| Court | Supreme Court of India |
|---|---|
| Citation | (2019) 4 SCC 17 |
| Decided | 25 January 2019 |
| Bench | Justice R.F. Nariman, Justice Navin Sinha |
Background
The Insolvency and Bankruptcy Code, 2016 (IBC) overhauled how India deals with companies that can't pay their debts. A creditor can now start a time-bound corporate insolvency resolution process (CIRP) before the National Company Law Tribunal (NCLT). Control of the company passes from its promoters to a resolution professional, and the committee of creditors decides the company's fate. Several companies and promoters challenged key provisions of the Code as unconstitutional.
Issues
- Is treating financial creditors (lenders) differently from operational creditors (suppliers, service providers) discriminatory under Article 14?
- Is Section 29A, which bars defaulting promoters and connected persons from bidding for their own company, arbitrary?
- Are the tribunal structure, the role of the resolution professional and other provisions constitutionally valid?
Held
- The IBC was upheld in its entirety.
- The distinction between financial and operational creditors has an intelligible differentia. Financial creditors are generally involved in assessing viability from the start, lend large secured amounts, and are best placed to judge whether the company can be revived. Giving only them votes in the committee of creditors is therefore reasonable. Operational creditors must still be paid at least what they would get in liquidation.
- Section 29A is valid. Its purpose is to keep persons responsible for the company's failure, and those connected with them, from getting the company back through the back door. Its classification is reasonable.
- The Code is beneficial legislation. Its primary focus is revival of the corporate debtor as a going concern, not mere recovery for creditors. Liquidation is a last resort.
Why it matters
- It cemented the IBC as India's central insolvency law and gave lenders and investors certainty.
- It established that the Code's aim is resolution, not recovery, a principle repeatedly applied by NCLT, NCLAT and the Supreme Court since.
- It is essential reading for corporate lawyers, insolvency professionals and law students studying company law.
Exam one-liner
The IBC is constitutionally valid; the financial/operational creditor distinction and the Section 29A bar on defaulting promoters are reasonable classifications under Article 14, and the Code's object is revival, not recovery. (Swiss Ribbons, 2019)
Related: Duties and Liabilities of Company Directors