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SUPREME COURT OF INDIA
R.F. Nariman, Navin Sinha, JJ.
Swiss Ribbons Pvt. Ltd. & Anr. – Petitioners
Versus
Union of India & Ors. – Respondents
Writ Petition (Civil) Nos. 99, 100, 115, 459, 598, 775, 822, 849, 1221 of 2018; 37 of 2019 & Special Leave Petition (Civil) No. 28623 of 2018
Decided On : 25-01-2019
Civil Appeal Nos. 9402-9405/2018 – Relied upon
(b) Companies Act, 2013 – Section 412 – Appointment of NCLT members – Appointments made in accordance with section 412 and Supreme Court order in (2015) 8 SCC 583 – No error. (Para 14)
(2015) 8 SCC 583 – Relied upon
(c) Insolvency and Bankruptcy Code, 2016 – Section – Bench at Delhi only – Union of India directed to set up circuit benches of NCLT in six months. (Para 16)
(2014) 10 SCC 1 – Relied upon
(d) Constitution of India – Article 77(3) – Rules of business allocating matters arising under the Insolvency Code to Ministry of Corporate Affairs – Mandatory in nature for executive and have to be followed by them – However, in view of (2010) 11 SCC 1 Union of India directed to follow the judgment in letter and spirit. (Para 19)
(2010) 11 SCC 1 – Relied upon
(2015) 8 SCC 446 – Referred
(e) Insolvency and Bankruptcy Code, 2016 – Sections 5(7) and 5(20) of the Code – “Financial creditor” and “Operational creditor” – Classification whether arbitrary – Most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors like suppliers, contractors, workers are unsecured – Nature of loan agreements with financial creditors is different from contracts with operational creditors – Financial creditors generally lend finance on a term loan or for working capital, contracts with operational creditors are for supply of goods and services in the operation of business – Financial contracts generally involve large sums of money whereas quantum of dues of operational contracts is generally less – Operational creditors can be many as opposed to financial creditors – 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 – Forum for dispute resolution in the two cases is entirely different – Operational debts tend to be recurring in nature with possibility of genuine disputes being much higher as compared to financial debts – Financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor and therefore do engage in restructuring of the loan as well as reorganization of the corporate debtor’s business, which the operational creditors do not and cannot do – Held, financial creditors are clearly different from operational creditors – There is an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. (Para 27, 28, 84)
(2017) 9 SCC 1 – Relied upon
(f) National Company Law Tribunal Rules, 2016 – Rules 11, 34, and 37 – Practice and procedure – At the stage of the Adjudicating Authority’s satisfaction corporate debtor is served with a copy of the application filed with the Adjudicating Authority – Corporate debtor may then file a reply – It will then be heard by the authority before an order is made admitting the application. (Para 33)
(2018) 1 SCC 407 – Relied upon
(g) Insolvency and Bankruptcy Code, 2016 – Section 65 and 75 – Penalties for dragging corporate debtor into corporate insolvency resolution process malafide. (Para 33, 34)
(h) Insolvency and Bankruptcy Code, 2016 – Section 60. Section 60(5)(c) – Financial debts require repayment of amount due set-off being a rarity – However, legitimate set-off may be considered at the stage of filing of proof of claims during the resolution process by the resolution professional – Decision of resolution professional is subject to challenge before the Adjudicating Authority – Similarly independent right of counterclaim is not taken away by the Code – Form C, Insolvency Resolution Process for Corporate Persons Regulations, 2016. (Para 35, 36)
(i) Insolvency and Bankruptcy Code, 2016 – Section 21, 24, 30 and 31 r/w Regulation 38, Insolvency Resolution Process for Corporate Persons Regulations, 2016 – Resolution plan – Committee of creditors – Financial creditors have resources to assess financial position of corporate debtor and do it while lending, they are better placed to vote in the committee of creditors which approve the resolution plan – Further it is the financial creditors who implement the resolution plan – Operational creditors not having such resources and interested only in recovery of their debt are not given voting rights – However, interests of operational creditors is safeguarded by providing for requirement of a minimum payment to operational creditors, being not less than liquidation value for any resolution plan to be approved by NCLAT – Held, there is no discrimination of operational creditors as infraction of Article 14 either on the ground of equals being treated unequally or on the ground of manifest arbitrariness. (Para 44, 46, 47)
