SWISS RIBBONS PVT. LTD. & ANR. versus UNION OF INDIA & ORS. on 25 January 2019

SWISS RIBBONS PVT. LTD. & ANR.

v.

UNION OF INDIA & ORS.

(Writ Petition (Civil) No. 99 of 2018)

JANUARY 25, 2019

[R. F. NARIMAN AND NAVIN SINHA, JJ.]

Insolvency and Bankruptcy Code, 2016:

Constitutional validity of – Held: Provisions of the Code passesconstitutional muster.

ss. 5(7), 5(8), 5(20), 7(1), 7(4), 7(5), 8 and 9 – Classificationbetween financial creditor and operational creditor – Whetherdiscriminatory, arbitrary, and violative of Art. 14 – Held: Preservingthe corporate debtor as a going concern, while ensuring maximumrecovery for all creditors being the objective of the Code, financialcreditors are clearly different from operational creditors – Thus,there is an intelligible differentia between the two which has a directrelation to the objects sought to be achieved by the Code – Thus,there is no discrimination – Constitution of India – Art. 14.

ss. 3, 3(9)(c), 214(e), 60, 65, 75, 7, 8 and 9 – Notice, hearing,and set-off or counterclaim qua financial debts – Triggering ofinsolvency resolution process by financial creditors and operationalcreditors – Submission that the difference in the triggering processat behest of financial creditors and operational creditors isdiscriminatory and arbitrary – Held: A financial creditor has toprove “default” as opposed to an operational creditor who merely“claims” a right to payment of a liability or obligation in respect ofa debt which may be due – In view thereof, the differentiation in thetriggering of insolvency resolution process by financial creditorsu/s. 7 and by operational creditors u/ss. 8 and 9 becomes clear –Insolvency and Bankruptcy Board of India (Information Utilities)Regulations, 2017 – Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016 – Form I.

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Ass. 21, 24, 28 and 30(2)(b) r/w s. 31 – Operational creditors– Right to vote in the committee of creditors – Plea that operationalcreditor do not have even a single vote in committee of creditors –Held: Financial creditors are best equipped to assess viability andfeasibility of the business of the corporate debtor and evaluate thecontents of a resolution plan – On the other hand, operationalBcreditors, who provide goods and services, are involved only inrecovering amounts that are paid for such goods and services, andare typically unable to assess viability and feasibility of business –Resolution plan cannot pass muster u/s. 30(2)(b) rw s. 31 unless aminimum payment is made to operational creditors, being not lessCthan liquidation value – Regulation 38 strengthens the rights ofoperational creditors by statutorily incorporating the principle offair and equitable dealing of operational creditors’ rights, togetherwith priority in payment over financial creditors – Thus, theoperational creditors are not discriminated against nor Art. 14 hasbeen infracted either on the ground of equals being treated unequallyDor on the ground of manifest arbitrariness – Insolvency andBankruptcy Board of India (Insolvency Resolution Process forCorporate Persons) Regulations, 2016 – Regulation 38 –Constitution of India – Art. 14.

ss.12A(as amended) and 60 – s. 12A wherein withdrawal ofEapplication admitted u/ss 7, 9 or 10, with approval of ninety percent voting shares of the committee of creditors – s. 12A if violativeof Art. 14 – Held: s. 12A is not violative of Art. 14 – ILC Report hasexplained that as all financial creditors have to put their headstogether to allow such withdrawal as, ordinarily, an omnibusFsettlement involving allcreditors ought, ideally, to be entered into –In any case, the figure of ninety per cent, in the absence of anythingfurther to show that it is arbitrary, must pertain to the domain oflegislative policy – Also, if the committee of creditors arbitrarilyrejects a just settlement and/or withdrawal claim, the NCLT, andthereafter, the NCLAT can always set aside such decision u/s. 60 –GInsolvency and Bankruptcy (Second Amendment) Act, 2018 –Insolvency and Bankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016 – Reg 30A.

s. 210 – Private Information Utilities – Evidence providedby private information utilities – Plea that Private InformationH

Utilities not governed by proper norms and evidence of loan defaultin records of such utility not conclusive evidence – Held: Regulations20 and 21 makes it clear that apart from the stringent requirementsas to registration of such utility, the moment information of defaultis received, such information has to be communicated to all partiesand sureties to the debt and an information utility shall expeditiouslyundertake the process of authentication and verification ofinformation – Evidence provided by private information utilities isonly prima facie evidence of default which is rebuttable by thecorporate debtor – Insolvency and Bankruptcy Board of India(Insolvency Resolution Process for Corporate Persons) Regulations,2016 – Regulations 20 and 21

ss. 18, 41, 42 and 28 – Resolution professional – Adjudicatorypower, under the Code and the Regulations – Held: It is clear fromthe Code as well as the Regulations that the resolution professionalhas no adjudicatory powers – Resolution professional is givenadministrative as opposed to quasi-judicial powers – Even whenthe resolution professional is to make a “determination” underRegulation 35A, he is only to apply to the Adjudicating Authorityfor appropriate relief based on the determination made – Thus, theresolution professional is really a facilitator of the resolution process,whose administrative functions are overseen by the committee ofcreditors and by the Adjudicating Authority – Insolvency andBankruptcy Board of India (Insolvency Resolution Process forCorporate Persons) Regulations, 2016 – Regulations 10, 12, 13,14, and 35A.

