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REPORTABLE  

IN THE SUPREME COURT OF INDIA  

CIVIL ORIGINAL/APPELLATE JURISDICTION  

WRIT PETITION (CIVIL) NO. 99 OF 2018  

Swiss Ribbons Pvt. Ltd. & Anr.   …..Petitioners  

VERSUS  

Union of India & Ors.     …..Respondents  

WITH  

WRIT PETITION (CIVIL) NO. 100 OF 2018  

WRIT PETITION (CIVIL) NO. 115 OF 2018  

WRIT PETITION (CIVIL) NO. 459 OF 2018  

WRIT PETITION (CIVIL) NO. 598 OF 2018  

WRIT PETITION (CIVIL) NO. 775 OF 2018  

WRIT PETITION (CIVIL) NO. 822 OF 2018  

WRIT PETITION (CIVIL) NO. 849 OF 2018  

WRIT PETITION (CIVIL) NO. 1221 OF 2018  

SPECIAL LEAVE PETITION (CIVIL) NO. 28623 OF 2018  

WRIT PETITION (CIVIL) NO. 37 OF 2019  

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J U D G M E N T  

R.F. Nariman, J.   

1. The present petitions assail the constitutional validity of various  

provisions of the Insolvency and Bankruptcy Code, 2016 [―Insolvency  

Code‖ or ―Code‖]. Since we are deciding only questions relating to the  

constitutional validity of the Code, we are not going into the individual  

facts of any case.  

2. Shri Mukul Rohatgi, learned Senior Advocate, appearing in Writ  

Petition (Civil) No. 99 of 2018, has first and  foremost argued that the  

members of the National Company Law Tribunal [―NCLT‖] and certain  

members of the National Company Law Appellate Tribunal [―NCLAT‖],  

apart from the President, have been appointed contrary to this Court‘s  

judgment in Madras Bar Association v. Union of India, (2015) 8  

SCC 583 [―Madras Bar Association (III)‖], and that therefore, this  

being so, all orders that are passed by such members, being passed  

contrary to the judgment of this Court in the aforesaid case, ought to  

be set aside. In any case, even assuming that the de facto doctrine  

would apply to save such orders, it is clear that such members ought to  

be restrained from passing any orders in future. In any case, until a

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properly constituted committee, in accordance with the aforesaid  

judgment, reappoints them, they ought not to be allowed to function.  

He also argued that the administrative support for all tribunals should  

be from the Ministry of Law and Justice. However, even today, NCLT  

and NCLAT are functioning under the Ministry of Corporate Affairs.  

This again needs to be corrected immediately. A further technical  

violation also exists in that if the powers of the High Court are taken  

away, the NCLAT, as an appellate forum, should have the same  

convenience and expediency as existed prior to appeals going to the  

NCLAT.  Since the NCLAT, as an appellate court, has a seat only at  

New Delhi, this would render the remedy inefficacious inasmuch as  

persons would have to travel from Tamil Nadu, Calcutta, and Bombay  

to New Delhi, whereas earlier, they could have approached the  

respective High Courts in their States. This again is directly contrary to  

Madras Bar Association v. Union of India, (2014) 10 SCC 1  

[―Madras Bar Association (II)‖], and to paragraph 123 in particular.  

Apart from the aforesaid technical objection, Shri Rohatgi assailed the  

legislative scheme that is contained in Section 7 of the Code, stating  

that there is no real difference between financial creditors and  

operational creditors. According to him, both types of creditors would

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give either money in terms of loans or money‘s worth in terms of goods  

and services. Thus, there is no intelligible differentia between the two  

types of creditors, regard being had to the object sought to be  

achieved by the Code, namely, insolvency resolution, and if that is not  

possible, then ultimately, liquidation. Relying upon Shayara Bano v.  

Union of India, (2017) 9 SCC 1 [―Shayara Bano‖], he argued that  

such classification will not only be discriminatory, but also manifestly  

arbitrary, as under Sections 8 and 9 of the Code, an operational debtor  

is not only given notice of default, but is entitled to dispute the  

genuineness of the claim. In the case of a financial debtor, on the other  

hand, no notice is given and the financial debtor is not entitled to  

dispute the claim of the financial creditor. It is enough that a default as  

defined occurs, after which, even if the claim is disputed and even if  

there be a set-off and counterclaim, yet, the Code gets triggered at the  

behest of a financial creditor, without the corporate debtor being able  

to justify the fact that a genuine dispute is raised, which ought to be left  

for adjudication before ordinary courts and/or tribunals. Shri Rohatgi  

then argued that assuming that a valid distinction exists between  

financial and operational creditors, there is hostile discrimination  

against operational creditors. First and foremost, unless they amount

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to 10% of the aggregate of the amount of debt owed, they have no  

voice in the committee of creditors. In any case, Sections 21 and 24 of  

the Code are discriminatory and manifestly arbitrary in that operational  

creditors do not have even a single vote in the committee of creditors  

which has very important functions to perform in the resolution process  

of corporate debtors. Shri Rohatgi then went on to assail the  

establishment of information utilities that are set up under the Code.  

According to him, under Section 210 of the Code, there can be private  

information utilities whose sole object would be to make a profit.  

Further, the said information utility is not only to collect financial data,  

but also to check whether a default has or has not occurred.  

Certification of such agency cannot substitute for adjudication. Thus,  

the certificate of an information utility is in the nature of a preliminary  

decree issued without any hearing and without any process of  

adjudication. Shri Rohatgi next argued that Section 12A of the Code is  

contrary to the directions of this Court in its order in Uttara Foods and  

Feeds Pvt. Ltd. v. Mona Pharmachem, Civil Appeal No. 18520/2017  

[decided on 13.11.2017], and that instead of following the said order,  

Section 12A now derails the settlement process by requiring the  

approval of at least ninety per cent of the voting share of the committee

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of creditors. Unbridled and uncanalized power is given to the  

committee of creditors to reject legitimate settlements entered into  

between creditors and the corporate debtors. Shri Rohatgi then argued  

that the resolution professional, having been given powers of  

adjudication under the Code and Regulations, grant of adjudicatory  

power to a non-judicial authority is violative of basic aspects of  

dispensation of justice and access to justice. Lastly, a four-fold attack  

was raised against Section 29A, in particular, clause (c) thereof. First  

and foremost, Shri Rohatgi stated that the vested rights of erstwhile  

promoters to participate in the recovery process of a corporate debtor  

have been impaired by retrospective application of Section 29A.  

Section 29A, in any case, is contrary to the object sought to be  

achieved by the Code, in particular, speedy disposal of the resolution  

process as it will inevitably lead to challenges before the Adjudicating  

Authority and Appellate Authority, which will slow down and delay the  

insolvency resolution process. In particular, so far as Section 29A(c) is  

concerned, a blanket ban on participation of all promoters of corporate  

debtors, without any mechanism to weed out those who are  

unscrupulous and have brought the company to the ground, as against  

persons who are efficient managers, but who have not been able to

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pay their debts due to various other reasons, would not only be  

manifestly arbitrary, but also be treating unequals as equals. Also,  

according to Shri Rohatgi, maximization of value of assets is an  

important goal to be achieved in the resolution process. Section 29A is  

contrary to such goal as an erstwhile promoter, who may outbid all  

other applicants and may have the best resolution plan, would be kept  

out at the threshold, thereby impairing the object of maximization of  

value of assets. Another argument that was made was that under  

Section 29A(c), a person‘s account may be classified as a non-

performing asset [―NPA‖] in accordance with the guidelines of the  

Reserve Bank of India [―RBI‖], despite him not being a wilful defaulter.  

Also, the period of one year referred to in clause (c) is again wholly  

arbitrary and without any basis either in rationality or in law. Shri  

Rohatgi then trained his gun on Section 29A(j), and stated that persons  

who may be related parties in the sense that they may be relatives of  

the erstwhile promoters are also debarred, despite the fact that they  

may have no business connection with the erstwhile promoters who  

have been rendered ineligible by Section 29A.       

3. Shri K.V. Viswanathan, learned Senior Advocate, appearing in  

Writ Petition No.822 of 2018, strongly supported Shri Rohatgi and

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argued the same points with great clarity and with various nuances of  

his own, which will be reflected in our judgment. Followed by Shri  

Viswanathan, Shri A.K. Gupta, Shri Pulkit Deora, Shri Devanshu Sajlan  

and Shri Deepak Joshi also made submissions with particular regard to  

discrimination against operational creditors.  

4. As against these submissions, Shri K.K. Venugopal, the learned  

Attorney General for India, and Shri Tushar Mehta, learned Solicitor  

General for India, appearing for the Union of India, and Shri Rakesh  

Dwivedi, learned Senior Advocate, appearing for the Reserve Bank of  

India, countered all the aforesaid submissions. They argued with  

reference to our judgments and Committee Reports that till the  

Insolvency Code was enacted, the regime of previous legislation had  

failed to maximize the value of stressed assets and had focused on  

reviving the corporate debtor with the same erstwhile management. All  

these legislations had failed, as a result of which, the Code was  

enacted to reorganize insolvency resolution of corporate debtors in a  

time bound manner to maximize the value of assets of such person.  

They further argued that there is a paradigm shift from the erstwhile  

management of a corporate debtor being in possession of stressed  

assets to creditors who now assume control from the erstwhile

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management and are able to approve resolution plans of other better  

and more efficient managers, which would not only be in the interest of  

the corporate debtor itself but in the interest of all stakeholders,  

namely, all creditors, workers, and shareholders other than  

shareholdings of the erstwhile management. They referred to the  

Statement of Objects and Reasons, the Preamble, and various  

provisions of the Code, and to the Rules and Regulations made  

thereunder, to buttress their submissions. In particular, they referred to  

judgments which mandated a judicial hands-off when it came to laws  

relating to economic regulation. They argued that the legislature must  

get the maximum free play in the joints to experiment and come up  

with solutions to problems that have seemed intractable earlier. In  

particular, in combating the individual points made by the learned  

counsel appearing on behalf of the petitioners, they argued that none  

of the members of the NCLT or the NCLAT had been appointed  

contrary to the judgments of this Court in Union of India v. R. Gandhi,  

President, Madras Bar Association (2010) 11 SCC 1 [―Madras Bar  

Association (I)‖] and Madras Bar Association (III) (supra). They  

referred to affidavits filed before this Court to show that all such  

members had been appointed by a Committee consisting of two

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Supreme Court Judges and two bureaucrats, in conformity with the  

aforesaid judgments. When it came to classification between financial  

and operational creditors, they argued that the differentiation between  

the two types of creditors occurs from the nature of the contracts  

entered into with them. Financial contracts involve large sums of  

money given by fewer persons, whereas operational creditors are  

much larger in number and the quantum of dues is generally small.  

Financial creditors have specified repayment schedules and  

agreements which entitle such creditors to recall the loan in totality on  

defaults being made, which the operational creditors do not have.  

Further, financial creditors are, from the start, involved with the  

assessment of viability of corporate debtors and are, therefore, better  

equipped to engage in restructuring of loans as well as reorganization  

of the corporate debtor‘s business in the event of financial stress. All  

these differentiae are not only intelligible, but directly relate to the  

objects sought to be achieved by the Code. Insofar as Section 7,  

relatable to financial creditors, and Sections 8 and 9, which relate to  

operational creditors are concerned, it is a fallacy to say that no notice  

is issued to the financial debtor on defaults made, as financial debtors  

are fully aware of the loan structure and the defaults that have been

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made. Further, this Court‘s judgment in Innoventive Industries Ltd. v.  

ICICI Bank and Anr., (2018) 1 SCC 407 [―Innoventive Industries‖]  

has made it clear that under Section 7(5) of the Code, the Adjudicating  

Authority, in being ―satisfied‖ that there is a default, has to issue notice  

to the corporate debtor, hear the corporate debtor, and then adjudicate  

upon the same. The reason why disputes raised by financial debtors  

are not gone into at the stage of triggering the Code is because the  

evidence of financial debts are contained in the documents of  

information utilities, banks, and financial institutions. Disputes which  

may be raised can be raised at the stage of filing of claims once the  

resolution process is underway. Also, by the very nature of financial  

debts, set-off and counterclaims by financial debtors are very rare and,  

in any case, wholly independent of the loan that has been granted to  

them. Insofar as operational creditors having no vote in the committee  

of creditors is concerned, this is because operational creditors are  

typically interested only in getting payment for supply of goods or  

services made by them, whereas financial creditors are typically  

involved in seeing that the entirety of their loan gets repaid, for which  

they are better equipped to go into the viability of corporate  

enterprises, both at the stage of grant of the loan and at the stage of

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default. Also, the interests of operational creditors, when a resolution  

plan is to be approved, are well looked-after as the minimum that the  

operational creditors are to be paid is the liquidation value of assets.  

Apart from this, their interests are to be placed at par with the interests  

of financial creditors, and if this is not done, then the Adjudicating  

Authority intervenes to reject or modify resolution plans until the same  

is done. In the 80 cases that have been resolved since the Code has  

come into force, figures were also shown to this Court to indicate that  

not only are the operational creditors paid before the financial creditors  

under the resolution plan, but that the initial recovery of what is owed  

to them is slightly higher than what is owed to financial creditors.  

Insofar as Section 12A is concerned, they argued that once an  

application by a creditor is admitted by the Adjudicating Authority, the  

proceeding becomes a proceeding in rem and is no longer an  

individual proceeding but a collective proceeding. This being the case,  

it is important that when a resolution process is to begin and a  

committee of creditors is formed, it is that committee that is best  

equipped to deal with applications for withdrawal or settlement after  

admission of an insolvency petition. Ninety per cent of such creditors  

have been given this task as once the proceeding is in rem, to halt

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such proceeding, which is for the benefit of all creditors generally, can  

only be if all or most of them agree to the same. They argued that the  

resolution professional has no adjudicatory powers under the Code or  

the Regulations, but is only to collate information. Even when he  

exercises his discretion to exercise his best judgment in certain  

situations, he does so administratively, and is subject to an  

adjudicatory body overseeing the same. When it comes to Section 29A  

of the Code, they argued that Section 29A does not disturb any vested  

or existing rights, as a resolution applicant does not have any vested or  

existing rights that can be disturbed, as has been held in ArcelorMittal  

India Private Limited v. Satish Kumar Gupta and Ors., Civil Appeal  

Nos. 9402-9405/2018 [decided on 04.10.2018] [―ArcelorMittal‖].  

Further, merely because this Section relies on antecedent facts for its  

application, does not mean that it is retrospective. Also, Section 29A  

subserves a very important object of the Code, which is to see that  

undesirable persons who are mentioned in all its clauses are rendered  

ineligible to submit resolution plans so that such persons may not  

come into the management of stressed corporate debtors. They also  

argued that Section 29A is not aimed at only persons who have  

committed acts of malfeasance, but also persons who are otherwise

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unfit to be put in the saddle of the management of the corporate  

debtor, such as undischarged insolvents and persons who have been  

removed as directors under Section 164 of the Companies Act, 2013  

(for not filing financial statements or annual returns for any continuous  

period of 3 financial years, for example). They further argued that a  

period of one year is sufficient period within which a person, whose  

account has been declared NPA, should clear its dues. They referred  

to the RBI Regulations dealing with NPAs and stated that even before  

a person‘s account is declared NPA, a long rope is given for such  

person to clear off its debts. It is only when it does not do so, that its  

account is declared NPA in the first instance. Also, once the said  

guidelines are perused, it is clear that an account, which has been  

NPA for one year, is declared as substandard asset and it is for this  

reason that the one year period is given in Section 29A(c), which is  

based on reason, and is not arbitrary.  

5. Shri C.U. Singh, appearing on behalf of the Asset Reconstruction  

Company of India Limited, referred to the pre-existing state of  

legislation before the Code was enacted, and referred in detail to how  

all such legislations had failed to produce the necessary results. He  

also relied upon extracts from the Insolvency Act, 1986 of the United

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Kingdom to buttress his point that worldwide, Insolvency Acts have  

moved away from mere liquidation so as to first concentrate on  

reconstruction of corporate debtors. Also, according to him, Section  

29A is not a Section aimed at malfeasance; it is aimed at rendering  

ineligible persons who are undesirable in the widest sense of the term,  

i.e., persons who are unfit to take over the management of a corporate  

debtor.   

 PROLOGUE: THE PRE-EXISTING STATE OF THE LAW  

6. Having heard the rival contentions, it is important to first clear the  

air on what was the background which led to the enactment of the  

Insolvency Code. The erstwhile regime which led to the enactment of  

the Insolvency Code was discussed by the Bankruptcy Law Reforms  

Committee [―BLRC‖] in its Report dated 04.11.2015 as follows:    

―The current state of the bankruptcy process for firms  is a highly fragmented framework. Powers of the  creditor and the debtor under insolvency are provided  for under different Acts. Given the conflicts between  creditors and debtors in the resolution of insolvency as  described in Section 3.2.2, the chances for  consistency and efficiency in resolution are low when  rights are separately defined. It is problematic that  these different laws are implemented in different  judicial fora. Cases that are decided at the  tribunal/BIFR often come for review to the High Courts.   This gives rise to two types of problems in

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implementation of the resolution framework.  The first  is the lack of clarity of jurisdiction.  In a situation where  one forum decides on matters relating to the rights of  the creditor, while another decides on those relating to  the rights of the debtor, the decisions are readily  appealed against and either stayed or overturned in a  higher court.  Ideally, if economic value is indeed to be  preserved, there must be a single forum that hears  both sides of the case and makes a judgment based  on both. A second problem exacerbates the problems  of multiple judicial fora. The fora entrusted with  adjudicating on matters relating to insolvency and  bankruptcy may not have the business or financial  expertise, information or bandwidth to decide on such  matters.  This leads to delays and extensions in  arriving at an outcome, and increases the vulnerability  to appeals of the outcome.   

The uncertainty that these problems give rise to shows  up in case law on matters of insolvency and  bankruptcy in India.  Judicial precedent is set by ―case  law‖ which helps flesh out the statutory laws. These  may also, in some cases, pronounce new substantive  law where the statute and precedent are silent. (Ravi,  2015) reviews judgments of the High Courts on BIFR  cases, the DRTs and DRATs, as well as a review of  important judgments of the Supreme Court that have  had a significant impact on the interpretation of  existing insolvency legislation. The judgments  reviewed are those after June 2002 when the  SARFAESI Act came into effect.  It is illustrative of  both debtor and creditor led process of corporate  insolvency, and reveals a matrix of fragmented and  contrary outcomes, rather than coherent and  consistent, being set as precedents.  

In such an environment of legislative and judicial  uncertainty, the outcomes on insolvency and  bankruptcy are poor.   World Bank (2014) reports that  the average time to resolve insolvency is four years in  India, compared to 0.8 years in Singapore and 1 year

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in London.  Sengupta and Sharma, 2015 compare the  number of new cases that file for corporate insolvency  in the U.K., which has a robust insolvency law, to the  status of cases registered at the BIFR under SICA,  1985, as well as those filed for liquidation under  Companies Act, 1956. They compare this with the  number of cases files in the UK, and find a significantly  higher turnover in the cases that are filed and cleared  through the insolvency process in the UK.  If we are to  bring financing patterns back on track with the global  norm, we must create a legal framework to make debt  contracts credible channels of financing.   

This calls for a deeper redesign of the entire resolution  process, rather than working on strengthening any  single piece of it.  India is not unusual in requiring this.  In all countries, bankruptcy laws undergo significant  changes over the period of two decades or more.  For  example, the insolvency resolution framework in the  UK is the Insolvency Act of 1986, which was  substantially modified with the Insolvency Act of 2000,  and the Enterprise Act of 2002.  The first Act for  bankruptcy resolution in the US that lasted for a  significant time was the Bankruptcy Act of 1889.  This  was followed by the Act of 1938, the Reform Act of  1978, the Act of 1984, the Act of 1994, a related  consumer protection Act of 2005.  Singapore proposed  a bankruptcy reform in 2013, while there are significant  changes that are being proposed in the US and the  Italian bankruptcy framework this year in 2015.   Several of these are structural reforms with  fundamental implications on resolving insolvency….‖  

 The BLRC went on to state:  

―[…..] India is one of the youngest republics in the  world, with a high concentration of the most dynamic  entrepreneurs. Yet these game changers and growth  drivers are crippled by an environment that takes  some of the longest times and highest costs by world

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standards to resolve any problems that arise while  repaying dues on debt.  This problem leads to grave  consequences: India has some of the lowest credit  compared to the size of the economy. This is a  troublesome state to be in, particularly for a young  emerging economy with the entrepreneurial dynamism  of India.‖  

xxx xxx xxx  

―Speed is of essence for the working of the bankruptcy  code, for two reasons.  First, while the ‗calm period‘  can help keep an organization afloat, without the full  clarity of ownership and control, significant decisions  cannot be made.  Without effective leadership, the firm  will tend to atrophy and fail.  The longer the delay, the  more likely it is that liquidation will be the only answer.   Second, the liquidation value tends to go down with  time as many assets suffer from a high economic rate  of depreciation.   

From the viewpoint of creditors, a good realization can  generally be obtained if the firm is sold as a going  concern.  Hence, when delays induce liquidation, there  is value destruction.  Further, even in liquidation, the  realization is lower when there are delays. Hence,  delays cause value destruction.  Thus, achieving a  high recovery rate is primarily about identifying and  combating the sources of delay.   

This same idea is found in FSLRC‘s (Financial Sector  Legislative Reforms Commission) treatment of the  failure of financial firms.  The most important objective  in designing a legal framework for dealing with firm  failure is the need for speed.‖  

 The pre-existing scenario has been noticed in some of our judgments.  

In Madras Petrochem Ltd. and Anr. v. Board for Industrial and

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Financial Reconstruction and Ors., (2016) 4 SCC 1, this Court  

found:  

―40.……The Eradi Committee Report relating to  insolvency and winding up of companies dated 31-7- 2000, observed that out of 3068 cases referred to  BIFR from 1987 to 2000 all but 1062 cases have been  disposed of. Out of the cases disposed of, 264 cases  were revived, 375 cases were under negotiation for  revival process, 741 cases were recommended for  winding up, and 626 cases were dismissed as not  maintainable. These facts and figures speak for  themselves and place a big question mark on the utility  of the Sick Industrial Companies (Special Provisions)  Act, 1985. The Committee further pointed out that  effectiveness of the Sick Industrial Companies  (Special Provisions) Act, 1985 as has been pointed out  earlier, has been severely undermined by reason of  the enormous delays involved in the disposal of cases  by BIFR. (See Paras 5.8, 5.9 and 5.15 of the Report.)  Consequently, the Committee recommended that the  Sick Industrial Companies (Special Provisions) Act,  1985 be repealed and the provisions thereunder for  revival and rehabilitation should be telescoped into the  structure of the Companies Act, 1956 itself.‖  

(emphasis supplied)  

xxx xxx xxx  

―43.……In fact, another interesting document is the  Report on Trend and Progress of Banking in India  2011-2012 for the year ended 30-6-2012 submitted by  Reserve Bank of India to the Central Government in  terms of Section 36(2) of the Banking Regulation Act,  1949. In Table IV.14 the Report provides statistics  regarding trends in non-performing assets bank-wise,  group-wise. As per the said Table, the opening  balance of non-performing assets in public sector  banks for the year 2011-2012 was Rs 746 billion but  the closing balance for 2011-2012 was Rs 1172 billion

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only. The total amount recovered through the  Securitisation and Reconstruction of Financial Assets  and Enforcement of Security Interest Act, 2002 during  2011-2012 registered a decline compared to the  previous year, but, even then, the amounts recovered  under the said Act constituted 70% of the total amount  recovered. The amounts recovered under the  Recovery of Debts Due to Banks and Financial  Institutions Act, 1993 constituted only 28%. All this  would go to show that the amounts that public sector  banks and financial institutions have to recover are in  staggering figures and at long last at least one  statutory measure has proved to be of some efficacy.  This Court would be loathe to give such an  interpretation as would thwart the recovery process  under the Securitisation and Reconstruction of  Financial Assets and Enforcement of Security Interest  Act, 2002 which Act alone seems to have worked to  some extent at least.‖  

 Similarly, in Innoventive Industries (supra), this Court found:  

―13. One of the important objectives of the Code is to  bring the insolvency law in India under a single unified  umbrella with the object of speeding up of the  insolvency process. As per the data available with the  World Bank in 2016, insolvency resolution in India took  4.3 years on an average, which was much higher  when compared with the United Kingdom (1 year),  USA (1.5 years) and South Africa (2 years). The World  Bank‘s Ease of Doing Business Index, 2015, ranked  India as country number 135 out of 190 countries on  the ease of resolving insolvency based on various  indicia.‖  

 Further, this Court in ArcelorMittal (supra) observed:  

―62. Previous legislation, namely, the Sick Industrial  

Companies (Special Provisions) Act, 1985, and the

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Recovery of Debts Due to Banks and Financial  

Institutions Act, 1993, which made provision for  

rehabilitation of sick companies and repayment of  

loans availed by them, were found to have completely  

failed. This was taken note of by our judgment  

in Madras Petrochem Ltd. v. Board for Industrial and  

Financial Reconstruction, (2016) 4 SCC 1……‖  

xxx xxx xxx  

―63. These two enactments were followed by the  

Securitization and Reconstruction of Financial Assets  

and Enforcement of Securities Interest Act, 2002. As  

has been noted hereinabove, amounts recovered  

under the said Act recorded improvement over the  

previous two enactments, but this was yet found to be  

inadequate.‖  

JUDICIAL HANDS-OFF QUA ECONOMIC LEGISLATION  

 7. In the United States, at one point of time, Justice Stephen Field‘s  

dissents of the 19th Century were translated into majority opinions in  

the early 20th Century. This was referred to as the Lochner era, in  

which the U.S. Supreme Court, over a period of 40 years, consistently  

struck down legislation which was economic in nature as such  

legislation did not, according to the Court, square with property rights.  

