Judges: Rohinton Fali Nariman and Navin Sinha, JJ.

Facts:

Several petitions invoking the writ and the special leave jurisdiction of the Supreme Court were filed in the present matter assailing the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016 [IBC]. Since the Court has decided questions relating to the constitutional validity of the IBC, it is not relevant to discuss individual facts of any case

Issues:

(i) Whether appointment of members of NCLT and NCLAT is as per the Madras Bar Association v. Union of India, MANU/SC/0610/201?

(ii) Whether classification between financial creditor and operational creditor is discriminatory, arbitrary and violative of Article 14 of the Constitution?

(iii) Whether Sections 21 and 24 of IBC are ultra vires Article 14 of Constitution, since, operational creditors have no vote in the committee of creditors?

(iv) Whether Section 12A of IBC is violative of Article 14 of the Constitution?

(v) Whether the Resolution professional has any adjudicatory powers?

(vi) Whether Section 53 of IBC violate Article 14 of the Constitution?

Law:

IBC - Section 21 - To give the financial creditors who are really interested in the resurrection of the corporate debtor ample influence and incentives to drive the entire process, Section 21 of IBC calls for the establishment of a Committee of Creditors (CoC) that will direct the CIRP for the resolution of the corporate debtor. Related parties are not permitted to join the CoC under the proviso to Section 21(2).

IBC - Section 24 - Deals with provisions relating to meeting of CoC.

IBC - Section 124A - A request for withdrawal may be submitted by an applicant with the approval of the CoC. Additionally, it enables the Insolvency and Bankruptcy Board of India to establish regulations that specify how such applications should be submitted.

IBC - Section 53 - Prescribe priority of distribution of assets during liquidation.

Constitution of India - Article 14 - Guarantees equality before the law or equal protection of the laws to all persons, within the territory of India. It states that, "the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India".

Contentions:

Appellants

(i) Contrary to the judgments in Madras Bar Association (I) (MANU/SC/0378/2010) and Madras Bar Association (III) (MANU/SC/0610/2015), Section 412(2) of the Companies Act, 2013 continued on the statute book. As a result of this, the two Judicial Members of the Selection Committee get outweighed by three bureaucrats, in matters relating to appointment of the Members of the Tribunal and the Technical Members of the Appellate Tribunal.

(ii) Administrative support for all tribunals should be from the Ministry of Law and Justice. However, NCLT and NCLAT are functioning under the Ministry of Corporate Affairs.

(iii) Since the NCLAT, as an appellate court, has a seat only at New Delhi, this would render the remedy inefficacious inasmuch as persons would have to travel from Tamil Nadu, Calcutta, and Bombay to New Delhi. Earlier, they could have approached the respective High Courts in their States.

(iv) Section 7 of IBC was challenged stating that there is no real difference between financial creditors and operational creditors. Both types of creditors would give either money in terms of loans or money's worth in terms of goods and services. Thus, there is no intelligible differentia between the two types of creditors, regard being had to the object sought to be achieved by IBC, namely, insolvency resolution, and if that is not possible, then ultimately, liquidation.

(v) Classification, as aforesaid, will not only be discriminatory, but also manifestly arbitrary. This is because under Sections 8 and 9 of IBC, an operational debtor is not only given notice of default, but is entitled to dispute the genuineness of the claim.

(vi) In any case, Sections 21 and 24 of IBC are discriminatory and manifestly arbitrary as operational creditors do not have even a single vote in the committee of creditors which has very important functions to perform in the resolution process of corporate debtors.

Respondent

(i) Till IBC was enacted, the regime of previous legislation had failed to maximize the value of stressed assets and had focused on reviving the corporate debtor with the same erstwhile management.

(ii) As all these legislations failed, IBC was enacted to reorganize insolvency resolution of corporate debtors in a time bound manner to maximize the value of assets of such person.

(iii) None of the members of the NCLT or the NCLAT had been appointed contrary to the judgments of this Court in Madras Bar Association (I) and Madras Bar Association (III).