s. 29A(as amended) – Retrospective application – Submissionthat vested rights of erstwhile promoters to participate in the recoveryprocess of a corporate debtor have been impaired by retrospectiveapplication of s. 29A – Held: A statute is not retrospective merelybecause it affects existing rights or merely because a part of therequisites for its action is drawn from a time antecedent to its passing– Resolution applicant has no vested right for consideration orapproval of its resolution plan – By application of s. 29A, no vestedright is taken away – Since a resolution applicant who applies u/s.29A(c) has no vested right to apply for being considered as aresolution applicant, submission cannot be accepted.

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As. 29A and s.35(1)(f) proviso – s. 29A if restricted tomalfeasance – Submission that s. 29A puts a blanket ban onparticipation of all promoters of corporate debtors, without anymechanism to weed out the unscrupulous as against the efficientmanager but who have not been able to pay off their debts due toother reasons – Held: s. 29A not restricted to malfeasance –BLegislative purpose which permeates s. 29A continues to permeatethe Section when it applies not merely to resolution applicants, butto liquidation also.

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s. 29(A)(c) – One year period in s. 29A – Non-performingasset – Plea that u/s. 29A(c), a person’s account may be classifiedCas a non- performing asset even though he is not a wilful defaulter;and that the period of one year referred in clause (c) is whollyarbitrary and without any basis either in rationality or in law –Held: A person is a defaulter when an installment and/or intereston the principal remains overdue for more than three months, afterDwhich, its account is declared NPA – During the period of one yearthereafter, this grace period is given to such person to pay off thedebt – If a person is unable to repay a loan taken, in whole or inpart, within this period of one year and three months, he would beineligible to become a resolution applicant – This legislative policycannot be found fault with – Neither can the period of one year beEfound fault with.

ss. 29A(j) and 5(24A) – Related party – Plea that personswho may be relatives of erstwhile promoters are debarred frombecoming a resolution applicant – Held: Persons who act jointly orin concert with others are connected with the business activity ofFthe resolution applicant – Similarly, all the categories of personsmentioned in s. 5(24A) show that such persons must be “connected”with the resolution applicant within the meaning of s. 29A(j) – Thus,the said categories of persons who are collectively mentioned underthe caption “relative” obviously need to have a connection with theGbusiness activity of the resolution applicant – In the absence ofshowing that such person is “connected” with the business of theactivity of the resolution applicant, such person cannot possibly bedisqualified u/s. 29A(j) – Explanation I clause (ii) to s. 29A(j) makesit clear that if a person is otherwise covered as a “connected person”,this provision would also cover a person who is in management orHcontrol of the business of the corporate debtor during the implementation of a resolution plan – Thus, any such person is notindeterminate at all, but is a person who is in the saddle of thebusiness of the corporate debtor either at an anterior point of timeor even during implementation of the resolution plan.

s. 29A – Exemption of micro, small and medium enterprisesfrom s. 29A – Justification of – Held: Justified – Rationale forexcluding such industries from the eligibility criteria laid down inss. 29A(c) and 29A(h) is because qua such industries, otherresolution applicants may not be forthcoming, which then willinevitably lead not to resolution, but to liquidation – Micro, Smalland Medium Enterprises Development Act, 2006 – s. 7.

s. 53 – Distribution of assets – Submission that in the event ofliquidation, operational creditors would never get anything as theyrank below all other creditors, including other unsecured creditorswho happen to be financial creditors, thus s. 53(1)(f) discriminatoryand arbitrary thus, violative of Art. 14 – Held: s. 53 does not violateArt. 14 – Repayment of financial debts infuses capital into theeconomy inasmuch as banks and financial institutions are able,with the money that has been paid back, to further lend such moneyto other entrepreneurs for their businesses – This rationale createsan intelligible differentia between financial debts and operationaldebts, which are unsecured, which is directly related to the objectsought to be achieved by the Code – So long as there is somelegitimate interest sought to be protected, having relation to theobject sought to be achieved by the statute, Art. 14 does not getinfracted – Constitution of India – Art. 14.

Object and reasons for the Code – Explained.

Enactment and working of the Code – Explained.

Companies Act, 2013: s. 412 – Selection of members oftribunal and appellate tribunal – Plea that appointment of membersof the NCLT and the NCLAT contrary to Madras Bar Association(III)’s case – s. 412 whereby members of the tribunal and appellatetribunal to be selected, two judicial members of the SelectionCommittee get outweighed by three bureaucrats – Held: s. 412 hasbeen amended by the Companies Amendment Act, 2017 – Presentmembers of NCLT and NCLAT have been appointed by the SelectionCommittee, reconstituted in compliance with the direction of thisCourt.