As a result, a large number of minimum wage laws, maximum hours of  

work in factories laws, child labour laws, etc. were struck down. The  

result, as is well known, is that President Roosevelt initiated a court-

packing plan in which he sought to get authorization from Congress to

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appoint additional judges to the Supreme Court, who would have then  

overruled the Lochner line of precedents. As it turned out, that became  

unnecessary as Justice Roberts switched his vote so that a 5:4  

majority from 1937 onwards upheld economic legislation. It is important  

to note that the dissents of Justice Holmes and Justice Brandeis now  

became the law. Justice Holmes had, in his dissent in Lochner v. New  

York, 198 U.S. 45 (1905), stated:  

―This case is decided upon an economic theory  which a large part of the country does not entertain. If  it were a question whether I agreed with that theory, I  should desire to study it further and long before  making up my mind. But I do not conceive that to be  my duty, because I strongly believe that my agreement  or disagreement has nothing to do with the right of a  majority to embody their opinions in law. It is settled by  various decisions of this court that state constitutions  and state laws may regulate life in many ways which  we, as legislators, might think as injudicious, or, if you  like, as tyrannical, as this, and which, equally with this,  interfere with the liberty to contract. Sunday laws and  usury laws are ancient examples. A more modern one  is the prohibition of lotteries. The liberty of the citizen  to do as he likes so long as he does not interfere with  the liberty of others to do the same, which has been a  shibboleth for some well-known writers, is interfered  with by school laws, by the Post Office, by every state  or municipal institution which takes his money for  purposes thought desirable, whether he likes it or not.  The Fourteenth Amendment does not enact Mr.  Herbert Spencer‘s Social Statics. The other day, we  sustained the Massachusetts vaccination law.  Jacobson v. Massachusetts, 197 U. S. 11. United

23  

States and state statutes and decisions cutting down  the liberty to contract by way of combination are  familiar to this court. Northern Securities Co. v. United  States, 193 U. S. 197. Two years ago, we upheld the  prohibition of sales of stock on margins or for future  delivery in the constitution of California. Otis v.  Parker, 187 U. S. 606. The decision sustaining an  eight hour law for miners is still recent. Holden v.  Hardy, 169 U. S. 366. Some of these laws embody  convictions or prejudices which judges are likely to  share. Some may not. But a constitution is not  intended to embody a particular economic theory,  whether of paternalism and the organic relation of the  citizen to the State or of laissez faire.  

It is made for people of fundamentally differing  views, and the accident of our finding certain opinions  natural and familiar or novel and even shocking ought  not to conclude our judgment upon the question  whether statutes embodying them conflict with the  Constitution of the United States.  

General propositions do not decide concrete  cases. The decision will depend on a judgment or  intuition more subtle than any articulate major premise.  But I think that the proposition just stated, if it is  accepted, will carry us far toward the end. Every  opinion tends to become a law. I think that the word  liberty in the Fourteenth Amendment is perverted  when it is held to prevent the natural outcome of a  dominant opinion, unless it can be said that a rational  and fair man necessarily would admit that the statute  proposed would infringe fundamental principles as  they have been understood by the traditions of our  people and our law. It does not need research to show  that no such sweeping condemnation can be passed  upon the statute before us. A reasonable man might  think it a proper measure on the score of health. Men  whom I certainly could not pronounce unreasonable  would uphold it as a first instalment of a general  regulation of the hours of work. Whether in the latter

24  

aspect it would be open to the charge of inequality I  think it unnecessary to discuss.‖1  

 Similarly, in New State Ice Co. v. Liebman, 285 U.S. 262 (1932),  

Justice Brandeis echoed Justice Holmes as follows:  

―The discoveries in physical science, the  triumphs in invention, attest the value of the process of  trial and error. In large measure, these advances have  been due to experimentation. In those fields  experimentation has, for two centuries, been not only  free but encouraged. Some people assert that our  present plight is due, in part, to the limitations set  by  courts upon experimentation in the fields of social and  economic science; and to the discouragement to which  proposals for betterment there have been subjected  otherwise. There must be power in the States and the  Nation to remould, through experimentation, our  economic practices and institutions to meet changing  social and economic needs. I cannot believe that the  framers of the Fourteenth Amendment, or the States  which ratified it, intended to deprive us of the power to  correct the evils of technological unemployment and  excess productive capacity which have attended  progress in the useful arts.  

To stay experimentation in things social and  economic is a grave responsibility. Denial of the right  to experiment may be fraught with serious  consequences to the Nation. It is one of the happy  incidents of the federal system that a single  courageous State may, if its citizens choose, serve as  a laboratory; and try novel social and economic  experiments without risk to the rest of the country. This  Court has the power to prevent an experiment. We  may strike down the statute which embodies it on the  

                                                 1  Lochner v. New York, 198 U.S. 45, 75-76 (1905).

25  

ground that, in our opinion, the measure is arbitrary,  capricious or unreasonable. We have power to do this,  because the due process clause has been held by the  Court applicable to matters of substantive law as well  as to matters of procedure. But in the exercise of this  high power, we must be ever on our guard, lest we  erect our prejudices into legal principles. If we would  guide by the light of reason, we must let our minds be  bold.‖2  

The Lochner doctrine was finally buried in Ferguson v. Skrupa, 372  

U.S. 726 (1962), where the Supreme Court held:  

―Both the District Court in the present case and  the Pennsylvania court in Stone adopted the  philosophy of Adams v. Tanner, and cases like it, that  it is the province of courts to draw on their own views  as to the morality, legitimacy, and usefulness of a  particular business in order to decide whether a statute  bears too heavily upon that business and, by so doing,  violates due process. Under the system of government  created by our Constitution, it is up to legislatures, not  courts, to decide on the wisdom and utility of  legislation. There was a time when the Due Process  Clause was used by this Court to strike down laws  which were thought unreasonable, that is, unwise or  incompatible with some particular economic or social  philosophy. In this manner, the Due Process Clause  was used, for example, to nullify laws prescribing  maximum hours for work in bakeries, Lochner v. New  York, 198 U. S. 45 (1905), outlawing ―yellow dog‖  contracts, Coppage v. Kansas, 236 U. S. 1 (1915),  setting minimum wages for women, Adkins v.  Children’s Hospital, 261 U. S. 525 (1923), and fixing  

                                                 2  New State Ice Co. v. Liebman, 285 U.S. 262, 310-311 (1932).

26  

the weight of loaves of bread, Jay Burns Baking Co. v.  Bryan, 264 U. S. 504 (1924). This intrusion by the  judiciary into the realm of legislative value judgments  was strongly objected to at the time, particularly by Mr.  Justice Holmes and Mr. Justice Brandeis. Dissenting  from the Court‘s invalidating a state statute which  regulated the resale price of theatre and other tickets,  Mr. Justice Holmes said,  

―I think the proper course is to recognize that  a state Legislature can do whatever it sees fit  to do unless it is restrained by some express  prohibition in the Constitution of the United  States or of the State, and that Courts should  be careful not to extend such prohibitions  beyond their obvious meaning by reading into  them conceptions of public policy that the  particular Court may happen to entertain.  

And, in an earlier case, he had emphasized that,  ‗The criterion of constitutionality is not whether we  believe the law to be for the public good‘ [Adkins v.  Children’s Hospital, 261 U. S. 525, 567, 570 (1923)  (dissenting opinion)].  

The doctrine that prevailed in Lochner, Coppage,  Adkins, Burns, and like cases - that due process  authorizes courts to hold laws unconstitutional when  they believe the legislature has acted unwisely - has  long since been discarded. We have returned to the  original constitutional proposition that courts do not  substitute their social and economic beliefs for the  judgment of legislative bodies, who are elected to pass  laws. As this Court stated in a unanimous opinion in  1941, ―We are not concerned… with the wisdom,  need, or appropriateness of the legislation. [Olsen v.  Nebraska ex rel. Western Reference & Bond Assn.,  313 U. S. 236, 246 (1941)]‖  

Legislative bodies have broad scope to  experiment with economic problems, and this Court  does not sit to, ―subject the state to an intolerable  supervision hostile to the basic principles of our

27  

government and wholly beyond the protection which  the general clause of the Fourteenth Amendment was  intended to secure‖ [Sproles v. Binford, 286 U.S. 374,  388 (1932)]. It is now settled that States ―have power  to legislate against what are found to be injurious  practices in their internal commercial and business  affairs, so long as their laws do not run afoul of some  specific federal constitutional prohibition, or of some  valid federal law‖ [Lincoln Federal Labor Union, etc. v.  Northwestern Iron & Metal Co., 335 U.S. 525, 536  (1949)].  

In the face of our abandonment of the use of the  ―vague contours‖ [Adkins v. Children’s Hospital, 261 U.  S. 525, 535 (1923)] of the Due Process Clause to  nullify laws which a majority of the Court believed to be  economically unwise, reliance on Adams v. Tanner is  as mistaken as would be adherence to Adkins v.  Children’s Hospital, overruled by West Coast Hotel Co.  v. Parrish, 300 U. S. 379 (1937). Not only has the  philosophy of Adams been abandoned, but also this  Court, almost 15 years ago, expressly pointed to  another opinion of this Court as having ―clearly  undermined‖ Adams. [Lincoln Federal Labor Union,  etc. v. Northwestern Iron & Metal Co., 335 U.S. 525  (1949)]. We conclude that the Kansas Legislature was  free to decide for itself that legislation was needed to  deal with the business of debt adjusting.  Unquestionably, there are arguments showing that the  business of debt adjusting has social utility, but such  arguments are properly addressed to the legislature,  not to us. We refuse to sit as a ―superlegislature to  weigh the wisdom of legislation,‖ [Day-Brite Lighting,  Inc., v. Missouri, 342 U.S. 421, 423 (1923)] and we  emphatically refuse to go back to the time when courts  used the Due Process Clause ―to strike down state  laws, regulatory of business and industrial conditions,  because they may be unwise, improvident, or out of  harmony with a particular school of thought‖  [Williamson v. Lee Optical Co., 348 U.S. 483, 488

28  

(1955)]. Nor are we able or willing to draw lines by  calling a law ―prohibitory‖ or ―regulatory.‖ Whether the  legislature takes for its textbook Adam Smith, Herbert  Spencer, Lord Keynes, or some other is no concern of  ours. The Kansas debt adjusting statute may be wise  or unwise. But relief, if any be needed, lies not with us,  but with the body constituted to pass laws for the State  of Kansas.  

Nor is the statute‘s exception of lawyers a denial  of equal protection of the laws to nonlawyers. Statutes  create many classifications which do not deny equal  protection; it is only ―invidious discrimination‖ which  offends the Constitution. The business of debt  adjusting gives rise to a relationship of trust in which  the debt adjuster will, in a situation of insolvency, be  marshalling assets in the manner of a proceeding in  bankruptcy. The debt adjuster‘s client may need  advice as to the legality of the various claims against  him remedies existing under state laws governing  debtor-creditor relationships, or provisions of the  Bankruptcy Act - advice which a nonlawyer cannot  lawfully give him. If the State of Kansas wants to limit  debt adjusting to lawyers, the Equal Protection Clause  does not forbid it. We also find no merit in the  contention that the Fourteenth Amendment is violated  by the failure of the Kansas statute‘s title to be as  specific as appellee thinks it ought to be under the  Kansas Constitution.‖3  

(emphasis supplied)  

8. In this country, this Court in R.K. Garg v. Union of India, (1981)  

4 SCC 675 has held:  

                                                 3  Ferguson v. Skrupa, 372 U.S. 726, 728-733 (1962).

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―8. Another rule of equal importance is that laws  relating to economic activities should be viewed with  greater latitude than laws touching civil rights such as  freedom of speech, religion etc. It has been said by no  less a person than Holmes, J., that the legislature  should be allowed some play in the joints, because it  has to deal with complex problems which do not admit  of solution through any doctrinaire or strait-jacket  formula and this is particularly true in case of  legislation dealing with economic matters, where,  having regard to the nature of the problems required to  be dealt with, greater play in the joints has to be  allowed to the legislature. The court should feel more  inclined to give judicial deference to legislative  judgment in the field of economic regulation than in  other areas where fundamental human rights are  involved. Nowhere has this admonition been more  felicitously expressed than in Morey v. Doud [351 US  457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J.,  said in his inimitable style:  

 ―In the utilities, tax and economic regulation  cases, there are good reasons for judicial  self-restraint if not judicial deference to  legislative judgment. The legislature after all  has the affirmative responsibility. The courts  have only the power to destroy, not to  reconstruct. When these are added to the  complexity of economic regulation, the  uncertainty, the liability to error, the  bewildering conflict of the experts, and the  number of times the judges have been  overruled by events — self-limitation can be  seen to be the path to judicial wisdom and  institutional prestige and stability.‖  

 The Court must always remember that ―legislation is  directed to practical problems, that the economic  mechanism is highly sensitive and complex, that many  problems are singular and contingent, that laws are

30  

not abstract propositions and do not relate to abstract  units and are not to be measured by abstract  symmetry‖; ―that exact wisdom and nice adaption of  remedy are not always possible‖ and that ―judgment is  largely a prophecy based on meagre and  uninterpreted experience‖. Every legislation,   particularly in economic matters is essentially empiric  and it is based on experimentation or what one may  call trial and error method and therefore it cannot  provide for all possible situations or anticipate all  possible abuses. There may be crudities and  inequities in complicated experimental economic  legislation but on that account alone it cannot be  struck down as invalid. The courts cannot, as pointed  out by the United States Supreme Court in Secretary  of Agriculture v. Central Roig Refining Company [94 L  Ed 381 : 338 US 604 (1950)] be converted into  tribunals for relief from such crudities and inequities.  There may even be possibilities of abuse, but that too  cannot of itself be a ground for invalidating the  legislation, because it is not possible for any  legislature to anticipate as if by some divine  prescience, distortions and abuses of its legislation  which may be made by those subject to its provisions  and to provide against such distortions and abuses.  Indeed, howsoever great may be the care bestowed  on its framing, it is difficult to conceive of a legislation  which is not capable of being abused by perverted  human ingenuity. The Court must therefore adjudge  the constitutionality of such legislation by the  generality of its provisions and not by its crudities or  inequities or by the possibilities of abuse of any of its  provisions. If any crudities, inequities or possibilities of  abuse come to light, the legislature can always step in  and enact suitable amendatory legislation. That is the  essence of pragmatic approach which must guide and  inspire the legislature in dealing with complex  economic issues.‖  

(emphasis supplied)  

xxx xxx xxx

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19. It is true that certain immunities and exemptions  are granted to persons investing their unaccounted  money in purchase of Special Bearer Bonds but that is  an inducement which has to be offered for unearthing  black money. Those who have successfully evaded  taxation and concealed their income or wealth despite  the stringent tax laws and the efforts of the tax  department are not likely to disclose their unaccounted  money without some inducement by way of immunities  and exemptions and it must necessarily be left to the  legislature to decide what immunities and exemptions  would be sufficient for the purpose. It would be outside  the province of the Court to consider if any particular  immunity or exemption is necessary or not for the  purpose of inducing disclosure of black money. That  would depend upon diverse fiscal and economic  considerations based on practical necessity and  administrative expediency and would also involve a  certain amount of experimentation on which the Court  would be least fitted to pronounce. The Court would  not have the necessary competence and expertise to  adjudicate upon such an economic issue. The Court  cannot possibly assess or evaluate what would be the  impact of a particular immunity or exemption and  whether it would serve the purpose in view or not.  There are so many imponderables that would enter  into the determination that it would be wise for the  Court not to hazard an opinion where even economists  may differ. The Court must while examining the  constitutional validity of a legislation of this kind, ―be  resilient, not rigid, forward looking, not static, liberal,  not verbal‖ and the Court must always bear in mind the  constitutional proposition enunciated by the Supreme  Court of the United States in Munn v. Illinois [94 US  13] , namely, ―that courts do not substitute their social  and economic beliefs for the judgment of legislative  bodies‖. The Court must defer to legislative judgment  in matters relating to social and economic policies and  must not interfere, unless the exercise of legislative  judgment appears to be palpably arbitrary. The Court

32  

should constantly remind itself of what the Supreme  Court of the United States said in Metropolis Theater  Company v. City of Chicago [57 L Ed 730 : 228 US 61  (1912)] :  

―The problems of government are practical  ones and may justify, if they do not require,  rough accommodations, illogical it may be,  and unscientific. But even such criticism  should not be hastily expressed. What is best  is not always discernible, the wisdom of any  choice may be disputed or condemned. Mere  error of government are not subject to our  judicial review.‖  

It is true that one or the other of the immunities or  exemptions granted under the provisions of the Act  may be taken advantage of by resourceful persons by  adopting ingenious methods and devices with a view  to avoiding or saving tax. But that cannot be helped  because human ingenuity is so great when it comes to  tax avoidance that it would be almost impossible to  frame tax legislation which cannot be abused.  Moreover, as already pointed out above, the trial and  error method is inherent in every legislative effort to  deal with an obstinate social or economic issue and if  it is found that any immunity or exemption granted  under the Act is being utilized for tax evasion or  avoidance not intended by the legislature, the Act can  always be amended and the abuse terminated. We are  accordingly of the view that none of the provisions of  the Act is violative of Article 14 and its constitutional  validity must be upheld.‖  

(emphasis supplied)    

  Likewise, in Bhavesh D. Parish v. Union of India, (2000) 5 SCC 471,  

this Court held:

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―26. The services rendered by certain informal sectors  of the Indian economy could not be belittled. However,  in the path of economic progress, if the informal  system was sought to be replaced by a more  organized system, capable of better regulation and  discipline, then this was an economic philosophy  reflected by the legislation in question. Such a  philosophy might have its merits and demerits. But  these were matters of economic policy. They are best  left to the wisdom of the legislature and in policy  matters the accepted principle is that the courts should  not interfere. Moreover in the context of the changed  economic scenario the expertise of people dealing with  the subject should not be lightly interfered with. The  consequences of such interdiction can have large- scale ramifications and can put the clock back for a  number of years. The process of rationalization of the  infirmities in the economy can be put in serious  jeopardy and, therefore, it is necessary that while  dealing with economic legislations, this Court, while  not jettisoning its jurisdiction to curb arbitrary action or  unconstitutional legislation, should interfere only in  those few cases where the view reflected in the  legislation is not possible to be taken at all.‖  

xxx xxx xxx    ―30. Before we conclude there is another matter which  we must advert to. It has been brought to our notice  that Section 45-S of the Act has been challenged in  various High Courts and a few of them have granted  the stay of provisions of Section 45-S. When  considering an application for staying the operation of  a piece of legislation, and that too pertaining to  economic reform or change, then the courts must bear  in mind that unless the provision is manifestly unjust or  glaringly unconstitutional, the courts must show judicial  restraint in staying the applicability of the same. Merely  because a statute comes up for examination and some  arguable point is raised, which persuades the courts to

34  

consider the controversy, the legislative will should not  normally be put under suspension pending such  consideration. It is now well settled that there is always  a presumption in favour of the constitutional validity of  any legislation, unless the same is set aside after final  hearing and, therefore, the tendency to grant stay of  legislation relating to economic reform, at the interim  stage, cannot be understood. The system of checks  and balances has to be utilized in a balanced manner  with the primary objective of accelerating economic  growth rather than suspending its growth by doubting  its constitutional efficacy at the threshold itself.‖  

(emphasis supplied)    

In DG of Foreign Trade v. Kanak Exports, (2016) 2 SCC 226, this  

Court has held:  

―109. Therefore, it cannot be denied that the  Government has a right to amend, modify or even  rescind a particular scheme. It is well settled that in  complex economic matters every decision is  necessarily empiric and it is based on experimentation  or what one may call trial and error method and  therefore, its validity cannot be tested on any rigid prior  considerations or on the application of any straitjacket  formula. In Balco Employees’ Union v. Union of India  [Balco Employees’ Union v. Union of India, (2002) 2  SCC 333], the Supreme Court held that laws, including  executive action relating to economic activities should  be viewed with greater latitude than laws touching civil  rights such as freedom of speech, religion, etc. that the  legislature should be allowed some play in the joints  because it has to deal with complex problems which  do not admit of solution through any doctrine or  straitjacket formula and this is particularly true in case  of legislation dealing with economic matters, where  having regard to the nature of the problems greater  latitude require to be allowed to the legislature……‖  

35  

It is with this background, factual and legal, that the constitutional  

validity of the Insolvency and Bankruptcy Code, 2016 has to be  

viewed.   

THE RAISON D’ÊTRE FOR THE INSOLVENCY AND BANKRUPTCY CODE  

9. The Statement of Objects and Reasons for the Code have been  

referred to in Innoventive Industries (supra) which states:  

―12. ……The Statement of Objects and Reasons of the  Code reads as under:  

―Statement of Objects and Reasons.—There is no  single law in India that deals with insolvency and  bankruptcy. Provisions relating to insolvency and  bankruptcy for companies can be found in the Sick  Industrial Companies (Special Provisions) Act, 1985,  the Recovery of Debts Due to Banks and Financial  Institutions Act, 1993, the Securitisation and  Reconstruction of Financial Assets and Enforcement  of Security Interest Act, 2002 and the Companies Act,  2013. These statutes provide for creation of multiple  fora such as Board of Industrial and Financial  Reconstruction (BIFR), Debts Recovery Tribunal  (DRT) and National Company Law Tribunal (NCLT)  and their respective Appellate Tribunals. Liquidation of  companies is handled by the High Courts. Individual  bankruptcy and insolvency is dealt with under the  Presidency Towns Insolvency Act, 1909, and the  Provincial Insolvency Act, 1920 and is dealt with by the  Courts. The existing framework for insolvency and  bankruptcy is inadequate, ineffective and results in  undue delays in resolution, therefore, the proposed  legislation.

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2. The objective of the Insolvency and Bankruptcy  Code, 2015 is to consolidate and amend the laws  relating to reorganization and insolvency resolution of  corporate persons, partnership firms and individuals in  a time-bound manner for maximization of value of  assets of such persons, to promote entrepreneurship,  availability of credit and balance the interests of all the  stakeholders including alteration in the priority of  payment of government dues and to establish an  Insolvency and Bankruptcy Fund, and matters  connected therewith or incidental thereto. An effective  legal framework for timely resolution of insolvency and  bankruptcy would support development of credit  markets and encourage entrepreneurship. It would  also improve Ease of Doing Business, and facilitate  more investments leading to higher economic growth  and development.  

