2019 (1) TMI 1508 - SC - Insolvency and Bankruptcy

Constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 - corporate debtor - Code for reorganization and insolvency resolution of corporate debtors - Regulations 16A and 16B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 - Held that - 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 BLRC Report, already quoted above, makes this abundantly clear. The operational creditors are not 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. 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. 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. Resolution professional has no adjudicatory powers - Held 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. Constitutional Validity of Section 29A - retrospective application - Held that - 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 - it is clear that no vested right is taken away by application of Section 29A. Section 29A(C) not restricted to malfeasance - Held that - 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. The One-year period in section 29A(C) and NPAs - Held that - As a matter of legislative policy therefore, quite apart from malfeasance, if a person is unable to repay a loan taken, in whole or in part, within this period of one year and three months (which, in any case, is after an earlier period where the corporate debtor and its financial creditors sit together to resolve defaults that continue), it is stated to be ineligible to become a resolution applicant. The reason is not far to see. A person who cannot service a debt for the aforesaid period is obviously a person who is ailing itself. The saying of Jesus comes to mind if the blind lead the blind, both shall fall into the ditch. The legislative policy, therefore, is that a person who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with - Neither can the period of one year be found fault with, as this is a policy matter decided by the RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset. The ineligibility attaches only after this one year period is over as the NPA now gets classified as a doubtful asset. Related party - Held that - The 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 - 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 - Held that - When the Code has worked hardship to a class of enterprises, the Committee constituted by the Government, in overseeing the working of the Code, has been alive to such problems, and the Government in turn has followed the recommendations of the Committee in enacting Section 240A. This is an important instance of how the executive continues to monitor the application of the Code, and exempts a class of enterprises from the application of some of its provisions in deserving cases. This and other amendments that are repeatedly being made to the Code, and to subordinate legislation made thereunder, based upon Committee Reports which are looking into the working of the Code, would also show that the legislature is alive to serious anomalies that arise in the working of the Code and steps in to rectify them. Section 53 of the code does not violate article 14 - Held that - The 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. 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 - the 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. Petition disposed off.

Issues Involved:
1. Constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016.
2. Appointment of members of the NCLT and NCLAT.
3. Functioning of NCLAT Bench only at Delhi.
4. Administrative support for tribunals.
5. Classification between financial and operational creditors.
6. Notice, hearing, and set-off or counterclaim for financial debts.
7. Voting rights of operational creditors in the committee of creditors.
8. Section 12A regarding withdrawal of applications.
9. Evidence provided by private information utilities.
10. Adjudicatory powers of the resolution professional.
11. Constitutional validity of Section 29A.
12. Retrospective application of Section 29A.
13. Exemption of Micro, Small, and Medium Enterprises (MSMEs) from Section 29A.
14. Section 53 and its impact on operational creditors.

Detailed Analysis:

1. Constitutional Validity of Various Provisions:
The petitions challenged the constitutional validity of several provisions of the Insolvency and Bankruptcy Code (IBC), 2016. The court examined these provisions in light of their objectives, which include timely resolution of insolvency, maximization of asset value, and balancing the interests of all stakeholders.

2. Appointment of Members of NCLT and NCLAT:
It was argued that the appointments were contrary to the Supreme Court’s judgment in Madras Bar Association (III). The court found that a Selection Committee, including two Supreme Court judges, had been constituted in compliance with the court's directions, validating the appointments.

3. Functioning of NCLAT Bench Only at Delhi:
The court noted that having a single NCLAT Bench in Delhi was contrary to the principles of convenience and expediency. The Attorney General assured the establishment of Circuit Benches, and the court directed the Union of India to set up these benches within six months.

4. Administrative Support for Tribunals:
The court reiterated that administrative support for tribunals should come from the Ministry of Law and Justice, as stated in Madras Bar Association (I). Despite the rules of business allocating this to the Ministry of Corporate Affairs, the court emphasized compliance with its earlier judgment.

5. Classification Between Financial and Operational Creditors:
The court upheld the classification, stating that financial creditors are typically involved in assessing the viability of corporate debtors and restructuring loans, which operational creditors are not equipped to do. This classification is neither discriminatory nor arbitrary.

6. Notice, Hearing, and Set-off or Counterclaim for Financial Debts:
The court clarified that financial creditors must provide evidence of default, and the corporate debtor can contest this at the stage of the Adjudicating Authority’s satisfaction. Set-offs and counterclaims can be considered during the resolution process.

7. Voting Rights of Operational Creditors in the Committee of Creditors:
Operational creditors do not have voting rights in the committee of creditors. The court found this justified as financial creditors are better equipped to assess the viability and feasibility of the corporate debtor’s business.

8. Section 12A Regarding Withdrawal of Applications:
Section 12A allows withdrawal of applications with the approval of 90% of the committee of creditors. The court upheld this provision, stating that it ensures collective decision-making in insolvency proceedings.

9. Evidence Provided by Private Information Utilities:
The court held that evidence from private information utilities is only prima facie and rebuttable, ensuring that the corporate debtor can contest the information.

10. Adjudicatory Powers of the Resolution Professional:
The court clarified that the resolution professional has administrative, not adjudicatory, powers. Decisions made by the resolution professional are subject to oversight by the committee of creditors and the Adjudicating Authority.

11. Constitutional Validity of Section 29A:
Section 29A, which disqualifies certain persons from being resolution applicants, was upheld. The court found that it serves the purpose of preventing persons responsible for insolvency from regaining control of the corporate debtor.

12. Retrospective Application of Section 29A:
The court held that Section 29A does not affect vested rights as resolution applicants have no vested right to be considered. Therefore, its retrospective application is valid.

13. Exemption of MSMEs from Section 29A:
The court noted that MSMEs are exempt from certain clauses of Section 29A to prevent liquidation due to lack of interest from other resolution applicants, which is justified given their role in the economy.

14. Section 53 and Its Impact on Operational Creditors:
The court upheld Section 53, stating that the differentiation between financial and operational creditors is based on legitimate interests and is related to the objectives of the IBC.

Conclusion:
The Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code, 2016, and its various provisions, emphasizing the importance of the Code in the economic context and its role in ensuring timely resolution of insolvency and maximizing asset value. The court also directed the establishment of Circuit Benches for NCLAT and reiterated the need for administrative support from the Ministry of Law and Justice for tribunals.

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