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AJudiciary: NCLAT Bench – Creation of Circuit Benches –Submission that NCLAT Bench has a seat only at New Delhi and iscontrary to the judgment in Madras Bar Association (II) case –Held: In view of the assurance by the Attorney General that CircuitBenches would be established soon, issuance of direction to Unionof India to set up Circuit Benches of the NCLAT within the stipulatedBperiod.

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Constitution of India: Art. 77 – Submission that the tribunals-NCLT and NCLAT are functioning under the wrong Ministry-Ministryof Corporate Affairs, however, as per the Madras Bar Association(I)case the administrative support for all the tribunals should be fromCthe Ministry of Law and Justice – Held: Rules of business beingmandatory in nature and having to be followed, are to be followedby the executive branch of the Government – However, this Court isbeing bound by the Madras Bar Association(I), the Union of Indiato follow the judgment, both in letter and spirit.

DDisposing of the petitions, the Court

HELD:

CLASSIFICATION BETWEEN FINANCIAL CREDITORAND OPERATIONALCREDITOR NEITHER

EDISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OFARTICLE 14

1.1 Since equality is only among equals, no discriminationresults if the Court can be shown that there is an intelligibledifferentia which separates two kinds of creditors so long as thereis some rational relation between the creditors so differentiated,Fwith the object sought to be achieved by the legislation. Alegislation can be struck down as being manifestly arbitrary. [Para20, 21][586-A-C]

1.2 A perusal of the definition of “financial creditor” and“financial debt” makes it clear that a financial debt is a debtGtogether with interest, if any, which is disbursed against theconsideration for time value of money. Money that is borrowedor raised in any of the manners prescribed in Section 5(8) of theInsolvency and Bankruptcy Code, 2016 or otherwise, as Section5(8) is an inclusive definition. On the other hand, an “operational H

debt” would include a claim in respect of the provision of goodsor services, including employment, or a debt in respect ofpayment of dues arising under any law and payable to theGovernment or any local authority. [Para 23][594-B-C]

1.3 A financial creditor may trigger the Code either by itselfor jointly with other financial creditors or such persons as maybe notified by the Central Government when a “default” occurs.The Explanation to Section 7(1) also makes it clear that the Codemay be triggered by such persons in respect of a default made toany other financial creditor of the corporate debtor, making itclear that once triggered, the resolution process under the Codeis a collective proceeding in rem which seeks, in the first instance,to rehabilitate the corporate debtor. Under Section 7(4), theAdjudicating Authority shall, within the prescribed period,ascertain the existence of a default on the basis of evidencefurnished by the financial creditor; and under Section 7(5), theAdjudicating Authority has to be satisfied that a default hasoccurred, when it may, by order, admit the application, or dismissthe application if such default has not occurred. On the otherhand, under Sections 8 and 9, an operational creditor may, on theoccurrence of a default, deliver a demand notice which must thenbe replied to within the specified period. What is important isthat at this stage, if an application is filed before the AdjudicatingAuthority for initiating the corporate insolvency resolutionprocess, the corporate debtor can prove that the debt is disputed.When the debt is so disputed, such application would be rejected.[Para 24][594-D-F]

1.4 It is clear that most financial creditors, particularly banksand financial institutions, are secured creditors whereas mostoperational creditors are unsecured, payments for goods andservices as well as payments to workers not being secured bymortgaged documents and the like. The nature of loanagreements with financial creditors is different from contractswith operational creditors for supplying goods and services.Financial creditors generally lend finance on a term loan or forworking capital that enables the corporate debtor to either setup and/or operate its business. On the other hand, contracts withoperational creditors are relatable to supply of goods and services A

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Ain the operation of business. Financial contracts generally involvelarge sums of money. By way of contrast, operational contractshave dues whose quantum is generally less. In the running of abusiness, operational creditors can be many as opposed tofinancial creditors, who lend finance for the set up or working ofbusiness. Also, financial creditors have specified repaymentBschedules, and defaults entitle financial creditors to recall a loanin totality. Contracts with operational creditors do not have anysuch stipulations. Also, the forum in which dispute resolution takesplace is completely different. Contracts with operational creditorscan and do have arbitration clauses where dispute resolution isCdone privately. Operational debts also tend to be recurring innature and the possibility of genuine disputes in case ofoperational debts is much higher when compared to financialdebts. [Para 27][599-G-H; 600-A-D]

1.5 Financial creditors are, from the very beginning, involvedDwith assessing the viability of the corporate debtor. They can,and therefore do, engage in restructuring of the loan as well asreorganization of the corporate debtor’s business when there isfinancial stress, which are things operational creditors do not andcannot do. Thus, preserving the corporate debtor as a goingconcern, while ensuring maximum recovery for all creditors beingEthe objective of the Code, financial creditors are clearly differentfrom operational creditors and therefore, there is obviously anintelligible differentia between the two which has a direct relationto the objects sought to be achieved by the Code. [Para 28][600-F-G]

