Home > Companies > News > Supreme Court upholds insolvency law in its entirety

New Delhi: The Supreme Court on Friday upheld the Insolvency and Bankruptcy Code, 2016, dismissing a challenge to several of its provisions.

"We have upheld the insolvency code in its entirety," a bench headed by Justice R.F. Nariman said.

The court, however, said the definition of related persons in the code must mean one who is connected to the business, and not relatives.

This comes as a setback to operational creditors and promoters of companies that have defaulted on their debts. They were seeking quashing of certain provisions in the code regarding voting rights, and an option to bid for companies by promoters of companies in debt default.

A two-judge bench headed by Justice Nariman was hearing a batch of petitions challenging the validity of different aspects of the IBC.

During the hearings, former Attorney General Mukul Rohatgi had highlighted the deficiencies in the insolvency and bankruptcy law and had told the court that it offered no resuscitation or recuperation in the way operational creditors and promoters were treated.

According to Rohatgi, who was appearing for operational creditors, there were many creases the apex court needed to iron out. “Operational creditors are also owed money but they do not have a say in the current scheme of things. Their fate rests at the mercy of the committee of creditors (CoC). By virtue of Section 29A, the promoter is barred and cannot bid," he added.

Among the petitions were those challenging Sections 3 (12), 5 (7), 6, 7, 12, 29, 62, 214 (f), 231 and 238 of the IBC. The pleas sought quashing of these legal provisions and also challenged various appointments made to the National Company Law Tribunal (NCLT) and its appellate body.

The petitioners had sought that provisions under the code and rules that are discriminatory, arbitrary or excessive be interpreted by the resolution professional and the National Company Law Tribunal (NCLT) before any scheme is finalized.

It was alleged that unlike the Companies Act, 1956 and 2013, the IBC sought to “arbitrarily and unfairly discriminate and divide" unsecured creditors into two classes — unsecured financial creditors and operational creditors.

Making the rights of operational creditors subservient to those of financial creditors is contrary to law and in violation of Article 14 (equality before law), 19 (1) (g) (freedom of profession, trade) and 300 A (right to property) of the Constitution, it was claimed.

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