IBC ASSIGNMENT

Topic:
Constitutionality of Insolvency and Bankruptcy Code, 2016

Submitted by:
Aangi Sanghvi- B051- Sap Id.- 51001190107

Submitted to:
Dr. CS Vanita Agarwal

Semester VIII
IV Year- B.L.S/L.L.B
th

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Sr. No. Content Pg No.

Background and context of the Insolvency and

1. 3
Bankruptcy Code (IBC)

2. Importance of Constitutionality of the Code 3

Constitutional Validity of IBC 4

• Article 14 5
3. • Article 19(1)(g) 6
• Article 21 7
• Article 300A 8

Judicial Interpretation of IBC 8

• Supreme Court's view on constitutionality of
4.
IBC 9
• High Court's view on constitutionality of IBC 10

5. Conclusion 11

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Background and context of the Insolvency and Bankruptcy Code (IBC)
The Insolvency and Bankruptcy Code (IBC) is a legal framework introduced in India in
2016 to consolidate and amend the laws relating to insolvency resolution of companies,
partnerships, and individuals. The Code aims to streamline and expedite the process of
insolvency resolution and promote ease of doing business in India. Prior to the
introduction of the IBC, India had a fragmented legal framework for insolvency and
bankruptcy, with different laws governing different types of entities. This resulted in
lengthy and cumbersome insolvency procedures, which often failed to provide timely
resolution for creditors and debtors.

The IBC has significantly streamlined the insolvency process by creating a unified
framework for insolvency resolution for all entities, including companies, partnerships,
and individuals. The Code provides for a time-bound and transparent process for
resolution of insolvency, with a maximum time limit of 330 days for completion of the
entire resolution process. Under the IBC, an insolvency resolution process is initiated
when a debtor defaults on its debt obligations, and a creditor files an application with the
National Company Law Tribunal (NCLT) to initiate the resolution process. The NCLT
appoints an insolvency resolution professional (IRP) to manage the affairs of the debtor
during the resolution process. The IRP prepares a resolution plan, which is approved by
the creditors and the NCLT. If the resolution plan is not approved, the debtor is liquidated.

The IBC has had a significant impact on India's business and economic landscape since its
introduction. It has helped in reducing the burden of non-performing assets (NPAs) on
banks, provided a mechanism for timely resolution of insolvency, and promoted a culture
of entrepreneurship and risk-taking in India. However, there have also been some concerns
regarding the effectiveness and implementation of the Code, particularly in terms of the
capacity of the NCLT and the IRPs to handle the large volume of cases.

Importance of Constitutionality of the Code

The constitutionality of any law is a fundamental aspect of its validity and enforceability.
The Insolvency and Bankruptcy Code, 2016 (IBC) is no exception. The constitutionality of
the IBC is important for several reasons:

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1. Protecting fundamental rights: The IBC affects the fundamental rights of various
stakeholders involved in the insolvency resolution process, including creditors, debtors,
and employees. The constitutionality of the IBC ensures that these rights are protected
and not violated during the insolvency resolution process.
2. Ensuring fairness and transparency: The insolvency resolution process under the IBC
is required to be fair and transparent, and any violation of constitutional provisions
could lead to an unfair or biased process. The constitutionality of the IBC ensures that
the process is conducted in a just and equitable manner.
3. Upholding the rule of law: The IBC is a statutory law, and its constitutionality is
essential to uphold the rule of law. The Constitution of India is the supreme law of the
land, and any law that is inconsistent with it is void to the extent of the inconsistency.
The constitutionality of the IBC ensures that it is consistent with the Constitution and
can be enforced as a valid law.
4. Ensuring legal certainty: The constitutionality of the IBC provides legal certainty to all
stakeholders involved in the insolvency resolution process. Any doubts or ambiguities
regarding the constitutionality of the IBC could lead to legal challenges and uncertainty
in the enforcement of the law.
5. Encouraging investor confidence: The IBC was enacted with the objective of promoting
entrepreneurship and investment in India. The constitutionality of the IBC is important
to encourage investor confidence in the insolvency resolution process and promote a
stable and predictable business environment.

