Case study: Swiss Ribbons Pvt. Ltd. & Anr vs Union of India & Ors

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Resolution of Astral Steritech

The Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. case pertains to a constitutional challenge in the Supreme Court of India against various provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).

Background

The petitions challenged the constitutional validity of certain provisions of the IBC, which aimed to consolidate and amend laws related to reorganization and insolvency resolution. The petitioners raised issues about the classification between financial and operational creditors, the role of information utilities, and procedural mechanisms, among others.


Key Issues Raised:

  1. Appointment of NCLT and NCLAT Members:
    • Allegation that members were appointed contrary to the Supreme Court’s earlier judgments in the Madras Bar Association cases.
    • Claim that tribunals continue to operate under the Ministry of Corporate Affairs rather than the Ministry of Law and Justice.
  2. Classification Between Financial and Operational Creditors:
    • The petitioners argued there was no intelligible differentia between financial and operational creditors, making this classification arbitrary and discriminatory.
    • Operational creditors of Swiss Ribbons Ltd were alleged to have limited representation in the committee of creditors (CoC) and lacked voting power, which impacted their interests.
  3. Role of Information Utilities:
    • Concerns about private information utilities being for-profit entities tasked with validating defaults, which the petitioners argued should involve a proper adjudicatory process.
  4. Section 12A:
    • Criticism of the provision that required 90% CoC approval for withdrawal of insolvency applications, allegedly derailing settlement opportunities.
  5. Section 29A:
    • Blanket disqualification of promoters and related parties from submitting resolution plans was alleged to be arbitrary and against the principle of maximizing asset value.
  6. Concentration of NCLAT at Delhi:
    • Arguments highlighted inefficiency and inconvenience caused by requiring litigants to travel to New Delhi for appeals, contrary to earlier judgments suggesting Circuit Benches.

The Court’s Observations:

  1. Economic Legislation and Judicial Hands-Off:
    • The Court reiterated the principle that economic laws should be treated with judicial restraint unless found manifestly arbitrary.
    • The IBC’s classification and structure were deemed rooted in economic rationale, focusing on creditors’ expertise and financial discipline.
  2. Classification Validity:
    • Differentiation between financial and operational creditors was upheld as being based on distinct contract types and roles in the insolvency process.
    • Operational creditors’ interests were adequately safeguarded by provisions mandating their payment equal to the liquidation value.
  3. Appointment of Members:
    • The Court found no violation in the appointment of members, noting compliance with judgments and amendments in the Companies Act.
  4. Role of Information Utilities:
    • The Court rejected claims of arbitrariness, affirming their role in financial data verification and enabling smoother resolution processes.
  5. Section 29A and Disqualification of Promoters:
    • Section 29A was upheld, emphasizing its role in barring defaulters and ensuring efficient resolution. Retrospective applicability was not deemed unreasonable.
  6. Section 12A:
    • The Court upheld the requirement of 90% CoC approval for withdrawal post-admission, noting that insolvency resolution serves collective creditor interests.

Conclusion:

  1. The Court directed the establishment of NCLAT Circuit Benches for ease of access and procedural efficiency.
  2. It urged the government to align tribunal administration under the Ministry of Law and Justice in adherence to earlier judgments.
  3. The IBC was held as constitutionally valid, being a progressive economic legislation aimed at resolving insolvencies efficiently while balancing stakeholder interests.

Also See: Landmark Judgments


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