‘Insolvency code is sacrosanct’: SC upholds IBC’s constitutional validity

The Supreme Court on January 25 has upheld the Insolvency & Bankruptcy Code (IBC) in its 'entirety' and its constitutional validity. While dismissing a batch of petitions challenging the IBC, the apex court refused pleas to allow operational creditors' parity with financial creditors.

The genesis of this judgement is the Allahabad High Court ruling in April last year which declined to give private power companies any interim relief on the February 12 Reserve Bank of India (RBI) circular, which tightened bad loan norms from August 27 (the deadline for finalising resolution plans for stressed assets). It also mandated insolvency proceedings by lenders against defaulting power projects.

RBI’s February 12 circular said defaulters have to be admitted to the National Company Law Tribunal (NCLT) within 180 days. Power companies had sought a relaxation on this as had the government, while the banking regulator had sought a transfer of all cases filed in various high courts to the SC.

This ruling will come as a serious jolt to operational creditors of bankrupt companies, whose hopes were raised after the court had on December 17, 2018 suggested they be given a voice, including voting rights, in the resolution proceedings in proportion to their debt.

Operational creditors, usually suppliers of products and services to bankrupt companies, don’t have much of a say as such as they are excluded from the Committees of Creditors (CoCs) that comprise financial creditors like banks. Since they do not have voting rights, so have no control on any CoC decision on the bankrupt asset.

The SC bench was hearing a slew of petitions challenging several IBC provisions, calling it ‘arbitrary’ and ‘discriminatory’.

Petitioners wanted promoter creditors of defaulting companies be kept out of the resolution process, while those opposing sought their presence on the grounds that without their involvement, creditors would fail to recover the true value of assets.

One of the cases implored the apex court to make a provision for debtors to be heard during insolvency proceedings.