FShayara Bano v. Union of India (2017) 9 SCC 1 :[2017] 7 SCR 797; Gopal Jha v. The Hon’ble SupremeCourt of India [2018] 14 SCALE 286; Indian YoungLawyers Associations and Ors. v. State of Kerala andOrs. 2018 (13) SCALE 75; Joseph Shine v. Union ofGIndia 2018 (11) SCALE 556; K.S. Puttaswamy v. Unionof India (2019) 1 SCC 1; Navtej Singh Johar and Ors.v. Union of India (2018) 10 SCC 1; Lok Prahari v.State of Uttar Pradesh and Ors. (2018) 6 SCC 1 : [2018]6 SCR 1076; Nikesh Tarachand Shah v. Union of Indiaand Ors. (2018) 11 SCC 1 : [2017] 12 SCR 358 –Hreferred to.

NOTICE, HEARING, AND SET-OFFORACOUNTERCLAIM QUA FINANCIAL DEBTS.

2.1 It is clear from Section 3 (a) (c) read with Section 214(e) of the Code that information in respect of debts incurred byfinancial debtors is easily available through information utilitieswhich, under the Insolvency and Bankruptcy Board of India(Information Utilities) Regulations, 2017 are to satisfy themselvesthat information provided as to the debt is accurate. This is doneby giving notice to the corporate debtor who then has anopportunity to correct such information. Apart from the recordmaintained by such utility, Form I appended to the Insolvencyand Bankruptcy (Application to Adjudicating Authority) Rules,2016, makes clear the other sources which evidence a financialdebt. [Paras 31, 32][603-F-H]

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2.2 A conjoint reading of Rule 4(3), 11, 34 and 37 of theNational Company Law Tribunal Rules, 2016 makes it clear thatat the stage of the Adjudicating Authority’s satisfaction underSection 7(5) of the Code, the corporate debtor is served with acopy of the application filed with the Adjudicating Authority andhas the opportunity to file a reply before the said authority andbe heard by the said authority before an order is made admittingthe said application. In order to protect the corporate debtor frombeing dragged into the corporate insolvency resolution processmalafide, the Code prescribes penalties. Also, punishment isprescribed under Section 75 for furnishing false information inan application made by a financial creditor which further deters afinancial creditor from wrongly invoking the provisions of Section7. [Paras 33, 34][606-C, D, G]

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2.3 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 berepaid. However, it is not as if a legitimate set-off is not to beconsidered at all. Such set-off may be considered at the stage offiling of proof of claims during the resolution process by theresolution professional, his decision being subject to challengebefore the Adjudicating Authority u/s.60. Equally, counterclaims,by their very definition, are independent rights which are nottaken away by the Code but are preserved for the stage of G

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Aadmission of claims during the resolution plan. Also, there isnothing in the Code which interdicts the corporate debtor frompursuing such counterclaims in other judicial fora. [Paras 35, 36][607-B, C, F]

2.4 The trigger for a financial creditor’s application is non-Bpayment of dues when they arise under loan agreements. It is forthis reason that Section 433(e) of the Companies Act, 1956 hasbeen repealed by the Code and a change in approach has beenbrought about. Legislative policy now is to move away from theconcept of “inability to pay debts” to “determination of default”.The said shift enables the financial creditor to prove, based uponCsolid documentary evidence, that there was an obligation to paythe debt and that the debtor has failed in such obligation. Fourpolicy reasons have been stated by the Solicitor General for thisshift in legislative policy. First is predictability and certainty.Secondly, the paramount interest to be safeguarded is that of theDcorporate debtor and admission into the insolvency resolutionprocess does not prejudice such interest but, in fact, protects it.Thirdly, in a situation of financial stress, the cause of default isnot relevant; protecting the economic interest of the corporatedebtor is more relevant. Fourthly, the trigger that would lead toliquidation can only be upon failure of the resolution process.E[Para 37][610-F-H; 611-A-B]

2.5 Whereas a “claim” gives rise to a “debt” only when itbecomes “due”, a “default” occurs only when a “debt” becomes“due and payable” and is not paid by the debtor. It is for thisreason that a financial creditor has to prove “default” as opposedFto an operational creditor who merely “claims” a right to paymentof a liability or obligation in respect of a debt which may be due.When this aspect is borne in mind, the differentiation in thetriggering of insolvency resolution process by financial creditorsunder Section 7 and by operational creditors under Sections 8Gand 9 of the Code becomes clear. [Para 38][611-H; 612-A-B]

Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC407 : [2017] 8 SCR 33 - referred to.

