inancial creditor Current Affairs - 2019

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Supreme Court Upholds Constitutional Validity of Insolvency & Bankruptcy Code

The Supreme Court has upheld the constitutional validity of the Insolvency & Bankruptcy Code. The petitioners had questioned the Insolvency & Bankruptcy Code based on the following grounds:

  • The constitutional validity of IBC was questioned as a violation of Article 14 of the Constitution.
  • The petitioners argued that IBC doesn’t make an intelligible differentiation in the classification of a financial creditor and operational creditor, and hence violates Article 14.
  • Petitioners claimed that Operational creditors provide services to companies and have the right to initiate insolvency proceedings if their payments are defaulted upon. But the code bars them for participating in the resolution process through the committee of creditors.
  • As per IBC, the committee can only consist of financial creditors who assess and vote on resolution plans submitted by interested bidders.
  • Petitioners also argued against barring promoters from bidding for their own companies forces them to undertake the sale of the company to new bidders. This violates the fundamental rights of promoters of a company.

The Supreme Court dismissed both the arguments of petitioners while upholding the bar on promoters to come in as resolution applicants Supreme Court noted that the Section 12A route is open for them.

Section 12A of IBC allows for a withdrawal of an insolvency application if 90 per cent of the creditors’ committee by voting share approves it.