{"id":208756,"date":"2019-01-25T13:06:18","date_gmt":"2019-01-25T07:36:18","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=208756"},"modified":"2019-02-04T18:12:56","modified_gmt":"2019-02-04T12:42:56","slug":"sc-validity-of-insolvency-and-bankruptcy-code-upheld-in-entirety","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2019\/01\/25\/sc-validity-of-insolvency-and-bankruptcy-code-upheld-in-entirety\/","title":{"rendered":"SC| Insolvency and Bankruptcy Code upheld in entirety; a ‘paradise lost’ for defaulters [Full Report]"},"content":{"rendered":"

Supreme Court<\/strong>: The bench of RF Nariman and Navin Sinha, JJ has, in a landmark verdict, upheld the validity of the Insolvency and Bankruptcy Code, 2016 in it\u2019s entirety as the provisions contained therin pass the constitutional muster.<\/p>\n

Noticing 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 bench said:<\/p>\n

\n

\u201cThe defaulter\u2018s paradise is lost. In its place, the economy\u2018s rightful position has been regained.\u201d<\/p>\n<\/blockquote>\n

Object of the Code<\/strong><\/h5>\n

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. The 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.<\/p>\n

Classification between \u2018Financial Creditor\u2019 and \u2018Operational Creditor\u2019, if discriminatory<\/strong><\/h5>\n

The Court elaborated on the distinction between the two and held that:<\/p>\n

\n

\u201cpreserving 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.\u201d<\/p>\n<\/blockquote>\n

Below are the differences between \u2018Financial Creditor\u2019 and \u2018Operational Creditor\u2019 as elaborated by the Court:<\/p>\n\n\n\n\n\n\n\n\n
\n

Financial Creditor<\/strong><\/p>\n<\/td>\n

Operational Creditor<\/strong><\/td>\n<\/tr>\n
\n

most financial creditors, particularly banks and financial institutions, are secured creditors<\/p>\n<\/td>\n

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<\/td>\n<\/tr>\n
\n

financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and\/or operate its business<\/p>\n<\/td>\n

contracts with operational creditors are relatable to supply of goods and services in the operation of business.<\/p>\n

\u00a0<\/strong><\/td>\n<\/tr>\n

\n

financial contracts generally involve large sums of money<\/p>\n<\/td>\n

\n

operational contracts have dues whose quantum is generally less.<\/p>\n

\u00a0<\/strong><\/p>\n<\/td>\n<\/tr>\n

financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality<\/td>\n\n

Contracts with operational creditors do not have any such stipulations.<\/p>\n<\/td>\n<\/tr>\n

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\u2018s business when there is financial stress<\/td>\n\n

operational creditors do not and cannot do any of these things<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/h5>\n
Validity of Section 29A providing ineligibility of a person to be resolution applicant<\/strong><\/h5>\n
\n

\u201cIf the blind lead the blind, both shall fall into the ditch\u201d<\/p>\n<\/blockquote>\n

A person who is unable to service its own debt beyond the grace period, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with.<\/p>\n

Section 53 dealing with distribution of assets not discriminatory<\/strong><\/h5>\n

The reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Insolvency Code. Repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts, which are unsecured, which is directly related to the object sought to be achieved by the Code.<\/p>\n

Constitution of Circuit Benches of the National Company Law Appellate Tribunal (NCLAT)<\/strong><\/h5>\n

The Court noticed that since the NCLAT, as an appellate court, has a seat only at New Delhi, it has rendered the remedy inefficacious inasmuch as persons would have to travel from Tamil Nadu, Calcutta, and Bombay to New Delhi, whereas earlier, they could have approached the respective High Courts in their States. It, hence, directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from the date of the order.<\/p>\n

Conclusion<\/strong><\/h5>\n

Noticing that the Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole, the bench said:<\/p>\n

\n

\u201cThe 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. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.\u201d<\/p>\n<\/blockquote>\n

[Swiss Ribbons Pvt. Lmt. V. Union of India, 2019 SCC OnLine SC 73<\/b><\/a>, decided on 25.01.2019]<\/p>\n","protected":false},"excerpt":{"rendered":"