3.1 SECTIONS 21 AND 24 AND ARTICLE 14:OPERATIONAL CREDITORS HAVE NO VOTE IN THEHCOMMITTEE OF CREDITORS.

Under the Code, the committee of creditors is entrustedwith the primary responsibility of financial restructuring. Theyare required to assess the viability of a corporate debtor by takinginto account all available information as well as to evaluate allalternative investment opportunities that are available. Thecommittee of creditors is required to evaluate the resolution planon the basis of feasibility and viability. Once the resolution planis approved by the committee of creditors and thereafter by theAdjudicating Authority, the said plan is binding on allstakeholders. Since the financial creditors are in the business ofmoney lending, banks and financial institutions are best equippedto assess viability and feasibility of the business of the corporatedebtor. Even at the time of granting loans, these banks andfinancial institutions undertake a detailed market study whichincludes a techno-economic valuation report, evaluation ofbusiness, financial projection, etc. Since this detailed study hasalready been undertaken before sanctioning a loan, and sincefinancial creditors have trained employees to assess viability andfeasibility, they are in a good position to evaluate the contents ofa resolution plan. On the other hand, operational creditors, whoprovide goods and services, are involved only in recoveringamounts that are paid for such goods and services, and aretypically unable to assess viability and feasibility of business. TheBLRC Report makes this abundantly clear. [Paras 43, 44][620-E-F; 621-E; 622-A-C]

3.2 The NCLAT has, while looking into viability andfeasibility of resolution plans that are approved by the committeeof creditors, always gone into whether operational creditors aregiven roughly the same treatment as financial creditors, and ifthey are not, such plans are either rejected or modified so thatthe operational creditors’ rights are safeguarded. It may be seenthat a resolution plan cannot pass muster u/s.30(2)(b) rw Section31 unless a minimum payment is made to operational creditors,being not less than liquidation value. Regulation 38 strengthensthe rights of operational creditors by statutorily incorporatingthe principle of fair and equitable dealing of operational creditors’rights, together with priority in payment over financial creditors.Thus, it cannot be said that the operational creditors arediscriminated against or that Article 14 has been infracted either AB

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Aon the ground of equals being treated unequally or on the groundof manifest arbitrariness. [Paras 46-48][623-C-D; 624-B-C]SECTION 12A IS NOTVIOLATIVE OFARTICLE 14

4.1 It is clear that once the Code gets triggered byadmission of a creditor’s petition under Sections 7 to 9, theBproceeding that is before the Adjudicating Authority, being acollective proceeding, is a proceeding in rem. Being a proceedingin rem, it is necessary that the body which is to oversee theresolution process must be consulted before any individualcorporate debtor is allowed to settle its claim. A question arisesas to what is to happen before a committee of creditors isCconstituted (as per the timelines that are specified, a committeeof creditors can be appointed at any time within 30 days from thedate of appointment of the interim resolution professional). It ismade clear that at any stage where the committee of creditors isnot yet constituted, a party can approach the NCLT directly, whichDtribunal may, in exercise of its inherent powers under Rule 11 ofthe NCLT Rules, 2016, allow or disallow an application forwithdrawal or settlement. This would be decided after hearing allthe concerned parties and considering all relevant factors on thefacts of each case. [Para 52][626-E-H]

E4.2 The main thrust against the provision of Section 12A isthe fact that ninety per cent of the committee of creditors has toallow withdrawal. This high threshold has been explained in theILC Report as all financial creditors have to put their headstogether to allow such withdrawal as, ordinarily, an omnibussettlement involving allcreditors ought, ideally, to be enteredFinto. This explains why ninety per cent, which is substantially allthe financial creditors, have to grant their approval to an individualwithdrawal or settlement. In any case, the figure of ninety percent, in the absence of anything further to show that it is arbitrary,must pertain to the domain of legislative policy, which has beenGexplained by the Report. Also, it is clear, that under Section 60 ofthe Code, the committee of creditors do not have the last wordon the subject. If the committee of creditors arbitrarily rejects ajust settlement and/or withdrawal claim, the NCLT, and thereafter,the NCLAT can always set aside such decision under Section 60of the Code. Thus, the Section 12A also passes constitutionalHmuster. [Para 53][627-A-D]

Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors.SLP (Civil) No. 31557/2018 dated 14.12.2018 -referred to.

EVIDENCE PROVIDED BY PRIVATE INFORMATIONUTILITIES: ONLYPRIMA FACIE EVIDENCE OF DEFAULT

5. The Information Utilities Regulations, in particularRegulations 20 and 21, make it clear that on receipt of informationof default, an information utility shall expeditiously undertake theprocess of authentication and verification of information. The saidRegulations also make it clear that apart from the stringentrequirements as to registration of such utility, the momentinformation of default is received, such information has to becommunicated to all parties and sureties to the debt. Apart fromthis, the utility is to expeditiously undertake the process ofauthentication and verification of information, which will includeauthentication and verification from the debtor who has defaulted.This being the case, coupled with the fact that such evidence, ashas been conceded by the Attorney General, is only prima facieevidence of default, which is rebuttable by the corporate debtor,makes it clear that the challenge based on this ground must alsofail. [Paras 56, 57][628-E; 629-D-E]

RESOLUTION PROFESSIONAL HAS NO

ADJUDICATORY POWERS.

