‘The defaulter’s paradise is lost’ – an unsuccessful challenge to India’s new Bankruptcy Code

India’s new Bankruptcy Code has survived an initial challenge to its constitutional validity, with the Supreme Court of India waxing poetic about the importance of the new law to the nation’s economy.

The Code came into operation in 2016, offering a fresh insolvency law regime for a country that had a fragmented framework across different pieces of legislation, determined in different judicial for a, and plagued by high costs and extended time delays, both anathema to an efficient and effective insolvency regime. This was in a country with a “high concentration of the most dynamic entrepreneurs” where the necessary support framework for resolution of the inevitable outcomes of entrepreneurial risk were inadequate if non-existent.

The Code’s constitutional validity was upheld in Swiss Ribbons v Union of India, a 150 page judgment of the Supreme Court given on 25 January 2019. Many of the fundamental issues about the purposes of insolvency law, and how the courts should interpret the government’s intention in enacting such legislation, are discussed in the judgment.

The Court usefully explains and discusses the details of India’s new insolvency regime, and how the law seeks to remedy the deficiencies of the past. The judgment is commended for detailed reading.

Epilogue

The Supreme Court’s ‘epilogue’ [pp 148-150] contains interesting concluding comments about the Code which the Court describes as an ‘experiment’.

The Court notes that an insolvency law ‘deals with the economy of the country as a whole’. Earlier insolvency law ‘experiments’ in India had failed. But

‘the experiment contained in the [2016] Code … passes constitutional muster’.

To stay such experimentation, as sought by the those challenging the Code, would be a

“grave responsibility … fraught with serious consequences to the nation”.

The Court noted that the operation of the Code was being monitored by an expert committee, which had already prompted adjusting amendments to the Code.

The Supreme Court then noted that since the Code had become operational, “the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid”. Ensuring a flow of credit is an underlying purpose of an insolvency regime for any country.

The Court concluded by saying that the country’s financial figures “show that the experiment conducted in enacting the Code is proving to be largely successful”.

With inferred acknowledgment to Milton, the Court said that

“(t)he defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained”.

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