01 February 2019

Insolvency and Bankruptcy Code is constitutionally valid: SC

1st February 

Supreme Court has upheld constitutional validity of various provisions of Insolvency and Bankruptcy Code, 2016. It noted that the Code is a beneficial legislation which puts corporate debtor back on its feet, not being a mere recovery legislation for creditors.

Observing that there is no liquidation, even in the preamble, the court noted that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time-bound manner, the value of the assets of such persons will deplete.

It held that the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests and that the moratorium imposed by Section 14 of IBC is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process.

Court in Swiss Ribbons (P) Ltd. v. UOI held that classification between financial creditor and operational creditor is neither discriminatory, nor arbitrary, nor violative of Art. 14 of Constitution. It observed that there is intelligible difference between financial creditors and operational creditors. On the question of no voting rights to operational creditors, the court was of the view that since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan.

It was observed that small, medium and micro industries are kept out of the eligibility of I&B Code since they are the foundation of our economy and would end up getting liquidated as a result of the resolution process.

It also directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from today. Further, relying on constitution Bench judgement in the case of Madras Bar Association, Court held that it is high time the Union of India follow the judgement which had directed that administrative support for all Tribunals should be from the Ministry of Law and Justice.

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