6. It is clear from a reading of the Code as well as theRegulations that the resolution professional has no adjudicatorypowers. Section 18 of the Code lays down the duties of an interimresolution professional. Under the CIRP Regulations, theresolution professional has to vet and verify claims made, andultimately, determine the amount of each claim. It is clear from areading of Regulations 10, 12, 13, 14 and 15 that the resolutionprofessional is given administrative as opposed to quasi–judicialpowers. In fact, even when the resolution professional is to makea “determination” under Regulation 35A, he is only to apply tothe Adjudicating Authority for appropriate relief based on thedetermination made. As opposed to this, the liquidator, inliquidation proceedings under the Code, has to consolidate andverify the claims, and either admit or reject such claims underSections 38 to 40 of the Code. It is clear from Sections 41 and 42

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Athat when the liquidator “determines” the value of claimsadmitted under Section 40, such determination is a “decision”,which is quasi–judicial in nature, and which can be appealed againstto the Adjudicating Authority under Section 42 of the Code. Unlikethe liquidator, the resolution professional cannot act in a numberof matters without the approval of the committee of creditorsBunder Section 28 of the Code, which can, by a two–thirds majority,replace one resolution professional with another, in case theyare unhappy with his performance. Thus, the resolutionprofessional is really a facilitator of the resolution process, whoseadministrative functions are overseen by the committee ofCcreditors and by the Adjudicating Authority. [Paras 58-61][629-F; 631-C; 632-F; 633-C, E-G]CONSTITUTIONALVALIDITY OF SECTION 29A:RETROSPECTIVE APPLICATION

7. A statute is not retrospective merely because it affectsDexisting rights; nor is it retrospective merely because a part ofthe requisites for its action is drawn from a time antecedent to itspassing. In ArcelorMittal’s case, this Court has observed that aresolution applicant has no vested right for consideration orapproval of its resolution plan. This being the case, it is clearEthat no vested right is taken away by application of Section 29A.Since a resolution applicant who applies under Section 29A(c)has no vested right to apply for being considered as a resolutionapplicant, this point is of no avail. [Paras 64, 65][640-E-F;641-B, G]ArcelorMittal India Private Limited v. Satish KumarFGupta and Ors. [2018] 13 SCALE 381 - followed.

Ritesh Agarwal and Anr. v. SEBI and Ors. (2008) 8 SCC205 : [2008] 8 SCR 553; K.S. Paripoornan v. State ofKerala and Ors. (1994) 5 SCC 593 : [1994] 3 Suppl.GSCR 405; Darshan Singh v. Ram Pal Singh and Anr.(1992) Supp 1 SCC 191 : [1990] 3 Suppl. SCR 212;Pyare Lal Sharma v. Managing Director and Ors. (1989)3 SCC 448 : [1989] 3 SCR 428; P.D. Aggarwal andOrs. v. State of U.P. and Ors. (1987) 3 SCC 622 : [1987]3 SCR 427; Govind Das and Ors. v. Income Tax Officer H

and Anr. (1976) 1 SCC 906 : [1976] 3 SCR 44 -distinguished.

Chitra Sharma v. Union of India 2018 (9) SCALE 490;State Bank’s Staff Union (Madras Circle) v. Union ofIndia and Ors. (2005) 7 SCC 584 : [2005] 3 Suppl.SCR 200 - referred to.

SECTION 29A(C) NOT RESTRICTED TOMALFEASANCE

8. There is no vested right in an erstwhile promoter of acorporate debtor to bid for the immovable and movable propertyof the corporate debtor in liquidation. Further, given the categoriesof persons who are ineligible under Section 29A, which includespersons who are malfeasant, or persons who have fallen foul ofthe law in some way, and persons who are unable to pay theirdebts in the grace period allowed, are further, by this proviso,interdicted from purchasing assets of the corporate debtor whosedebts they have either wilfully not paid or have been unable topay. The legislative purpose which permeates Section 29Acontinues to permeate the Section when it applies not merely toresolution applicants, but to liquidation also. Thus, this plea isalso rejected. [Para 69][643-D-F]

THE ONE-YEAR PERIOD IN SECTION 29A(C) ANDNPAS

9. It is clear that Section 29A goes to eligibility to submit aresolution plan. A wilful defaulter, in accordance with theguidelines of the RBI, would be a person who though able to pay,does not pay. An NPA, on the other hand, refers to the accountbelonging to a person that is declared as such under guidelinesissued by the RBI. It is clear from clause 4 of the RBI MasterCircular that accounts are declared NPA only if defaults made bya corporate debtor are not resolved (for example, interest onand/or instalment of the principal remaining overdue for a periodof more than 90 days in respect of a term loan). Post declarationof such NPA, what is clear is that a substandard asset would thenbe NPA which has remained as such for a period of twelve months.In short, a person is a defaulter when an instalment and/or intereston the principal remains overdue for more than three months, A