(iv) When it came to classification between financial and operational creditors, the differentiation between the two types of creditors occurs from the nature of the contracts entered into with them.

(v) Financial contracts involve large sums of money given by fewer persons, whereas operational creditors are much larger in number and the quantum of dues is generally small.

(vi) Insofar as Section 7 of IBC, relatable to financial creditors, and Sections 8 and 9, which relate to operational creditors are concerned, it is a fallacy to say that no notice is issued to the financial debtor on defaults made, as financial debtors are fully aware of the loan structure and the defaults that have been made.

Analysis:

Appointment of members of NCLT and NCLAT is as per the Madras Bar Association ruling

(i) Acting in compliance with the directions of the Supreme Court in the aforesaid judgments, a Selection Committee was constituted to make appointments of Members of the NCLT in the year 2015 itself. Thus, by an Order dated 27.07.2015, (i) Justice Gogoi (as he then was), (ii) Justice Ramana, (iii) Secretary, Department of Legal Affairs, Ministry of Law and Justice, and (iv) Secretary, Corporate Affairs, were constituted as the Selection Committee. 

This Selection Committee was reconstituted on 22.02.2017 to make further appointments.

In compliance of the directions of this Court, advertisements dated 10.08.2015 were issued inviting applications for Judicial and Technical Members as a result of which, all the present Members of the NCLT and NCLAT have been appointed.

Hence, appointment of members of the NCLT and the NCLAT are not contrary to this Court's judgments in the Madras Bar Association case.

Classification between financial creditor and operational creditor is not violative of Article 14 of the Constitution

(i) 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. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country.

(ii) Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. 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. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business.

(iii) Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business.

Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately.

(iv) Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable.

(v) Therefore, the classification between financial creditor and operational creditor is neither discriminatory, nor arbitrary, nor violative of Article 14 of the Constitution.

Sections 21 and 24 of IBC and Article 14 of Constitution: Votes of operational creditors in the committee of creditors

(i) Financial creditors are in the business of money lending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. 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.

(ii) Further Regulation 38 strengthens the rights of operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors' rights, together with priority in payment over financial creditors.

(iii) Therefore, operational creditors are not discriminated against or that Article 14 has been infracted either on the ground of equals being treated unequally or on the ground of manifest arbitrariness.

Section 12A of IBC is not violative of Article 14 of the Constitution

(i) The main thrust against the provision of Section 12A is the fact that ninety per cent of the committee of creditors has to allow withdrawal. This high threshold has been explained in the ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement.

(ii) In any case, the figure of ninety per cent, in the absence of anything to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the ILC Report. Also, it is clear, that under Section 60 of IBC, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision Under Section 60 of the IBC.

Thus, Section 12A of the IBC is not violative of Article 14 of Constitution.

Resolution professional and adjudicatory powers

(i) Unlike the liquidator, the resolution professional cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the IBC, which can, by a two-thirds majority, replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.

Section 53 of IBC and Article 14 of the Constitution

(i) 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 IBC.

(ii) 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 IBC.

(iii) In any case, workmen's dues, which are also unsecured debts, have traditionally been placed above most other debts. Thus, unsecured debts are of various kinds, and 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 of the Constitution does not get infracted. For these reasons, the challenge to Section 53 of the IBC fails.

Conclusion:

(i) Appointment of members of NCLT and NCLAT is as per the Madras Bar Association ruling.

(ii) Classification between financial creditor and operational creditor is not discriminatory or arbitrary. It is not violative of Article 14 of the Constitution.

(iii) Sections 21 and 24 of IBC are constitutional.

(iv) Section 12A of IBC is not violative of Article 14 of the Constitution.

(v) Section 53 of IBC is not violative of Article 14 of the Constitution.

Important Precedents:

(i) Shayara Bano v. Union of India, MANU/SC/1031/2017

(ii) Innoventive Industries Ltd. v. ICICI Bank and Anr. MANU/SC/1063/2017

(iii)ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors.

(iv)Attorney General for India and Ors. v. Amratlal Prajivandas and Ors., MANU/SC/0774/1994