Supreme Court upholds constitutional validity of IBC

The Supreme Court, while deciding the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 (code), in the case of Swiss Ribbons Pvt Ltd v Union of India, upheld the mandate of section 29A with minor distinctions. Section 29A of the code lists persons or entities not eligible to submit a resolution application in insolvency proceedings before the National Company Law Tribunal.

The challenge to the constitutional validity of section 29A, more particularly clause (c), was made on the grounds that it restricts the speedy disposal of a resolution process, and as such is contrary to the object of the code. Clause (c) of section 29A provides that a person who exercises control and management over a corporate debtor’s non-performing asset (NPA) account or who is a promoter of the corporate debtor, and at least one year has elapsed from the date on which such account was classified as NPA. is not qualified to be a resolution applicant.

A proviso to the provision makes exceptions in casesc where (1) the applicant discharges their debt under the said NPA accounts, (2) the applicant is a financial entity and is not a related party to the corporate debtor, and (3) the applicant has the control and management of the NPA accounts and is a promoter of the corporate debtor pursuant to a resolution plan approved under the code.

Section 29A(c) was challenged on the grounds that it brings about a blanket ban on all the promoters of the corporate debtor. Also, it does not provide any mechanism to bar unscrupulous promoters responsible for the stressed state of the corporate debtor and does not allow efficient managers to revive the corporate debtor, and is manifestly arbitrary.

Also, it was contended that retrospective application of the provision has erroneously restricted the former promoters who may have the best resolution plan, resulting in the maximization of value, and as such is contrary to the object of the code.

Further, the classification of an account as NPA may be due to various reasons without the person being a willful defaulter. Restricting such a person from making a resolution application otherwise valid under the code is without any basis in law and rationality. Also, restricting relatives of former promoters (clause (h)), who do not have a business connection with such promoters, from submitting a valid resolution plan may not be a rational interpretation of the mandate of the code.

The Supreme Court, in upholding the constitutional validity of section 29A, observed that the Statement of Object and Reasons of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, clearly stated that persons, who with their conduct have contributed to the defaults of the corporate debtor, and are otherwise undesirable, may misuse the code to participate in the resolution process, and gain or regain control of the corporate debtor.

The retrospective application of the said provision was held to be valid on the basis of the fact that an applicant has no vested right for consideration and approval of its resolution plan (ArcelorMittal India Private Limited v Satish Kumar Gupta and Ors), and no vested right is being taken away by the retrospective application of section 29A.

Further, the Supreme Court observed that restricting an efficient erstwhile manager or promoter of the corporate debtor from making a resolution application under the code is valid. The court held that such persons do not have a vested right to make an application as they are also restricted from purchasing stressed assets of a corporate debtor under liquidation.

With regard to restrictions imposed on the relatives of such ineligible resolution applicant, the Supreme Court applied the doctrine of nexus (Attorney General for India & Ors v Amratlal Prajivandas & Ors), and observed that categories of persons qualified to be relatives under the code should not be considered to be ineligible resolution applicants under section 29A in the absence of any (real) connection with the business activity of former promoters or managers.

The above ruling of the Supreme Court furthers the principle that a person, owing to whose conduct the corporate debtor has gone into insolvency, should not be allowed to regain control of the stressed enterprise at a discounted value, and is in line with its judgment in the case of State Bank of India v V Ramakrishnan.