The constitutionality of the Insolvency and Bankruptcy Code, 2016 is essential for
upholding fundamental rights, ensuring fairness and transparency, upholding the rule of law,
ensuring legal certainty, and encouraging investor confidence. Any doubts regarding the
constitutionality of the IBC could lead to legal challenges and uncertainty in the
enforcement of the law, which could adversely affect the objectives of the IBC. Therefore,
it is crucial to ensure that the IBC is consistent with the Constitution of India and upholds
the principles of justice, equality, and fairness.

Constitutional Validity of IBC

The constitutional validity of the Insolvency and Bankruptcy Code (IBC) has been
challenged on various grounds which include:

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 1. Article 14: Right to Equality
Article 14 of the Constitution of India provides for the right to equality before the law
and equal protection of the law. It prohibits discrimination on the grounds of religion,
race, caste, sex, or place of birth, and ensures that all individuals are treated equally
under the law.

The IBC has been criticized for discriminating between secured and unsecured
creditors, as well as between operational and financial creditors, in the distribution of
assets during the insolvency resolution process. Secured creditors are given priority in
the distribution of assets, while unsecured creditors are given lower priority. Similarly,
operational creditors are given lower priority than financial creditors.

However, the Supreme Court of India has held that the differential treatment of
creditors under the IBC is based on intelligible differentia and reasonable classification,
and therefore does not violate Article 14 of the Constitution. In the case of Swiss
Ribbons Pvt. Ltd. v. Union of India1, the Supreme Court observed that the
classification of creditors under the IBC is based on the nature of their claims, and the
differential treatment is necessary for achieving the objectives of the IBC, which
include maximizing the value of assets and providing a speedy resolution of
insolvency. Moreover, the IBC provides for a transparent and time-bound process for
insolvency resolution, which ensures that all creditors are treated equally in terms of
access to information and participation in the resolution process.

In the case of Essar Steel India Ltd. v. Satish Kumar Gupta2, the Supreme Court
upheld the constitutional validity of the IBC and emphasized the importance of treating
all creditors equally and impartially and adhering to the principles of natural justice.
The Court further held that the objective of the IBC is to maximize the value of assets
of the corporate debtor and ensure the equitable distribution of assets among all
creditors.

1
(2019) 4 SCC 17 : 2019 SCC OnLine SC 73
2
MANU/SC/1577/2019

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 2. Article 19(1)(g): Right to Freedom of Trade
Article 19(1)(g) of the Constitution of India guarantees the right to practice any
profession, or to carry on any occupation, trade or business. The right to trade and
commerce is considered a fundamental right under the Indian Constitution and is
subject to reasonable restrictions under Article 19(6).

The IBC provides for a mechanism for insolvency resolution, which involves the
appointment of an insolvency resolution professional (IRP) to manage the affairs of the
debtor during the resolution process. The IRP has the power to take over the
management of the debtor's assets and operations, and to take decisions regarding the
continuation or closure of the debtor's business.

It has been argued that IBC deprives the corporate debtor from managing its own
business by imposing a moratorium and appointing an insolvency professional to
manage its affairs and hence violates the right to freedom of trade and commerce. The
IBC imposes certain restrictions on the management of an insolvent company during
the insolvency resolution process (IRP) and can lead to the change of control of the
company.

However, the Supreme Court of India in cases like Innoventive Industries Ltd. v. ICICI
Bank & Anr3 and Swiss Ribbons Pvt. Ltd. V. Union of India4 has held that the restrictions
imposed by the IBC on the right to freedom of trade and commerce are reasonable and
necessary for achieving the objectives of the Code, which include maximizing the value
of assets and providing a speedy resolution of insolvency. The Court has held that the
IBC provides for a fair and transparent process for insolvency resolution, which ensures
that the interests of all stakeholders are taken into account.

3
MANU/SC/1063/2017
4
MANU/SC/0079/2019

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3. Article 21: Right to Life and Personal Liberty
Article 21 of the Constitution of India guarantees the right to life and personal liberty to
all individuals, and has been interpreted by the Supreme Court of India to include the
right to livelihood. The right to livelihood is considered a fundamental right under the
Indian Constitution and is subject to reasonable restrictions under Article 21.