3. The Code seeks to provide for designating NCLT  and DRT as the Adjudicating Authorities for corporate  persons and firms and individuals, respectively, for  resolution of insolvency, liquidation and bankruptcy.  The Code separates commercial aspects of insolvency  and bankruptcy proceedings from judicial aspects. The  Code also seeks to provide for establishment of the  Insolvency and Bankruptcy Board of India (Board) for  regulation of insolvency professionals, insolvency  professional agencies and information utilities. Till the  Board is established, the Central Government shall  exercise all powers of the Board or designate any  financial sector regulator to exercise the powers and  functions of the Board. Insolvency professionals will  assist in completion of insolvency resolution,  liquidation and bankruptcy proceedings envisaged in  the Code. Information Utilities would collect, collate,  authenticate and disseminate financial information to  facilitate such proceedings. The Code also proposes  to establish a fund to be called the Insolvency and  Bankruptcy Fund of India for the purposes specified in  the Code.

37  

4. The Code seeks to provide for amendments in the  Indian Partnership Act, 1932, the Central Excise Act,  1944, Customs Act, 1962, the Income Tax Act, 1961,  the Recovery of Debts Due to Banks and Financial  Institutions Act, 1993, the Finance Act, 1994, the  Securitisation and Reconstruction of Financial Assets  and Enforcement of Security Interest Act, 2002, the  Sick Industrial Companies (Special Provisions) Repeal  Act, 2003, the Payment and Settlement Systems Act,  2007, the Limited Liability Partnership Act, 2008, and  the Companies Act, 2013.  

5. The Code seeks to achieve the above objectives.‖  (emphasis in original)  

10. The Preamble of the Code states as follows:  

―An Act to consolidate and amend the laws relating to  reorganization and insolvency resolution of corporate  persons, partnership firms and individuals in a time- bound manner for maximization of value of assets of  such persons, to promote entrepreneurship, availability  of credit and balance the interests of all the  stakeholders including alteration in the order of priority  of payment of Government dues and to establish an  Insolvency and Bankruptcy Board of India, and for  matters connected therewith or incidental thereto.‖  

11. As is discernible, the Preamble gives an insight into what is  

sought to be achieved by the Code. The Code is first and foremost, a  

Code for reorganization and insolvency resolution of corporate debtors.  

Unless such reorganization is effected in a time-bound manner, the  

value of the assets of such persons will deplete. Therefore,

38  

maximization of value of the assets of such persons so that they are  

efficiently run as going concerns is another very important objective of  

the Code. This, in turn, will promote entrepreneurship as the persons in  

management of the corporate debtor are removed and replaced by  

entrepreneurs. When, therefore, a resolution plan takes off and the  

corporate debtor is brought back into the economic mainstream, it is  

able to repay its debts, which, in turn, enhances the viability of credit in  

the hands of banks and financial institutions. Above all, ultimately, the  

interests of all stakeholders are looked after as the corporate debtor  

itself becomes a beneficiary of the resolution scheme – workers are  

paid, the creditors in the long run will be repaid in full, and  

shareholders/investors are able to maximize their investment. Timely  

resolution of a corporate debtor who is in the red, by an effective legal  

framework, would go a long way to support the development of credit  

markets. Since more investment can be made with funds that have  

come back into the economy, business then eases up, which leads,  

overall, to higher economic growth and development of the Indian  

economy. What is interesting to note is that the Preamble does not, in  

any manner, refer to liquidation, which is only availed of as a last resort  

if there is either no resolution plan or the resolution plans submitted are

39  

not up to the mark. Even in liquidation, the liquidator can sell the  

business of the corporate debtor as a going concern. [See  

ArcelorMittal (supra) at paragraph 83, footnote 3].  

 12. It can thus be seen that the primary focus of the legislation is to  

ensure revival and continuation of the corporate debtor by protecting  

the corporate debtor from its own management and from a corporate  

death by liquidation. The Code is thus a beneficial legislation which  

puts the corporate debtor back on its feet, not being a mere recovery  

legislation for creditors. The interests of the corporate debtor have,  

therefore, been bifurcated and separated from that of its promoters /  

those who are in management. Thus, the resolution process is not  

adversarial to the corporate debtor but, in fact, protective of its  

interests. The moratorium imposed by Section 14 is in the interest of  

the corporate debtor itself, thereby preserving the assets of the  

corporate debtor during the resolution process.  The timelines within  

which the resolution process is to take place again protects the  

corporate debtor‘s assets from further dilution, and also protects all its  

creditors and workers by seeing that the resolution process goes  

through as fast as possible so that another management can, through

40  

its entrepreneurial skills, resuscitate the corporate debtor to achieve all  

these ends.  

 APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT NOT CONTRARY  

TO THIS COURT’S JUDGMENTS.    

13. Shri Rohatgi has argued that contrary to the judgments in  

Madras Bar Association (I) (supra) and Madras Bar Association (III)  

(supra), Section 412(2) of the Companies Act, 2013 continued on the  

statute book, as a result of which, the two Judicial Members of the  

Selection Committee get outweighed by three bureaucrats.    

14. On 03.01.2018, the Companies Amendment Act, 2017 was  

brought into force by which Section 412 of the Companies Act, 2013  

was amended as follows:  

―412. Selection of Members of Tribunal and  Appellate Tribunal.—  

xxx xxx xxx  (2) The Members of the Tribunal and the  Technical Members of the Appellate Tribunal shall  be appointed on the recommendation of a  Selection Committee consisting of—  

(a) Chief Justice of India or his nominee— Chairperson;  (b) a senior Judge of the Supreme Court or  Chief Justice of High Court—Member;  (c) Secretary in the Ministry of Corporate  Affairs—Member; and

41  

(d) Secretary in the Ministry of Law and  Justice—Member.  

(2-A) Where in a meeting of the Selection  Committee, there is equality of votes on any  matter, the Chairperson shall have a casting  vote.‖  

This was brought into force by a notification dated 09.02.2018.   

However, an additional affidavit has been filed during the course of  

these proceedings by the Union of India.  This affidavit is filed by one  

Dr. Raj Singh, Regional Director (Northern Region) of the Ministry of  

Corporate Affairs. This affidavit makes it clear that, acting in  

compliance with the directions of the Supreme Court in the aforesaid  

judgments, a Selection Committee was constituted to make  

appointments of Members of the NCLT in the year 2015 itself. Thus, by  

an Order dated 27.07.2015, (i) Justice Gogoi (as he then was), (ii)  

Justice Ramana, (iii) Secretary, Department of Legal Affairs, Ministry of  

Law and Justice, and (iv) Secretary, Corporate Affairs, were  

constituted as the Selection Committee. This Selection Committee was  

reconstituted on 22.02.2017 to make further appointments. In  

compliance of the directions of this Court, advertisements dated  

10.08.2015 were issued inviting applications for Judicial and Technical  

Members as a result of which, all the present Members of the NCLT

42  

and NCLAT have been appointed. This being the case, we need not  

detain ourselves any further with regard to the first submission of Shri  

Rohatgi.    

NCLAT BENCH ONLY AT DELHI.   

15. It has been argued by Shri Rohatgi that as per our judgment in  

Madras Bar Association (II) (supra), paragraph 123 states as follows:  

―123. We shall first examine the validity of Section 5 of  the NTT Act. The basis of challenge to the above  provision has already been narrated by us while  dealing with the submissions advanced on behalf of  the petitioners with reference to the fourth contention.  According to the learned counsel for the petitioners,  Section 5(2) of the NTT Act mandates that NTT would  ordinarily have its sittings in the National Capital  Territory of Delhi. According to the petitioners, the  aforesaid mandate would deprive the litigating  assessee the convenience of approaching the  jurisdictional High Court in the State to which he  belongs. An assessee may belong to a distant/remote  State, in which eventuality, he would not merely have  to suffer the hardship of travelling a long distance, but  such travel would also entail uncalled for financial  expense. Likewise, a litigant assessee from a far-flung  State may find it extremely difficult and inconvenient to  identify an Advocate who would represent him before  NTT, since the same is mandated to be ordinarily  located in the National Capital Territory of Delhi. Even  though we have expressed the view, that it is open to  Parliament to substitute the appellate jurisdiction  vested in the jurisdictional High Courts and constitute  courts/tribunals to exercise the said jurisdiction, we are  of the view, that while vesting jurisdiction in an

43  

alternative court/tribunal, it is imperative for the  legislature to ensure that redress should be available  with the same convenience and expediency as it was  prior to the introduction of the newly created  court/tribunal. Thus viewed, the mandate incorporated  in Section 5(2) of the NTT Act to the effect that the  sittings of NTT would ordinarily be conducted in the  National Capital Territory of Delhi, would render the  remedy inefficacious, and thus unacceptable in law.  The instant aspect of the matter was considered by  this Court with reference to the Administrative  Tribunals Act, 1985 in S.P. Sampath Kumar case [S.P.  Sampath Kumar v. Union of India, (1987) 1 SCC 124 :  (1987) 2 ATC 82] and L. Chandra Kumar case [L.  Chandra Kumar v. Union of India, (1997) 3 SCC 261 :  1997 SCC (L&S) 577], wherein it was held that  permanent Benches needed to be established at the  seat of every jurisdictional High Court. And if that was  not possible, at least a Circuit Bench required to be  established at every place where an aggrieved party  could avail of his remedy. The position on the above  issue is no different in the present controversy. For the  above reason, Section 5(2) of the NTT Act is in clear  breach of the law declared by this Court.‖  

(emphasis supplied)    

16. The learned Attorney General has assured us that this judgment  

will be followed and Circuit Benches will be established as soon as it is  

practicable. In this view of the matter, we record this submission and  

direct the Union of India to set up Circuit Benches of the NCLAT within  

a period of 6 months from today.   

THE TRIBUNALS ARE FUNCTIONING UNDER THE WRONG MINISTRY

44  

17. Shri Mukul Rohatgi argued that in Madras Bar Association (I)  

(supra), paragraph 120(xii) specifically reads as follows:  

―120 We may tabulate the corrections required to set  right the defects in Parts I-B and I-C of the Act:  

xxx xxx xxx  

(xii) The administrative support for all Tribunals  should be from the Ministry of Law and Justice.  Neither the Tribunals nor their members shall  seek or be provided with facilities from the  respective sponsoring or parent Ministries or  Department concerned.  

xxx xxx xxx‖    

Even though eight years have passed since the date of this judgment,  

the administrative support for these tribunals continues to be from the  

Ministry of Corporate Affairs. This needs to be rectified at the earliest.   

18. However, the learned Attorney General pointed out Article 77(3)  

of the Constitution of India and Delhi International Airport Limited v.  

International Lease Finance Corporation and Ors., (2015) 8 SCC  

446, which state that once rules of business are allocated among  

various Ministries, such allocation is mandatory in nature. According to  

him, therefore, the rules of business, having allocated matters which  

arise under the Insolvency Code to the Ministry of Corporate Affairs,  

are mandatory in nature and have to be followed.  

45  

19. It is obvious that the rules of business, being mandatory in  

nature, and having to be followed, are to be so followed by the  

executive branch of the Government. As far as we are concerned, we  

are bound by the Constitution Bench judgment in Madras Bar  

Association (I) (supra). This statement of the law has been made  

eight years ago. It is high time that the Union of India follow, both in  

letter and spirit, the judgment of this Court.  

CLASSIFICATION BETWEEN FINANCIAL CREDITOR AND OPERATIONAL  

CREDITOR NEITHER DISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OF  

ARTICLE 14 OF THE CONSTITUTION OF INDIA.   

 20. The tests for violation of Article 14 of the Constitution of India,  

when legislation is challenged as being violative of the principle of  

equality, have been settled by this Court time and again. Since equality  

is only among equals, no discrimination results if the Court can be  

shown that there is an intelligible differentia which separates two kinds  

of creditors so long as there is some rational relation between the  

creditors so differentiated, with the object sought to be achieved by the  

legislation. This aspect of Article 14 has been laid down in judgments  

too numerous to cite, from the very inception.  

46  

21. Another development of the law is that legislation can be struck  

down as being manifestly arbitrary. This has been laid down by the  

recent Constitution Bench decision in Shayara Bano (supra) as  

follows:  

―95. On a reading of this judgment in Natural  Resources Allocation case [Natural Resources  Allocation, In re, Special Reference No. 1 of 2012,  (2012) 10 SCC 1], it is clear that this Court did not  read McDowell [State of A.P. v. McDowell and Co.,  (1996) 3 SCC 709] as being an authority for the  proposition that legislation can never be struck down  as being arbitrary. Indeed the Court, after referring to  all the earlier judgments, and Ajay Hasia [Ajay Hasia v.  Khalid Mujib Sehravardi, (1981) 1 SCC 722 : 1981  SCC (L&S) 258] in particular, which stated that  legislation can be struck down on the ground that it is  ―arbitrary‖ under Article 14, went on to conclude that  ―arbitrariness‖ when applied to legislation cannot be  used loosely. Instead, it broad based the test, stating  that if a constitutional infirmity is found, Article 14 will  interdict such infirmity. And a constitutional infirmity is  found in Article 14 itself whenever legislation is  ―manifestly arbitrary‖ i.e. when it is not fair, not  reasonable, discriminatory, not transparent, capricious,  biased, with favouritism or nepotism and not in pursuit  of promotion of healthy competition and equitable  treatment. Positively speaking, it should conform to  norms which are rational, informed with reason and  guided by public interest, etc.  

96. Another Constitution Bench decision in  Subramanian Swamy v. CBI [Subramanian Swamy v.  CBI, (2014) 8 SCC 682 : (2014) 6 SCC (Cri) 42 :  (2014) 3 SCC (L&S) 36] dealt with a challenge to  Section 6-A of the Delhi Special Police Establishment  Act, 1946. This section was ultimately struck down as

47  

being discriminatory and hence violative of Article 14.  A specific reference had been made to the  Constitution Bench by the reference order in  Subramanian Swamy v. CBI [Subramanian Swamy v.  CBI, (2005) 2 SCC 317 : 2005 SCC (L&S) 241] and  after referring to several judgments including Ajay  Hasia [Ajay Hasia v. Khalid Mujib Sehravardi, (1981) 1  SCC 722 : 1981 SCC (L&S) 258], Mardia Chemicals  [Mardia Chemicals Ltd. v. Union of India, (2004) 4  SCC 311], Malpe Vishwanath Acharya [Malpe  Vishwanath Acharya v. State of Maharashtra, (1998) 2  SCC 1] and McDowell [State of A.P. v. McDowell and  Co., (1996) 3 SCC 709], the reference, inter alia, was  as to whether arbitrariness and unreasonableness,  being facets of Article 14, are or are not available as  grounds to invalidate a legislation.  

97. After referring to the submissions of the counsel,  and several judgments on the discrimination aspect of  Article 14, this Court held: (Subramanian Swamy case  [Subramanian Swamy v. CBI, (2014) 8 SCC 682 :  (2014) 6 SCC (Cri) 42 : (2014) 3 SCC (L&S) 36] , SCC  pp. 721-22, paras 48-49)  

―48. In E.P. Royappa [E.P. Royappa v. State of  T.N., (1974) 4 SCC 3 : 1974 SCC (L&S) 165] , it  has been held by this Court that the basic  principle which informs both Articles 14 and 16  are equality and inhibition against discrimination.  This Court observed in para 85 as under: (SCC p.  38)  

‗85. … From a positivistic point of view,  equality is antithetic to arbitrariness. In fact  equality and arbitrariness are sworn enemies;  one belongs to the rule of law in a republic  while the other, to the whim and caprice of an  absolute monarch. Where an act is arbitrary,  it is implicit in it that it is unequal both  according to political logic and constitutional  law and is therefore violative of Article 14,  and if it affects any matter relating to public

48  

employment, it is also violative of Article 16.  Articles 14 and 16 strike at arbitrariness in  State action and ensure fairness and equality  of treatment.‘  

Court’s approach  

49. Where there is challenge to the constitutional  validity of a law enacted by the legislature, the  Court must keep in view that there is always a  presumption of constitutionality of an enactment,  and a clear transgression of constitutional  principles must be shown. The fundamental  nature and importance of the legislative process  needs to be recognised by the Court and due  regard and deference must be accorded to the  legislative process. Where the legislation is  sought to be challenged as being unconstitutional  and violative of Article 14 of the Constitution, the  Court must remind itself to the principles relating  to the applicability of Article 14 in relation to  invalidation of legislation. The two dimensions of  Article 14 in its application to legislation and  rendering legislation invalid are now well  recognised and these are: (i) discrimination,  based on an impermissible or invalid  classification, and (ii) excessive delegation of  powers; conferment of uncanalised and unguided  powers on the executive, whether in the form of  delegated legislation or by way of conferment of  authority to pass administrative orders—if such  conferment is without any guidance, control or  checks, it is violative of Article 14 of the  Constitution. The Court also needs to be mindful  that a legislation does not become  unconstitutional merely because there is another  view or because another method may be  considered to be as good or even more effective,  like any issue of social, or even economic policy.  It is well settled that the courts do not substitute  their views on what the policy is.‖

49  

xxx xxx xxx  

100. To complete the picture, it is important to note  that subordinate legislation can be struck down on the  ground that it is arbitrary and, therefore, violative of  Article 14 of the Constitution. In Cellular Operators  Assn. of India v. TRAI [Cellular Operators Assn. of  India v. TRAI, (2016) 7 SCC 703], this Court referred  to earlier precedents, and held: (SCC pp. 736-37,  paras 42-44)  

―Violation of fundamental rights  

42. We have already seen that one of the tests for  challenging the constitutionality of subordinate  legislation is that subordinate legislation should  not be manifestly arbitrary. Also, it is settled law  that subordinate legislation can be challenged on  any of the grounds available for challenge against  plenary legislation. [See Indian Express  Newspapers (Bombay) (P) Ltd. v. Union of India  [Indian Express Newspapers (Bombay) (P) Ltd. v.  Union of India, (1985) 1 SCC 641 : 1985 SCC  (Tax) 121] , SCC at p. 689, para 75.]  

43. The test of ―manifest arbitrariness‖ is well  explained in two judgments of this Court. In  Khoday Distilleries Ltd. v. State of Karnataka  [Khoday Distilleries Ltd. v. State of Karnataka,  (1996) 10 SCC 304], this Court held: (SCC p. 314,  para 13)  

‗13. It is next submitted before us that the  amended Rules are arbitrary, unreasonable  and cause undue hardship and, therefore,  violate Article 14 of the Constitution. Although  the protection of Article 19(1)(g) may not be  available to the appellants, the Rules must,  undoubtedly, satisfy the test of Article 14,  which is a guarantee against arbitrary action.  However, one must bear in mind that what is  being challenged here under Article 14 is not  executive action but delegated legislation.

50  

The tests of arbitrary action which apply to  executive actions do not necessarily apply to  delegated legislation. In order that delegated  legislation can be struck down, such  legislation must be manifestly arbitrary; a law  which could not be reasonably expected to  emanate from an authority delegated with the  law-making power. In Indian Express  Newspapers (Bombay) (P) Ltd. v. Union of  India [Indian Express Newspapers (Bombay)  (P) Ltd. v. Union of India, (1985) 1 SCC 641 :  1985 SCC (Tax) 121], this Court said that a  piece of subordinate legislation does not  carry the same degree of immunity which is  enjoyed by a statute passed by a competent  legislature. A subordinate legislation may be  questioned under Article 14 on the ground  that it is unreasonable; “unreasonable not in  the sense of not being reasonable, but in the  sense that it is manifestly arbitrary‖. Drawing  a comparison between the law in England  and in India, the Court further observed that  in England the Judges would say,  ―Parliament never intended the authority to  make such rules; they are unreasonable and  ultra vires‖. In India, arbitrariness is not a  separate ground since it will come within the  embargo of Article 14 of the Constitution. But  subordinate legislation must be so arbitrary  that it could not be said to be in conformity  with the statute or that it offends Article 14 of  the Constitution.‘  

44. Also, in Sharma Transport v. State of A.P.  [Sharma Transport v. State of A.P., (2002) 2 SCC  188], this Court held: (SCC pp. 203-04, para 25)  

‗25. … The tests of arbitrary action applicable  to executive action do not necessarily apply  to delegated legislation. In order to strike  down a delegated legislation as arbitrary it  has to be established that there is manifest

51  

arbitrariness. In order to be described as  arbitrary, it must be shown that it was not  reasonable and manifestly arbitrary. The  expression ―arbitrarily‖ means: in an  unreasonable manner, as fixed or done  capriciously or at pleasure, without adequate  determining principle, not founded in the  nature of things, non-rational, not done or  acting according to reason or judgment,  depending on the will alone.‘‖  

(emphasis in original)  

101. It will be noticed that a Constitution Bench of this  Court in Indian Express Newspapers (Bombay) (P)  Ltd. v. Union of India [Indian Express Newspapers  (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641  : 1985 SCC (Tax) 121] stated that it was settled law  that subordinate legislation can be challenged on any  of the grounds available for challenge against plenary  legislation. This being the case, there is no rational  distinction between the two types of legislation when it  comes to this ground of challenge under Article 14.  The test of manifest arbitrariness, therefore, as laid  down in the aforesaid judgments would apply to  invalidate legislation as well as subordinate legislation  under Article 14. Manifest arbitrariness, therefore,  must be something done by the legislature  capriciously, irrationally and/or without adequate  determining principle. Also, when something is done  which is excessive and disproportionate, such  legislation would be manifestly arbitrary. We are,  therefore, of the view that arbitrariness in the sense of  manifest arbitrariness as pointed out by us above  would apply to negate legislation as well under Article  14.‖  

 This judgment has since been followed in Gopal Jha v. The Hon’ble  

Supreme Court of India, Writ Petition (Civil) No. 745/2018 [decided

52  

on 25.10.2018] (at paragraph 27); Indian Young Lawyers  

Associations and Ors. v. State of Kerala and Ors., Writ Petition  

(Civil) No. 373/2006 [decided on 28.09.2018]; Joseph Shine v. Union  

of India, Writ Petition (Criminal) No. 194/2017 [decided on 27.09.2018]  

(at paragraphs 110, 195, 197); K.S. Puttaswamy v. Union of India,  

Writ Petition (Civil) No. 494/2012 [decided on 26.09.2018] (at  

paragraphs 77, 78, 416, 724, 725, 1160); Navtej Singh Johar and  

Ors. v. Union of India, (2018) 10 SCC 1 (at paragraphs 253, 353,  

411, 637.9); Lok Prahari v. State of Uttar Pradesh and Ors., (2018)  

6 SCC 1 (at paragraph 35); and Nikesh Tarachand Shah v. Union of  

India and Ors., (2018) 11 SCC 1 (at paragraph 23).   

