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Writer's pictureUjjwal Anand
Aug 11, 202010 min read

Swiss Ribbons Pvt. Ltd. v. Union of India [AIR 2019 SC. 739: (2019) 4 SCC 17]

Author: Ujjwal Anand Symbiosis Law School, Pune Editor: Sri Hari Mangalam The West Bengal National University of Juridical Sciences, Kolkata

ABSTRACT

“The Defaulters’ paradise is lost. In its place, the economy’s rightful position has been regained.”

~ Justice RF Nariman

Insolvency and Bankruptcy Code (IBC) was inducted in 2016. The statute was mandated due to the gigantic pile of non-performing loans of banks and impediments in loan resolution. In India, the insolvency resolution took an average of more than four years equated to other countries such as the United Kingdom (one year) and the United States of America (one and half years), which adversely impacted on the ease of business index of the country and also expedited the heap of unsettled lawsuits of insolvency. IBC applies to companies, partnerships, and individuals. This procures a time-bound cycle for determining insolvency. When repayment defaults, creditors regain control of the debtor’s assets and must decide to resolve the bankruptcy. Both under IBC debtors and creditors can initiate ‘recovery’ proceedings against each other.

Since IBC was newly incorporated at the time of the Swiss Ribbon case, there was a prominent need for interpretation of the code by the apex body.  The Supreme Court, on January 25, 2019, in the case of Swiss Ribbon Private Limited Ltd. v. Union of India and ORS[1] upheld the validity of the Insolvency and Bankruptcy Code eliminating the quandary. The bench of Justices RF Nariman and Justice Naveen Sinha reserved orders on various petitions on January 15, 2019, including the High Courts of Calcutta and Gujarat, questioning the validity of the code[2]. The bunches of petitions were moved mostly by stating that the IBC was discriminative, unfair, and arbitrary with operating creditors as compared to financial creditors.

ISSUES AND OBSERVATIONS

  1. CATEGORIZING OF ‘FINANCIAL CREDITOR’ AND ‘OPERATIONAL CREDITOR’- SECTIONS 53. S(7) & (20)

The Court held- “preserving the corporate debtor as a going concern while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are different from operational creditors and therefore, there is an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.”[3]

The major argument of the petitioners was that there is no relation between the financial and operational creditors to the items sought to be fulfilled by the Code. Certainly, no such distinction has been made anywhere; and so, it was defended to discriminate. The SC, however, believed that the distinction was “neither prejudicial nor arbitrary nor a violation of Article 14 of the Constitution of India”. It received this decision after a detailed analysis dissecting several sections of the Code, detailed regulations, and commentary to the Bankruptcy Law Reform Committee report[4]. The Insolvency Law Committee Report and the Joint Parliamentary Committee Report included a counterpoint drawn from the UNCITRAL Legislative Guide on Insolvency Law. The importance of the decision lies in the fact that the financial creditors have a better knowledge of the business and foresight of the corporate lender, and the long-term interests based on a large number, due to the technical-valuation analyzes performed by them before the loan. Financial creditors examine the viability of the corporate debtor. They are equipped in loan restructuring, as well as reorganizing the corporate debtor’s company when there is a financial burden, which is elements that operational creditors do not and cannot do[5]. This issue now seems to have been impounded down with finality, with nearly every provision and procedure of the Code posited upon this distinction being firmly determined in the judgment[6]. Section 53 was analyzed separately. This section gives precedence in the distribution of assets in the structure and liquidation of claims[7]. The code takes precedence in secured claims (protection of frequent financial creditors). Unsecured claims (typically position operational creditors find themselves) are given the lowest priority. This order of claims in the past, it can be seen, was particularly and often contrasted with government claims of several tons ahead of financial creditors[8].

