SWISS RIBBONS PVT. LTD. V. UNION OF INDIA

AUTHOR : ZULAIKA AFTHAZ

Introduction:

If we ask anybody about the fields where we can save the lives of people, the most popular answers we get are medical, defence, law, etc. But we never connect the corporate world to this group. How would I say that there is a field in the corporate world that saves the lives of people? It is none other than the Insolvency and Bankruptcy Law, where we can save the livelihood of hundreds of people indirectly, who are the stakeholders of the company.

Legislative Intent Behind IBC:

Insolvency is a state in which a company loses its ability to pay its debts to its creditors, and when its liability increases more than its assets. In simple words, the company goes bankrupt and enters the Insolvency Resolution process under IBC. It is governed by the Insolvency and Bankruptcy Board of India and the Insolvency and Bankruptcy Code.

If a company is on the verge of going bankrupt, any rational creditor's perspective will be that if the company continues to operate, it will give good realization of assets instead of liquidating the assets and closing down the company. So, liquidation should be the last option that any creditor should choose. This revival-oriented framework will preserve employment, maintain economic productivity, and maximise the asset value. Through this, it serves the broader economic interests beyond the individual creditor's interest.

Core Constitutional Challenge:

Multiple writ petitions were filed under Article 32 in Swiss Ribbons Pvt. Ltd. v. Union of India, challenging the differential treatment of Financial & Operational Creditors, Sec 29A and procedural differences between Sec 7&9. Article 14 does not prohibit the classification, but prohibits only the arbitrary classification. For any cases that question the Right to Equality, the Constitution has the Two-fold test, i.e., Intelligible differentia and Rational nexus with the objective. The main objectives of the Insolvency & Bankruptcy Law are the revival of the company, maximisation of the value of the assets and time-bound resolution. Now the question arises whether distinguishing the financial and operational creditors helps to achieve this objective. Of course, yes. So, the rational nexus exists. Art 14 itself permits the reasonable classification. Therefore, economic efficiency and Constitutional equality are not in conflict if the classification is rational.

The constitution is silent on the internal structuring of the insolvency processes, which leaves room for the experts in legislatures to make rules regarding corporate aspects. Courts usually show restraint in economic matters. Unless the classification is arbitrary, it does not interfere. The court in this case also noted that the Committee of Creditors’ decisions are based on commercial wisdom, and courts should not handle such commercial decisions. It also highlights one of the core principles of the Constitution, i.e., the Separation of Powers and emphasizes that the Judiciary respects the economic decision-making.

The court applied the Article 14 test and upheld the classification. It emphasized revival as the primary objective and recognized the commercial wisdom of CoC. It said that IBC is not a mere recovery mechanism.

The Supreme Court’s Economic Reasoning:

Giving operational creditors equal voting rights may result in short-term decisions based on urgent recovery plans. Given their numerical strength, operational creditors may outvote financial creditors, undermining restructuring attempts. Financial creditors, on the other hand, have an advantage in assessing viability due to their access to financial data, engagement in loan structuring, and long-term exposure to company risk. The recovery of debts resulting from the provision of goods and services is the main concern of operational creditors. Instead of long-term financial restructuring, their risk is transaction-specific.

While the IBC prioritises resurrection and delegated decision-making authority to financial creditors, operational creditors are not completely ignored. Section 30(2)(b) requires that operational creditors receive at least the same amount as in liquidation. This rule illustrates a balancing approach: while operational creditors are barred from voting power, their economic interests are protected to avoid absolute marginalisation.

Impact on Insolvency Practice:

If we analyze what would happen to the CoC if the distinction had been struck down. The insolvency framework is designed for a speedy resolution process. As the operational creditors are numerous in numbers compared to the financial creditors, the resolution process will slow down, which defeats the objective of the IBC. Decision-making under Sec 30(4) requires the voting thresholds, and with too many members in a committee, the consensus would become harder.

Financial creditors assess viability, restructuring and long-term sustainability, whereas Operational creditors focus on recovery of dues, immediate payment for their goods & services and individual interest rather than the survival of the company. If banks, after overlooking and financing the company, are given the same priority as that of the others, it might discourage structured lending. Banks undertake due diligence, assess the credit risk, and provide structured, long-term financing. If they lose the priority over decision-making, credit discipline may weaken, future lending becomes conservative, and credit markets might destabilize.  

Conclusion:

This judgement sent a clear message to the Banks and Financial Institutions about assurance of control in insolvency resolution and recognized their commercial expertise. It also emphasized that their risk exposure translates into decision-making authority. When it comes to investors, they care about predictability. As a clear hierarchy reduces uncertainty, and commercial decisions remain in the hands of the financial creditors, revival is more likely because these decision makers prioritize the long-term sustainability. If the decision supported the claims of petitioners, then Resolution Professionals would have struggled to balance the micro conflicts, and negotiations would become chaotic, and delays might have increased in the resolution process. With financial creditors, the negotiations are structured, evaluations are viability-based and commercial experts guide the decisions. Thus, the judgment harmonized the constitutional equality with the economic efficiency, emphasizing the revival as the heart of the insolvency law.