 22. Sections 5(7) and 5(8) of the Code define ―financial creditor‖ and  

―financial debt‖ as follows:  

―5. Definitions.—In this Part, unless the context  

otherwise requires,—  

xxx xxx xxx  

(7) ―financial creditor‖ means any person to whom  a financial debt is owed and includes a person to  whom such debt has been legally assigned or  transferred to;  

(8) ―financial debt‖ means a debt along with  interest, if any, which is disbursed against the

53  

consideration for the time value of money and  includes—  

(a) money borrowed against the payment of  interest;  (b) any amount raised by acceptance under  any acceptance credit facility or its de- materialised equivalent;  (c) any amount raised pursuant to any note  purchase facility or the issue of bonds, notes,  debentures, loan stock or any similar  instrument;  (d) the amount of any liability in respect of  any lease or hire purchase contract which is  deemed as a finance or capital lease under  the Indian Accounting Standards or such  other accounting standards as may be  prescribed;  (e) receivables sold or discounted other than  any receivables sold on non-recourse basis;  (f) any amount raised under any other  transaction, including any forward sale or  purchase agreement, having the commercial  effect of a borrowing;  

Explanation.—For the purposes of this sub- clause,—  (i) any amount raised from an allottee  under a real estate project shall be deemed  to be an amount having the commercial  effect of a borrowing; and  (ii) the expressions, ―allottee‖ and ―real  estate project‖ shall have the meanings  respectively assigned to them in clauses  (d) and (zn) of Section 2 of the Real Estate  (Regulation and Development) Act, 2016  (16 of 2016);  

(g) any derivative transaction entered into in  connection with protection against or benefit  from fluctuation in any rate or price and for  calculating the value of any derivative

54  

transaction, only the market value of such  transaction shall be taken into account;  (h) any counter-indemnity obligation in  respect of a guarantee, indemnity, bond,  documentary letter of credit or any other  instrument issued by a bank or financial  institution;  (i) the amount of any liability in respect of any  of the guarantee or indemnity for any of the  items referred to in sub-clauses (a) to (h) of  this clause;  

xxx xxx xxx‖    

Section 5(20) defines ―operational creditor‖ as follows:  

―5. Definitions.—In this Part, unless the context  

otherwise requires,—  

xxx xxx xxx  

(20) ―operational creditor‖ means a person to whom  an operational debt is owed and includes any  person to whom such debt has been legally  assigned or transferred;  

xxx xxx xxx‖  

Section 7 of the Code states:  

―7. Initiation of corporate insolvency resolution  process by financial creditor.—(1) A financial  creditor either by itself or jointly with other financial  creditors, or any other person on behalf of the financial  creditor, as may be notified by the Central  Government, may file an application for initiating  corporate insolvency resolution process against a  corporate debtor before the Adjudicating Authority  when a default has occurred.  

Explanation.—For the purposes of this sub-section,  a default includes a default in respect of a financial

55  

debt owed not only to the applicant financial creditor  but to any other financial creditor of the corporate  debtor.  

(2) The financial creditor shall make an application  under sub-section (1) in such form and manner and  accompanied with such fee as may be prescribed.  

(3) The financial creditor shall, along with the  application furnish—  

(a) record of the default recorded with the  information utility or such other record or  evidence of default as may be specified;  (b) the name of the resolution professional  proposed to act as an interim resolution  professional; and  (c) any other information as may be specified by  the Board.  

(4) The Adjudicating Authority shall, within fourteen  days of the receipt of the application under sub-section  (2), ascertain the existence of a default from the  records of an information utility or on the basis of other  evidence furnished by the financial creditor under sub- section (3).  

(5) Where the Adjudicating Authority is satisfied that—  (a) a default has occurred and the application  under sub-section (2) is complete, and there is no  disciplinary proceedings pending against the  proposed resolution professional, it may, by order,  admit such application; or  (b) default has not occurred or the application  under sub-section (2) is incomplete or any  disciplinary proceeding is pending against the  proposed resolution professional, it may, by order,  reject such application:  Provided that the Adjudicating Authority shall,  before rejecting the application under clause (b) of  sub-section (5), give a notice to the applicant to  rectify the defect in his application within seven  days of receipt of such notice from the  Adjudicating Authority.

56  

(6) The corporate insolvency resolution process shall  commence from the date of admission of the  application under sub-section (5).  

(7) The Adjudicating Authority shall communicate—  

(a) the order under clause (a) of sub-section (5) to  the financial creditor and the corporate debtor;  (b) the order under clause (b) of sub-section (5) to  the financial creditor, within seven days of  admission or rejection of such application, as the  case may be.‖  

23. A perusal of the definition of ―financial creditor‖ and ―financial  

debt‖ makes it clear that a financial debt is a debt together with  

interest, if any, which is disbursed against the consideration for time  

value of money. It may further be money that is borrowed or raised in  

any of the manners prescribed in Section 5(8) or otherwise, as Section  

5(8) is an inclusive definition. On the other hand, an ―operational debt‖  

would include a claim in respect of the provision of goods or services,  

including employment, or a debt in respect of payment of dues arising  

under any law and payable to the Government or any local authority.    

24. A financial creditor may trigger the Code either by itself or jointly  

with other financial creditors or such persons as may be notified by the  

Central Government when a ―default‖ occurs. The Explanation to  

Section 7(1) also makes it clear that the Code may be triggered by  

such persons in respect of a default made to any other financial

57  

creditor of the corporate debtor, making it clear that once triggered, the  

resolution process under the Code is a collective proceeding in rem  

which seeks, in the first instance, to rehabilitate the corporate debtor.  

Under Section 7(4), the Adjudicating Authority shall, within the  

prescribed period, ascertain the existence of a default on the basis of  

evidence furnished by the financial creditor; and under Section 7(5),  

the Adjudicating Authority has to be satisfied that a default has  

occurred, when it may, by order, admit the application, or dismiss the  

application if such default has not occurred. On the other hand, under  

Sections 8 and 9, an operational creditor may, on the occurrence of a  

default, deliver a demand notice which must then be replied to within  

the specified period. What is important is that at this stage, if an  

application is filed before the Adjudicating Authority for initiating the  

corporate insolvency resolution process, the corporate debtor can  

prove that the debt is disputed. When the debt is so disputed, such  

application would be rejected.   

25. The argument of learned counsel on behalf of the petitioners is  

that in point of fact, there is no intelligible differentia having relation to  

the objects sought to be achieved by the Code between financial and  

operational creditors and indeed, nowhere in the world has this

58  

distinction been made. The BLRC Report presents what according to it  

is the rationale for the reason to differentiate between financial and  

operational creditors. The Report states as follows:  

―While both types of creditors can trigger the IRP  under the Code, the evidence presented to trigger  varies. Since financial creditors have electronic  records of the liabilities filed in the Information Utilities  of Section 4.3, incontrovertible event of default on any  financial credit contract can be readily verifiable by  accessing this system. The evidence submitted of  default by the debtor to the operational creditor may be  in either electronic or physical form, since all  operational creditors may or may not have electronic  filings of the debtors‘ liability. Till such time that the  Information Utilities are ubiquitous, financial creditors  may establish default in a manner similar to  operational creditors.‖  

 Similarly, the Insolvency and Bankruptcy Bill in the Notes on Clause 8  

states:  

―Clause 8 lays down the procedure for the initiation of  the corporate insolvency resolution process by an  operational creditor. This procedure differs from the  procedure applicable to financial creditors as  operational debts (such as trade debts, salary or wage  claims) tend to be small amounts (in comparison to  financial debts) or are recurring in nature and may not  be accurately reflected on the records of information  utilities at all times. The possibility of disputed debts in  relation to operational creditors is also higher in  comparison to financial creditors such as banks and  financial institutions. Accordingly, the process for  initiation of the insolvency resolution process differs for  an operational creditor…… This ensures that

59  

operational creditors, whose debt claims are usually  smaller, are not able to put the corporate debtor into  the insolvency resolution process prematurely or  initiate the process for extraneous considerations. It  may also facilitate informal negotiations between such  creditors and the corporate debtor, which may result in  a restructuring of the debt outside the formal  proceedings.‖  

 However, the Insolvency Law Committee [―ILC‖], in its Report of March  

2018 dealt with debenture holders and fixed deposit holders, who are  

also financial creditors, and are numerous. The Report then went on to  

state:  

―10.6 For certain securities, a trustee or an agent may  already be appointed as per the terms of the security  instrument. For example, a debenture trustee would be  appointed if debentures exceeding 500 have been  issued [Section 71(5), Companies Act, 2013] or if  secured debentures are issued [Rule 18(1)(c),  Companies (Share Capital and Debenture) Rules,  2014]. Such creditors may be represented through  such pre-appointed trustees or agents. For other  classes of creditors which exceed a certain threshold  in number, like home buyers or security holders for  whom no trustee or agent has already been appointed  under a debt instrument or otherwise, an insolvency  professional (other than the IRP) shall be appointed by  the NCLT on the request of the IRP. It is to be noted  that as the agent or trustee or insolvency professional,  i.e. the authorised representative for the creditors  discussed above and executors, guarantors, etc. as  discussed in paragraph 9 of this Report, shall be a part  of the CoC, they cannot be related parties to the  corporate debtor in line with the spirit of proviso to  section 21(2).‖

60  

xxx xxx xxx  

―10.8 In light of the deliberation above, the Committee  felt that a mechanism requires to be provided in the  Code to mandate representation in meetings of  security holders, deposit holders, and all other classes  of financial creditors which exceed a certain number,  through an authorised representative. This can be  done by adding a new provision to section 21 of the  Code. Such a representative may either be a trustee  or an agent appointed under the terms of the debt  agreement of such creditors, otherwise an insolvency  professional may be appointed by the NCLT for each  such class of financial creditors. Additionally, the  representative shall act and attend the meetings on  behalf of the respective class of financial creditors and  shall vote on behalf of each of the financial creditor to  the extent of the voting share of each such creditor,  and as per their instructions. To ensure adequate  representation by the authorised representative of the  financial creditors, a specific provision laying down the  rights and duties of such authorised representatives  may be inserted. Further, the requisite threshold for  the number of creditors and manner of voting may be  specified by IBBI through regulations to enable  efficient voting by the representative. Also, regulation  25 may also be amended to enable voting through  electronic means such as e-mail, to address any  technical issues which may arise due to a large  number of creditors voting at the same time.‖  

 Given this Report, the Code was amended and Section 21(6A) and  

21(6B) were added, which are set out hereinbelow:  

―21. Committee of creditors.—  

xxx xxx xxx  

(6-A) Where a financial debt—

61  

(a) is in the form of securities or deposits and the  terms of the financial debt provide for appointment  of a trustee or agent to act as authorised  representative for all the financial creditors, such  trustee or agent shall act on behalf of such  financial creditors;  

(b) is owed to a class of creditors exceeding the  number as may be specified, other than the  creditors covered under clause (a) or sub-section  (6), the interim resolution professional shall make  an application to the Adjudicating Authority along  with the list of all financial creditors, containing the  name of an insolvency professional, other than  the interim resolution professional, to act as their  authorised representative who shall be appointed  by the Adjudicating Authority prior to the first  meeting of the committee of creditors;  

(c) is represented by a guardian, executor or  administrator, such person shall act as authorised  representative on behalf of such financial  creditors,   

and such authorised representative under clause (a) or  clause (b) or clause (c) shall attend the meetings of the  committee of creditors, and vote on behalf of each  financial creditor to the extent of his voting share.  

 (6-B) The remuneration payable to the authorised  representative—  

(i) under clauses (a) and (c) of sub-section (6-A),  if any, shall be as per the terms of the financial  debt or the relevant documentation; and  

(ii) under clause (b) of sub-section (6-A) shall be  as specified which shall form part of the  insolvency resolution process costs.‖  

    Also, Regulations 16A and 16B of the Insolvency and Bankruptcy  

Board of India (Insolvency Resolution Process for Corporate Persons)

62  

Regulations, 2016 [―CIRP Regulations‖] were added, with effect from  

04.07.2018, as follows:  

―16A. Authorised representative.—(1) The interim  resolution professional shall select the insolvency  professional, who is the choice of the highest number  of financial creditors in the class in Form CA received  under sub-regulation (1) of regulation 12, to act as the  authorised representative of the creditors of the  respective class:  

Provided that the choice for an insolvency  professional to act as authorised representative in  Form CA received under sub-regulation (2) of  regulation 12 shall not be considered.   

(2) The interim resolution professional shall apply to  the Adjudicating Authority for appointment of the  authorised representatives selected under sub- regulation (1) within two days of the verification of  claims received under sub-regulation (1) of regulation  12.   

(3) Any delay in appointment of the authorised  representative for any class of creditors shall not affect  the validity of any decision taken by the committee.   

(4) The interim resolution professional shall provide  the list of creditors in each class to the respective  authorised representative appointed by the  Adjudicating Authority.   

(5) The interim resolution professional or the resolution  professional, as the case may be, shall provide an  updated list of creditors in each class to the respective  authorised representative as and when the list is  updated.   

Clarification: The authorised representative shall  have no role in receipt or verification of claims of  creditors of the class he represents.  

(6) The interim resolution professional or the resolution  professional, as the case may be, shall provide

63  

electronic means of communication between the  authorised representative and the creditors in the  class.  

(7) The voting share of a creditor in a class shall be in  proportion to the financial debt which includes an  interest at the rate of eight per cent per annum unless  a different rate has been agreed to between the  parties.  

(8) The authorised representative of creditors in a  class shall be entitled to receive fee for every meeting  of the committee attended by him in the following  manner, namely:  

Number of creditors in  the class  

Fee per meeting of the  committee (Rs.)  

10-100 15,000  

101-1000 20,000  

More than 1000 25,000   

(9) The authorised representative shall circulate the  agenda to creditors in a class and announce the voting  window at least twenty-four hours before the window  opens for voting instructions and keep the voting  window open for at least twelve hours.   

16B. Committee with only creditors in a class.— Where the corporate debtor has only creditors in a  class and no other financial creditor eligible to join the  committee, the committee shall consist of only the  authorised representative(s).‖  

26. It is obvious that debenture holders and persons with home  

loans may be numerous and, therefore, have been statutorily dealt  

with by the aforesaid change made in the Code as well as the

64  

Regulations. However, as a general rule, it is correct to say that  

financial creditors, which involve banks and financial institutions, would  

certainly be smaller in number than operational creditors of a corporate  

debtor.  

27. According to us, it is clear that most financial creditors,  

particularly banks and financial institutions, are secured creditors  

whereas most operational creditors are unsecured, payments for  

goods and services as well as payments to workers not being secured  

by mortgaged documents and the like. The distinction between  

secured and unsecured creditors is a distinction which has obtained  

since the earliest of the Companies Acts both in the United Kingdom  

and in this country. Apart from the above, the nature of loan  

agreements with financial creditors is different from contracts with  

operational creditors for supplying goods and services.  Financial  

creditors generally lend finance on a term loan or for working capital  

that enables the corporate debtor to either set up and/or operate its  

business. On the other hand, contracts with operational creditors are  

relatable to supply of goods and services in the operation of business.  

Financial contracts generally involve large sums of money. By way of  

contrast, operational contracts have dues whose quantum is generally

65  

less. In the running of a business, operational creditors can be many  

as opposed to financial creditors, who lend finance for the set up or  

working of business. Also, financial creditors have specified repayment  

schedules, and defaults entitle financial creditors to recall a loan in  

totality. Contracts with operational creditors do not have any such  

stipulations. Also, the forum in which dispute resolution takes place is  

completely different. Contracts with operational creditors can and do  

have arbitration clauses where dispute resolution is done privately.  

Operational debts also tend to be recurring in nature and the possibility  

of genuine disputes in case of operational debts is much higher when  

compared to financial debts. A simple example will suffice. Goods that  

are supplied may be substandard.  Services that are provided may be  

substandard. Goods may not have been supplied at all. All these qua  

operational debts are matters to be proved in arbitration or in the  

courts of law. On the other hand, financial debts made to banks and  

financial institutions are well-documented and defaults made are easily  

verifiable.   

28. Most importantly, financial creditors are, from the very beginning,  

involved with assessing the viability of the corporate debtor. They can,  

and therefore do, engage in restructuring of the loan as well as

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reorganization of the corporate debtor‘s business when there is  

financial stress, which are things operational creditors do not and  

cannot do.  Thus, preserving the corporate debtor as a going concern,  

while ensuring maximum recovery for all creditors being the objective  

of the Code, financial creditors are clearly different from operational  

creditors and therefore, there is obviously an intelligible differentia  

between the two which has a direct relation to the objects sought to be  

achieved by the Code.    

NOTICE, HEARING, AND SET-OFF OR COUNTERCLAIM QUA FINANCIAL DEBTS.   

29. This Court, in Innoventive Industries (supra) stated as follows:  

―27. The scheme of the Code is to ensure that when a  default takes place, in the sense that a debt becomes  due and is not paid, the insolvency resolution process  begins. Default is defined in Section 3(12) in very wide  terms as meaning non-payment of a debt once it  becomes due and payable, which includes non- payment of even part thereof or an instalment amount.  For the meaning of ―debt‖, we have to go to Section  3(11), which in turn tells us that a debt means a liability  of obligation in respect of a ―claim‖ and for the  meaning of ―claim‖, we have to go back to Section 3(6)  which defines ―claim‖ to mean a right to payment even  if it is disputed. The Code gets triggered the moment  default is of rupees one lakh or more (Section 4). The  corporate insolvency resolution process may be  triggered by the corporate debtor itself or a financial  creditor or operational creditor. A distinction is made  by the Code between debts owed to financial creditors

67  

and operational creditors. A financial creditor has been  defined under Section 5(7) as a person to whom a  financial debt is owed and a financial debt is defined in  Section 5(8) to mean a debt which is disbursed against  consideration for the time value of money. As opposed  to this, an operational creditor means a person to  whom an operational debt is owed and an operational  debt under Section 5(21) means a claim in respect of  provision of goods or services.  

28. When it comes to a financial creditor triggering the  process, Section 7 becomes relevant. Under the  Explanation to Section 7(1), a default is in respect of a  financial debt owed to any financial creditor of the  corporate debtor — it need not be a debt owed to the  applicant financial creditor. Under Section 7(2), an  application is to be made under sub-section (1) in such  form and manner as is prescribed, which takes us to  the Insolvency and Bankruptcy (Application to  Adjudicating Authority) Rules, 2016. Under Rule 4, the  application is made by a financial creditor in Form 1  accompanied by documents and records required  therein. Form 1 is a detailed form in 5 parts, which  requires particulars of the applicant in Part I,  particulars of the corporate debtor in Part II, particulars  of the proposed interim resolution professional in Part  III, particulars of the financial debt in Part IV and  documents, records and evidence of default in Part V.  Under Rule 4(3), the applicant is to dispatch a copy of  the application filed with the Adjudicating Authority by  registered post or speed post to the registered office of  the corporate debtor. The speed, within which the  Adjudicating Authority is to ascertain the existence of a  default from the records of the information utility or on  the basis of evidence furnished by the financial  creditor, is important. This it must do within 14 days of  the receipt of the application. It is at the stage of  Section 7(5), where the Adjudicating Authority is to be  satisfied that a default has occurred, that the corporate  debtor is entitled to point out that a default has not

68  

occurred in the sense that the ―debt‖, which may also  include a disputed claim, is not due. A debt may not be  due if it is not payable in law or in fact. The moment  the Adjudicating Authority is satisfied that a default has  occurred, the application must be admitted unless it is  incomplete, in which case it may give notice to the  applicant to rectify the defect within 7 days of receipt of  a notice from the Adjudicating Authority. Under sub- section (7), the Adjudicating Authority shall then  communicate the order passed to the financial creditor  and corporate debtor within 7 days of admission or  rejection of such application, as the case may be.  

29. The scheme of Section 7 stands in contrast with  the scheme under Section 8 where an operational  creditor is, on the occurrence of a default, to first  deliver a demand notice of the unpaid debt to the  operational debtor in the manner provided in Section  8(1) of the Code. Under Section 8(2), the corporate  debtor can, within a period of 10 days of receipt of the  demand notice or copy of the invoice mentioned in  sub-section (1), bring to the notice of the operational  creditor the existence of a dispute or the record of the  pendency of a suit or arbitration proceedings, which is  pre-existing—i.e. before such notice or invoice was  received by the corporate debtor. The moment there is  existence of such a dispute, the operational creditor  gets out of the clutches of the Code.  

30. On the other hand, as we have seen, in the case of  a corporate debtor who commits a default of a financial  debt, the Adjudicating Authority has merely to see the  records of the information utility or other evidence  produced by the financial creditor to satisfy itself that a  default has occurred. It is of no matter that the debt is  disputed so long as the debt is ―due‖ i.e. payable  unless interdicted by some law or has not yet become  due in the sense that it is payable at some future date.  It is only when this is proved to the satisfaction of the  Adjudicating Authority that the Adjudicating Authority  may reject an application and not otherwise.‖

69  

 30. Section 3(9)(c) read with Section 214(e) of the Code are  

important and are set out as under:  

―3. Definitions.—In this Code, unless the context  otherwise requires,—  xxx xxx xxx  (9) ―core services‖ means services rendered by an  information utility for—  xxx xxx xxx  

(c) authenticating and verifying the financial  information submitted by a person; and  xxx xxx xxx‖  

―214. Obligations of information utility.—For the  purposes of providing core services to any person,  every information utility shall—  xxx xxx xxx  

(e) get the information received from various  persons authenticated by all concerned  parties before storing such information;  xxx xxx xxx‖  

31. It is clear from these Sections that information in respect of debts  

incurred by financial debtors is easily available through information  

utilities which, under the Insolvency and Bankruptcy Board of India  

(Information Utilities) Regulations, 2017 [―Information Utilities  

Regulations‖], are to satisfy themselves that information provided as  

to the debt is accurate. This is done by giving notice to the corporate  

debtor who then has an opportunity to correct such information.  

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32. Apart from the record maintained by such utility, Form I  

appended to the Insolvency and Bankruptcy (Application to  

Adjudicating Authority) Rules, 2016, makes it clear that the following  

are other sources which evidence a financial debt:  

(a) Particulars of security held, if any, the date of its  creation, its estimated value as per the creditor;  

(b) Certificate of registration of charge issued by the  registrar of companies (if the corporate debtor is a  company);  

(c) Order of a court, tribunal or arbitral panel  adjudicating on the default;  

(d) Record of default with the information utility;  (e) Details of succession certificate, or probate of a  

will, or letter of administration, or court decree (as  may be applicable), under the Indian Succession  Act, 1925;  

(f) The latest and complete copy of the financial  contract reflecting all amendments and waivers to  date;  

(g) A record of default as available with any credit  information company;  

(h) Copies of entries in a bankers book in accordance  with the Bankers Books Evidence Act, 1891.  

33. Rule 4 (3) of the aforesaid Rules states as follows:  

―4. Application by financial creditor.—  

xxx xxx xxx  

(3) The applicant shall dispatch forthwith, a  copy of the application filed with the  Adjudicating Authority, by registered post or  speed post to the registered office of the  corporate debtor.  

xxx xxx xxx‖

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Section 420 of the Companies Act, 2013 states as follows:  

―420. Orders of Tribunal.—(1) The Tribunal may,  after giving the parties to any proceeding before it, a  reasonable opportunity of being heard, pass such  orders thereon as it thinks fit.  

(2) The Tribunal may, at any time within two years  from the date of the order, with a view to rectifying any  mistake apparent from the record, amend any order  passed by it, and shall make such amendment, if the  mistake is brought to its notice by the parties:  

Provided that no such amendment shall be made in  respect of any order against which an appeal has been  preferred under this Act.  

(3) The Tribunal shall send a copy of every order  passed under this section to all the parties concerned.‖  

 Rules 11, 34, and 37 of the National Company Law Tribunal Rules,  

2016 [―NCLT Rules‖] state as follows:  

―11. Inherent Powers.—Nothing in these rules shall be  deemed to limit or otherwise affect the inherent powers  of the Tribunal to make such orders as may be  necessary for meeting the ends of justice or to prevent  abuse of the process of the Tribunal.‖  

xxx xxx xxx  

34. General Procedure.—(1) In a situation not  provided for in these rules, the Tribunal may, for  reasons to be recorded in writing, determine the  procedure in a particular case in accordance with the  principles of natural justice.

