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SC upholds constitutional validity of Insolvency and Bankruptcy Code

The top court quashes a clutch of petitions that challenged provisions of three-year-old law, including barring promoters from bidding for stressed assets.

twitter-logo BusinessToday.In   New Delhi     Last Updated: January 25, 2019  | 16:56 IST
SC upholds constitutional validity of Insolvency and Bankruptcy Code

The Supreme Court on Friday upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC) and quashed a clutch of petitions that had challenged several provisions of the three-year-old law as arbitrary and discriminatory. The two-judge bench headed by Justice RF Nariman upheld the constitutional validity "in its entirety".

The court not only upheld the ban on promoters' bids for the defaulting company undergoing the insolvency process but also rejected pleas to treat operational creditors at par with financial creditors. "Today's judgment will boost a clean credit culture," Financial Services Secretary Rajiv Kumar told BloombergQuint, adding that the ruling will help to recover Rs 1.8 lakh crore in the current fiscal.

Operational creditors, such as the suppliers of products and services to bankrupt companies and contractors, have long complained of landing a raw deal under the IBC. Currently, the Committee of Creditors (CoC) constituted for bankrupt firms only comprise all financial creditors, like banks. And since operational creditors don't have a place in the CoC, they have no voting rights when the committee decides on what to do with an asset. That's why several operational creditors had moved the court arguing that the bankruptcy code violates Article 14.

Also read: IBC Amendments: More clarity needed

Last month, the top court had raised hopes by suggesting that operational creditors be given a voice in the resolution proceedings in proportion to their debt. But the latest ruling puts a stop to all such aspirations, which is being seen as a major setback for this category of stakeholders in a corporate debtor.

The Supreme Court's verdict furthermore upheld Section 29A of the IBC that bars promoters of bankrupt companies - as well as people related to them - from bidding to regain control of their assets at a discount. Specifically, the section dictates that promoters of companies, which have been classified as non-performing assets for over a year can't participate in the resolution process of any company unless the dues are repaid.

Also read: Four ways to make Insolvency & Bankruptcy Code work

This ruling has far-reaching implications for the promoters of big defaulting companies on the block such as Essar Steel and Bhushan Power & Steel. In fact, the latter's promoter had challenged the constitutional validity of Section 29A in the apex court last month. The long-drawn battle for Essar Steel saw yet another twist last October when the beleaguered firm's promoters, the Ruias, offered to repay around Rs 54,389 crore to all the lenders - or 100% of the debt it owes - and exit the insolvency process after the CoC had voted for ArcelorMittal's Rs 42,000-crore bid. The NCLT is yet to decide on the legality of this move by the Ruias, and the Supreme Court's ruling on Friday could have a bearing on that.

The Ruias are, basically, depending on Section 12A of the IBC to bail them out, and so could other promoters. This section allows for a withdrawal of an insolvency application before the bidding process starts if 90% of the creditors' committee by voting share approves it. ""In more cases than not, 12A is going to give a higher recovery for lenders; it may even be the entire recovery," Nilang Desai, partner at AZB told the portal. "If that is the case, then I see no problem for the promoters coming back and taking control of their company."

Also read: IBC has aided pick up in recoveries

Edited by Sushmita Choudhury Agarwal

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