Insolvency and Bankruptcy Code: SC upholds constitutional validity, rules no promoter bid

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Published: January 26, 2019 1:18:14 AM

A resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value, the court observed.

A final ruling on this matter is pending before the Ahmedabad bench of the National Company Law Tribunal, which is expected to give its order on January 31.

The Supreme Court on Friday upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC) in its entirety. The IBC law was passed in 2016 to prevent defaulting promoters from regaining control of their companies.
While upholding the law, a bench led by Justice RF Nariman rejected the plea to give operational creditors
parity with financial creditors. On related parties, the apex court said that it should mean a person connected with the business.

The order also upheld the Section 29A of the IBC which bars promoters of a company facing insolvency proceedings from bidding for it to regain control.

According to legal observers, the SC order is a setback for the Essar Group promoters, Ruias, who have offered to clear all dues to regain control of Essar Steel. Otherwise, ArcelorMittal’s bid of `42,000 crore has been approved by the committee of creditors. A final ruling on this matter is pending before the Ahmedabad bench of the National Company Law Tribunal, which is expected to give its order on January 31.

“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. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests,” the apex court said.

The operational creditors wanted to be treated at par with the financial creditors, who are secured creditors like banks. They have the first claim over the money which comes through the insolvency proceedings.

Ruling that operational creditors are not being discriminated against financial creditors, Justice Nariman, writing for the bench, said that the Regulation 38, which was amended in October, takes care of the operational creditors. The court’s reasoning is that revival plans of bankrupt companies are approved by the resolution professionals, CoCs, and National Company Law Tribunal which take care of the operational creditors also. Any plan which doesn’t take care of them is not approved.

A resolution plan cannot pass muster under Section 30(2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than liquidation value, the court observed.

“Since the financial creditors are in the business of money lending, banks and FIs are best equipped to assess viability and feasibility of the business of the corporate debtor… Since this detailed study has already been undertaken before sanctioning a loan and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services and are typically unable to assess viability and feasibility of business,” the 150-page order said.

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