SC upholds bankruptcy code, cites improved financial flows

In a whoop of victory for credits markets and entrepreneurship, the Supreme Court on Friday upheld the constitutionality of the Insolvency and Bankruptcy Code (IBC), saying the law sends a clear message that India is no longer “the defaulter’s paradise”.

“The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained,” a Bench of Justices Rohinton Nariman and Navin Sinha gave the IBC a thumbs-up in their 150-page judgment.

The Code consolidates disparate bankruptcy and insolvency laws of the past under one umbrella. The judgment authored by Justice Nariman termed these past laws as “trials which led to repeated errors”.


The IBC, on the other hand, adopts a two-pronged approach. It provides a time-bound resolution mechanism, aimed at protecting the maximum value of the assets of the corporate debtor. It also, while doing so, promotes entrepreneurship and credit markets. The court noted that the working of the Code is being monitored by the Centre through expert committees. The Code is constantly evolving, bettering itself.

“We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector has increased exponentially as a result of financial debts being repaid,” the judgment observed.

3,300 cases

“Approximately 3,300 cases have been disposed of by the adjudicating authority based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over ₹1,20,390 crore,” the judgment added.

It said the liquidation value of 63 of the 80 cases resolved through the acceptance of resolution plans was ₹29,788.07 crore. But the amount realised from the resolution process was ₹60,000 crore, that is, 202% higher than the liquidation value. The court noted that IBC has witnessed an improvement in the total flow of resources to the commercial sector, both bank and non-bank, and domestic and foreign (relatable to the non-food sector), has gone up from a total of ₹14,530.47 crore in 2016-2017 to ₹18,469.25 crore in 2017- 2018 to ₹18,798.20 crore 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,” Justice Nariman wrote.

The judgment, however, partially reads down Section 29A. This provision disqualifies certain kinds of persons from submitting a resolution plan. The court said the very purpose of Section 29A is to ensure that the “persons responsible for insolvency of the corporate debtor do not participate in the resolution process”.

However, the court interprets clause (j) of Section 29A to hold that the “mere fact that somebody happens to be a relative of an ineligible person cannot be good enough to oust such person from becoming a resolution applicant, if he is otherwise qualified”. It said the expression “related party” and “relative” would include only persons connected with the business activity of the resolution applicant.

Relaxation for MSMEs

The court upheld certain relaxations given to micro, small and medium enterprises (MSME) under Section 29A of the Code. The court said the MSME form the “bedrock of our economy” and stringent restrictions through the IBC would adversely affect them. That is, instead of resolving crisis, it would lead to the untimely liquidation of MSMEs. The court said the relaxation provided to MSMEs is proof that the legislature is alive to the anomalies within the Code and is taking steps to rectify them.

The court dismissed arguments that the IBC discriminates between financial creditors and operational creditors. It said “financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts”.

“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,” the court observed.

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Printable version | Jul 29, 2021 6:00:47 PM |

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