Supreme Courts Upholds Constitutional Validity of Insolvency and Bankruptcy Code

Prelims level : Economy Mains level : Statutory, regulatory and various quasi-judicial bodies.
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  • The government’s Insolvency and Bankruptcy Code, 2016 (IBC), earned some rare praise from the Supreme Court which said that it was “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 apex court was hearing a batch of petitions that had challenged the constitutional validity of IBC under Article 14 of the Constitution. Several operational creditors had argued that IBC doesn’t make an intelligible differentia in the classification of a financial creditor and operational creditor, and hence violates Article 14.
  • Operational creditors had argued that they provide services to companies and while they have the right to initiate insolvency proceedings if their payments are defaulted upon, but the code bars them for participating in the resolution process through the committee of creditors.
  • Under IBC, the committee can only consist of financial creditors who assess and vote on resolution plans submitted by interested bidders.
  • The second important argument was that by barring promoters from bidding for their own companies, IBC forces the sale of the company to new bidders. This, the petitioners had argued, is against the fundamental rights of promoters of a company. The apex court dismissed both these arguments.
  • Since its enactment, “approximately 3,300 cases have been disposed of by the Adjudicating Authority based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over Rs 1,20,390 crore.”
  • “Eighty cases have since been resolved by resolution plans being accepted” of which “the liquidation value of sixty- three such cases is Rs 29,788.07 crore.”
  • “However, the amount realised from the resolution process is in the region of Rs 60,000 crore, which is over 202 per cent of the liquidation value,
  • Citing Reserve Bank of India statistics, the judgement said “credit that has been given by banks and financial institutions to the commercial sector (other than food) has jumped up from Rs 4,952.24 crore in 2016-2017, to Rs 9,161.09 crore in 2017-2018, and to Rs 13,195.20 crore for the first six months of 2018- 2019.” The court noted that the “credit flow from non-banks has gone up from Rs 6,819.93 crore in 2016-2017, to Rs 4,718 crore for the first six months of 2018-2019.”
  • “Ultimately, 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 Rs 14,530.47 crore in 2016-2017, to Rs18,469.25 crore in 2017- 2018, and to Rs 18,798.20 crore in the first six months of 2018-2019
  • Summing up, the court said that the figures were proof 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 judgement added.
  • The apex court also dismissed the contention that the appointments made to the National Company Law Tribunal and National Company Law Appellate Tribunal (NCLAT) were contrary to its earlier judgments and the Companies Act.
  • The judgment directed the government to establish Circuit Benches of NCLAT within a period of six months.

Insolvency and bankruptcy code a gist:

  • The Code creates a framework for resolving insolvency in India. Insolvency is a situation where an individual or a company is unable to repay their outstanding debt.
  • The Code repeals the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. In addition, it amends 11 laws, including the Companies Act, 2013, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, among others.
  • The Code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government.
    • Insolvency Resolution Process:

      The Code specifies similar insolvency resolution processes for companies and individuals, which will have to be completed within 180 days. This limit may be extended to 270 days in certain circumstances. The resolution process will involve negotiations between the debtor and creditors to draft a resolution plan.

    • The process will end under two circumstances:

      1. when the creditors decide to evolve a resolution plan or sell the assets of the debtor, or
      2. the 180-day time period for negotiations has come to an end. In case a plan cannot be negotiated upon during the time limit, the assets of the debtor will be sold to repay his outstanding dues. The proceeds from the sale of assets will be distributed based on an order of priority
    • Priority under liquidation:

      The assets will be distributed in the following order, in case of liquidation:

      1. Fees of insolvency professional and costs related to the resolution process,
      2. Workmen’s dues and secured creditors,
      3. Employee wages
      4. Unsecured creditors
      5. Government dues and remaining secured creditors (any remaining debt if they enforce their collateral),
      6. Any remaining debt, and
      7. Shareholders
    • Fresh Start Process:

      The Code provides a Fresh Start Process for individuals under which they will be eligible for a debt waiver of up to Rs 35,000. The individual will be eligible for the waiver subject to certain limits prescribed under the Code.

    • Insolvency Professionals and Agencies:

      The resolution process will be conducted by a licensed insolvency professional (IP). The IP will control the assets of the debtor during the process. Insolvency professional agencies will be created to regulate these IPs. The agencies will conduct examinations to enrol IPs and enforce a code of conduct for their functioning.

    • Information Utilities:

      The Code establishes multiple information utilities to collect, collate and disseminate financial information related to a debtor. This will include a record of debt and liabilities of the debtor.

    • Insolvency Regulator:

      The Insolvency and Bankruptcy Board of India will be established as a regulator to oversee functioning of IPs, insolvency professional agencies and information utilities. The Board will have 10 members, including representatives from the central government and the Reserve Bank of India.

    • Adjudicatory Authorities:

      The Code proposes two tribunals to adjudicate insolvency resolution cases: (i) the National Company Law Tribunal will adjudicate cases for companies and limited liability partnerships, and (ii) the Debt Recovery Tribunal will adjudicate cases for individuals and partnership firms.

    • Insolvency and Bankruptcy Fund:

      The Code creates an Insolvency and Bankruptcy Fund. The Fund will receive voluntary contributions from any person. In case of insolvency proceedings being initiated against the contributor, he will be allowed to withdraw his contribution for making payments to workmen, protecting his assets, etc.

    • Cross-border insolvency:

      Cross border insolvency relates to an insolvent debtor who has assets abroad. The central government may enter into agreements with other countries to enforce provisions of the Code.

    • Offences:

      The Code specifies penalties for offences committed under corporate insolvency (such as concealing property). This penalty will be imprisonment of up to five years, or a fine of up to one crore rupees, or both. For offences committed under individual insolvency (such as providing false information), the imprisonment will vary based on the offence. For most of the offences, the penalty will be imprisonment of up to six months, or a fine of up to five lakh rupees, or both.

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