 2016, s 21
[10] Insolvency and Bankruptcy Code 2016, s 24
[11] Insolvency and Bankruptcy Code 2016, s 53
[12] Insolvency and Bankruptcy Code 2016, s 12A
[13] Insolvency and Bankruptcy Code 2016, s 29A
[14] Ibid
[15] Ibid
[16] Arcelor Mittal India Pvt Ltd v Satish Kumar Gupta & Ors (2019) 2 SCC.
[17] Chitra Sharma v Union of India (2017) Writ Petion (Civil) No. 744/2017.
[18] Salomon v A. Salomon & Co Ltd (1896) UKHL 1.
[19] Insolvency and Bankruptcy Code 2016, s 7
[20] Insolvency and Bankruptcy Code 2016, s 21
[21] Insolvency and Bankruptcy Code 2016, s 24
[22] Insolvency and Bankruptcy Code 2016, s 53
[23] EP Royappa v State of Tamil Nadu & Anr (1974) AIR 555.
[24] Constitution of India 1950, art 14
[25] Constitution of India 1950, art 16
