India - Supreme Court Fully Upholds Constitutional Validity Of IBC In Landmark Verdict.

Legal News & Analysis - Asia Pacific - India - Insolvency & Restructuring

8 February, 2019

 

Cyril Amarchand Mangaldas instructs Mr. Tushar Mehta, Solicitor General of India, on behalf of respondent banks and financial institutions in the defence of IBC. 

 

In a landmark decision on January 25th, 2019, the Hon’ble Supreme Court of India in Swiss Ribbons v. Union of India has upheld the constitutional validity of the Insolvency and Bankruptcy Code, 2016 (IBC) in its entirety, laying rest to several issues which arose due to the departure of IBC from previous laws governing insolvency in India. The lead Petitioner Mr. Sanjay Singhal (promoter of Bhushan Power and Steel Limited (Bhushan Power)) had challenged the constitutionality of various provisions of IBC such as Sections 7, 9, 12A, 21, 24, 29A, 53 along with several regulations pertaining to Corporate Insolvency Resolution Process (CIRP), Information Utilities, Resolution Professional as well as constitution of various benches of NCLT and the NCLAT. 

 

The defense of IBC was led by the Mr. K.K. Venugopal, Attorney General of India and by Mr. Tushar Mehta, Solicitor General of India. The CAM team instructed Mr. Tushar Mehta in the proceedings on behalf of 32 banks and financial institutions forming the Committee of Creditors (CoC) of Bhushan Power and Steel Limited (BPSL). The matter relates to the Insolvency proceedings initiated against Bhushan Power under IBC, for resolution of debt of INR 49,000 crore (USD 7 billion appox.) owed to creditors.

 

The Cyril Amarchand Mangaldas Team representing the banks and financial institutions were led by Mr. L. Viswanathan, Chair - Finance and Projects; Mr. Bishwajit Dubey, Partner; Mr. Spandan Biswal, Partner; with support from Ms. Srideepa Bhattacharyya, Associate; and Mr. Prafful Goyal, Associate. 

 

The key challenges made were in respect of the admission process under Section 7, lack of participation of operational creditors in CoC and the disqualification of erstwhile promoters under Section 29A; all such provisions being conceptual departures from previous regimes and which contribute to the immediate impact of IBC on the financial sector. 

 

In its Judgement on 25 January, 2019, the Bench comprising of Hon’ble Justice Mr. Rohinton F. Nariman and Hon’ble Justice Mr. Navin Sinha), while upholding IBC in its entirety, the Hon’ble Supreme Court recognized the Legislature’s right to experimentation in the field of economic legislation and the positive impact of the working of IBC. The Hon’ble Court has observed that “the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid”.  The Court based its key observations on the distinction between the interests of the corporate debtor and of its promoters/ management, on the difference in nature and purpose of financial debt and of operational debt, and in the role of COC members in bringing financial expertise to the resolution process.  

 

The Supreme Court has set out a test for disqualification caused due to related parties being a “connected person” under Section 29A(j) of IBC (the related party has to be connected to the business of the Resolution Applicant). Additionally, the Court has recognized the NCLT’s inherent power to permit withdrawal of a Company from CIRP in the time period between admission and before formation of CoC. The Court has also directed the Government to set up Circuit Benches of NCLAT within a period of 6 months.