IBC: Supreme Court Upholds Insolvency And Bankruptcy Code In Its Entirety

The two-year old IBC law has been upheld by the Supreme Court, quashing petitions by operational creditors.

A view of the Supreme Court (Source: PTI)
A view of the Supreme Court (Source: PTI)

The Supreme Court of India upheld the two-year old insolvency code in its entirety, quashing petitions which challenged the law saying it was discriminatory. The two-judge bench headed by Justice Rohinton Nariman also upheld the ban on promoters’ bids for the defaulting company undergoing the insolvency process.

Today’s judgment will boost a clean credit culture, said Rajiv Kumar, secretary at the Department of Financial Services. The ruling will help recover Rs 1.8 lakh crore in the current financial year, he said.

The apex court was hearing a batch of petitions that had challenged the constitutional validity of IBC under Article 14 of the Constitution. Several operational creditors had argued that IBC doesn’t make an intelligible differentia in the classification of a financial creditor and operational creditor, and hence violates Article 14. Operational creditors had argued that they provide services to companies and while they have the right to initiate insolvency proceedings if their payments are defaulted upon, the code bars them for participating in the resolution process through the committee of creditors. Under IBC, the committee can only consist of financial creditors who assess and vote on resolution plans submitted by interested bidders.

The second important argument was that by barring promoters from bidding for their own companies, IBC forces the sale of the company to new bidders. This, the petitioners had argued, is against the fundamental rights of promoters of a company.

The apex court dismissed both these arguments. Former Attorney General of India and Senior Advocate Mukul Rohatgi was among the lawyers appearing for the petitioners challenging the law. The top court had reserved its judgment on Jan. 16.

While the Supreme Court upheld the bar on promoters to come in as resolution applicants, the Section 12A route is open for them, Nilang Desai, partner at AZB pointed out. Section 12A of IBC allows for a withdrawal of an insolvency application if 90 percent of the creditors’ committee by voting share approves it.

In more cases than not, 12A is going to give a higher recovery for lenders; it may even be the entire recovery. If that is the case, then I see no problem for the promoters coming back and taking control of their company. If they’re paying their debts, then what’s the problem?
Nilang Desai, Partner, AZB

This section is relevant in Essar Steel’s case where the promoters are vying to take back control of their company when the resolution process is in its final stages. The Ruias offered to repay 100 percent of its debts. However, this came after steel giant Arcelor Mittal won the formal bidding process for Essar Steel.

Davos 2019: Aditya Mittal Calls Ruias’ Bid For Essar Steel A Tactic To Delay Resolution

Watch the discussion with Shardul Shroff and Nilang Desai.