It has been argued that the IBC violates the right to life and personal liberty, as it allows
the IRP to take decisions that may adversely affect the livelihood of the debtor and its
employees, without giving them an adequate opportunity to be heard. It has also been
argued that the IBC does not provide for adequate safeguards to protect the interests of
the debtor's employees, and may lead to their unemployment and loss of livelihood.

However, the Supreme Court of India has held that the restrictions imposed by the IBC
on the right to livelihood are reasonable and necessary for achieving the objectives of
the Code, which include maximizing the value of assets and providing a speedy
resolution of insolvency. The Court has held that the IBC ensures that the interests of
all stakeholders, including employees, are taken into account. In the case of
Innoventive Industries Limited v. ICICI Bank, the Supreme Court held that the
objective of the Insolvency and Bankruptcy Code, 2016 is to balance the interests of all
stakeholders, including the debtor, the creditors, and the economy as a whole. The court
also held that the appointment of an insolvency professional does not violate the
debtor's right to personal liberty and that the resolution process must be conducted in a
fair and transparent manner.

In the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme
Court held that the Insolvency and Bankruptcy Code, 2016 is constitutional and that the
right to life and personal liberty under Article 21 includes the right to conduct business.
The court also held that the objective of the code is to revive the debtor's business and
not to liquidate it. The court further held that the insolvency resolution process must be
completed within a fixed time frame to ensure that the debtor's rights are not unduly
curtailed.

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4. Article 300A: Right to Property
Article 300A of the Indian Constitution provides for the right to property, which states
that no person shall be deprived of his property except by the authority of law.
However, this right is not an absolute right and is subject to reasonable restrictions that
may be imposed by the State.

It has been argued that the IBC violates the right to property, as it allows the IRP to
take over the management of the debtor's assets and operations, which may result in the
deprivation of the debtor's property without adequate compensation. It has also been
argued that the IBC does not provide for adequate safeguards to protect the interests of
the debtor's creditors and other stakeholders, and may result in the liquidation of viable
businesses.

However, the Supreme Court of India has held that the right to property under Article
300A is not an absolute right and is subject to reasonable restrictions that may be
imposed by the State. The Court has held that the IBC ensures that the interests of all
stakeholders, including the debtor and its creditors, are taken into account.

Judicial Interpretation of IBC

The Insolvency and Bankruptcy Code (IBC) has been subject to extensive judicial
interpretation since its enactment in 2016. The Supreme Court of India and various High
Courts have dealt with several important legal issues arising under the IBC, including the
scope and applicability of the Code, the rights and obligations of stakeholders, and the role
of the National Company Law Tribunal (NCLT) and other authorities under the Code.

One of the most significant issues that have been addressed by the courts is the scope of
the IBC and its applicability to various types of debtors and creditors. The Supreme Court
has held that the IBC applies to all companies, including public sector undertakings
(PSUs), and that operational creditors have the right to initiate insolvency proceedings
against debtors. The Court has also held that the IBC is a complete code and that other
laws dealing with insolvency and bankruptcy are repealed to the extent of any
inconsistency with the Code.

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 Another important issue that has been addressed by the courts is the role and powers of the
NCLT and the appellate tribunals under the IBC. The NCLT has the power to take over
the management of a debtor's assets and operations during the insolvency resolution
process, and that its decisions are subject to judicial review by the appellate tribunal and
the courts. The NCLT has the power to order the liquidation of a debtor's assets if the
insolvency resolution process fails.

The courts have also addressed several other legal issues under the IBC, including the
rights and obligations of financial and operational creditors, the eligibility of resolution
applicants, and the timelines for completing the insolvency resolution process. In
conclusion, the judicial interpretation of the IBC has been crucial in shaping the
implementation and enforcement of the Code. The courts have provided guidance on
several legal issues arising under the Code and have sought to ensure a fair and transparent
process for insolvency resolution. The jurisprudence developed by the courts will continue
to play an important role in the development of insolvency law in India.