(j) Insolvency and Bankruptcy Code, 2016 – Section 12A – Withdrawal by individual corporate debtor – Permissible on consent of 90% of members of committee of creditors – On admission of a creditor’s petition under Sections 7 to 9, the proceeding, being a collective proceeding, is a proceeding in rem – Any settlement, ideally, should apply to all creditors – It is necessary therefore that the committee of creditors must be consulted before any individual corporate debtor is allowed to settle its claim – Therefore 90% of creditors are required to approve any withdrawal – Moreover, section 60 provides a safeguard against arbitrary rejection of withdrawal – NCLT or NCLAT can always set aside such arbitrary rejection – Section 12A held valid. (Para 52, 53)
(k) Information Utilities Regulations – Regulations 20 and 21 – Contention that private information utilities are not governed by proper norms – Registration of such utilities on fulfilling stringent requirements – Regulations requiring such utilities to communicate information of default to all parties and sureties to debt – Utility, on receiving information required to expeditiously undertake the process of authentication and verification of information including that from debtor – Contention rejected. (Para 57)
(l) Insolvency and Bankruptcy Code, 2016 – Section 18, 38 to 40, 41 and 42 r/w Regulations 10, 12, 13, 14 and 35A, Insolvency Resolution Process for Corporate Persons Regulations, 2016 – Administrative as opposed to quasi-judicial powers given to Resolution professional – ‘Determination’ made by Resolution professional means his application to Adjudicating Authority for appropriate relief based on the determination made – The liquidator, on the other hand, required to consolidate and verify the claims, and either admit or reject such claims – Held, resolution professional really a facilitator of resolution process – His administrative functions overseen by the committee of creditors and the Adjudicating Authority.
(m) Insolvency and Bankruptcy Code, 2016 – Section 29A – Validity – “Persons acting in concert” – Intention to rope in all persons who may be acting in concert with the person submitting a resolution plan – Provision rectifying a loophole in the Act allowing a back door entry to erstwhile managements in the CIRP. (Para 63)
Civil Appeal Nos. 9402-9405/2018; Writ Petition (Civil) No. 744 of 2017 – Relied upon
(n) Insolvency and Bankruptcy Code, 2016 – Section 29A – Retrospectivity – 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 – Held, no vested right is taken away by section 29A – Resolution applicants have no vested right to be considered as such in the resolution process. (Para 64, 65)
Civil Appeal Nos. 9402-9405/2018; (2005) 7 SCC 584 – Relied upon
(2008) 8 SCC 205; (1994) 5 SCC 593; 1992 Supp (1) SCC 191; (1989) 3 SCC 448; (1987) 3 SCC 622; (1976) 1 SCC 906 – Distinguished
(o) Insolvency and Bankruptcy Code, 2016 – Section 29A(c) – Keeping out erstwhile managers from resolution process – Keeping out does not mean that the person kept out is a criminal – He may be disqualified in many ways in accordance with law, for example under Companies Act, 2013. (Para 67)
(p) Insolvency and Bankruptcy Code, 2016 – Section 35(1)(f) Proviso – Retrospective effect – No vested right in erstwhile promoter of a corporate debtor to bid for immovable and movable property of the corporate debtor in liquidation – Proviso rightly interdicts persons made ineligible by section 29A and persons who are unable to pay their debts in the grace period allowed, from purchasing assets of the corporate debtor whose debts they have either wilfully not paid or have been unable to pay – Not arbitrary and violative of Article 14, Constitution of India. (Para 69)
