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[Srujan Sangai is a V year B.A. LLB student at National Law School of India University, Bengaluru.
Part I of this post is available here]
Reframing Equity’s Domain within the IBC
Theoretical Foundations: Interpreting “Fairness” through Legal Positivism and Economic Efficiency
In the context of the IBC, the “law” refers to the explicit, codified rules, procedures, timelines, and priorities laid down in the statute as enacted by the Parliament. This includes provisions such as section 30(2) outlining the mandatory contents of a resolution plan, section 29A on eligibility of resolution applicants, section 12 on timelines for the CIRP, and the defined roles and powers of the resolution professional, the CoC, the NCLT, and the NCLAT. These are the black-letter rules designed to provide a predictable and structured framework for resolving insolvency.
The IBC finds its most coherent and effective interpretive framework in Andrei Marmor’s theory of Exclusive Legal Positivism (ELP). This approach aligns with the IBC’s core objectives of certainty, predictability, time-bound resolution, and its nature as a comprehensive, source-based law. The IBC’s foundation as a source-based, conventional system aligns with ELP’s sources thesis. Marmor argues that “legal validity is exhausted by reference to the conventional sources of law: all law is source based, and anything which is not source based is not law.” The IBC was meticulously designed by the BLRC as a comprehensive, self-contained code intended to be the primary, if not exclusive, source of law for insolvency and bankruptcy in India (BLRC Report, Vol 1). Its provisions, from the definition of default, the process for initiating insolvency, the conduct of the CIRP, to the waterfall mechanism in liquidation (section 53), are all explicitly laid down. ELP also provides a coherent framework for understanding “fairness” and “equity” within the IBC.
ELP does not deny that moral considerations can be relevant to law. Marmor explains that source-based law can “incorporate morality on its own terms” often by granting “directed power” to legal officials (like judges or tribunals) to apply certain moral criteria specified by the legal source. The IBC itself contains provisions that address fairness and equity, but these are source-based incorporations. For example, section 30(2)(b) requires a resolution plan to be “fair and equitable” to dissenting financial creditors and ensure operational creditors receive at least the liquidation value. This is a specific, source-defined application of fairness. The waterfall mechanism in section 53, while sometimes perceived as harsh, is a legislative determination of distributive fairness in liquidation, as per the “source”. Interpreting these through an ELP lens means that when the NCLT or courts apply these “fair and equitable” standards, they are exercising a power directed by the IBC itself, using criteria and limits set by that source, rather than importing freestanding moral judgments. This exercise of directed power, where the source itself guides the application of morally-inflected terms, changes or clarifies the law in specific instances based on the authority conferred by that source, thereby maintaining the integrity of the source-based nature of the legal determination and upholding the predictability and certainty the IBC strives to achieve.
Further, Marmor argues that inclusive positivism, which might allow moral considerations to more broadly determine legal validity, is untenable. Interpreting the IBC through such a lens could introduce the very uncertainty and delay the statute seeks to avoid, as it might open the door to arguments based on moral principles not explicitly or narrowly incorporated by the IBC itself. ELP’s insistence on source-based determination shields the IBC from such interpretive expansions that could dilute its effectiveness.
Lastly, the Meld Model, as theorized by Singh, provides a jurisprudential model to understand IBC within the Indian context and to understand the implications of equity within IBC through its law and economics approach. The Model focuses on Coase’s transaction costs and Posner’s wealth maximization. Allowing courts to pursue broad, undefined “equitable outcomes” outside the IBC’s statutory confines introduces subjectivity and uncertainty. This uncertainty directly increases transaction costs (e.g., costs of litigation, unpredictability in commercial planning, higher risk premiums in lending) and can lead to inefficient resource allocation. Singh’s critique of judicial decisions in Excel Crop Care v. Competition Commission of India and Essar Steel for deviating from clear statutory language and thereby creating ambiguity and transaction costs illustrates this point. If the Court were to disregard the IBC’s defined treatment of equity for a more amorphous version, it would likely lead to similar negative economic consequences. Kaldor-Hicks efficiency argument can be invoked when if pursuing a particular equitable outcome for one group diminishes the total value recoverable or leads to the failure of an otherwise viable resolution. For instance, in the case of Kalyani Transco, the economic repercussions of the liquidation of the corporate debtor are projected to be severe: a reported ₹15,000-crore loss for JSW Steel, a significant drop in production, and a fall in JSW’s share price. Creditors, including the State Bank of India, face the prospect of having to refund ₹19,350 crore (which was a 60% haircut on their original claims) and may encounter provisioning issues, with liquidation likely yielding even lower recovery rates. Job losses for the company’s workers and an erosion of trust among foreign investors are also anticipated.
