The two-year-old Insolvency and Bankruptcy Code had been upheld in its entirety by the Supreme Court of India. Apex court had quashed the petition submitted under article 14 of Indian constitution that challenged the validity of IBC. The petitioners argued that the code doesn’t make a difference in the classification of operational and financial creditors and hence violates article 14. Also, they argued that IBC forces the sale of a company to new bidders that violate the fundamental rights of company promoters. The bench constitutes of Justice Rohinton Nariman and Justice Navin Sinha. They had dismissed all these arguments. The court observed that the IBC had caused rising credit flows and so it must be upheld. The judgment had made an impact to the ruling government in backing efforts to deal with the bad debt burden of the bank.
The Court stated that “We have upheld the insolvency code in its entirety. We are happy to note 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 provisions of Section 29A are intended to ensure that, among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process .Parliament rectified a loophole… which allowed a backdoor entry to erstwhile managements in the resolution process. Section 30 of IBC, as amended, also clarifies that a resolution plan of a person who is ineligible under Section 29A will not be considered by the committee of creditors (CoC)”
The Bench also mentioned that ”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. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the committee of creditors do not have the last word on the subject. If the committee of creditors arbitrarily 102 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 Code. For all these reasons, we are of the view that Section 12A also passes constitutional muster.”
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