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Aafter which, its account is declared NPA. During the period ofone year thereafter, since it is now classified as a substandardasset, this grace period is given to such person to pay off thedebt. During this grace period, it is clear that such person canbid along with other resolution applicants to manage the corporatedebtor. Prior to this one–year–three–month period, banks andBfinancial institutions do not declare the accounts of corporatedebtors to be NPAs. As a matter of practice, they first try andresolve disputes with the corporate debtor, after which, thecorporate debtor’s account is declared NPA. As a matter oflegislative policy therefore, quite apart from malfeasance, if aCperson is unable to repay a loan taken, in whole or in part, withinthis period of one year and three months (which, in any case, isafter an earlier period where the corporate debtor and its financialcreditors sit together to resolve defaults that continue), it is statedto be ineligible to become a resolution applicant. The reason isnot far to see. A person who cannot service a debt for the saidDperiod is obviously a person who is ailing itself. The legislativepolicy, therefore, is that a person who is unable to service itsown debt beyond the grace period is unfit to be eligible to becomea resolution applicant. This policy cannot be found fault with.Neither can the period of one year be found fault with, as this is aEpolicy matter decided by the RBI and which emerges from itsMaster Circular, as during this period, an NPA is classified as asubstandard asset. The ineligibility attaches only after this oneyear period is over as the NPA now gets classified as a doubtfulasset. [Paras 70, 71][643-G; 646-A-G]

FRELATED PARTY

10.1 Persons who act jointly or in concert with others areconnected with the business activity of the resolution applicant.Similarly, all the categories of persons mentioned in Section5(24A) show that such persons must be “connected” with theGresolution applicant within the meaning of Section 29A(j). Thisbeing the case, the said categories of persons who are collectivelymentioned under the caption “relative” obviously need to havea connection with the business activity of the resolution applicant.In the absence of showing that such person is “connected” withthe business of the activity of the resolution applicant, such personH

cannot possibly be disqualified under Section 29A(j). All thecategories in Section 29A(j) deal with persons, natural as well asartificial, who are connected with the business activity of theresolution applicant. The expression “related party”, therefore,and “relative” contained in the definition Sections must be readnoscitur a sociis with the categories of persons mentioned inExplanation I, and so read, would include only persons who areconnected with the business activity of the resolution applicant.[Para 75][654-F-H; 655-A]

Attorney General for India and Ors. v. AmratlalPrajivandas and Ors. (1994) 5 SCC 54 : [1994] 1 Suppl.SCR 1 - referred to.

10.2 It was submitted that the expression “connectedperson” in Explanation I, clause (ii) to Section 29A(j) cannotpossibly refer to a person who may be in management or controlof the business of the corporate debtor in future. This would bearbitrary as the explanation would then apply to an indeterminateperson. This submission cannot be accepted as Explanation Iseeks to make it clear that if a person is otherwise covered as a“connected person”, this provision would also cover a personwho is in management or control of the business of the corporatedebtor during the implementation of a resolution plan. Therefore,any such person is not indeterminate at all, but is a person who isin the saddle of the business of the corporate debtor either at ananterior point of time or even during implementation of theresolution plan. [Para 76][655-B-D]

EXEMPTION OF MICRO, SMALL, AND MEDIUMENTERPRISES FROM SECTION 29A

EXEMPTION OF MICRO, SMALL, AND MEDIUMENTERPRISES FROM SECTION 29A

11. Section 7 of the Micro, Small and Medium EnterprisesDevelopment Act, 2006 classifies enterprises depending uponwhether they manufacture or produce goods, or are engaged inproviding and rendering services as micro, small, or medium,depending upon certain investments made. The rationale of ILCReport of 2018 for excluding such industries from the eligibilitycriteria laid down in Section 29A(c) and 29A(h) is because quasuch industries, other resolution applicants may not beforthcoming, which then will inevitably lead not to resolution, but AB

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Ato liquidation. Following upon the Insolvency Law Committee’sReport, Section 240A has been inserted in the Code withretrospective effect from 06.06.2018. It can thus, be seen thatwhen the Code has worked hardship to a class of enterprises,the Committee constituted by the Government, in overseeingthe working of the Code, has been alive to such problems, andBthe Government in turn has followed the recommendations ofthe Committee in enacting Section 240A. This is an importantinstance of how the executive continues to monitor the applicationof the Code, and exempts a class of enterprises from theapplication of some of its provisions in deserving cases. This andCother amendments that are repeatedly being made to the Code,and to subordinate legislation made thereunder, based uponCommittee Reports which are looking into the working of theCode, would also show that the legislature is alive to seriousanomalies that arise in the working of the Code and steps in torectify them. [Paras 78, 80 and 81][655-F; 657-B-C; 658-C-E]DSECTION 53 OFTHE CODE DOES NOTVIOLATEARTICLE 14.

