SC upholds constitutional validity of IBC; says Operational Creditors not being discriminated against under Article 14
The Supreme Court has upheld the constitutional validity of the Insolvency and Bankruptcy Code after hearing a batch of petitions filed by some 40 companies alleging discrimination against operational creditors under the Code.
Division bench of Justice RF Nariman and Justice Navin Sinha disposed off the petitions and held that there was no discrimination against the operational creditors under Article 14 of the constitution.
While it was argued on behalf of the petitioners that operational creditors do not have a say in the committee of creditors, apex court observed that under the Code, the committee of creditors is entrusted with the primary responsibility of financial restructuring. They are required to assess the viability of a corporate debtor by taking into account all available information as well as to evaluate all alternative investment opportunities that are available. The committee of creditors is also required to evaluate the resolution plan on the basis of feasibility and viability.
Whereas, financial creditors are in the business of money lending. Banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business, the bench noted.
The apex court went on to classify the differences between financial creditors and operational creditors –
- A perusal of the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, and 'operational debt' would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.
- Most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less.
- In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business. Financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. The forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately.
Apart from this Court upheld the constitutional validity of Section 29A, which deals with eligibility criteria for a resolution applicant. The bench concluded that a resolution professional has no adjudicatory powers and cannot act in a number of matters without the approval of the committee of creditors under Section 28 of the Code.