"Defaulter's Paradise Lost; Economy's Rightful Position Regained"; IBC Code Passes Constitutional Muster: SC

Defaulters Paradise Lost; Economys Rightful Position Regained; IBC Code Passes Constitutional Muster: SC

"We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid"

"The defaulter's paradise is lost. In its place, the economy's rightful position has been regained", this is how the Supreme Court summed up the judgment upholding the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016.

Justice Rohinton Fali Nariman, for the bench also comprising of Justice Navin Sinha, authored 150 paged judgment which starts by discussing the background which led to the enactment of the Insolvency Code. He observed that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors.

Experiment conducted in enacting the Code is proving to be largely successful.

Interesting comments are made by the Court in the 'epilogue' part of the judgment. The court said: "The experiment contained in the Code, judged by the generality of its provisions and not by so called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster."

The judge said: "We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid".

The court noted that the total flow of resources to the commercial sector in India, both bank and non-bank, and domestic and foreign (relatable to the non-food sector) has gone up from a total of INR 14530.47 crores in 2016-2017, to INR 18469.25 crores in 2017- 2018, and to INR 18798.20 crores in the first six months of 2018-2019.

The court added: "These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful position has been regained."

The bench also observed: "The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, 'trial' having led to repeated 'errors', ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by socalled crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners."

Summary of the judgment

-While disposing the petitions challenging various provisions of the IBC Code, the bench held as follows:

-Classification between financial creditor and operational creditor neither discriminatory, nor arbitrary, nor violative Of Article 14

-Sections 21 and 24 (Operational creditors have no vote in the committee of creditors) not violative of Article 14

-Section 12A (withdrawal of insolvency application) is not violative of Article 14

-Section 29A (eligibility of persons to be a resolution applicant) constitutionally Valid- however 'Related Person' not connected with the business of the activity of the resolution applicant cannot be disqualified

-Section 53 (Operational creditors ranked below all other creditors, including other unsecured creditors who happen to be financial creditors) does not violate Article 14.


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