Swiss Ribbons Pvt Ltd V. UOI, 2019 SCC OnLine SC 73

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. 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.
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Introduction

The bench of RF Nariman and Navin Sinha, JJ in a landmark verdict, upheld the validity of a section of the Insolvency and Bankruptcy Code, 2016 under a case Swiss Ribbons v. Union of India[1] because as a whole this provision which is mentioned under the code is passed by the constitutional muster.

It is noticed that the working under the code in the recent times has led to the flow of financial resources into the commercial sector of India and in a result, it has increased in the financial debt which need to be repaid. Once it is quoted by the bench that “The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.”[2] Financial creditors are basically secured creditors compromises of banks and financial institutions and operational creditors are unsecured creditors.

Object of the code:

The object of the code does not focus on one party rather it focusses on both the parties that is operational creditor, financial creditor, and debtors also. The object of the code is to maximise the preserve the interest of debtors and also maximise the recovery of all the creditors. This is also an object which is states that a corporate debtor has to be given a chance to correct its own bad management and he has to be saved from a corporate death by giving them an option of liquidation. 

Facts

  1. The senior advocate, Shri Mukul Rohatgi, appeared first in a writ petition and argued that all the members of NCLT and NCLT keeping aside the president of National Company Law Appellant has to be appointed to look into the matter of Madras Bar Association v. Union of India, (2015) 8 SCC 583 [Madras Bar Association (III)], and by looking into the matter all the orders which are passed in the aforesaid case has to be set aside.  In any case in the future assuming to have a de facto doctrine then also it is clear that such members of the case are to be restrained from passing any such order in the future. In any case until a committee who properly constitute till that in accordance with aforesaid judgement, they need to reappoint them, and they will be allowed to function.
  2. In addition to that he also argued with another argument which was that all the administrative support provided to all tribunals must be from the Ministry of Law and Justice. It is to be noted that today also NCLAT is working under the functioning of Ministry of Corporate affairs and there is one more technical error that it exists in the powers of the High Court which are taken away by the NCLAT, it is to be noted that as an appellate forum they must have the same convenience and utility as which is existed prior to the appeals which are going to the NCLAT.
  3. By keeping aside, the above technical objection, Shri Rohatgi set upon the legislature of the code and said that Section 7 of the code does not provide any real difference between financial creditors and operational creditors.
  4. Sharaya Bano, he then argued on the point of classification which is made out by learned senior counsel Shri rastogi that if the classification is made then it will not only be discriminatory, but it will also be showed as an arbitrary action because under Section 8 and Section 9 of the code an operational creditor has also been given the notice of default and in accordance with the same is entitled to have a dispute on the genuineness of the claim. Then again Shri Rohatgi argued that if we assume that there is valid discrimination between the financial creditor and operational creditor then also there exist a confrontational discrimination against the operational creditor. After that learned counsel Shri Rohatgi then set upon the establishment of the information system that are set up under the code.
  5.  He claimed that under Section 210 of the code private information utility can be obtained with an only purpose to make profit and to collect the information on financial data and to check whether a default has been occurred or not.
  6. The obtaining of certificate of information utility under is of preliminary nature which can be issued without hearing and even without any process of the adjudication. Then further, Shri Rohatgi argued on the basis of Section 12A of the code as this section is contrary to the directions of the court .A it is seen under the case of Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem, Civil Appeal No. 18520/2017, and instead of passing of order in this court Section 12A deflect the purpose of the code. Firstly, Shri Rastogi argued that the rights which are vested with promoters to take part in the process of recovery from corporate debtors is harmed by the retrospective application of Section 29A of the code.
  7. With the above-mentioned argument, he further argued that the object of the code is to maximise the value of asset in the process of resolution process. But this is not achieved due to the presence of Section 29A of the code. The promoter who may have best plan for resolution kept out from the threshold. Another argument which was made by the learned counsel was that the person’s account must be mentioned as non-performing asset in accordance with the guidelines issued by RBI. Even if he is a wilful defaulter.
  8. Another senior advocate who came in the picture named as Shri K.V. Viswanathan, strongly supported Shri Rastogi by doing the arguments on the same points with better clarity. Another counsel also supported Shri Rastogi on the point that operational creditors are being discriminated.
  9. Many other counsels came into the pictures, some advocates came on behalf of Union of India and some came on behalf of Solicitor general of India and some came on behalf of RBI who strongly oppose the arguments made by Shri Rastogi. They argued that previous legislation which were in picture before enactment of Insolvency and bankruptcy code failed to maximize the value of assets. Because of all these issues faced IBC was enacted to give insolvency resolution of corporate debtors in a timely manner to fulfil the object of the code.
  10. That counsel further argued that there is a shift in the pattern of management of corporate debtors who now approve better resolution plans, they not only put their interest in corporate debtors but also put interest in all of their stakeholders who can be benefited by them.
  11. In addition to that it was stated that financial creditors are now involved in the assessment of ability of the corporate debtors from the beginning. This ensures the better restructuring of loans and structuring of organisation. This is because of all the sections and objective framed in the code. Under this it was argued that operational creditors are not discriminated, and no defaults are made to them. They are fully aware of the default and credit structure.
  12. Apart of that the interest of operational creditors they have to place equally with financial creditor and if their interest is not put equally then adjudicating authority reject the resolution plan which was approved by committee of creditors and then it has to be modified to fulfil those gaps. They argued for existence of Section 29A that it does not disturb any vested right because resolution applicant does not have any vested right. Also, they stated that this section is not retrospective in nature.
  13. Learned counsel on behalf of Asset Reconstruction Company of India Limited appeared and refer to all the pre-existing legislations before IBC came into the force and showed how those all acts failed to give the results. 