Circumscribing Intervention: When, If Ever, Can Article 142 Be Invoked in IBC?
The invocation of Article 142 of the Constitution by the Supreme Court in matters relating to the IBC must be reserved for the most exceptional and compelling circumstances, and any such intervention should not undermine or rewrite the core fabric and legislative intent of the IBC. The grounds for which Article 142 may be invoked are: first, gross miscarriage of justice unremediable by the Code. It would include situations where a manifest injustice has occurred due to a procedural anomaly or fraud that the IBC’s existing provisions cannot adequately address, and where intervention would not fundamentally disrupt the resolution process or timelines. Second, addressing legislative gaps. For instance, the Supreme Court has in 21 cases invoked Article 142 to grant settlements in insolvency cases before section 12A was inserted. However, there are certain fundamental features of the IBC the Court cannot supersede which include: (i) overriding the commercial wisdom of the CoC on a resolution plan that is otherwise compliant with section 30(2); (ii) redistributing proceeds in a manner inconsistent with section 53; (iii) extending timelines beyond what the IBC permits, except in the most extraordinary, system-level disruptions (e.g., nationwide lockdowns, as judicially acknowledged); (iv) introducing parties or claims that fall outside the IBC’s framework (the list being only indicative). The judgment in Shilpa Sailesh v. Varun Sreenivasan cautions that Article 142 should not contravene a “fundamental and non-derogable principle at the core of a statute” or an “express pre-eminent prohibition in any substantive law.”The IBC’s core principles include attempting resolution before liquidation (liquidation is a measure of last resort), adherence to a creditor-driven process through the CoC, and adjudication by a specialized tribunal (NCLT/NCLAT). A direct order for liquidation by the Supreme Court, without exhausting the resolution avenues or bypassing the CoC’s role and NCLT’s jurisdiction as delineated in the IBC, would violate these fundamental principles. Shilpa Sailesh case also notes that Article 142 is tempered by considerations of “specific public policy”, understood as an “express pre-eminent prohibition in any substantive law”. The IBC itself represents a specific public policy regarding the efficient and timely resolution of insolvency, maximization of the value of assets of the corporate debtor, promoting entrepreneurship, availability of credit, and balancing the interests of all stakeholders. Directly ordering liquidation without adherence to the IBC’s processes could undermine this public policy. In essence, while Article 142 allows the Supreme Court to “iron out creases” or do “complete justice” where procedures might cause injustice, it does not permit the Court to disregard or override the comprehensive and substantive legal framework established by a special enactment like the IBC for initiating and ordering liquidation. The IBC has its own inbuilt mechanisms and designated authorities for such actions, and these statutory mandates must be respected.
Conclusion
This post has argued that the Supreme Court’s invocation of inherent equitable powers, particularly under Article 142, to adjudicate insolvency matters in a manner that supersedes the express provisions of the IBC is problematic. The statute, by its very architecture and legislative intent, prioritizes predictability, speed, and economic efficiency, with any notion of “fairness” or “equity” being intrinsically linked to and defined by the Code itself. Established judicial precedent, particularly the harmonious interpretation of Article 142 following Supreme Court Bar Association, dictates that these powers cannot be used to override statutory mandates. Despite this, recent Supreme Court decisions in IBC cases have demonstrated an inconsistent application of Article 142, sometimes deviating from its own established principles and the IBC’s structure. A more coherent approach, grounded in theories like Exclusive Legal Positivism and economic efficiency models, suggests that equity within the IBC should be understood as incorporated and directed by the Code’s own provisions. Therefore, while Article 142 may have a role in truly exceptional circumstances, such as gross miscarriages of justice unremediable by the IBC or to address genuine legislative gaps, it must not be wielded to rewrite the fundamental, source-based framework of the statute, thereby preserving the certainty and integrity of the insolvency resolution process.
[Concluded]
– Srujan Sangai
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