- In a powerful statement, the Supreme Court has instructed all lower courts to take into account the fact that the Insolvency and Bankruptcy Code, 2016 constitutes a paradigm shift.
- The recent court ruling in the case between ICICI Bank and Innoventive Industries has come at a time when the Indian central bank has forced lenders to move against large loan defaulters.
What is the issue?
- The private sector lender had initiated insolvency proceedings against the company because it defaulted on its loan commitments.
What does Supreme Court judgement signify?
- The Supreme Court judgement clearly states that the Insolvency and Bankruptcy Code, 2016 overrides the confusing maze of state laws that companies could use in the future to avoid insolvency.
- Justice R.F. Nariman and Justice Sanjay Kishan Kaul have cited Article 54 of the Constitution to say that a Central law should prevail over state law whenever the two are contradictory.
- The court ruling comes even as the Reserve Bank of India (RBI) has asked banks to move against another 28 large defaulters.
- The central bank action is a clear signal that regulatory forbearance is not an option given the mounting bad loans that now constitute the biggest risk to economic stability.
- Such firm action is now possible because the Insolvency and Bankruptcy Code empowers creditors for the first time ever.
Report by the committee
- The Supreme Court has liberally quoted parts of the report by the committee that worked on the reform of Indian bankruptcy law.
- The limited liability company is a contract between equity and debt.
- Equity owners are in full control as long as debt obligations are met.
- Creditors have no say in how the company is run. The situation flips in case of a default. Control should then be passed to creditors. Equity owners have no say.
- Weak protection for creditors means that they are averse to lending.
- At least some part of the credit constraints in India can be traced back to this problem.
- The growth of a corporate bond market is also held back by the lack of a modern bankruptcy framework.
- The control of a defaulting company should be transferred to the creditors.