Swiss Ribbons Pvt. Ltd. vs Union of India - Important Supreme Court Judgment 2019

Swiss Ribbons Pvt. Ltd. vs Union of India - Important Supreme Court Judgment 2019


On 25th January, 2019, in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. [Writ Petition (Civil) No. 99 of 2018], the constitutional validity of the Insolvency and Bankruptcy Code, 2016 was upheld.


The Supreme Court held that “the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation” and the Insolvency Code “is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.” It was held that “the moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”


Amongst others, it was argued on behalf of the petitioners that, there was no intelligible differentia having relation to the objects sought to be achieved by the Insolvency Code between financial and operational creditors. On this, the Supreme Court said that “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” and “apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services.”


It was held that “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 reorganization of the corporate debtor’s business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, 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 Supreme Court observed that earlier experiments, “in terms of legislations having failed, ‘trial’ having led to repeated ‘errors’, ultimately led to the enactment of the Code” and “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.” 

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