  1. CONSTITUTIONAL VALIDITY OF SECTION 12A (SECTION 12A & 60)

Before the insertion of Section 12A[9], once a corporate debtor is deemed to have gone bankrupt, the two possibilities accessible under the code were the sale of all or parts of the current business or liquidation of the corporation with the distribution of its assets to creditors and other stakeholders. In Lokhandwala Kataria[10] and Uttara Foods[11], SC’s birthright jurisdiction was implemented to propagate a third option, which permitted promoters the opportunity to access the settlement and revoke the CIRP (Corporate Insolvency Resolution Process). In exercise of its powers under Article 142 of the Constitution[12], the SC allowed orders to withdraw applications even after the creditors’ requests were accepted by the NCLT or NCLAT. Subsequently, on the advice of the Insolvency Law Committee, new section 12A was inducted in June 2018. Section 12A initially allows the withdrawal of the CIRP application from the subsequent admission of the applicant, given which the Committee of Creditors (CoC) conceded to such withdrawal from the vote share of ninety percent. This provision is clear and inferred only on the conditions when this provision can be brought into play. Nonetheless, it is not a question whether this is certainly the basis for the promoter proposing a settlement or starting a settlement plan. In the Swiss ribbon, it was argued: The Committee of Creditors was given unchecked and canalized power to dismiss legitimate settlement reached between creditors and corporate debtors”. The Supreme Court held that CIRP, formerly admitted, falls into ‘rem’ and is no longer individual proceedings but integrated proceedings. In the case of all stakeholders in corporate debtors, there is a concern. In certain instances, settlements were deemed by NCLT, NCLAT, and SC, but it was between the corporate debtor and all its creditors (not only between the corporate debtor and the applicant creditor). In this context, the BLRC[13] report identified that the code’s layout was founded on securing: All key stakeholders will be involved to fully assess viability. The law must assure that all creditors who have the capacity and the alacrity to restructure their liabilities must be part of the negotiation cycle. The liabilities of all creditors who are not engaged in the negotiation process must too be convened in any negotiated solution. The liabilities of all creditors who are not engaged in the negotiation process should also be called in to resolve any negotiation[14].How all stakeholders, issues are to be determined, it is already adequately interpreted that financial creditors are sufficiently positioned to take calls. Ninety percent is a good high limit, and if met, should be taken seriously. The apex court observed that “the figure of ninety percent, in the event of nothing to ascertain that it is arbitrary, should be related within the ambit of legislative policy”. Controversially, the SC further stated in the judgment that under Section 60 of the Code[15], the COC is not a complete adjudicator on the subject: “Furthermore, it is clear that, under Section 60 of the Code, the Committee of Creditors does the subject but there is no final word. If the creditor’s committee arbitrarily dismisses a settlement and/or withdrawal claim, the NCLT and thereafter, the NCLAT may always revoke such a decision under section 60 of the Code.

Section 60(5)[16] grants a residuary jurisdiction on the NCLT and NCLAT for matters and causes of action not already delivered elsewhere in the Code. Hence, the clear explanation above would suggest that a minor promoter (who could not garner 90 percent support of the COC, or where the COC expressly rejects it for voting) is free to move towards the NCLT and claim is that his bus disposal plan was arbitrarily rescinded. Hence, section 12A was not arbitrary and unconstitutional.

  1. PERSONS INELIGIBLE TO RESOLUTION APPLICANT (SECTION 29 A)

Section 29A essentially establishes the disqualification norms for resolution applicants under the Code[17]. It was enforced first through an ordinance, and afterward by an amendment on November 23, 2017. At the moment, there was an apparent and existing danger – that the unscrupulous promoters were tricking the operation. This was essential not just to give rise to quick amendments to the Code but also to go a step further in executing the amendment with retrospective impact. It should not be the case of the blind leading the blind.  This step was enacted to deter the back-door threshold by such wrong promoters. The section 29A was challenged in Swiss Ribbons case[18] because-

  1. The fundamental rights of the former promoters to join in the corporate lender’s recovery cycle have been undermined by the retrospective application of section 29A.

  2. A blanket ban on the participation of all the promoters without defining between dishonest and virtuous promoters is entirely arbitrary.

  3. The primitive of the resolution is to amplify the value of assets. Section 29A is incompatible to such a target as it bars the former promoters, who could outdo the rest of the applicants and present the most efficient resolution plan.

  4. According to RBI norms, a person’s account can be regarded as an NPA, despite him not being a willful defaulter. Moreover, a period of one year and three months grace period is arbitrary (Disqualification where a person’s account has been NPA for one year).

  5. People who may be related to the erstwhile promoters in the sense that they are relatives, friends, etc and don’t have any business relationship are also barred by section 29A.

The Supreme Court formerly concluded that the promoters possessed no inherent right to be considered as resolution applicants in the cases of Chitra Sharma[19] and ArcelorMittal[20]. As the court had already refuted that the promoters don’t have any vested right, the contention that the right to be part of the resolution process was rescinded with a retrospective impact is ruled out. Further, it was delivered that person who is incapable to fix its debt beyond the grace period is a person who is struggling itself. Hence, there existed no drawback with the legislative policy that if someone was incapable to pay back becomes ineligible to become a resolution applicant. The petitioner’s argument was countered with strict reference to the RBI’s income recognition and classification mechanisms about the conclusion of NPA’s and their guidelines[21]. The Supreme Court determined that this is legislative policy, the SC would not intervene and in any case, the RBI guidelines provide reasonable justification on resolution applicant. Neither a mistake in this policy can be established, nor can one year be questioned, as it is a policy matter decided by RBI. The argument in the issue regarding the relation of any person with the erstwhile promoter was essentially clarified as an act of legislative nuisance – the fact that a person is a relative of a disqualified person in law is not a practical justification to deter a person from becoming a resolution applicant, maybe if it is otherwise qualified. The Supreme Court, however, found that in the Code’s scheme, the definitions of “related party”, “relative” and “connected person”, when reading together pragmatically in the context of each other, certainly eliminates any theory of arbitrariness[22].