• Supreme Court's view on constitutionality of IBC

The Supreme Court of India has upheld the constitutionality of the Insolvency and
Bankruptcy Code (IBC) in several cases. The Court has held that the IBC is a
comprehensive legislation that seeks to consolidate and amend the laws relating to
insolvency and bankruptcy in India, and that it is consistent with the constitutional scheme
and principles.

In a landmark judgment in 2019, the Supreme Court upheld the constitutional validity of
the IBC against challenges under various provisions of the Constitution, including Articles
14, 19(1)(g), and 21. The Court held that the IBC provides for a fair and transparent
process for insolvency resolution, which ensures that the interests of all stakeholders,
including the debtor and its creditors, are taken into account. The Court also held that the
IBC is a complete code that supersedes all other laws relating to insolvency and
bankruptcy, and that it is not discriminatory or arbitrary.

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 The Supreme Court has also issued several important judgments on the interpretation and
application of the IBC. For example, in the Essar Steel case, the Court clarified the role of
the Committee of Creditors (CoC) in the insolvency resolution process and held that the
CoC has the power to evaluate and approve resolution plans submitted by resolution
applicants. In the Swiss Ribbons case, the Court held that the IBC is a beneficial
legislation that seeks to promote entrepreneurship and maximize the value of assets of the
debtor.

• High Court's view on constitutionality of IBC

The High Courts in India have also addressed several constitutional challenges to the
Insolvency and Bankruptcy Code (IBC) in various cases. Overall, the High Courts have
been supportive of the IBC and have upheld its constitutionality.

For example, in a case before the Madras High Court, a petition was filed challenging the
constitutionality of Section 29A of the IBC, which provides for eligibility criteria for
resolution applicants. Section 29A(c) was challenged on the grounds that it brings about a
blanket ban on all the promoters of the corporate debtor. Also, it does not provide any
mechanism to bar unscrupulous promoters responsible for the stressed state of the
corporate debtor and does not allow efficient managers to revive the corporate debtor, and
is manifestly arbitrary. The Court held that Section 29A is not violative of the Constitution
and that the eligibility criteria are necessary to ensure that only credible and financially
sound persons are allowed to participate in the insolvency resolution process.

Similarly, in a case before the Gujarat High Court, a petition was filed challenging the
constitutional validity of the provisions of the IBC relating to the initiation of insolvency
proceedings against personal guarantors of corporate debtors. The Court held that the IBC
is a beneficial legislation that seeks to promote resolution of debts and that the provisions
relating to personal guarantors are in line with the objectives of the Code.

In another case before the Delhi High Court, a petition was filed challenging the
constitutional validity of certain provisions of the IBC relating to the rights of homebuyers
in insolvency proceedings against real estate developers. The Court held that the IBC

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provides for a comprehensive mechanism for insolvency resolution and that the rights of
homebuyers are protected under the Code.

Conclusion
The IBC has been a game-changer for the Indian economy, as it has addressed long-
standing issues in the insolvency resolution process and has provided a framework for the
resolution of stressed assets. The Code has improved the business environment in India
and has made it easier for entrepreneurs to do business, by providing a clear exit
mechanism for distressed businesses. The IBC has also strengthened the banking system
and has contributed to the development of the Indian financial markets.

In conclusion, the constitutionality of the Insolvency and Bankruptcy Code (IBC) has been
a matter of debate since its introduction in India in 2016. However, the Supreme Court of
India has upheld the constitutionality of the IBC in various cases and has held that it is a
valid and important legislation that serves the public interest. The Court has dismissed
arguments that the IBC violates the federal structure of the Constitution, infringes upon
the fundamental rights of individuals and companies, and violates the principles of natural
justice. The IBC has been seen as a positive development for the Indian economy as it
provides a time-bound process for the resolution of insolvency and bankruptcy cases,
thereby promoting entrepreneurship and enhancing the ease of doing business in India.
The IBC is expected to have a significant impact on the resolution of insolvency and
bankruptcy cases in India.

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