NEW DELHI: Putting a stop to hundreds of litigations dragging down the insolvency process, the Supreme Court on Friday upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC) in its entirety and dismissed all petitions challenging its provisions. The two-judge bench of Justices Rohinton Fali Nariman and Navin Sinha was hearing petitions moved by several operational creditors alleging discriminatory treatment and arguing that IBC was unfair as it was protecting the rights of only financial creditors.
But the bench dismissed all the pleas saying that the Code is proving to be largely successful and the flow of financial resources to the commercial sector has increased exponentially as a result of debts being repaid. “The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained. The result is that all the petitions will now be disposed of in terms of this judgment. There will be no order as to costs,” the bench said. The petitioners represented by advocate Mukul Rohatgi had argued that IBC doesn’t make an intelligible differentia in the classification of a financial creditor and operational creditor. Currently, the all important creditors’ committee can only consist of financial creditors who assess and vote on resolution plans.
While operational creditors provide services to companies and have the right to initiate insolvency proceedings if their payments are defaulted upon, the code bars them from participating in the resolution process through the committee of creditors. Another argument was that IBC bar promoters from bidding for their own companies. The petitioners argued that by doing so, IBC forces its sale to new bidders. This, they argued, was against the fundamental rights of promoters of a company. However the bench dismissed both the arguments. The ruling will put a stop to a host of litigations pending in various courts that have been slowing down IBC process and will pave way for banks to more efficiently recover billions of dollars from bankrupt firms.
“Today’s judgment will boost a clean credit culture. The ruling will help recover Rs 1.8 lakh crore in the current financial year,” said Rajiv Kumar, secretary, Department of Financial Services. The ruling is also important in the case of Essar Steel where the promoters (Ravi and Shashi Ruia) have offered to repay 100 per cent of debt after steel giant Arcelor Mittal won the formal bidding process. This has delayed the process, stretching it for more than 500 days, far longer than the maximum 270 days set by the IBC for resolution. While the National Company Law Tribunal (NCLT) is yet to decide on the legality of this move by the promoters, and Friday’s SC ruling could have a bearing on that to the disadvantage of the Ruias.