Swiss Ribbons Pvt. Ltd. v. Union of India (2019)

This is the case in which the whole Code was put on trial at once, and survived. Almost every objection a student can raise against the scheme of the Code — that it prefers financial creditors to operational creditors without reason, that s. 29A shuts out honest promoters, that the waterfall in s. 53 is arbitrary, that the resolution professional wields judicial power — was argued here and answered. For Unit 1 it does three jobs. It states the object of the Code in a sentence you can quote. It supplies the definitional chain — claim, debt, default — that every later question depends on. And it establishes the Article 14 test by which the Code's classifications are judged.

The petitions were not an ordinary dispute between a creditor and a debtor. They were a batch of writ petitions and appeals brought by companies, promoters and creditors affected by proceedings under the Code, challenging the constitutional validity of a large number of its provisions. Because the challenge was to the statute itself, the facts that mattered were the provisions attacked and the classifications they drew, not the fortunes of any one corporate debtor.

The Code was upheld. In terms that the Court made central to everything that followed, it described the Code as a beneficial legislation which puts the corporate debtor back on its feet and is not a mere recovery legislation for creditors; the interests of the corporate debtor have been bifurcated and separated from those of its promoters and of those in management; and, in the Court's celebrated phrase, "The defaulter's paradise is lost. In its place, the economy's rightful position has been regained."

On the particular provisions:

• The definitional chain. A claim gives rise to a debt only when it is due, and a default occurs only when the debt becomes due and payable and is not paid by the debtor. A financial debt is a debt together with interest disbursed against the consideration for the time value of money; an operational debt is a claim in respect of the provision of goods or services.
• Financial and operational creditors. There is an intelligible differentia between financial debts and operational debts which are unsecured, and that differentia has a direct relation to the object the Code seeks to achieve. Unsecured debts are of various kinds, and so long as some legitimate interest is being protected which relates to the statutory object, Article 14 is not infringed. On that reasoning the validity of s. 53 was upheld.
• Section 29A was held constitutionally valid.
• The moratorium under s. 14 was held to be imposed in the interest of the corporate debtor itself, preserving its assets during the resolution process.
• The committee of creditors carries the primary responsibility of financial restructuring: it must assess the viability of the debtor on all available information, evaluate alternative investment opportunities, and judge a resolution plan on feasibility and viability.
• The resolution professional has administrative, not adjudicatory, powers.
• Withdrawal before the committee is constituted. At a stage where the committee of creditors is not yet constituted, a party may approach the Tribunal directly, which may in exercise of its inherent powers allow or disallow an application for withdrawal or settlement, after hearing all concerned parties and on the facts of each case.

The method is worth copying. For each challenge the Court asked what object the Code pursues, then asked whether the classification under attack bore a rational relation to that object. Because the object is resolution and value maximisation rather than recovery, a distinction that helps a viable business survive is not arbitrary merely because it disadvantages a class of creditors or a class of bidders. The financial creditor is treated differently because it lends money against the time value of money, is equipped to assess viability and to restructure, and can be trusted with the commercial judgment the Code entrusts to the committee; the operational creditor supplies goods and services and is differently placed. Section 29A is justified by the same logic read in reverse: the object is not to hand the business back to those whose conduct produced the default.

1. Open any essay on the objects of the Code with this case. The formulation that the Code is a beneficial legislation which puts the corporate debtor back on its feet and is not a "mere recovery legislation for creditors", and the bifurcation of the debtor's interests from the promoters', frame the whole paper.
2. Use it for definitions. Where a question turns on whether there is a default, set out claim, debt, and default in that order, then apply.
3. Use it as the Article 14 answer. Whenever a question asks whether a distinction in the Code is discriminatory — financial versus operational creditors, the ranking in s. 53, the disqualification in s. 29A — state the intelligible-differentia reasoning and the object of the statute.
4. What it does not decide. It does not decide when the Adjudicating Authority must admit an application; that came later. It says nothing about whether a plan, once approved, may be modified or withdrawn. And it settles the validity of the withdrawal machinery only for the stage before the committee of creditors is constituted.

The provisions this decision upheld have since been amended. In particular s. 14 now carries an Explanation clarifying that the moratorium also applies where a surety seeks to initiate or continue action against the corporate debtor under a contract of guarantee, and s. 53 has been given Explanations on the position of a partly secured creditor and on government dues. Section 196 has been recast so that the Board regulates service providers and may specify standards of conduct for the committee of creditors. State the case as decided, and note the amendment where the question turns on the amended words.