Supreme Court upholds Insolvency and Bankruptcy Code

Last Updated on March 27, 2019 by Bharat Saini

Insolvency and Bankruptcy Code 2016 (IBC), Law that takes over businesses and assets from defaulters and empowers lenders to change the management, upheld by Supreme Court on Friday 25 January 2019, is an exciting victory for credit markets and entrepreneurship, when a Bench of Justices Rohinton Nariman and Navin Sinha, stated, “The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained,” and observed, “We are happy to note that in the working of the Code, the flow of financial resource to the commercial sector has increased exponentially as a result of financial debts being repaid”.

This constitutes a clear signal of its backing for the IBC which, despite all the challenges that it has faced, has been successful in sending a message to recalcitrant defaulters that there can be no more business-as-usual when they default.

Supreme Court judgement upholding constitutional validity of IBC in its “entirety” is a strong signal to borrowers and banks, even as it brings a sense of relief to the Centre, which has been watching one of its better economic initiatives being stifled by vested interests. This would have a major impact on the country’s economic landscape as it eases the implementation of the Code in knotty cases.

• IBC adopts a two-pronged approach.
• It provides a time-bound resolution mechanism, aimed at protecting maximum value of assets of corporate debtor, and
• It also, promotes entrepreneurship and credit markets.
• Supreme Court noted that working of the Code is being monitored by the Centre through expert committees.
• Code is constantly evolving, bettering itself.
• Judgement stated that 3300 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 ₹120390 crore.
• Liquidation value of 63 of 80 cases resolved through acceptance of resolution plans was ₹29788.07 crore, whereas, amount realised from resolution process was ₹60000 crore, that is, 202% higher than liquidation value.
• IBC has witnessed an improvement in total flow of resources to commercial sector, both bank and non-bank, and domestic and foreign (relatable to the non-food sector), has gone up from a total of ₹14530.47 crore in 2016-2017 to ₹18,469.25 crore in 2017- 2018 to ₹18798.20 crore in the first six months of 2018-2019.
• “These figures show that the experiment conducted in enacting the Code is proving to be largely successful,” Justice Nariman wrote.
• Relaxations given to micro, small and medium enterprises (MSME) under Section 29A of the Code were upheld by the Court, stating that:
• MSME form the “bedrock of our economy” and stringent restrictions through the IBC would adversely affect them, it is a proof that the legislature is alive to the anomalies within the Code and is taking steps to rectify them
• Instead of resolving crisis, it would lead to untimely liquidation of MSMEs.
• Arguments that the IBC discriminates between financial creditors and operational creditors were dismissed by the Court, saying, “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”.
• “So long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted,” the court observed.

Repayment of financial debt by borrowers infuses capital into the economy as lenders can on-lend the money that has been repaid to other entrepreneurs, thus aiding economic activity, the judges observed.