Jan. 28, 2019

The Supreme Court has upheld the Insolvency & Bankruptcy Code (IBCs) constitutional validity in its ‘entirety’ and rejected petitions challenging the bankruptcy laws. 


Salient features of the IBC, 2016: 

  • The 2016 Code applies to companies and individuals.  

  • The Code creates time-bound processes for insolvency resolution of companies and individuals. These processes will be completed within 180 days.  

  • A resolution plan specifies the details of how the debt of a defaulting debtor can be restructured. 

  • The Code creates various institutions to facilitate resolution of insolvency.  These are as follows: 
    • Insolvency Professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making. 

    • The insolvency professionals will be registered with insolvency professional agencies. 

    • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution. 

    • Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and Debt Recovery Tribunal (DRT), for individuals. 

    • Insolvency and Bankruptcy Board: It will be set up to regulate functioning of IPs, IPAs and IUs. The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law. 

Recent Supreme Court Verdict: Key observations made

  • It is a code for reorganization and insolvency resolution of corporate debtors. Quick reorganization and insolvency resolution maximise value of the assets of corporate debtors and promotes entrepreneurship. 

  • In the working of the code, the flow of resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid. 

  • As a legal framework, IBC will help to develop the credit markets. The economy's rightful position has been regained and the defaulters' paradise is lost by the IBC. 

  • It upheld the classification between the financial creditor and operational creditor in IBC as it is neither discriminatory nor arbitrary and non-violative of Article 14 of the Constitution. 

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

  • The court upheld certain relaxations given to micro, small and medium enterprises (MSME) under Section 29A of the Code. This provision disqualifies certain kinds of persons from submitting a resolution plan. 

Comment on judgement:

  • Upholding of the provisions that bar the defaulting promoters from bidding is both ethical and proper. It will help in pushing a key structural reform. 

  • The decision is a setback to defaulting promoters hoping for a chance to remain in control of their firms. 

  • The endorsement of the law and its provisions by the Supreme Court would come as a boost to the government which pushed for a modern bankruptcy law in the first half of its term. 

Challenges and way ahead: 

  • Of about 1,500 cases admitted until end-December 2018, only 79 ended in an approval of the resolution plans and liquidation in a little over 300 cases. Thus in future, more cases of corporate debtors need to be resolved. 

  • The major worry is the failure in many cases to stick to the prescribed timeline of 180 to 270 days to firm up a resolution plan with elaborate hearings at NCLT benches. It is important that these timelines are adhered to. 

  • Over time, the NCLT may be better tuned to these kind of summary proceedings with capacity building and training of professionals. It will help that the Court has directed the government to set up circuit benches within six months. 

  • The challenge still lies in how quickly some of the dozen large accounts referred to the insolvency court by the RBI, featuring huge outstanding claims, are resolved.