Supreme Court: The bench of RF Nariman and Navin Sinha, JJ has, in a landmark verdict, upheld the validity of the Insolvency <\/p>\n","protected":false},"author":121,"featured_media":154914,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,9],"tags":[33425,32457,22064,33426],"class_list":["post-208756","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-casebriefs","category-supremecourt","tag-defaulters","tag-financial-creditors","tag-insolvency-and-bankruptcy-code","tag-operational-creditors"],"yoast_head":"\nSC| Insolvency and Bankruptcy Code upheld in entirety; a 'paradise lost' for defaulters [Full Report] | SCC Times<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.scconline.com\/blog\/post\/2019\/01\/25\/sc-validity-of-insolvency-and-bankruptcy-code-upheld-in-entirety\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"SC| Insolvency and Bankruptcy Code upheld in entirety; 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SC directs return of mortgaged land to JIL","author":"Prachi Bhardwaj","date":"February 28, 2020","format":false,"excerpt":"Supreme Court: The bench of AM Khanwilkar and Dinesh Maheshwari, JJ has restored the NCLT order wherein it was held that the lenders of Jaiprakash Associates Limited (JAL) were not the financial creditors of the corporate debtor Jaypee Infratech Limited (JIL) and that the transactions in question were to defraud\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Supreme-Court_Colour.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Supreme-Court_Colour.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Supreme-Court_Colour.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Supreme-Court_Colour.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Supreme-Court_Colour.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":243323,"url":"https:\/\/www.scconline.com\/blog\/post\/2021\/02\/03\/collusive-transactions-with-the-corporate-debtor-would-not-constitute-a-financial-debt-under-insolvency-and-bankruptcy-code-supreme-court\/","url_meta":{"origin":208756,"position":1},"title":"Collusive transactions with the Corporate Debtor would not constitute a \u2018financial debt\u2019 under Insolvency and Bankruptcy Code: Supreme Court","author":"Prachi Bhardwaj","date":"February 3, 2021","format":false,"excerpt":"Supreme Court: The 3-judge bench of Dr. DY Chandrachud*, Indu Malhotra and Indira Banerjee, JJ has held that collusive transactions with the Corporate Debtor would not constitute a \u2018financial debt\u2019 under Insolvency and Bankruptcy Code. Financial Creditor and Financial Debt Under Section 5(7) of the IBC, a person can be\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":248604,"url":"https:\/\/www.scconline.com\/blog\/post\/2021\/05\/23\/insolvency-and-bankruptcy-code-nothing-wrong-with-ibc-notification-treating-personal-guarantors-differently-from-other-categories-of-individuals-supreme-court\/","url_meta":{"origin":208756,"position":2},"title":"Insolvency and Bankruptcy Code| Nothing wrong with IBC Notification treating personal guarantors differently from other categories of individuals: Supreme Court","author":"Prachi Bhardwaj","date":"May 23, 2021","format":false,"excerpt":"Supreme Court: Adding to the series of verdicts on the Insolvency and Bankruptcy Code, 2016, the bench of L. Negaswara Rao and S. Ravindra Bhat* has upheld the legality of the notification dated 15.11.2019 which notified provisions of Part III of the Code only in respect of personal guarantors to\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2021\/02\/sc-2-7.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":217483,"url":"https:\/\/www.scconline.com\/blog\/post\/2019\/07\/30\/rajya-sabha-passes-the-insolvency-and-bankruptcy-code-amendment-bill-2019-critical-gaps-in-corporate-insolvency-framework-covered\/","url_meta":{"origin":208756,"position":3},"title":"Rajya Sabha passes the Insolvency and Bankruptcy Code (Amendment) Bill, 2019; Critical gaps in corporate insolvency framework covered","author":"Bhumika Indulia","date":"July 30, 2019","format":false,"excerpt":"As reported by ANI, Rajya Sabha passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, which will amend the Insolvency and Bankruptcy Code, 2016. Purpose of introducing the amendments to the Code -- Concerns have been raised that: in some cases, extensive litigation is causing undue delays, which may hamper\u2026","rel":"","context":"In "Legislation Updates"","block_context":{"text":"Legislation Updates","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/insolvency.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/insolvency.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/insolvency.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/insolvency.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/insolvency.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":292471,"url":"https:\/\/www.scconline.com\/blog\/post\/2023\/05\/18\/supertech-insolvency-casesc-upholds-nclats-order-approving-project-wise-resolution-process-legal-news\/","url_meta":{"origin":208756,"position":4},"title":"SC upholds NCLAT’s \u2018project-wise-resolution\u2019 process order in Supertech Insolvency; allows it to complete housing projects","author":"Editor","date":"May 18, 2023","format":false,"excerpt":"The Court said that if Committee of Creditors would be constituted for all projects of Supertech, it will cause immense hardships to the home buyers and will throw ever project into uncertainty.","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"supertech insolvency case","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/supertech-insolvency-case.webp?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/supertech-insolvency-case.webp?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/supertech-insolvency-case.webp?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/05\/supertech-insolvency-case.webp?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":217614,"url":"https:\/\/www.scconline.com\/blog\/post\/2019\/08\/01\/parliament-passes-the-insolvency-and-bankruptcy-amendment-bill-2019-330-days-time-limit-for-insolvency-resolution-process\/","url_meta":{"origin":208756,"position":5},"title":"Parliament passes the Insolvency and Bankruptcy (Amendment) Bill, 2019; 330-days time limit for Insolvency Resolution Process!","author":"Bhumika Indulia","date":"August 1, 2019","format":false,"excerpt":"As reported by ANI, Parliament has approved the Insolvency and Bankruptcy (Amendment) Bill, 2019\u00a0which will amend the Insolvency and Bankruptcy Code, 2016. To fill the critical gaps in the corporate insolvency framework, Insolvency and Bankruptcy Code (Amendment) Bill, 2019 has been introduced. The critically analysed 7 seven amendments that will\u2026","rel":"","context":"In "Foreign Legislation"","block_context":{"text":"Foreign Legislation","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/foreign\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Parliament_Colour.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Parliament_Colour.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Parliament_Colour.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Parliament_Colour.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/09\/Parliament_Colour.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]}],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/208756","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/users\/121"}],"replies":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/comments?post=208756"}],"version-history":[{"count":0,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/208756\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media\/154914"}],"wp:attachment":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media?parent=208756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/categories?post=208756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/tags?post=208756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}