72  

(2) The general heading in all proceedings before the  Tribunal, in all advertisements and notices shall be in  Form No. NCLT 4.   (3) Every petition or application or reference shall be  filed in form as provided in Form No. NCLT 1 with  attachments thereto accompanied by Form No. NCLT  2 and in case of an interlocutory application, the same  shall be filed in Form No. NCLT 1 accompanied by  such attachments thereto along with Form No. NCLT  3.  (4) Every petition or application including interlocutory  application shall be verified by an affidavit in Form No.  NCLT 6. Notice to be issued by the Tribunal to the  opposite party shall be in Form NCLT 5.‖  

xxx xxx xxx  

―37. Notice to Opposite Party.- (1) The Tribunal shall  issue notice to the respondent to show cause against  the application or petition on a date of hearing to be  specified in the Notice. Such notice in Form No. NCLT  5 shall be accompanied by a copy of the application  with supporting documents.   (2) If the respondent does not appear on the date  specified in the notice in Form No. NCLT 5, the  Tribunal, after according reasonable opportunity to the  respondent, shall forthwith proceed ex-parte to  dispose of the application.  (3) If the respondent contests to the notice received  under sub-rule (1), it may, either in person or through  an authorised representative, file a reply accompanied  with an affidavit and along with copies of such  documents on which it relies, with an advance service  to the petitioner or applicant, to the Registry before the  date of hearing and such reply and copies of  documents shall form part of the record.‖  

73  

A conjoint reading of all these Rules makes it clear that at the stage of  

the Adjudicating Authority‘s satisfaction under Section 7(5) of the  

Code, the corporate debtor is served with a copy of the application filed  

with the Adjudicating Authority and has the opportunity to file a reply  

before the said authority and be heard by the said authority before an  

order is made admitting the said application.  What is also of relevance  

is that in order to protect the corporate debtor from being dragged into  

the corporate insolvency resolution process malafide, the Code  

prescribes penalties. Thus, Section 65 of the Code reads as follows:  

―65. Fraudulent or malicious initiation of  proceedings.—(1) If, any person initiates the  insolvency resolution process or liquidation  proceedings fraudulently or with malicious intent for  any purpose other than for the resolution of  insolvency, or liquidation, as the case may be, the  Adjudicating Authority may impose upon such person  a penalty which shall not be less than one lakh rupees,  but may extend to one crore rupees.  (2) If, any person initiates voluntary liquidation  proceedings with the intent to defraud any person, the  Adjudicating Authority may impose upon such person  a penalty which shall not be less than one lakh rupees  but may extend to one crore rupees.‖  

34. Also, punishment is prescribed under Section 75 for furnishing  

false information in an application made by a financial creditor which

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further deters a financial creditor from wrongly invoking the provisions  

of Section 7.  Section 75 reads as under:  

―75. Punishment for false information furnished in  application.—Where any person furnishes information  in the application made under Section 7, which is false  in material particulars, knowing it to be false or omits  any material fact, knowing it to be material, such  person shall be punishable with fine which shall not be  less than one lakh rupees, but may extend to one  crore rupees.‖  

 35. Insofar as set-off and counterclaim is concerned, a set-off of  

amounts due from financial creditors is a rarity. Usually, financial debts  

point only in one way – amounts lent have to be repaid. However, it is  

not as if a legitimate set-off is not to be considered at all.  Such set-off  

may be considered at the stage of filing of proof of claims during the  

resolution process by the resolution professional, his decision being  

subject to challenge before the Adjudicating Authority under Section  

60. Section 60(5)(c) reads as follows:  

―60. Adjudicating Authority for corporate  persons.—  xxx xxx xxx  (5) Notwithstanding anything to the contrary contained  in any other law for the time being in force, the  National Company Law Tribunal shall have jurisdiction  to entertain or dispose of—  

xxx xxx xxx

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(c) any question of priorities or any question  of law or facts, arising out of or in relation to  the insolvency resolution or liquidation  proceedings of the corporate debtor or  corporate person under this Code.‖  

36. Equally, counterclaims, by their very definition, are independent  

rights which are not taken away by the Code but are preserved for the  

stage of admission of claims during the resolution plan. Also, there is  

nothing in the Code which interdicts the corporate debtor from pursuing  

such counterclaims in other judicial fora. Form C dealing with  

submission of claims by financial creditors in the CIRP Regulations  

states thus:  

―FORM C  SUBMISSION OF CLAIM BY FINANCIAL  

CREDITORS  [Under Regulation 8 of the Insolvency and Bankruptcy  

Board of India (Insolvency Resolution Process for  Corporate Persons) Regulations, 2016]  

[Date]  From  

[Name and address of the financial creditor, including  address of its registered office and principal office]  

To  

The Interim Resolution Professional/Resolution  Professional,  

[Name of the Insolvency Resolution Professional /  Resolution Professional]  

[Address as set out in public announcement]  

Subject: Submission of claim and proof of claim.

76  

Madam/Sir,  

[Name of the financial creditor], hereby submits this  claim in respect of the corporate insolvency resolution  process of [name of corporate debtor]. The details for  the same are set out below:  

Relevant Particulars  

1 Name of the financial creditor   

Identification number of the financial  creditor  (If an incorporated body, provide  identification number and proof of  incorporation. If a partnership or  individual provide identification  records* of all the partners or the  individual)  

3 .  

Address and email address of the  financial creditor for correspondence  

4 .  

Total amount of claim  (including any interest as at the  insolvency commencement date)  

5 .  

Details of documents by reference to  which the debt can be substantiated  

6 .  

Details of how and when debt incurred   

7 .  

Details of any mutual credit, mutual  debts, or other mutual dealings  between the corporate debtor and the  creditor which may be set-off against  the claim  

8 .  

Details of any security held, the value  of the security, and the date it was  given  

77  

9 .  

Details of the bank account to which  the amount of the claim or any part  thereof can be transferred pursuant to  a resolution plan  

1 0 .  

List of documents attached to this  claim in order to prove the existence  and non-payment of claim due to the  financial creditor  

(Signature of financial creditor or person authorised  to act on his behalf)  [Please enclose the authority if this is being  submitted on behalf of the financial creditor]  

Name in BLOCK LETTERS  

Position with or in relation to creditor  

Address of person signing  

 * PAN number, passport, AADHAAR Card or the  identity card issued by the Election Commission of  India.  

 DECLARATION  

I, [Name of claimant], currently residing at [insert address],  do hereby declare and state as follows:  

1. [Name of corporate debtor], the corporate  debtor was, at the insolvency  commencement date, being the ………… day  of ………… 20……, actually indebted to me  for a sum of Rs. [insert amount of claim].  

2. In respect of my claim of the said sum or any  part thereof, I have relied on the documents  specified below:   [Please list the documents relied on as  evidence of claim].  

3. The said documents are true, valid and  genuine to the best of my knowledge,

78  

information and belief and no material facts  have been concealed therefrom.   

4. In respect of the said sum or any part thereof,  neither I, nor any person, by my order, to my  knowledge or belief, for my use, had or  received any manner of satisfaction or  security whatsoever, save and except the  following:  [Please state details of any mutual credit,  mutual debts, or other mutual dealings  between the corporate debtor and the  creditor which may be set-off against the  claim].  

5. I am/I am not a related party of the corporate  debtor, as defined under Section 5(24) of the  Code.  

6. I am eligible to join committee of creditors by  virtue of proviso to Section 21(2) of the Code  even though I am a related party of the  corporate debtor.  

Date:  Place:  

(Signature of the claimant)    

VERIFICATION  I, [Name] the claimant hereinabove, do hereby verify  that the contents of this proof of claim are true and  correct to my knowledge and belief and no material  fact has been concealed therefrom.  

Verified at … on this …… day of ………, 20…  

(Signature of claimant)  

[Note: In the case of company or limited liability  partnership, the declaration and verification shall be  made by the director/manager/secretary/designated  partner and in the case of other entities, an officer  authorised for the purpose by the entity.]‖  

79  

 37. The trigger for a financial creditor‘s application is non-payment of  

dues when they arise under loan agreements. It is for this reason that  

Section 433(e) of the Companies Act, 1956 has been repealed by the  

Code and a change in approach has been brought about. Legislative  

policy now is to move away from the concept of ―inability to pay debts‖  

to ―determination of default‖. The said shift enables the financial  

creditor to prove, based upon solid documentary evidence, that there  

was an obligation to pay the debt and that the debtor has failed in such  

obligation. Four policy reasons have been stated by the learned  

Solicitor General for this shift in legislative policy. First is predictability  

and certainty. Secondly, the paramount interest to be safeguarded is  

that of the corporate debtor and admission into the insolvency  

resolution process does not prejudice such interest but, in fact,  

protects it. Thirdly, in a situation of financial stress, the cause of default  

is not relevant; protecting the economic interest of the corporate debtor  

is more relevant. Fourthly, the trigger that would lead to liquidation can  

only be upon failure of the resolution process.  

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38. In this context, it is important to differentiate between ―claim‖,  

―debt‖ and ―default‖. Each of these terms is separately defined as  

follows:  

―3. Definitions.—In this Code, unless the context  otherwise requires,—  xxx xxx xxx  (6) ―claim‖ means—  

(a) a right to payment, whether or not such  right is reduced to judgment, fixed, disputed,  undisputed, legal, equitable, secured or  unsecured;  (b) right to remedy for breach of contract  under any law for the time being in force, if  such breach gives rise to a right to payment,  whether or not such right is reduced to  judgment, fixed, matured, unmatured,  disputed, undisputed, secured or unsecured;  

xxx xxx xxx  

(11) ―debt‖ means a liability or obligation in respect of  a claim which is due from any person and includes a  financial debt and operational debt;  

(12) ―default‖ means non-payment of debt when whole  or any part or instalment of the amount of debt has  become due and payable and is not paid by the debtor  or the corporate debtor, as the case may be;  

xxx xxx xxx‖    

Whereas a ―claim‖ gives rise to a ―debt‖ only when it becomes ―due‖, a  

―default‖ occurs only when a ―debt‖ becomes ―due and payable‖ and is  

not paid by the debtor. It is for this reason that a financial creditor has  

to prove ―default‖ as opposed to an operational creditor who merely

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―claims‖ a right to payment of a liability or obligation in respect of a  

debt which may be due. When this aspect is borne in mind, the  

differentiation in the triggering of insolvency resolution process by  

financial creditors under Section 7 and by operational creditors under  

Sections 8 and 9 of the Code becomes clear.   

SECTIONS 21 AND 24 AND ARTICLE 14: OPERATIONAL CREDITORS HAVE NO  

VOTE IN THE COMMITTEE OF CREDITORS.    

39. Section 21 of the Code reads as follows:  

―21. Committee of creditors.—(1) The interim  resolution professional shall after collation of all claims  received against the corporate debtor and  determination of the financial position of the corporate  debtor, constitute a committee of creditors.  

(2) The committee of creditors shall comprise all  financial creditors of the corporate debtor:  

Provided that a financial creditor or the authorised  representative of the financial creditor referred to in  sub-section (6) or sub-section (6-A) or sub-section (5)  of Section 24, if it is a related party of the corporate  debtor, shall not have any right of representation,  participation or voting in a meeting of the committee of  creditors:  

Provided further that the first proviso shall not apply  to a financial creditor, regulated by a financial sector  regulator, if it is a related party of the corporate debtor  solely on account of conversion or substitution of debt  into equity shares or instruments convertible into  equity shares, prior to the insolvency commencement  date.

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(3) Subject to sub-sections (6) and (6-A), where the  corporate debtor owes financial debts to two or more  financial creditors as part of a consortium or  agreement, each such financial creditor shall be part of  the committee of creditors and their voting share shall  be determined on the basis of the financial debts owed  to them.  

(4) Where any person is a financial creditor as well as  an operational creditor,—  

(a) such person shall be a financial creditor to  the extent of the financial debt owed by the  corporate debtor, and shall be included in the  committee of creditors, with voting share  proportionate to the extent of financial debts  owed to such creditor;  (b) such person shall be considered to be an  operational creditor to the extent of the  operational debt owed by the corporate  debtor to such creditor.  

(5) Where an operational creditor has assigned or  legally transferred any operational debt to a financial  creditor, the assignee or transferee shall be  considered as an operational creditor to the extent of  such assignment or legal transfer.  

(6) Where the terms of the financial debt extended as  part of a consortium arrangement or syndicated facility  provide for a single trustee or agent to act for all  financial creditors, each financial creditor may—  

(a) authorize the trustee or agent to act on his  behalf in the committee of creditors to the  extent of his voting share;  (b) represent himself in the committee of  creditors to the extent of his voting share;  (c) appoint an insolvency professional (other  than the resolution professional) at his own  cost to represent himself in the committee of  creditors to the extent of his voting share; or

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(d) exercise his right to vote to the extent of  his voting share with one or more financial  creditors jointly or severally.  

(6-A) Where a financial debt—  (a) is in the form of securities or deposits and  the terms of the financial debt provide for  appointment of a trustee or agent to act as  authorised representative for all the financial  creditors, such trustee or agent shall act on  behalf of such financial creditors;  (b) is owed to a class of creditors exceeding  the number as may be specified, other than  the creditors covered under clause (a) or sub- section (6), the interim resolution professional  shall make an application to the Adjudicating  Authority along with the list of all financial  creditors, containing the name of an  insolvency professional, other than the  interim resolution professional, to act as their  authorised representative who shall be  appointed by the Adjudicating Authority prior  to the first meeting of the committee of  creditors;  (c) is represented by a guardian, executor or  administrator, such person shall act as  authorised representative on behalf of such  financial creditors,  

and such authorised representative under clause (a) or  clause (b) or clause (c) shall attend the meetings of  the committee of creditors, and vote on behalf of each  financial creditor to the extent of his voting share.  

(6-B) The remuneration payable to the authorised  representative—  

(i) under clauses (a) and (c) of sub-section  (6-A), if any, shall be as per the terms of the  financial debt or the relevant documentation;  and

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(ii) under clause (b) of sub-section (6-A) shall  be as specified which shall form part of the  insolvency resolution process costs.  

(7) The Board may specify the manner of voting and  the determining of the voting share in respect of  financial debts covered under sub-sections (6) and (6- A).  

(8) Save as otherwise provided in this Code, all  decisions of the committee of creditors shall be taken  by a vote of not less than fifty-one per cent. of voting  share of the financial creditors:  

Provided that where a corporate debtor does not  have any financial creditors, the committee of creditors  shall be constituted and shall comprise of such  persons to exercise such functions in such manner as  may be specified.  

(9) The committee of creditors shall have the right to  require the resolution professional to furnish any  financial information in relation to the corporate debtor  at any time during the corporate insolvency resolution  process.  

(10) The resolution professional shall make available  any financial information so required by the committee  of creditors under sub-section (9) within a period of  seven days of such requisition.‖  

40. Section 24(3), 24(4), and Section 28, which are also material,  

read as follows:  

―24. Meeting of committee of creditors.—  xxx xxx xxx  (3) The resolution professional shall give notice of  each meeting of the committee of creditors to—  

(a) members of  [committee of creditors,  including the authorised representatives

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referred to in sub-sections (6) and (6-A) of  Section 21 and sub-section (5)];  (b) members of the suspended Board of  Directors or the partners of the corporate  persons, as the case may be;  (c) operational creditors or their  representatives if the amount of their  aggregate dues is not less than ten per cent  of the debt.  

(4) The directors, partners and one representative of  operational creditors, as referred to in sub-section (3),  may attend the meetings of committee of creditors, but  shall not have any right to vote in such meetings:  

Provided that the absence of any such director,  partner or representative of operational creditors, as  the case may be, shall not invalidate proceedings of  such meeting.  xxx xxx xxx‖  

 xxx xxx xxx    

―28. Approval of committee of creditors for certain  actions.—(1) Notwithstanding anything contained in  any other law for the time being in force, the resolution  professional, during the corporate insolvency  resolution process, shall not take any of the following  actions without the prior approval of the committee of  creditors namely—  

(a) raise any interim finance in excess of the  amount as may be decided by the committee  of creditors in their meeting;  (b) create any security interest over the  assets of the corporate debtor;  (c) change the capital structure of the  corporate debtor, including by way of  issuance of additional securities, creating a  new class of securities or buying back or  redemption of issued securities in case the  corporate debtor is a company;

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(d) record any change in the ownership  interest of the corporate debtor;  (e) give instructions to financial institutions  maintaining accounts of the corporate debtor  for a debit transaction from any such  accounts in excess of the amount as may be  decided by the committee of creditors in their  meeting;  (f) undertake any related party transaction;  (g) amend any constitutional documents of  the corporate debtor;  (h) delegate its authority to any other person;  (i) dispose of or permit the disposal of shares  of any shareholder of the corporate debtor or  their nominees to third parties;  (j) make any change in the management of  the corporate debtor or its subsidiary;  (k) transfer rights or financial debts or  operational debts under material contracts  otherwise than in the ordinary course of  business;  (l) make changes in the appointment or terms  of contract of such personnel as specified by  the committee of creditors; or  (m) make changes in the appointment or  terms of contract of statutory auditors or  internal auditors of the corporate debtor.  

(2) The resolution professional shall convene a  meeting of the committee of creditors and seek the  vote of the creditors prior to taking any of the actions  under sub-section (1).  

(3) No action under sub-section (1) shall be approved  by the committee of creditors unless approved by a  vote of sixty-six per cent of the voting shares.  

(4) Where any action under sub-section (1) is taken by  the resolution professional without seeking the  approval of the committee of creditors in the manner  as required in this section, such action shall be void.

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(5) The committee of creditors may report the actions  of the resolution professional under sub-section (4) to  the Board for taking necessary actions against him  under this Code. Approval of committee of creditors for  certain actions.‖  

41. In this regard, the BLRC Report states:  

―The creditors committee will have the power to decide  the final solution by majority vote in the negotiations.  The majority vote requires more than or equal to 75  percent of the creditors committee by weight of the  total financial liabilities…… The Committee deliberated  on who should be on the creditors committee, given  the power of the creditors committee to ultimately keep  the entity as a going concern or liquidate it. The  Committee reasoned that members of the creditors  committee have to be creditors both with the capability  to assess viability, as well as to be willing to modify  terms of existing liabilities in negotiations. Typically,  operational creditors are neither able to decide on  matters regarding the insolvency of the entity, nor  willing to take the risk of postponing payments for  better future prospects for the entity. The Committee  concluded that, for the process to be rapid and  efficient, the Code will provide that the creditors  committee should be restricted to only the financial  creditors.‖  

―The second is that any proposed solution must  explicitly account for the IRP costs and the liabilities of  the operational creditors within a reasonable period  from the approval of the solution if it is approved. The  Committee argues that there must be a  counterbalance to operational creditors not having a  vote on the creditors committee. Thus, they concluded  that the dues of the operational creditors must have  priority in being paid as an explicit part of the proposed  solution. This must be ensured by the RP in evaluating  a proposal before bringing it to the creditors

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committee. If there is ambiguity about the coverage of  the liability in the information memorandum that the  RP presents to garner solutions, then the RP must  ensure that this is clearly stated and accounted for in  the proposed solution.‖  

The Joint Parliamentary Committee Report of April, 2016 [―Joint  

Parliamentary Committee Report‖] on the Insolvency and Bankruptcy  

Code also agreed with these observations but modified Section 24 so  

as to permit operational creditors to be present at the meetings of the  

committee of creditors, albeit without voting rights, if operational  

creditors aggregate to 10% or more of the total debts owed by the  

corporate debtor.   

The Joint Parliamentary Committee Report also opined as follows:  

―21. Role of Operational Creditors - Clause 24  

Some of the stakeholders in the memorandum/views  furnished before the Committee were of the opinion  that whereas operation creditor has right to make  application for initiation of corporate insolvency  resolution process, operational creditors like workmen,  employees, suppliers have not been given any  representation in the committee of creditors which is  pivotal in whole resolution process. In this regard, one  of the stakeholders has suggested that committee of  creditors may contain operational creditors as well,  with some thresholds.  

In this context, while appreciating that the operational  creditors are important stakeholders in a company, the

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Committee took note of the rationale of not including  operational creditors in the committee of creditors as  indicated in notes on Clause 21 appended with the Bill  which states as under:―  

―The committee has to be composed of  members who have the capability to assess  the commercial viability of the corporate  debtor and who are willing to modify the  terms of the debt contracts in negotiations  between the creditors and the corporate  debtor. Operational creditors are typically not  able to decide on matters relating to  commercial viability of the corporate debtor,  nor are they typically willing to take the risk of  restructuring their debts in order to make the  corporate debtor a going concern. Similarly,  financial creditors who are also operational  creditors will be given representation on the  committee of creditors only to the extent of  their financial debts. Nevertheless, in order to  ensure that the financial creditors do not treat  the operational creditors unfairly, any  resolution plan must ensure that the  operational creditors receive an amount not  less than the liquidation value of their debt  (assuming the corporate debtor were to be  liquidated).   

All decisions of the Committee shall be taken by a vote  of not less than seventy-five per cent of the voting  share. In the event there are no financial creditors for a  corporate debtor, the composition and decision- making processes of the corporate debtor shall be  specified by the Insolvency and Bankruptcy Board.  The Committee shall also have the power to call for  information from the resolution professional.‖  

The Committee after due deliberations are of the view  that, if not voting rights, operational creditors at least  should have presence in the committee of creditors to

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present their views/concerns on important issues  considered at the meetings so that their  views/concerns are taken into account by the  committee of creditors while finalizing the resolution  plan.‖  

(emphasis supplied)    

The original Insolvency and Bankruptcy Bill did not allow operational  

creditors to attend the committee of creditors at all. This Bill was  

amended whilst in the form of a Bill, the Joint Parliamentary Committee  

deciding as follows:  

―The Committee, therefore, decided to modify clause  24(3) and (4) as given under:  

Modified Clause 24(3)―  

―The resolution professional shall give notice of each  meeting of the committee of creditors to-  

(a) members of committee of creditors;   (b) members of the suspended Board of  Directors or the partners of the corporate  persons, as the case may be;   (c) operational creditors or their representatives  if the amount of their aggregate dues is not less  than ten per cent of the debt.‖  

Modified Clause 24(4)―  

―The directors, partners and one representative of  operational creditors as referred to in sub-section (3),  may attend the meetings of committee of creditors, but  shall not have any right to vote in such meetings:   

Provided that the absence of any such director,  partner or representative of operational creditors, as  the case may be, shall not invalidate proceedings of  such meeting.‖

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42. What is also of importance is the fact that Expert Committees  

have been set up by the Government to oversee the working of the  

Code. Thus, the report of the Insolvency Law Committee of March,  

2018, after examining the working of the Code, thought it fit not to  

amend the Code so as to give operational creditors the right to vote.   

This was stated as follows:  

―This rationale still holds true, and thus it was deemed  fit not to amend the constitution of the CoC. Further,  operational creditors whose aggregate dues are not  less than ten percent of the debt have a right to attend  the meetings of the CoC. Also, under the resolution  plan, they are guaranteed at least the liquidation  value.‖  

―…The Committee agreed that presently, most of the  resolution plans are in the process of submission and  there is no empirical evidence to further the argument  that operational creditors do not receive a fair share in  the resolution process under the current scheme of the  Code. Hence, the Committee decided to continue with  the present arrangement without making any  amendments to the Code.‖  

43. Under the Code, the committee of creditors is entrusted with the  

primary responsibility of financial restructuring. They are required to  

assess the viability of a corporate debtor by taking into account all  

available information as well as to evaluate all alternative investment

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opportunities that are available. The committee of creditors is required  

to evaluate the resolution plan on the basis of feasibility and viability.  

Thus, Section 30(4) states:  

―30. Submission of resolution plan.—  

xxx xxx xxx  

(4) The committee of creditors may approve a  resolution plan by a vote of not less than sixty-six per  cent of voting share of the financial creditors, after  considering its feasibility and viability, and such other  requirements as may be specified by the Board:  

Provided that the committee of creditors shall not  approve a resolution plan, submitted before the  commencement of the Insolvency and Bankruptcy  Code (Amendment) Ordinance, 2017, where the  resolution applicant is ineligible under Section 29A and  may require the resolution professional to invite a fresh  resolution plan where no other resolution plan is  available with it:  

Provided further that where the resolution applicant  referred to in the first proviso is ineligible under clause  (c) of Section 29A, the resolution applicant shall be  allowed by the committee of creditors such period, not  exceeding thirty days, to make payment of overdue  amounts in accordance with the proviso to clause (c)  of Section 29A:  

Provided also that nothing in the second proviso  shall be construed as extension of period for the  purposes of the proviso to sub-section (3) of Section  12, and the corporate insolvency resolution process  shall be completed within the period specified in that  sub-section.  