(q) Insolvency and Bankruptcy Code, 2016 – Section 29A and NPAs – Wilful defaulter and Non Performing Asset (NPA) – Distinction – A wilful defaulter would be a person who though able to pay, does not pay – An NPA, on the other hand, refers to the account belonging to a person that is declared as such under RBI guidelines – A person becomes defaulter when an instalment and/or interest on the principal remains overdue for more than three months – Such account is declared substandard asset during the grace period of one year thereafter – During the grace period such person can bid along with other resolution applicants to manage the corporate debtor – If the defaulter fails to clear his dues even during the grace period then the account is declared NPA – As a matter of legislative policy if a person is unable to repay a loan taken, in whole or in part, within this period of one year and three months he is stated to be ineligible to become a resolution applicant – Prescription of one year being matter of policy, cannot be found fault with. (Para 71)
(r) Insolvency and Bankruptcy Code, 2016 – Section 29A(j) r/w section 5(24) and (24A) – Related party – Held, “related party” and “relative” must be read noscitur a sociis with the categories of persons mentioned in Explanation I to section 5(24A)(j) – So read, the expression would include only persons who are connected with the business activity of the resolution applicant – Such persons would be ineligible to become a resolution applicant. (Para 75)
(1994) 5 SCC 54 – Relied upon
(s) Insolvency and Bankruptcy Code, 2016 – Section 29A(j) r/w section 5(24) and (24A) – Connected person – Means any person in management or control of the business of the corporate debtor before or during implementation of the resolution plan – Such persons will be ineligible to become a resolution applicant. (Para 76)
(t) Insolvency and Bankruptcy Code, 2016 – Section 29A r/w section 240-A, and Section 7, Micro, Small and Medium Enterprises Development Act, 2006 – Exemption of Micro, Small and Medium Enterprises from operation of section 29A(c) and 29A(h) – Instance of monitoring application of the Code by executive and concern of the legislature to rectifying serious anomalies arising in the working of the Code. (Para 81)
Facts of the case:
The present petitions assail the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016
Finding of the Court:
The Code is a beneficial legislation which puts the corporate debtor back on its feet. It is not mere recovery legislation for creditors. Resolution process is not adversarial to the corporate debtor, rather protective of its interests.
Union of India directed to set up circuit benches of NCLT in six months.
Rules of business allocating matters arising under the Insolvency Code to Ministry of Corporate Affairs is mandatory in nature.
There is an intelligible differentia between the financial and the operational creditors which has a direct relation to the objects sought to be achieved by the Code. Classification not violative of Article 14.
Section 12A is valid.
Section 29A is valid.
JUDGMENT :
R.F. Nariman, J.
1. The present petitions assail the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 [“Insolvency Code” or “Code”]. Since we are deciding only questions relating to the constitutional validity of the Code, we are not going into the individual facts of any case.
2. Shri Mukul Rohatgi, learned Senior Advocate, appearing in Writ Petition (Civil) No. 99 of 2018, has first and foremost argued that the members of the National Company Law Tribunal [“NCLT”] and certain members of the National Company Law Appellate Tribunal [“NCLAT”], apart from the President, have been appointed contrary to this Court’s judgment in Madras Bar Association v. Union of India, (2015) 8 SCC 583 [“Madras Bar Association (III)”], and that therefore, this being so, all orders that are passed by such members, being passed contrary to the judgment of this Court in the aforesaid case, ought to be set aside. In any case, even assuming that the de facto doctrine would apply to save such orders, it is clear that such members ought to be restrained from passing any orders in future. In any case, until a properly constituted committee, in accordance with the aforesaid judgment, reappoints them, they ought not to be allowed to function. He also 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. A further technical violation also exists in that if the powers of the High Court are taken away, the NCLAT, as an appellate forum, should have the same convenience and expediency as existed prior to appeals going to the NCLAT. 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. Apart from the aforesaid technical objection, 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. Relying upon Shayara Bano v. Union of India, (2017) 9 SCC 1 [“Shayara Bano”], 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. 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. 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, u
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