IBC : Supreme Court Upholds Validity Of Insolvency & Bankruptcy Code [Read Judgment]

The Supreme Court today upheld the constitutional validity of the Insolvency and Bankruptcy Code 2016 in its "entirety".The Court however held that to attract the bar under Section 29A from participating in resolution process, "related person" should be a person connected to the defaulting entity.The bench of Justices R F Nariman and Navin Sinha had reserved orders on January 15 on the petitions challenging the validity of IBC.The bunch of petitions were moved primarily contending that IBC was discriminatory and unfair to operational creditors as compared to financial creditors.The apex court had transferred to it similar petitions filed in various High Courts.During the hearing, Justice Nariman had expressed the need to have circuit benches of NCLAT in metros.From the batch of petitions challenging IBC, the bench had split up the petitions challenging the circular issued by RBI on February 12, which had directed lenders to initiate IBC proceedings against defaulters in the sectors of power, steel and textiles.Private power companies challenged the circular saying it is ultra vires the RBI Act as it affected banks' discretion to decide on the action against non performing assets. The Court said that challenge to RBI Circular will be dealt with separately.Summary of the JudgmentObvious Intelligible Differentia Between Financial Creditor And Operational Creditor The court held that financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. The court made following observations regarding this Referring to the code, the bench explained the difference between Financial Creditor and operational Creditor. It said: "A perusal of the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, and 'operational debt' would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority." The court made following observations regarding Intelligible Differentia: Most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like.The nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of businessFinancial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business.Financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations.The forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable. Financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as 66 reorganization of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do.Whereas a 'claim' gives rise to a 'debt' only when it becomes 'due', a 'default' occurs only when a 'debt' becomes 'due' and 'payable' and is not...

IBC : Supreme Court Upholds Validity Of Insolvency & Bankruptcy Code [Read Judgment]

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