Provided also that the eligibility criteria in Section  29A as amended by the Insolvency and Bankruptcy  Code (Amendment) Ordinance, 2018 (Ord. 6 of 2018)

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shall apply to the resolution applicant who has not  submitted resolution plan as on the date of  commencement of the Insolvency and Bankruptcy  Code (Amendment) Ordinance, 2018.  

xxx xxx xxx‖  

It is important to bear in mind that once the resolution plan is approved  

by the committee of creditors and thereafter by the Adjudicating  

Authority, the aforesaid plan is binding on all stakeholders as follows:  

―31. Approval of resolution plan.—(1) If the  Adjudicating Authority is satisfied that the resolution  plan as approved by the committee of creditors under  sub-section (4) of Section 30 meets the requirements  as referred to in sub-section (2) of Section 30, it shall  by order approve the resolution plan which shall be  binding on the corporate debtor and its employees,  members, creditors, guarantors and other  stakeholders involved in the resolution plan:  

Provided that the Adjudicating Authority shall,  before passing an order for approval of resolution plan  under this sub-section, satisfy that the resolution plan  has provisions for its effective implementation.  

xxx xxx xxx‖  

44. Since the financial creditors are in the business of money  

lending, banks and financial institutions are best equipped to assess  

viability and feasibility of the business of the corporate debtor. Even at  

the time of granting loans, these banks and financial institutions  

undertake a detailed market study which includes a techno-economic

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valuation report, evaluation of business, financial projection, etc. Since  

this detailed study has already been undertaken before sanctioning a  

loan, and since financial creditors have trained employees to assess  

viability and feasibility, they are in a good position to evaluate the  

contents of a resolution plan. On the other hand, operational creditors,  

who provide goods and services, are involved only in recovering  

amounts that are paid for such goods and services, and are typically  

unable to assess viability and feasibility of business. The BLRC  

Report, already quoted above, makes this abundantly clear.   

45. Quite apart from this, the United Nations Commission on  

International Trade Law, in its Legislative Guide on Insolvency Law  

[―UNCITRAL Guidelines‖] recognizes the importance of ensuring  

equitable treatment to similarly placed creditors and states as follows:  

“Ensuring equitable treatment of similarly situated  creditors  

7. The objective of equitable treatment is based on the  notion that, in collective proceedings, creditors with  similar legal rights should be treated fairly, receiving a  distribution on their claim in accordance with their  relative ranking and interests. This key objective  recognizes that all creditors do not need to be treated  identically, but in a manner that reflects the different  bargains they have struck with the debtor. This is less  relevant as a defining factor where there is no specific  debt contract with the debtor, such as in the case of

95  

damage claimants (e.g. for environmental damage)  and tax authorities. Even though the principle of  equitable treatment may be modified by social policy  on priorities and give way to the prerogatives  pertaining to holders of claims or interests that arise,  for example, by operation of law, it retains its  significance by 12 UNCITRAL Legislative Guide on  Insolvency Law ensuring that the priority accorded to  the claims of a similar class affects all members of the  class in the same manner. The policy of equitable  treatment permeates many aspects of an insolvency  law, including the application of the stay or  suspension, provisions to set aside acts and  transactions and recapture value for the insolvency  estate, classification of claims, voting procedures in  reorganization and distribution mechanisms. An  insolvency law should address problems of fraud and  favouritism that may arise in cases of financial distress  by providing, for example, that acts and transactions  detrimental to equitable treatment of creditors can be  avoided.‖  

46. The NCLAT has, while looking into viability and feasibility of  

resolution plans that are approved by the committee of creditors,  

always gone into whether operational creditors are given roughly the  

same treatment as financial creditors, and if they are not, such plans  

are either rejected or modified so that the operational creditors‘ rights  

are safeguarded. It may be seen that a resolution plan cannot pass  

muster under Section 30(2)(b) read with Section 31 unless a minimum  

payment is made to operational creditors, being not less than

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liquidation value. Further, on 05.10.2018, Regulation 38 has been  

amended. Prior to the amendment, Regulation 38 read as follows:  

―38. Mandatory contents of the resolution plan.—  (1) A resolution plan shall identify specific sources of  funds that will be used to pay the—  

(a) insolvency resolution process costs and  provide that the [insolvency resolution  process costs, to the extent unpaid, will be  paid] in priority to any other creditor;  (b) liquidation value due to operational  creditors and provide for such payment in  priority to any financial creditor which shall in  any event be made before the expiry of thirty  days after the approval of a resolution plan by  the Adjudicating Authority; and  (c) liquidation value due to dissenting  financial creditors and provide that such  payment is made before any recoveries are  made by the financial creditors who voted in  favour of the resolution plan.‖  

Post amendment, Regulation 38 reads as follows:  

―38. Mandatory contents of the resolution plan.— (1) The amount due to the operational creditors under  a resolution plan shall be given priority in payment  over financial creditors.  (1-A) A resolution plan shall include a statement as to  how it has dealt with the interests of all stakeholders,  including financial creditors and operational creditors,  of the corporate debtor.  xxx xxx xxx‖  

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47. The aforesaid Regulation further strengthens the rights of  

operational creditors by statutorily incorporating the principle of fair and  

equitable dealing of operational creditors‘ rights, together with priority  

in payment over financial creditors.   

48. For all the aforesaid reasons, we do not find that operational  

creditors are discriminated against or that Article 14 has been infracted  

either on the ground of equals being treated unequally or on the  

ground of manifest arbitrariness.   

SECTION 12A IS NOT VIOLATIVE OF ARTICLE 14  

49. Section 12A was inserted by the Insolvency and Bankruptcy  

(Second Amendment) Act, 2018 with retrospective effect from  

06.06.2018. It reads as follows:  

―12-A. Withdrawal of application admitted under  

Section 7, 9 or 10.—The Adjudicating Authority may  

allow the withdrawal of application admitted under  

Section 7 or Section 9 or Section 10, on an application  

made by the applicant with the approval of ninety per  

cent voting share of the committee of creditors, in such  

manner as may be specified.‖  

 50. The ILC Report of March 2018, which led to the insertion of  

Section 12A, stated as follows:

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―29.1 Under rule 8 of the CIRP Rules, the NCLT may  permit withdrawal of the application on a request by  the applicant before its admission. However, there is  no provision in the Code or the CIRP Rules in relation  to permissibility of withdrawal post admission of a  CIRP application. It was observed by the Committee  that there have been instances where on account of  settlement between the applicant creditor and the  corporate debtor, judicial permission for withdrawal of  CIRP was granted [Lokhandwala Kataria Construction  Pvt. Ltd. v. Ninus Finance & Investment Manager LLP,  Civil Appeal No. 9279 of 2017; Mothers Pride Dairy  India Private Limited v. Portrait Advertising and  Marketing Private Limited, Civil Appeal No. 9286/2017;  Uttara Foods and Feeds Private Limited v. Mona  Pharmacem, Civil Appeal No. 18520/2017]. This  practice was deliberated in light of the objective of the  Code as encapsulated in the BLRC Report, that the  design of the Code is based on ensuring that ―all key  stakeholders will participate to collectively assess  viability. The law must ensure that all creditors who  have the capability and the willingness to restructure  their liabilities must be part of the negotiation process.  The liabilities of all creditors who are not part of the  negotiation process must also be met in any  negotiated solution.‖ Thus, it was agreed that once the  CIRP is initiated, it is no longer a proceeding only  between the applicant creditor and the corporate  debtor but is envisaged to be a proceeding involving  all creditors of the debtor. The intent of the Code is to  discourage individual actions for enforcement and  settlement to the exclusion of the general benefit of all  creditors.  

(emphasis in original)  

29.2 On a review of the multiple NCLT and NCLAT  judgments in this regard, the consistent pattern that  emerged was that a settlement may be reached  amongst all creditors and the debtor, for the purpose  of a withdrawal to be granted, and not only the

99  

applicant creditor and the debtor. On this basis read  with the intent of the Code, the Committee  unanimously agreed that the relevant rules may be  amended to provide for withdrawal post admission if  the CoC approves of such action by a voting share of  ninety per cent. It was specifically discussed that rule  11 of the National Company Law Tribunal Rules, 2016  may not be adopted for this aspect of CIRP at this  stage (as observed by the Hon‘ble Supreme Court in  the case of Uttara Foods and Feeds Private Limited v.  Mona Pharmacem, Civil Appeal No. 18520/2017) and  even otherwise, as the issue can be specifically  addressed by amending rule 8 of the CIRP Rules.‖  

 51. Before this Section was inserted, this Court, under Article 142,  

was passing orders allowing withdrawal of applications after creditors‘  

applications had been admitted by the NCLT or the NCLAT.   

Regulation 30A of the CIRP Regulations states as under:  

―30A. Withdrawal of application.—(1) An application  for withdrawal under Section 12-A shall be submitted  to the interim resolution professional or the resolution  professional, as the case may be, in Form FA of the  Schedule before issue of invitation for expression of  interest under Regulation 36A.  

(2) The application in sub-regulation (1) shall be  accompanied by a bank guarantee towards estimated  cost incurred for purposes of clauses (c) and (d) of  Regulation 31 till the date of application.  

(3) The committee shall consider the application made  under sub-regulation (1) within seven days of its  constitution or seven days of receipt of the application,  whichever is later.

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(4) Where the application is approved by the  committee with ninety percent voting share, the  resolution professional shall submit the application  under sub-regulation (1) to the Adjudicating Authority  on behalf of the applicant, within three days of such  approval.  

(5) The Adjudicating Authority may, by order, approve  the application submitted under sub-regulation (4).‖  

This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd.  

v. Mr. S. Rajagopal & Ors., SLP (Civil) No. 31557/2018, has stated  

that Regulation 30A(1) is not mandatory but is directory for the simple  

reason that on the facts of a given case, an application for withdrawal  

may be allowed in exceptional cases even after issue of invitation for  

expression of interest under Regulation 36A.   

52. It is clear that once the Code gets triggered by admission of a  

creditor‘s petition under Sections 7 to 9, the proceeding that is before  

the Adjudicating Authority, being a collective proceeding, is a  

proceeding in rem. Being a proceeding in rem, it is necessary that the  

body which is to oversee the resolution process must be consulted  

before any individual corporate debtor is allowed to settle its claim. A  

question arises as to what is to happen before a committee of creditors  

is constituted (as per the timelines that are specified, a committee of  

creditors can be appointed at any time within 30 days from the date of

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appointment of the interim resolution professional). We make it clear  

that at any stage where the committee of creditors is not yet  

constituted, a party can approach the NCLT directly, which Tribunal  

may, in exercise of its inherent powers under Rule 11 of the NCLT  

Rules, 2016, allow or disallow an application for withdrawal or  

settlement. This will be decided after hearing all the concerned parties  

and considering all relevant factors on the facts of each case.   

53. The main thrust against the provision of Section 12A is the fact  

that ninety per cent of the committee of creditors has to allow  

withdrawal. This high threshold has been explained in the ILC Report  

as all financial creditors have to put their heads together to allow such  

withdrawal as, ordinarily, an omnibus settlement involving all creditors  

ought, ideally, to be entered into. This explains why ninety per cent,  

which is substantially all the financial creditors, have to grant their  

approval to an individual withdrawal or settlement. In any case, the  

figure of ninety per cent, in the absence of anything further to show  

that it is arbitrary, must pertain to the domain of legislative policy,  

which has been explained by the Report (supra). Also, it is clear, that  

under Section 60 of the Code, the committee of creditors do not have  

the last word on the subject. If the committee of creditors arbitrarily

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rejects a just settlement and/or withdrawal claim, the NCLT, and  

thereafter, the NCLAT can always set aside such decision under  

Section 60 of the Code. For all these reasons, we are of the view that  

Section 12A also passes constitutional muster.   

 EVIDENCE PROVIDED BY PRIVATE INFORMATION UTILITIES: ONLY PRIMA FACIE  

EVIDENCE OF DEFAULT   

54. A frontal attack was made by Shri Mukul Rohatgi on the ground  

that private information utilities that have been set up are not governed  

by proper norms.  Also, the evidence by way of loan default contained  

in the records of such utility cannot be conclusive evidence of what is  

stated therein. The BLRC Report had stated:  

―Under the present arrangements, considerable time  can be lost before all parties obtain this information.  Disputes about these facts can take up years to  resolve in court…… Hence, the Committee envisions a  competitive industry of ―information utilities‖ who hold  an array of information about all firms at all times.  When the IRP commences, within less than a day,  undisputed and complete information would become  available to all persons involved in the IRP and thus  address this source of delay.‖  

55. The setting up of information utilities was preceded by a regime  

of information companies which were referred to as credit information

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companies [―CICs‖], as recommended by the Siddiqui Working Group  

in 1999. The Attorney General pointed out, in his written submission,  

that:  

―In 2013, the RBI constituted another Committee under  the chairmanship of Aditya Puri, MD, HDFC Bank to  examine reporting formats used by CICs and other  related issues.  The Committee‘s report led to the  standardization of data formats for reporting corporate,  consumer and MFI data by all credit institutions and  streamlining the process of data submission by credit  institutions to CICs.  In 2015, all credit institutions were  directed by RBI to become members of all the CICs  and submit current and historical data about specified  borrower to them and to update it regularly.   

The purpose of setting up the above regime of  information utilities was to reduce information  asymmetry for improved credit risk assessment and to  improve recovery processes.  

The setting up of IUs marks a shift in the above  position as not only is the information with IUs used to  reduce information asymmetry, but it is also to be  treated as prima facie evidence of the transaction for  the purpose of IBC proceedings. This assists in  improving the timelines for the resolution process.‖  

56. The Information Utilities Regulations, in particular Regulations 20  

and 21, make it clear that on receipt of information of default, an  

information utility shall expeditiously undertake the process of  

authentication and verification of information. Regulations 20 and 21  

read as follows:

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―20. Acceptance and receipt of information.—(1) An  information utility shall accept information submitted by  a user in Form C of the Schedule.  (2) On receipt of the information submitted under sub- regulation (1), the information utility shall—  

(a) assign a unique identifier to the information,  including records of debt;  (b) acknowledge its receipt, and notify the user  of—  

(i) the unique identifier of the information;  (ii) the terms and conditions of authentication  and verification of information; and  (iii) the manner in which the information may  be accessed by other parties.  

 21. Information of default.—(1) On receipt of  information of default, an information utility shall  expeditiously undertake the processes of  authentication and verification of the information.  (2) On completion of the processes of authentication  and verification under sub-regulation (1), the  information utility shall communicate the information of  default, and the status of authentication to registered  users who are—  

(a) creditors of the debtor who has defaulted;  (b) parties and sureties, if any, to the debt in  respect of which the information of default  has been received.‖  

57. The aforesaid Regulations also make it clear that apart from the  

stringent requirements as to registration of such utility, the moment  

information of default is received, such information has to be  

communicated to all parties and sureties to the debt. Apart from this,  

the utility is to expeditiously undertake the process of authentication

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and verification of information, which will include authentication and  

verification from the debtor who has defaulted.  This being the case,  

coupled with the fact that such evidence, as has been conceded by the  

learned Attorney General, is only prima facie evidence of default,  

which is rebuttable by the corporate debtor, makes it clear that the  

challenge based on this ground must also fail.   

 RESOLUTION PROFESSIONAL HAS NO ADJUDICATORY POWERS.   

58. It is clear from a reading of the Code as well as the Regulations  

that the resolution professional has no adjudicatory powers. Section 18  

of the Code lays down the duties of an interim resolution professional  

as follows:  

―18. Duties of interim resolution professional.—(1)  The interim resolution professional shall perform the  following duties, namely—  

(a) collect all information relating to the assets,  finances and operations of the corporate debtor  for determining the financial position of the  corporate debtor, including information relating  to—  

(i) business operations for the previous two  years;  (ii) financial and operational payments for the  previous two years;  (iii) list of assets and liabilities as on the  initiation date; and  (iv) such other matters as may be specified;

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(b) receive and collate all the claims submitted by creditors  to him, pursuant to the public announcement made under  Sections 13 and 15;  

(c) constitute a committee of creditors;  

(d) monitor the assets of the corporate debtor and manage  its operations until a resolution professional is appointed by  the committee of creditors;  

(e) file information collected with the information utility, if  necessary; and  

(f) take control and custody of any asset over which the  corporate debtor has ownership rights as recorded in the  balance sheet of the corporate debtor, or with information  utility or the depository of securities or any other registry  that records the ownership of assets including—  

(i) assets over which the corporate debtor  has ownership rights which may be located in  a foreign country;  (ii) assets that may or may not be in  possession of the corporate debtor;  (iii) tangible assets, whether movable or  immovable;  (iv) intangible assets including intellectual  property;  (v) securities including shares held in any  subsidiary of the corporate debtor, financial  instruments, insurance policies;  (vi) assets subject to the determination of  ownership by a court or authority;  

(g) to perform such other duties as may be  specified by the Board.  

Explanation.—For the purposes of this  section, the term ―assets‖ shall not include  the following, namely—  (a) assets owned by a third party in  possession of the corporate debtor held  under trust or under contractual  arrangements including bailment;

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(b) assets of any Indian or foreign subsidiary  of the corporate debtor; and  (c) such other assets as may be notified by  the Central Government in consultation with  any financial sector regulator.‖  

   59. Under the CIRP Regulations, the resolution professional has to  

vet and verify claims made, and ultimately, determine the amount of  

each claim as follows:  

―10. Substantiation of claims.—The interim  resolution professional or the resolution professional,  as the case may be, may call for such other evidence  or clarification as he deems fit from a creditor for  substantiating the whole or part of its claim.‖  

xxx xxx xxx  

―12. Submission of proof of claims.—(1) Subject to  sub-regulation (2), a creditor shall submit claim with  proof on or before the last date mentioned in the public  announcement.  

(2) A creditor, who fails to submit claim with proof  within the time stipulated in the public announcement,  may submit the claim with proof to the interim  resolution professional or the resolution professional,  as the case may be, on or before the ninetieth day of  the insolvency commencement date.  

(3) Where the creditor in sub-regulation (2) is a  financial creditor under regulation 8, it shall be  included in the committee from the date of admission  of such claim:  

Provided that such inclusion shall not affect the  validity of any decision taken by the committee prior to  such inclusion.  

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13. Verification of claims.—(1) The interim resolution  professional or the resolution professional, as the case  may be, shall verify every claim, as on the insolvency  commencement date, within seven days from the last  date of the receipt of the claims, and thereupon  maintain a list of creditors containing names of  creditors along with the amount claimed by them, the  amount of their claims admitted and the security  interest, if any, in respect of such claims, and update  it.  (2) The list of creditors shall be –   

(a) available for inspection by the persons  who submitted proofs of claim;   (b) available for inspection by members,  partners, directors and guarantors of the  corporate debtor;  (c) displayed on the website, if any, of the  corporate debtor;   (d) filed with the Adjudicating Authority; and   (e) presented at the first meeting of the  committee.   

14. Determination of amount of claim.—(1) Where  the amount claimed by a creditor is not precise due to  any contingency or other reason, the interim resolution  professional or the resolution professional, as the case  may be, shall make the best estimate of the amount of  the claim based on the information available with him.  (2) The interim resolution professional or the resolution  professional, as the case may be, shall revise the  amounts of claims admitted, including the estimates of  claims made under sub-regulation (1), as soon as may  be practicable, when he comes across additional  information warranting such revision.‖  

 It is clear from a reading of these Regulations that the resolution  

professional is given administrative as opposed to quasi-judicial

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powers.   In fact, even when the resolution professional is to make a  

―determination‖ under Regulation 35A, he is only to apply to the  

Adjudicating Authority for appropriate relief based on the determination  

made as follows:  

―35A. Preferential and other transactions.—(1) On  or before the seventy-fifth day of the insolvency  commencement date, the resolution professional shall  form an opinion whether the corporate debtor has  been subjected to any transaction covered under  sections 43, 45, 50 or 66.  (2) Where the resolution professional is of the opinion  that the corporate debtor has been subjected to any  transactions covered under sections 43, 45, 50 or 66,  he shall make a determination on or before the one  hundred and fifteenth day of the insolvency  commencement date, under intimation to the Board.  (3) Where the resolution professional makes a  determination under sub-regulation (2), he shall apply  to the Adjudicating Authority for appropriate relief on or  before the one hundred and thirty-fifth day of the  insolvency commencement date.  

 60. As opposed to this, the liquidator, in liquidation proceedings  

under the Code, has to consolidate and verify the claims, and either  

admit or reject such claims under Sections 38 to 40 of the Code.  

Sections 41 and 42, by way of contrast between the powers of the  

liquidator and that of the resolution professional, are set out  

hereinbelow:

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―41. Determination of valuation of claims.—The  liquidator shall determine the value of claims admitted  under Section 40 in such manner as may be specified  by the Board.    42. Appeal against the decision of liquidator.—A  creditor may appeal to the Adjudicating Authority  against the decision of the liquidator accepting or  rejecting the claims within fourteen days of the receipt  of such decision.‖  

It is clear from these Sections that when the liquidator ―determines‖ the  

value of claims admitted under Section 40, such determination is a  

―decision‖, which is quasi-judicial in nature, and which can be appealed  

against to the Adjudicating Authority under Section 42 of the Code.   

 61. Unlike the liquidator, the resolution professional cannot act in a  

number of matters without the approval of the committee of creditors  

under Section 28 of the Code, which can, by a two-thirds majority,  

replace one resolution professional with another, in case they are  

unhappy with his performance. Thus, the resolution professional is  

really a facilitator of the resolution process, whose administrative  

functions are overseen by the committee of creditors and by the  

Adjudicating Authority.  

 CONSTITUTIONAL VALIDITY OF SECTION 29A.  

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62. Section 29A reads as follows:  

―29A. Persons not eligible to be resolution  applicant.—A person shall not be eligible to submit a  resolution plan, if such person, or any other person  acting jointly or in concert with such person—  

(a) is an undischarged insolvent;  

(b) is a wilful defaulter in accordance with the  guidelines of the Reserve Bank of India issued  under the Banking Regulation Act, 1949 (10 of  1949);  

(c) at the time of submission of the resolution plan  has an account,] or an account of a corporate  debtor under the management or control of such  person or of whom such person is a promoter,  classified as non-performing asset in accordance  with the guidelines of the Reserve Bank of India  issued under the Banking Regulation Act, 1949  (10 of 1949) or the guidelines of a financial sector  regulator issued under any other law for the time  being in force, and at least a period of one year  has lapsed from the date of such classification till  the date of commencement of the corporate  insolvency resolution process of the corporate  debtor:  

Provided that the person shall be eligible to  submit a resolution plan if such person makes  payment of all overdue amounts with interest  thereon and charges relating to non-performing  asset accounts before submission of resolution  plan:  

Provided further that nothing in this clause shall  apply to a resolution applicant where such  applicant is a financial entity and is not a related  party to the corporate debtor.  

Explanation I.—For the purposes of this  proviso, the expression ―related party‖ shall not  include a financial entity, regulated by a financial  sector regulator, if it is a financial creditor of the

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corporate debtor and is a related party of the  corporate debtor solely on account of conversion  or substitution of debt into equity shares or  instruments convertible into equity shares, prior to  the insolvency commencement date.  