Issues

  1. Whether there is discrimination between operational creditor and financial creditor under the code?
  2. Whether Section 29A takes away the vested rights of promoters?
  3. Whether IBC fulfil the object which pre-existing acts were unable to provide.

Judgement

All the petitions relating to these matters were disposed and no order had been done to this cost. It was held that the code and the cases showed successfulness at the large scale that this code was fulfilling the objective needed for insolvency procedure which neither of pre-existing Acts were able to do.

Hence, it was held that in the result the existence of IBC should not be questioned as it was made for fulfilling the current requirements.

Analysis

  1. (a) A distinction between the management and corporate debtor has been made by all the judicial measures. The management of the companies are better under this code as they protect the interest of company as well as of stakeholders.

(b) The object of the code is fulfilled under this code as it maximises the interest of both corporate debtors and financial creditor’s also operational creditors.

(c) The Supreme Court has also taken operational creditors into the picture as to treat them with fairness and equity for the approval of resolution plan through committee of creditors and then by NCLT if anything is unfair to any party in the eyes of judiciary.

2. This can also be seen under the judgement of Binani Industries where it was held that the creditors cannot be discriminated upon the basis of anything. The Binani industries provide for both financial and operational creditors in the same manner. The Supreme Court has also clarified that operational creditors are of the same importance as of financial creditors.

3. Also, under Section 12A of the code withdrawal from the resolution procedure after initiating of CIRP under the code is possible and is permitted by NCLT in certain cases. This provides flexibility to the code at one hand but at another it attracts the lawbreakers who has intention to withdraw from the resolution plan from the beginning, but the take shelter of the court just fulfil their personal gains. 

4. The Supreme Court has verified the section 29A as entirely it includes all the related parties who are eligible for the disqualification mentioned under Section 29A or the parties who has a business connection with the Resolution Applicant. This will benefit in increasing the number of participants to be seen in the process. It would also be an immense help as it will provide a level of diligence required by resolution applicant. They are seen as a connected person by which reduce the cost of the CIRP process.

5. As somewhere there is discrimination made between the operational creditor and financial creditor because under section 7 of the code only financial creditors can file against a company on behalf of each other or they can also file collectively if the amount does not reach the minimum level of threshold. But operational creditors do not have such authority.

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. 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.[3]

Conclusion

The Supreme Court has by very stringent laws under the IBC has given right from its object. By upholding the constitutionality validity, the judgment of Swiss Ribbons has given foundation for implementation of the IBC in India.

Through this focus and the intent of the code has been revived as to protect the corporate debtor through liquidation and along with protect the interest of Financial creditors, other stakeholders, operational creditors to achieve such end results successfully.


[1] 2019 SCC OnLine SC 73

[2] www.scconline.com

[3] www.scconline.com

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