  1. THE INSOLVENCY RESOLUTION PROFESSIONAL IS MERELY AN ADMINISTRATOR.

The Bench held that under the Code, the resolution connoisseur is permitted administratively limit contrary to quasi-judicial or ancillary powers. It also notes that when a resolution professional is moreover required to make a ‘determination’ under Regulation 35A [IBBI] Regulations, 2018, he can only take the adjudicating authority for reasonable remedy. A resolution professional cannot edict under the Section 28 of the Code in various cases, like a liquidator without the consent of the Committee of Creditors, which, by a 2/3 majority, may supersede one resolution professional with another, if they are not satisfied with his operation in the case[23]. Therefore, the resolution professional is precisely a facilitator of the resolution process, whose administrative processes are supervised by the creditor’s committee and the adjudicating authority.

CONCLUSION

The code has impacted the matters related to CRIP positively; it’s the fundamental observation that can be drawn out from the judgment. The conclusive cash flow in the commercial sector owing to the repayment of corporate debts in India has ascended over the years since its implementation. The arbitral settlement between the corporate debtor and creditor is yet one of the primary outcomes of the code. The notion of the code of creating economic experimentation constructively thus the judiciary shall not intervene with the legislative norms. The disagreements simply based on fairness, plausibleness, or minor legal technicalities, which don’t affect the commercial and practical consideration won’t be regarded in the court of law. The other, key interpretation concluded by the judgment is the central objectives of economic experimentation to be achieved by the code are-

  1. Speedy and timely settlement of insolvency resolutions.

  2. Amplify the asset value during resolution.

  3. To protect the interest of all stakeholders during resolution.

How economic experimentation will be interpreted at various levels is a million-dollar question? I’ll quickly summarize the Essar Steel case[24], where it’s clear that the Swiss ribbon case was observed but it left us with numerous questions that are contrary to the objectives of the code.

Essar Steel amassed a debt over 54,000 crores in 2015 and the key financial creditors approached the NCLT for Essar’s liquidation[25]. The NCLT approved the proposal and a bid was put forward by Arcelor Mittal for 42,000 crores for Essar Steel Ltd. Arcelor Mittal had fallen foul of 29A as it had few NPA’s beyond the grace span that was required to be notified as NPA’s. The Supreme Court, under Article 142, provided a grace term of two weeks and Arcelor Mittal cleared existing NPA’s worth 7,469 crores.  Meanwhile, ESAR (Essar Steel Asia Holdings Ltd.) one of ESSAR’s promoters proposed a settlement plan worth Rs. 54,839 crore which was subsequently rejected by the NCLT. It’s was stated that for withdrawal of the resolution proposal, a 90% vote of COC should be attained. The COC got two months period to select the best resolution option available i.e. ESAH and Arcelor Mittal[26]. The Arcelor Mittal proposal was selected by the COC with over 90 percent vote. The deciding attempt was perpetrated by ESAH asserting 60(5) of the code arguing that their settlement proposal should be considered on a similar note. The NCLT banking on Swiss Ribbon judgment emphasized that a Section 12A[27] of the code instructs 90% voting of COC for authorizing withdrawal. Further, NCLT asserted that the application should be moved by the applicant creditor and not by the promoter. Thus it was contrary to the judgment passed by the Supreme Court in the Swiss Ribbon case which states- “If the committee of creditors arbitrarily rejects a settlement or withdrawal claim, the NCLT, and then after the NCLAT can always set aside such ruling under section 60 of the code”. Hence, if the ESAH’s proposal for settlement would have been accepted, the recovery of 54,000 crores in about 15 months it could be the biggest NPA recovery ever in India and would have aided all the creditors.

[5] Madras Bar Association v Union of India [2015] 131 SCL 26

[7] Innovative Industries Ltd. v ICICI Bank [2017] 143 SCL 635

[8] Shayara Bano v Union of India [2017] 9 SCC

[10] Lokhandwala Kataria Construction Private Limited Vs. Nisus Finance And Investment Managers LLP [2017] IBC law.in 04 SC

[11] & Feeds (P) Ltd v Mona Pharmachem [2018] 92

[14] 100 SCL 142, and Brilliant Alloys (P.) Ltd v S. Rajagopal

[19] Writ Petition (Civil) No 744 Of 2017

[20] [2018] IBC law.in 42 SC Case Name: ArcelorMittal India Private Limited Vs. Satish Kumar Gupta & Ors.

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