Explanation II.—For the purposes of this  clause, where a resolution applicant has an  account, or an account of a corporate debtor  under the management or control of such person  or of whom such person is a promoter, classified  as non-performing asset and such account was  acquired pursuant to a prior resolution plan  approved under this Code, then, the provisions of  this clause shall not apply to such resolution  applicant for a period of three years from the date  of approval of such resolution plan by the  Adjudicating Authority under this Code;  

(d) has been convicted for any offence punishable  with imprisonment—  

(i) for two years or more under any Act  specified under the Twelfth Schedule; or  (ii) for seven years or more under any other  law for the time being in force:  Provided that this clause shall not apply to a  

person after the expiry of a period of two years  from the date of his release from imprisonment:  

Provided further that this clause shall not apply  in relation to a connected person referred to in  clause (iii) of Explanation I;  

(e) is disqualified to act as a director under the  Companies Act, 2013 (18 of 2013):  Provided that this clause shall not apply in relation  to a connected person referred to in clause (iii) of  Explanation I;  

(f) is prohibited by the Securities and Exchange  Board of India from trading in securities or  accessing the securities markets;  

(g) has been a promoter or in the management or  control of a corporate debtor in which a

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preferential transaction, undervalued transaction,  extortionate credit transaction or fraudulent  transaction has taken place and in respect of  which an order has been made by the  Adjudicating Authority under this Code:  

Provided that this clause shall not apply if a  preferential transaction, undervalued transaction,  extortionate credit transaction or fraudulent  transaction has taken place prior to the  acquisition of the corporate debtor by the  resolution applicant pursuant to a resolution plan  approved under this Code or pursuant to a  scheme or plan approved by a financial sector  regulator or a court, and such resolution applicant  has not otherwise contributed to the preferential  transaction, undervalued transaction, extortionate  credit transaction or fraudulent transaction;  

(h) has executed a guarantee in favour of a  creditor in respect of a corporate debtor against  which an application for insolvency resolution  made by such creditor has been admitted under  this Code and such guarantee has been invoked  by the creditor and remains unpaid in full or part;  

(i) is subject to any disability, corresponding to  clauses (a) to (h), under any law in a jurisdiction  outside India; or  

(j) has a connected person not eligible under  clauses (a) to (i).  

Explanation I.—For the purposes of this clause,  the expression ―connected person‖ means—  

(i) any person who is the promoter or in the  management or control of the resolution  applicant; or  (ii) any person who shall be the promoter or  in management or control of the business of  the corporate debtor during the  implementation of the resolution plan; or

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(iii) the holding company, subsidiary  company, associate company or related party  of a person referred to in clauses (i) and (ii):  

Provided that nothing in clause (iii) of  Explanation I shall apply to a resolution  applicant where such applicant is a financial  entity and is not a related party of the  corporate debtor:  

Provided further that the expression  ―related party‖ shall not include a financial  entity, regulated by a financial sector  regulator, if it is a financial creditor of the  corporate debtor and is a related party of the  corporate debtor solely on account of  conversion or substitution of debt into equity  shares or instruments convertible into equity  shares, prior to the insolvency  commencement date;  

Explanation II.—For the purposes of this  section, ―financial entity‖ shall mean the following  entities which meet such criteria or conditions as  the Central Government may, in consultation with  the financial sector regulator, notify in this behalf,  namely—  

(a) a scheduled bank;  (b) any entity regulated by a foreign central  bank or a securities market regulator or other  financial sector regulator of a jurisdiction  outside India which jurisdiction is compliant  with the Financial Action Task Force  Standards and is a signatory to the  International Organisation of Securities  Commissions Multilateral Memorandum of  Understanding;  (c) any investment vehicle, registered foreign  institutional investor, registered foreign  portfolio investor or a foreign venture capital  investor, where the terms shall have the  meaning assigned to them in regulation 2 of

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the Foreign Exchange Management (Transfer  or Issue of Security by a Person Resident  Outside India) Regulations, 2017 made under  the Foreign Exchange Management Act,  1999 (42 of 1999);  (d) an asset reconstruction company  registered with the Reserve Bank of India  under Section 3 of the Securitisation and  Reconstruction of Financial Assets and  Enforcement of Security Interest Act, 2002  (54 of 2002);  (e) an Alternate Investment Fund registered  with the Securities and Exchange Board of  India;  (f) such categories of persons as may be  notified by the Central Government.‖  

63. This Section was first introduced by the Insolvency and  

Bankruptcy Code (Amendment) Ordinance, 2017, which amended the  

Insolvency and Bankruptcy Code on 23.11.2017. The Finance Minister  

while moving the Amendment Bill stated as follows:  

―The core and the soul of this new Ordinance is really  Clause 5, which is Section 29A of the original Bill. I  may just explain that once a company goes into the  resolution process, then applications would be invited  with regard to the potential resolution proposals as far  as the company is concerned or the enterprise is  concerned. Now a number of ineligibility clauses were  not there in the original Act, and, therefore, Clause  29A introduces those who are not eligible to apply. For  instance, there is a clause with regard to an  undischarged insolvent who is not eligible to apply; a  person who has been disqualified under the  Companies Act to act as a Director cannot apply; and  a person who is prohibited under the SEBI Act cannot

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apply. So these are statutory disqualifications. And,  there is also a disqualification in clause (c) with regard  to those who are corporate debtors and who, as on the  date of the application making a bid, do not  operationalize the account by paying the interest itself,  i.e., you cannot say that I have an NPA. I am not  making the account operational. The accounts will  continue to be NPAs and yet I am going to apply for  this. Effectively, this clause will mean that those, who  are in management and on account of whom this  insolvent or the non-performing asset has arisen, will  now try and say, I do not discharge any of the  outstanding debts in terms of making the accounts  operational, and yet I would like to apply and get the  same enterprise back at a discounted value, for this is  not the object of this particular Act itself. So clause 5  has been brought in with that purpose in mind.‖  

(emphasis supplied)    

The Statement of Objects and Reasons for the aforesaid amendment  

states:  

―2. The provisions for insolvency resolution and  liquidation of a corporate person in the Code did not  restrict or bar any person from submitting a resolution  plan or participating in the acquisition process of the  assets of a company at the time of liquidation.  Concerns have been raised that persons who, with  their misconduct contributed to defaults of companies  or are otherwise undesirable, may misuse this  situation due to lack of prohibition or restrictions to  participate in the resolution or liquidation process, and  gain or regain control of the corporate debtor. This  may undermine the processes laid down in the Code  as the unscrupulous person would be seen to be  rewarded at the expense of creditors. In addition, in  order to check that the undesirable persons who may  have submitted their resolution plans in the absence of

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such a provision, responsibility is also being entrusted  on the committee of creditors to give a reasonable  period to repay overdue amounts and become  eligible.‖  

(emphasis supplied)    

This Court has held in ArcelorMittal (supra):   

―27. A purposive interpretation of Section 29A,  depending both on the text and the context in which  the provision was enacted, must, therefore, inform our  interpretation of the same. We are concerned in the  present matter with sub-clauses (c), (f), (i) and (j)  thereof.  

28. It will be noticed that the opening lines of Section  29A contained in the Ordinance of 2017 are different  from the opening lines of Section 29A as contained in  the Amendment Act of 2017. What is important to note  is that the phrase ―persons acting in concert‖ is  conspicuous by its absence in the Ordinance of 2017.  The concepts of ―promoter‖, ―management‖ and  ―control‖ which were contained in the opening lines of  Section 29A under the Ordinance have now been  transferred to sub-clause (c) in the Amendment Act of  2017. It is, therefore, important to note that the  Amendment Act of 2017 opens with language which is  of wider import than that contained in the Ordinance of  2017, evincing an intention to rope in all persons who  may be acting in concert with the person submitting a  resolution plan.  

29. The opening lines of Section 29A of the  Amendment Act refer to a de facto as opposed to a de  jure position of the persons mentioned therein. This is  a typical instance of a ―see through provision‖, so that  one is able to arrive at persons who are actually in  ―control‖, whether jointly, or in concert, with other  persons. A wooden, literal, interpretation would

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obviously not permit a tearing of the corporate veil  when it comes to the ―person‖ whose eligibility is to be  gone into. However, a purposeful and contextual  interpretation, such as is the felt necessity of  interpretation of such a provision as Section 29A,  alone governs. For example, it is well settled that a  shareholder is a separate legal entity from the  company in which he holds shares. This may be true  generally speaking, but when it comes to a corporate  vehicle that is set up for the purpose of submission of  a resolution plan, it is not only permissible but  imperative for the competent authority to find out as to  who are the constituent elements that make up such a  company. In such cases, the principle laid down  in Salomon v. A Salomon and Co. Ltd. [1897] AC  22 will not apply. For it is important to discover in such  cases as to who are the real individuals or entities who  are acting jointly or in concert, and who have set up  such a corporate vehicle for the purpose of submission  of a resolution plan.‖  

Similarly in Chitra Sharma v. Union of India, Writ Petition (Civil) No.  

744 of 2017 [decided on 09.08.2018], this Court observed as follows:  

―31. Parliament has introduced Section 29A into the  IBC with a specific purpose. The provisions of Section  29A are intended to ensure that among others,  persons responsible for insolvency of the corporate  debtor do not participate in the resolution process......‖  

―32. …… The Court must bear in mind that Section  29A has been enacted in the larger public interest and  to facilitate effective corporate governance. Parliament  rectified a loophole in the Act which allowed a back- door entry to erstwhile managements in the CIRP.  Section 30 of the IBC, as amended, also clarifies that  a resolution plan of a person who is ineligible under  Section 29A will not be considered by the CoC……‖

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RETROSPECTIVE APPLICATION  

64. It is settled law that a statute is not retrospective merely because  

it affects existing rights; nor is it retrospective merely because a part of  

the requisites for its action is drawn from a time antecedent to its  

passing [See State Bank‘s Staff Union (Madras Circle) v. Union of  

India and Ors., (2005) 7 SCC 584 (at paragraph 21)]. In ArcelorMittal  

(supra), this Court has observed that a resolution applicant has no  

vested right for consideration or approval of its resolution plan as  

follows:   

―79. Take the next stage under Section 30. A  Resolution Professional has presented a resolution  plan to the committee of creditors for its approval, but  the committee of creditors does not approve such plan  after considering its feasibility and viability, as the  requisite vote of not less than 66% of the voting share  of the financial creditors is not obtained. As has been  mentioned hereinabove, the first proviso to Section  30(4) furnishes the answer, which is that all that can  happen at this stage is to require the Resolution  Professional to invite a fresh resolution plan within the  time limits specified where no other resolution plan is  available with him. It is clear that at this stage again no  application before the Adjudicating Authority could be  entertained as there is no vested right or fundamental  right in the resolution applicant to have its resolution  plan approved, and as no adjudication has yet taken  place.‖  

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65. This being the case, it is clear that no vested right is taken away  

by application of Section 29A. However, Shri Viswanathan pointed out  

the judgments in Ritesh Agarwal and Anr. v. SEBI and Ors., (2008)  

8 SCC 205 (at paragraph 25), K.S. Paripoornan v. State of Kerala  

and Ors., (1994) 5 SCC 593 (at paragraphs 60-66), Darshan Singh v.  

Ram Pal Singh and Anr., 1992 Supp (1) SCC 191 (at paragraph 35),  

Pyare Lal Sharma v. Managing Director and Ors., (1989) 3 SCC  

448 (at paragraph 21), P.D. Aggarwal and Ors. v. State of U.P. and  

Ors., (1987) 3 SCC 622 (at paragraph 18), and Govind Das and Ors.  

v. Income Tax Officer and Anr., (1976) 1 SCC 906 (at paragraphs 6  

and 11), to argue that if a Section operates on an antecedent set of  

facts, but affects a vested right, it can be held to be retrospective, and  

unless the legislature clearly intends such retrospectivity, the Section  

should not be construed as such. Each of these judgments deals with  

different situations in which penal and other enactments interfere with  

vested rights, as a result of which, they were held to be prospective in  

nature. However, in our judgment in ArcelorMittal (supra), we have  

already held that resolution applicants have no vested right to be  

considered as such in the resolution process. Shri Mukul Rohatgi,  

however, argued that this judgment is distinguishable as no question of

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constitutional validity arose in this case, and no issue as to the vested  

right of a promoter fell for consideration. We are of the view that the  

observations made in ArcelorMittal (supra) directly arose on the facts  

of the case in order to oust the Ruias as promoters from the pale of  

consideration of their resolution plan, in which context, this Court held  

that they had no vested right to be considered as resolution applicants.   

Accordingly, we follow the aforesaid judgment. Since a resolution  

applicant who applies under Section 29A(c) has no vested right to  

apply for being considered as a resolution applicant, this point is of no  

avail.   

 SECTION 29A(C) NOT RESTRICTED TO MALFEASANCE  

66. According to learned counsel for the petitioners, Section 29A(c)  

treats unequals as equals. A good erstwhile manager cannot be  

lumped with a bad erstwhile manager.  Where an erstwhile manager is  

not guilty of malfeasance or of acting contrary to the interests of the  

corporate debtor, there is no reason why he should not be permitted to  

take part in the resolution process. After all, say the counsel for the  

petitioners, maximization of value of the assets of the corporate debtor  

is an important objective to be achieved by the Code. Keeping out

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good erstwhile managers from the resolution process would go  

contrary to this objective.   

 67. This objection by the petitioners was countered by the learned  

Attorney General and Solicitor General, stating that the various clauses  

of Section 29A would show that a person need not be a criminal in  

order to be kept out of the resolution process. For example, under  

Section 29A(a), it is clear that a person may be an undischarged  

insolvent for no fault of his. Equally, under Section 29A(e), a person  

may be disqualified to act as a director under the Companies Act,  

2013, say, where he has not furnished the necessary financial  

statements on time [see Section 164(2)(a)4  of the Companies Act,  

2013].  

                                                 4  ―164. Disqualifications for appointment of director.—  

xxx xxx xxx  (2) No person who is or has been a director of a company which—  

(a) has not filed financial statements or annual returns for any continuous  period of three financial years; or  (b) has failed to repay the deposits accepted by it or pay interest thereon or  to redeem any debentures on the due date or pay interest due thereon or  pay any dividend declared and such failure to pay or redeem continues for  one year or more,  

shall be eligible to be re-appointed as a director of that company or appointed in  other company for a period of five years from the date on which the said company  fails to do so:  

Provided that where a person is appointed as a director of a company which is in  default of clause (a) or clause (b), he shall not incur the disqualification for a period  of six months from the date of his appointment.  xxx xxx xxx‖

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68. The learned counsel for some of the petitioners have also argued  

that the proviso to Section 35(1)(f) that was added by the Insolvency  

and Bankruptcy Code (Amendment) Act, 2017 [dated 19.01.2018] with  

retrospective effect from 23.11.2017 is manifestly arbitrary and  

violative of Article 14 of the Constitution of India. The proviso to  

Section 35(1)(f) reads as follows:  

―35. Powers and duties of liquidator.—(1) Subject to  the directions of the Adjudicating Authority, the  liquidator shall have the following powers and duties,  namely:—  

xxx xxx xxx  

(f) subject to Section 52, to sell the  immovable and movable property and  actionable claims of the corporate debtor in  liquidation by public auction or private  contract, with power to transfer such property  to any person or body corporate, or to sell the  same in parcels in such manner as may be  specified:  

Provided that the liquidator shall not sell  the immovable and movable property or  actionable claims of the corporate debtor in  liquidation to any person who is not eligible to  be a resolution applicant.  

xxx xxx xxx‖    

69. According to the learned counsel for the petitioners, when  

immovable and movable property is sold in liquidation, it ought to be  

sold to any person, including persons who are not eligible to be

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resolution applicants as, often, it is the erstwhile promoter who alone  

may purchase such properties piecemeal by public auction or by  

private contract. The same rationale that has been provided earlier in  

this judgment will apply to this proviso as well – there is no vested right  

in an erstwhile promoter of a corporate debtor to bid for the immovable  

and movable property of the corporate debtor in liquidation. Further,  

given the categories of persons who are ineligible under Section 29A,  

which includes persons who are malfeasant, or persons who have  

fallen foul of the law in some way, and persons who are unable to pay  

their debts in the grace period allowed, are further, by this proviso,  

interdicted from purchasing assets of the corporate debtor whose  

debts they have either wilfully not paid or have been unable to pay.  

The legislative purpose which permeates Section 29A continues to  

permeate the Section when it applies not merely to resolution  

applicants, but to liquidation also. Consequently, this plea is also  

rejected.  

THE ONE-YEAR PERIOD IN SECTION 29A(C) AND NPAS  

70. It is clear that Section 29A goes to eligibility to submit a  

resolution plan. A wilful defaulter, in accordance with the guidelines of

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the RBI, would be a person who though able to pay, does not pay. An  

NPA, on the other hand, refers to the account belonging to a person  

that is declared as such under guidelines issued by the RBI. It is  

important at this juncture to advert to the aforesaid guidelines. The  

RBI‘s Master Circular on Prudential Norms on Income Recognition,  

Asset Classification and Provisioning pertaining to Advances dated  

01.07.2015 [―RBI Master Circular‖] consolidates instructions issued  

upto 30.06.2015 on NPAs. Clause 2.1 defines NPAs as under:  

―2. DEFINITIONS  

2.1 Non-performing Assets  

2.1.1 An asset, including a leased asset, becomes  non-performing when it ceases to generate income  for the bank.  

2.1.2 A non-performing asset (NPA) is a loan or an  advance where;  

i. interest and/ or instalment of principal  remain overdue for a period of more than  90 days in respect of a term loan,  

ii. the account remains ‗out of order‘ as  indicated at paragraph 2.2 below, in  respect of an Overdraft/Cash Credit  (OD/CC),  

iii. the bill remains overdue for a period of  more than 90 days in the case of bills  purchased and discounted,  

iv. the instalment of principal or interest  thereon remains overdue for two crop  seasons for short duration crops,

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v. the instalment of principal or interest  thereon remains overdue for one crop  season for long duration crops,  

vi. the amount of liquidity facility remains  outstanding for more than 90 days, in  respect of a securitization transaction  undertaken in terms of guidelines on  securitization dated February 1, 2006.  

vii. in respect of derivative transactions, the  overdue receivables representing  positive mark-to-market value of a  derivative contract, if these remain  unpaid for a period of 90 days from the  specified due date for payment.  

2.1.3 In case of interest payments, banks should,  classify an account as NPA only if the interest due  and charged during any quarter is not serviced fully  within 90 days from the end of the quarter.  

2.1.4 In addition, an account may also be classified  as NPA in terms of paragraph 4.2.4 of this Master  Circular.‖  

Clause 4 of the RBI Master Circular deals with asset classification as  

follows:  

―4. ASSET CLASSIFICATION  4.1 Categories of NPAs  Banks are required to classify non-performing  assets further into the following three categories  based on the period for which the asset has  remained non-performing and the realisability of  the dues:   Substandard Assets   Doubtful Assets   Loss Assets  

4.1.1 Substandard Assets

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With effect from March 31, 2005, a substandard  asset would be one, which has remained NPA for a  period less than or equal to 12 months. Such an  asset will have well defined credit weaknesses that  jeopardize the liquidation of the debt and are  characterized by the distinct possibility that the  banks will sustain some loss, if deficiencies are not  corrected.  

4.1.2 Doubtful Assets   With effect from March 31, 2005, an asset would  be classified as doubtful if it has remained in the  substandard category for a period of 12 months. A  loan classified as doubtful has all the weaknesses  inherent in assets that were classified as sub- standard, with the added characteristic that the  weaknesses make collection or liquidation in full –  on the basis of currently known facts, conditions  and values – highly questionable and improbable.  

4.1.3 Loss Assets  A loss asset is one where loss has been identified  by the bank or internal or external auditors or the  RBI inspection but the amount has not been written  off wholly. In other words, such an asset is  considered uncollectible and of such little value  that its continuance as a bankable asset is not  warranted although there may be some salvage or  recovery value.  

xxx xxx xxx‖    

71. What is clear from the aforesaid circular is that accounts are  

declared NPA only if defaults made by a corporate debtor are not  

resolved (for example, interest on and/or instalment of the principal  

remaining overdue for a period of more than 90 days in respect of a  

term loan). Post declaration of such NPA, what is clear is that a

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substandard asset would then be NPA which has remained as such for  

a period of twelve months. In short, a person is a defaulter when an  

instalment and/or interest on the principal remains overdue for more  

than three months, after which, its account is declared NPA. During the  

period of one year thereafter, since it is now classified as a  

substandard asset, this grace period is given to such person to pay off  

the debt. During this grace period, it is clear that such person can bid  

along with other resolution applicants to manage the corporate debtor.  

What is important to bear in mind is also the fact that, prior to this one-

year-three-month period, banks and financial institutions do not declare  

the accounts of corporate debtors to be NPAs. As a matter of practice,  

they first try and resolve disputes with the corporate debtor, after  

which, the corporate debtor‘s account is declared NPA. As a matter of  

legislative policy therefore, quite apart from malfeasance, if a person is  

unable to repay a loan taken, in whole or in part, within this period of  

one year and three months (which, in any case, is after an earlier  

period where the corporate debtor and its financial creditors sit  

together to resolve defaults that continue), it is stated to be ineligible to  

become a resolution applicant. The reason is not far to see. A person  

who cannot service a debt for the aforesaid period is obviously a

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person who is ailing itself. The saying of Jesus comes to mind – ―if the  

blind lead the blind, both shall fall into the ditch.‖ The legislative policy,  

therefore, is that a person who is unable to service its own debt  

beyond the grace period referred to above, is unfit to be eligible to  

become a resolution applicant. This policy cannot be found fault with.  

Neither can the period of one year be found fault with, as this is a  

policy matter decided by the RBI and which emerges from its Master  

Circular, as during this period, an NPA is classified as a substandard  

asset. The ineligibility attaches only after this one year period is over  

as the NPA now gets classified as a doubtful asset.  

72. The Committee set up by the Government to oversee the  

working of the Code has, in its Report of March 2018, also considered  

this aspect of the matter and has opined as follows:  

―14.8 In regards to the disqualification under clause (c)  for having an NPA account, it was also stated to the  Committee that the time period for existence of the  NPA account must be increased from one year to  three years. The reason provided was that a downturn  in a typical business cycle was most likely to extend  over a year. However, in the absence of any concrete  data, the Committee felt that there is no conclusive  way to determine what the ideal time period for  existence of an NPA should be for the disqualification  to apply. The Committee felt that the Code was a  relatively new legislation and therefore, it would be

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prudent to wait and allow industry experience to  emerge for a few years before any amendment is  made to the NPA holding period under section 29A(c).  In relation to applicability of section 29A(c), the  Committee also discussed that it must be clarified that  the disqualification pursuant to section 29A(c) shall be  applicable if such NPA accounts are held by the  resolution applicant or its connected persons at the  time of submission of the resolution plan to the RP.‖  

(emphasis in original)    

RELATED PARTY  

73. A constitutional challenge has been raised against Section 29A(j)  

read with the definition of ―related party‖. ―Related party‖ is defined in  

the Code as follows:  

―5. Definitions.—In this Part, unless the context  otherwise requires,—  

xxx xxx xxx  

(24) ―related party‖, in relation to a corporate debtor,  means—  

(a) a director or partner of the corporate debtor or  a relative of a director or partner of the corporate  debtor;  (b) a key managerial personnel of the corporate  debtor or a relative of a key managerial personnel  of the corporate debtor;  (c) a limited liability partnership or a partnership  firm in which a director, partner, or manager of the  corporate debtor or his relative is a partner;  (d) a private company in which a director, partner  or manager of the corporate debtor is a director

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and holds along with his relatives, more than two  per cent of its share capital;  (e) a public company in which a director, partner  or manager of the corporate debtor is a director  and holds along with relatives, more than two per  cent of its paid-up share capital;  (f) anybody corporate whose board of directors,  managing director or manager, in the ordinary  course of business, acts on the advice, directions  or instructions of a director, partner or manager of  the corporate debtor;  (g) any limited liability partnership or a partnership  firm whose partners or employees in the ordinary  course of business, acts on the advice, directions  or instructions of a director, partner or manager of  the corporate debtor;  (h) any person on whose advice, directions or  instructions, a director, partner or manager of the  corporate debtor is accustomed to act;  (i) a body corporate which is a holding, subsidiary  or an associate company of the corporate debtor,  or a subsidiary of a holding company to which the  corporate debtor is a subsidiary;  (j) any person who controls more than twenty per  cent of voting rights in the corporate debtor on  account of ownership or a voting agreement;  (k) any person in whom the corporate debtor  controls more than twenty per cent of voting rights  on account of ownership or a voting agreement;  (l) any person who can control the composition of  the board of directors or corresponding governing  body of the corporate debtor;  (m) any person who is associated with the  corporate debtor on account of—  

(i) participation in policy-making processes of  the corporate debtor; or  (ii) having more than two directors in common  between the corporate debtor and such  person; or

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(iii) interchange of managerial personnel  between the corporate debtor and such  person; or  (iv) provision of essential technical  information to, or from, the corporate debtor;  

(24A) ―related party‖, in relation to an individual,  means—  

(a) a person who is a relative of the individual or a  relative of the spouse of the individual;  (b) a partner of a limited liability partnership, or a  limited liability partnership or a partnership firm, in  which the individual is a partner;  (c) a person who is a trustee of a trust in which  the beneficiary of the trust includes the individual,  or the terms of the trust confers a power on the  trustee which may be exercised for the benefit of  the individual;  (d) a private company in which the individual is a  director and holds along with his relatives, more  than two per cent. of its share capital;  (e) a public company in which the individual is a  director and holds along with relatives, more than  two per cent. of its paid-up share capital;  (f) a body corporate whose board of directors,  managing director or manager, in the ordinary  course of business, acts on the advice, directions  or instructions of the individual;  (g) a limited liability partnership or a partnership  firm whose partners or employees in the ordinary  course of business, act on the advice, directions  or instructions of the individual;  (h) a person on whose advice, directions or  instructions, the individual is accustomed to act;  (i) a company, where the individual or the  individual along with its related party, own more  than fifty per cent. of the share capital of the

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company or controls the appointment of the board  of directors of the company.  

Explanation.—For the purposes of this clause,—  

(a) ―relative‖, with reference to any person,  means anyone who is related to another, in the  following manner, namely—  

(i) members of a Hindu Undivided Family,  (ii) husband,  (iii) wife,  (iv) father,  (v) mother,  (vi) son,  (vii) daughter,  (viii) son's daughter and son,  (ix) daughter's daughter and son,  (x) grandson's daughter and son,  (xi) granddaughter's daughter and son,  (xii) brother,  (xiii) sister,  (xiv) brother's son and daughter,  (xv) sister's son and daughter,  (xvi) father's father and mother,  (xvii) mother's father and mother,  (xviii) father's brother and sister,  (xix) mother's brother and sister, and  

(b) wherever the relation is that of a son,  daughter, sister or brother, their spouses shall  also be included;‖  

74. What is argued by the petitioners is that the mere fact that  

somebody happens to be a relative of an ineligible person cannot be  

good enough to oust such person from becoming a resolution  

applicant, if he is otherwise qualified. We were urged, by Shri

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Viswanathan in particular, to apply the doctrine of nexus that is well  

known and that has been applied by this Court in several judgments in  

other legal contexts, more particularly, in Attorney General for India  

and Ors. v. Amratlal Prajivandas and Ors., (1994) 5 SCC 54.   

Paragraph 44 reads as under:  

―44. It is contended by the counsel for the petitioners  that extending the provisions of SAFEMA to the  relatives, associates and other ‗holders‘ is again a  case of overreaching or of over-breadth, as it may be  called — a case of excessive regulation. It is submitted  that the relatives or associates of a person falling  under clause (a) or clause (b) of Section 2(2) of  SAFEMA may have acquired properties of their own,  may be by illegal means but there is no reason why  those properties be forfeited under SAFEMA just  because they are related to or are associates of the  detenu or convict, as the case may be. It is pointed out  that the definition of ‗relative‘ in Explanation (2) and of  ‗associates‘ in Explanation (3) are so wide as to bring  in a person even distantly related or associated with  the convict/detenu, within the net of SAFEMA, and  once he comes within the net, all his illegally acquired  properties can be forfeited under the Act. In our  opinion, the said contention is based upon a  misconception. SAFEMA is directed towards forfeiture  of ―illegally acquired properties‖ of a person falling  under clause (a) or clause (b) of Section 2(2). The  relatives and associates are brought in only for the  purpose of ensuring that the illegally acquired  properties of the convict or detenu, acquired or kept in  their names, do not escape the net of the Act. It is a  well-known fact that persons indulging in illegal  activities screen the properties acquired from such  illegal activity in the names of their relatives and  associates. Sometimes they transfer such properties

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to them, may be, with an intent to transfer the  ownership and title. In fact, it is immaterial how such  relative or associate holds the properties of  convict/detenu — whether as a benami or as a mere  name-lender or as a bona fide transferee for value or  in any other manner. He cannot claim those properties  and must surrender them to the State under the Act.  Since he is a relative or associate, as defined by the  Act, he cannot put forward any defence once it is  proved that that property was acquired by the detenu  — whether in his own name or in the name of his  relatives and associates. It is to counteract the several  devices that are or may be adopted by persons  mentioned in clauses (a) and (b) of Section 2(2) that  their relatives and associates mentioned in clauses (c)  and (d) of the said sub-section are also brought within  the purview of the Act. The fact of their holding or  possessing the properties of convict/detenu furnishes  the link between the convict/detenu and his relatives  and associates. Only the properties of the  convict/detenu are sought to be forfeited, wherever  they are. The idea is to reach his properties in  whosoever's name they are kept or by whosoever they  are held. The independent properties of relatives and  friends, which are not traceable to the convict/detenu,  are not sought to be forfeited nor are they within the  purview of SAFEMA [ That this was the object of the  Act is evident from para 4 of the preamble which  states: ―And whereas such persons have in many  cases been holding the properties acquired by them  through such gains in the names of their relatives,  associates and confidants.‖ We are not saying that the  preamble can be utilized for restricting the scope of the  Act, we are only referring to it to ascertain the object of  the enactment and to reassure ourselves that the  construction placed by us accords with the said  object.] . We may proceed to explain what we say.  Clause (c) speaks of a relative of a person referred to  in clause (a) or clause (b) (which speak of a convict or  a detenu). Similarly, clause (d) speaks of associates of

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such convict or detenu. If we look to Explanation (3)  which specifies who the associates referred to in  clause (d) are, the matter becomes clearer.  ‗Associates‘ means — (i) any individual who had been  or is residing in the residential premises (including  outhouses) of such person [‗such person‘ refers to the  convict or detenu, as the case may be, referred to in  clause (a) or clause (b)]; (ii) any individual who had  been or is managing the affairs or keeping the  accounts of such convict/detenu; (iii) any association  of persons, body of individuals, partnership firm or  private company of which such convict/detenu had  been or is a member, partner or director; (iv) any  individual who had been or is a member, partner or  director of an association of persons, body of  individuals, partnership firm or private company  referred to in clause (iii) at any time when such person  had been or is a member, partner or director of such  association of persons, body of individuals, partnership  firm or private company; (v) any person who had been  or is managing the affairs or keeping the accounts of  any association of persons, body of individuals,  partnership firm or private company referred to in  clause (iii); (vi) the trustee of any trust where (a) the  trust has been created by such convict/detenu; or (b)  the value of the assets contributed by such  convict/detenu to the trust amounts, on the date of  contribution not less than 20% of the value of the  assets of the trust on that date; and (vii) where the  competent authority, for reasons to be recorded in  writing, considers that any properties of such  convict/detenu are held on his behalf by any other  person, such other person. It would thus be clear that  the connecting link or the nexus, as it may be called, is  the holding of property or assets of the convict/detenu  or traceable to such detenu/convict. Section 4 is  equally relevant in this context. It declares that ―as  from the commencement of this Act, it shall not be  lawful for any person to whom this Act applies to hold  any illegally acquired property either by himself or

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through any other person on his behalf‖. All such  property is liable to be forfeited. The language of this  section is indicative of the ambit of the Act. Clauses (c)  and (d) in Section 2(2) and the Explanations (2) and  (3) occurring therein shall have to be construed and  understood in the light of the overall scheme and  purpose of the enactment. The idea is to forfeit the  illegally acquired properties of the convict/detenu  irrespective of the fact that such properties are held by  or kept in the name of or screened in the name of any  relative or associate as defined in the said two  Explanations. The idea is not to forfeit the independent  properties of such relatives or associates which they  may have acquired illegally but only to reach the  properties of the convict/detenu or properties traceable  to him, wherever they are, ignoring all the transactions  with respect to those properties. By way of illustration,  take a case where a convict/detenu purchases a  property in the name of his relative or associate — it  does not matter whether he intends such a person to  be a mere name-lender or whether he really intends  that such person shall be the real owner and/or  possessor thereof — or gifts away or otherwise  transfers his properties in favour of any of his relatives  or associates, or purports to sell them to any of his  relatives or associates — in all such cases, all the said  transactions will be ignored and the properties forfeited  unless the convict/detenu or his relative/associate, as  the case may be, establishes that such property or  properties are not ―illegally acquired properties‖ within  the meaning of Section 3(c). In this view of the matter,  there is no basis for the apprehension that the  independently acquired properties of such relatives  and associates will also be forfeited even if they are in  no way connected with the convict/detenu. So far as  the holders (not being relatives and associates)  mentioned in Section 2(2)(e) are concerned, they are  dealt with on a separate footing. If such person proves  that he is a transferee in good faith for consideration,  his property — even though purchased from a

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convict/detenu — is not liable to be forfeited. It is  equally necessary to reiterate that the burden of  establishing that the properties mentioned in the show- cause notice issued under Section 6, and which are  held on that date by a relative or an associate of the  convict/detenu, are not the illegally acquired properties  of the convict/detenu, lies upon such  relative/associate. He must establish that the said  property has not been acquired with the monies or  assets provided by the detenu/convict or that they in  fact did not or do not belong to such detenu/convict.  We do not think that Parliament ever intended to say  that the properties of all the relatives and associates,  may be illegally acquired, will be forfeited just because  they happen to be the relatives or associates of the  convict/detenu. There ought to be the connecting link  between those properties and the convict/detenu, the  burden of disproving which, as mentioned above, is  upon the relative/associate. In this view of the matter,  the apprehension and contention of the petitioners in  this behalf must be held to be based upon a mistaken  premise. The bringing in of the relatives and  associates or of the persons mentioned in clause (e) of  Section 2(2) is thus neither discriminatory nor  incompetent apart from the protection of Article 31-B.‖  

(emphasis supplied)    

75. We are of the view that persons who act jointly or in concert with  

others are connected with the business activity of the resolution  

applicant. Similarly, all the categories of persons mentioned in Section  

5(24A) show that such persons must be ―connected‖ with the  

resolution applicant within the meaning of Section 29A(j). This being  

the case, the said categories of persons who are collectively

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mentioned under the caption ―relative‖ obviously need to have a  

connection with the business activity of the resolution applicant. In the  

absence of showing that such person is ―connected‖ with the business  

of the activity of the resolution applicant, such person cannot possibly  

be disqualified under Section 29A(j). All the categories in Section  

29A(j) deal with persons, natural as well as artificial, who are  

connected with the business activity of the resolution applicant. The  

expression ―related party‖, therefore, and ―relative‖ contained in the  

definition Sections must be read noscitur a sociis with the categories of  

persons mentioned in Explanation I, and so read, would include only  

persons who are connected with the business activity of the resolution  

applicant.  

76. An argument was also made that the expression ―connected  

person‖ in Explanation I, clause (ii) to Section 29A(j) cannot possibly  

refer to a person who may be in management or control of the  

business of the corporate debtor in future. This would be arbitrary as  

the explanation would then apply to an indeterminate person. This  

contention also needs to be repelled as Explanation I seeks to make it  

clear that if a person is otherwise covered as a ―connected person‖,  

this provision would also cover a person who is in management or

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control of the business of the corporate debtor during the  

implementation of a resolution plan. Therefore, any such person is not  

indeterminate at all, but is a person who is in the saddle of the  

business of the corporate debtor either at an anterior point of time or  

even during implementation of the resolution plan. This disposes of all  

the contentions raising questions as to the constitutional validity of  

Section 29A(j).  

 EXEMPTION OF MICRO, SMALL, AND MEDIUM ENTERPRISES FROM SECTION  

29A  

77. The ILC Report of March 2018 found that micro, small, and  

medium enterprises form the foundation of the economy and are key  

drivers of employment, production, economic growth,  

entrepreneurship, and financial inclusion.  

78. Section 7 of the Micro, Small and Medium Enterprises  

Development Act, 2006 classifies enterprises depending upon whether   

they manufacture or produce goods, or are engaged in providing and  

rendering services as micro, small, or medium, depending upon certain  

investments made, as follows:

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―7. Classification of enterprises.—(1)  Notwithstanding anything contained in Section 11-B of  the Industries (Development and Regulation) Act,  1951 (65 of 1951), the Central Government may, for  the purposes of this Act, by notification and having  regard to the provisions of sub-sections (4) and (5),  classify any class or classes of enterprises, whether  proprietorship, Hindu undivided family, associations of  persons, co-operative society, partnership firm,  company or undertaking, by whatever name called,—  

(a) in the case of the enterprises engaged in the  manufacture or production of goods pertaining to  any industry specified in the First Schedule to the  Industries (Development and Regulation) Act,  1951 (65 of 1951), as—  

(i) a micro enterprise, where the investment  in plant and machinery does not exceed  twenty-five lakh rupees;  (ii) a small enterprise, where the investment  in plant and machinery is more than twenty- five lakh rupees but does not exceed five  crore rupees; or  (iii) a medium enterprise, where the  investment in plant and machinery is more  than five crore rupees but does not exceed  ten crore rupees;  

(b) in the case of the enterprises engaged in  providing or rendering of services, as—  

(i) a micro enterprise, where the investment  in equipment does not exceed ten lakh  rupees;  (ii) a small enterprise, where the investment  in equipment is more than ten lakh rupees  but does not exceed two crore rupees; or  (iii) a medium enterprise, where the  investment in equipment is more than two  crore rupees but does not exceed five crore  rupees.  

xxx xxx xxx‖

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79. The ILC Report of 2018 exempted these industries from Section  

29A(c) and 29A(h) of the Code, their rationale for doing so being  

contained in paragraph 27.4 of the Report, which reads as follows:  

―27.4 Regarding the first issue, the Code is clear that  default of INR one lakh or above triggers the right of a  financial creditor or an operational creditor to file for  insolvency. Thus, the financial creditor or operational  creditors of MSMEs may take it to insolvency under  the Code. However, given that MSMEs are the  bedrock of the Indian economy, and the intent is not to  push them into liquidation and affect the livelihood of  employees and workers of MSMEs, the Committee  sought it fit to explicitly grant exemptions to corporate  debtors which are MSMEs by permitting a promoter  who is not a wilful defaulter, to bid for the MSME in  insolvency. The rationale for this relaxation is that a  business of an MSME attracts interest primarily from a  promoter of an MSME and may not be of interest to  other resolution applicants.‖  

(emphasis supplied)    

80. Thus, the rationale for excluding such industries from the  

eligibility criteria laid down in Section 29A(c) and 29A(h) is because  

qua such industries, other resolution applicants may not be  

forthcoming, which then will inevitably lead not to resolution, but to  

liquidation. Following upon the Insolvency Law Committee‘s Report,  

Section 240A has been inserted in the Code with retrospective effect  

from 06.06.2018 as follows:

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―240-A. Application of this Code to micro, small  and medium enterprises.—(1) Notwithstanding  anything to the contrary contained in this Code, the  provisions of clauses (c) and (h) of Section 29A shall  not apply to the resolution applicant in respect of  corporate insolvency resolution process of any micro,  small and medium enterprises.  (2) Subject to sub-section (1), the Central Government  may, in the public interest, by notification, direct that  any of the provisions of this Code shall—  

(a) not apply to micro, small and medium  enterprises; or  (b) apply to micro, small and medium  enterprises, with such modifications as may  be specified in the notification.  

(3) A draft of every notification proposed to be issued  under sub-section (2), shall be laid before each House  of Parliament, while it is in session, for a total period of  thirty days which may be comprised in one session or  in two or more successive sessions.  (4) If both Houses agree in disapproving the issue of  notification or both Houses agree in making any  modification in the notification, the notification shall not  be issued or shall be issued only in such modified form  as may be agreed upon by both the Houses, as the  case may be.  (5) The period of thirty days referred to in sub-section  (3) shall not include any period during which the  House referred to in sub-section (4) is prorogued or  adjourned for more than four consecutive days.  (6) Every notification issued under this section shall be  laid, as soon as may be after it is issued, before each  House of Parliament.  

Explanation.—For the purposes of this section, the  expression ―micro, small and medium enterprises‖  means any class or classes of enterprises classified as  such under sub-section (1) of Section 7 of the Micro,  Small and Medium Enterprises Development Act, 2006  (27 of 2006).‖  

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81. It can thus be seen that when the Code has worked hardship to a  

class of enterprises, the Committee constituted by the Government, in  

overseeing the working of the Code, has been alive to such problems,  

and the Government in turn has followed the recommendations of the  

Committee in enacting Section 240A. This is an important instance of  

how the executive continues to monitor the application of the Code,  

and exempts a class of enterprises from the application of some of its  

provisions in deserving cases. This and other amendments that are  

repeatedly being made to the Code, and to subordinate legislation  

made thereunder, based upon Committee Reports which are looking  

into the working of the Code, would also show that the legislature is  

alive to serious anomalies that arise in the working of the Code and  

steps in to rectify them.  

 SECTION 53 OF THE CODE DOES NOT VIOLATE ARTICLE 14.  

82. An argument has been made by counsel appearing on behalf of  

the petitioners that in the event of liquidation, operational creditors will  

never get anything as they rank below all other creditors, including  

other unsecured creditors who happen to be financial creditors. This,  

according to them, would render Section 53 and in particular, Section

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53(1)(f) discriminatory and manifestly arbitrary and thus, violative of  

Article 14 of the Constitution of India.   

Section 53(1) reads as follows:  

―53. Distribution of assets.—(1) Notwithstanding  anything to the contrary contained in any law enacted  by the Parliament or any State Legislature for the time  being in force, the proceeds from the sale of the  liquidation assets shall be distributed in the following  order of priority and within such period and in such  manner as may be specified, namely—  

(a) the insolvency resolution process costs and  the liquidation costs paid in full;  (b) the following debts which shall rank equally  between and among the following—  

(i) workmen's dues for the period of twenty- four months preceding the liquidation  commencement date; and  (ii) debts owed to a secured creditor in the  event such secured creditor has relinquished  security in the manner set out in Section 52;  

(c) wages and any unpaid dues owed to  employees other than workmen for the period of  twelve months preceding the liquidation  commencement date;  (d) financial debts owed to unsecured creditors;  (e) the following dues shall rank equally between  and among the following:—  

(i) any amount due to the Central  Government and the State Government  including the amount to be received on  account of the Consolidated Fund of India  and the Consolidated Fund of a State, if any,  in respect of the whole or any part of the  period of two years preceding the liquidation  commencement date;

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(ii) debts owed to a secured creditor for any  amount unpaid following the enforcement of  security interest;  

(f) any remaining debts and dues;  (g) preference shareholders, if any; and  (h) equity shareholders or partners, as the case  may be.  xxx xxx xxx‖  

83. The BLRC Report, which led to the enactment of the Insolvency  

Code, in dealing with this aspect of the matter, has stated:  

―The Committee has recommended to keep the right of  the Central and State Government in the distribution  waterfall in liquidation at a priority below the unsecured  financial creditors in addition to all kinds of secured  creditors for promoting the availability of credit and  developing a market for unsecured financing (including  the development of bond markets). In the long run, this  would increase the availability of finance, reduce the  cost of capital, promote entrepreneurship and lead to  faster economic growth. The government also will be  the beneficiary of this process as economic growth will  increase revenues. Further, efficiency enhancement  and consequent greater value capture through the  proposed insolvency regime will bring in additional  gains to both the economy and the exchequer.‖  

xxx xxx xxx  

―For the remaining creditors who participate in the  collective action of Liquidation, the Committee debated  on the waterfall of liabilities that should hold in  Liquidation in the new Code. Across different  jurisdictions, the observation is that secured creditors  have first priority on the realizations, and that these  are typically paid out net of the costs of insolvency  resolution and Liquidation. In order to bring the  practices in India in-line with the global practice, and to

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ensure that the objectives of this proposed Code is  met, the Committee recommends that the waterfall in  Liquidation should be as follows:   

1. Costs of IRP and liquidation.   2. Secured creditors and Workmen dues capped  up to three months from the start of IRP.   3. Employees capped up to three months.   4. Dues to unsecured financial creditors, debts  payable to workmen in respect of the period  beginning twelve months before the liquidation  commencement date and ending three months  before the liquidation commencement date;   5. Any amount due to the State Government and  the Central Government in respect of the whole or  any part of the period of two years before the  liquidation commencement date; any debts of the  secured creditor for any amount unpaid following  the enforcement of security interest   6. Remaining debt   7. Surplus to shareholders.‖  

84. It will be seen that the reason for differentiating between financial  

debts, which are secured, and operational debts, which are unsecured,  

is in the relative importance of the two types of debts when it comes to  

the object sought to be achieved by the Insolvency Code. We have  

already seen that repayment of financial debts infuses capital into the  

economy inasmuch as banks and financial institutions are able, with  

the money that has been paid back, to further lend such money to  

other entrepreneurs for their businesses. This rationale creates an  

intelligible differentia between financial debts and operational debts,

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which are unsecured, which is directly related to the object sought to  

be achieved by the Code. In any case, workmen‘s dues, which are also  

unsecured debts, have traditionally been placed above most other  

debts. Thus, it can be seen that unsecured debts are of various kinds,  

and so long as there is some legitimate interest sought to be protected,  

having relation to the object sought to be achieved by the statute in  

question, Article 14 does not get infracted. For these reasons, the  

challenge to Section 53 of the Code must also fail.   

 EPILOGUE  

85. The Insolvency Code is a legislation which deals with economic  

matters and, in the larger sense, deals with the economy of the country  

as a whole. Earlier experiments, as we have seen, in terms of  

legislations having failed, ‗trial‘ having led to repeated ‗errors‘,  

ultimately led to the enactment of the Code. The experiment contained  

in the Code, judged by the generality of its provisions and not by so-

called crudities and inequities that have been pointed out by the  

petitioners, passes constitutional muster. To stay experimentation in  

things economic is a grave responsibility, and denial of the right to  

experiment is fraught with serious consequences to the nation. We  

have also seen that the working of the Code is being monitored by the

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Central Government by Expert Committees that have been set up in  

this behalf. Amendments have been made in the short period in which  

the Code has operated, both to the Code itself as well as to  

subordinate legislation made under it. This process is an ongoing  

process which involves all stakeholders, including the petitioners.   

 86. We are happy to note that in the working of the Code, the flow of  

financial resource to the commercial sector in India has increased  

exponentially as a result of financial debts being repaid. Approximately  

3300 cases have been disposed of by the Adjudicating Authority based  

on out-of-court settlements between corporate debtors and creditors  

which themselves involved claims amounting to over INR 1,20,390  

crores. Eighty cases have since been resolved by resolution plans  

being accepted. Of these eighty cases, the liquidation value of sixty-

three such cases is INR 29,788.07 crores. However, the amount  

realized from the resolution process is in the region of INR 60,000  

crores, which is over 202% of the liquidation value. As a result of this,  

the Reserve Bank of India has come out with figures which reflect  

these results. Thus, credit that has been given by banks and financial  

institutions to the commercial sector (other than food) has jumped up  

from INR 4952.24 crores in 2016-2017, to INR 9161.09 crores in 2017-

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2018, and to INR 13195.20 crores for the first six months of 2018-

2019. Equally, credit flow from non-banks has gone up from INR  

6819.93 crores in 2016-2017, to INR 4718 crores for the first six  

months of 2018-2019. Ultimately, the total flow of resources to the  

commercial sector in India, both bank and non-bank, and domestic and  

foreign (relatable to the non-food sector) has gone up from a total of  

INR 14530.47 crores in 2016-2017, to INR 18469.25 crores in 2017-

2018, and to INR 18798.20 crores in the first six months of 2018-2019.  

These figures show that the experiment conducted in enacting the  

Code is proving to be largely successful. The defaulter‘s paradise is  

lost. In its place, the economy‘s rightful position has been regained.  

The result is that all the petitions will now be disposed of in terms of  

this judgment. There will be no order as to costs.   

      ……………………J.                    (R.F. Nariman)        

      ……………………J.  New Delhi              (Navin Sinha)  January 25, 2019