12. The reason for differentiating between financial debts,which are secured, and operational debts, which are unsecured,Eis in the relative importance of the two types of debts when itcomes to the object sought to be achieved by the InsolvencyCode. Repayment of financial debts infuses capital into theeconomy inasmuch as banks and financial institutions are able,with the money that has been paid back, to further lend suchmoney to other entrepreneurs for their businesses. This rationaleFcreates an intelligible differentia between financial debts andoperational debts, which are unsecured, which is directly relatedto the object sought to be achieved by the Code. In any case,workmen’s dues, which are also unsecured debts, havetraditionally been placed above most other debts. Thus, it can beGseen that unsecured debts are of various kinds, and so long asthere is some legitimate interest sought to be protected, havingrelation to the object sought to be achieved by the statute inquestion, Article 14 does not get infracted. Thus, the challengeto s. 53 that it is discriminatory and manifestly arbitrary cannotbe accepted. [Para 84][661-B-D]H

13. The Insolvency Code is a legislation which deals witheconomic matters and, in the larger sense, deals with the economyof the country as a whole. Earlier experiments, in terms oflegislations having failed, ‘trial’ having led to repeated ‘errors’,ultimately led to the enactment of the Code. The experimentcontained in the Code, judged by the generality of its provisionsand not by so–called crudities and inequities that have beenpointed out by the petitioners, passes constitutional muster. Tostay experimentation in things economic is a grave responsibility,and denial of the right to experiment is fraught with seriousconsequences to the nation. The working of the Code is beingmonitored by the Central Government by Expert Committeesthat have been set up in this behalf. Amendments have been madein the short period in which the Code has operated, both to theCode itself as well as to subordinate legislation made under it.This process is an ongoing process which involves allstakeholders, including the petitioners. In the working of theCode, the flow of financial resource to the commercial sector inIndia has increased exponentially as a result of financial debtsbeing repaid. The figures show that the experiment conducted inenacting the Code is proving to be largely successful. Thedefaulter’s paradise is lost. In its place, the economy’s rightfulposition has been regained. [Paras 85, 86][661-E-H; 662-A, E-F]

Madras Bar Association v. Union of India (2015) 8 SCC583 : [2014] 10 SCR 1; Madras Bar Association v.Union of India (2014) 10 SCC 1 : [2014] 10 SCR 1;Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem2017 (13) SCALE 526; Union of India v. R. Gandhi,President, Madras Bar Association (2010) 11 SCC 1:[2010] 6 SCR 857; Innoventive Industries Ltd. v. ICICIBank and Anr. (2018) 1 SCC 407: [2017] 8 SCR 33;Madras Petrochem Ltd. and Anr. v. Board for Industrialand Financial Reconstruction and Ors. (2016) 4 SCC1 : [2016] 11 SCR 419; R.K. Garg v. Union of India(1981) 4 SCC 675 : [1982] 1 SCR 947; Bhavesh D.Parish v. Union of India (2000) 5 SCC 471 : [2000] 1Suppl. SCR 291; DG of Foreign Trade v. Kanak Exports(2016) 2 SCC 226 : [2015] 15 SCR 287; Delhi AB

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AInternational Airport Limited v. International LeaseFinance Corporation and Ors. (2015) 8 SCC 446 :[2015] 2 SCR 1040 - referred to.

Lochner v. New York 198 U.S. 45 (1905); New StateIce Co. v. Liebman 285 U.S. 262 (1932); Ferguson v.BSkrupa 372 U.S. 726 (1962) - referred to.

Case Law Reference

[2014] 10 SCR 1[2014] 10 SCR 1C[2017] 7 SCR 7972017 (13) SCALE 526[2010] 6 SCR 857 [2017] 8 SCR 33D[2016] 11 SCR 419[1982] 1 SCR 947[2000] 1 Suppl. SCR 291[2015] 15 SCR 287E[2015] 2 SCR 1040 [2018] 14 SCALE 2862018 (13) SCALE 752018 (11) SCALE 556F2019 (1) SCC 1(2018) 10 SCC 1[2018] 6 SCR 1076[2017] 12 SCR 358G2018 (9) SCALE 490 [2005] 3 Suppl. SCR 200 [2018 (13) SCALE 381

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CIVIL ORIGINAL JURISDICTION: Writ Petition (Civil) No. 99of 2018.

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Under Article 32 of the Constitution of India.

WITH

Writ Petition (C) Nos. 115, 100, 459, 598, 775, 822, 849, 1221 of2018, D

Writ Petition (C) No. 37 of 2019 and S.L.P.(C) No. 28623 of2018.

K. K. Venugopal, Attorney General for India, Tushar Mehta, SG,Mrs. Madhvi Diwan, Vikramjit Banerjee, ASGs, Shyam Diwan, RakeshDwivedi, Sajan Poovayya, C.U. Singh, Mukul Rohatgi, K.V. Viswanathan,Chetan Sharma, Sr. Advs., R. Balasubramanian, Ms. Hari Priya,Ms. Shraddha Deshmukh, Ms. Charanya Lakshmikumaran,Ms. Chinmayee Chandra, Mrs. Anil Katiyar, A.K. Sharma,Parag P. Tripathi, Bishwajit Dubey, Spandan Biswal, Ms. SrideepaBhattacharyya, Manpreet Lamba, Aditya Marwah, Prafful Goyal, KanuAgarwal, Ms. Swarupama Chaturvedi, B.N. Dubey, Ms. Misha, SiddhantKant, Ms. Srishti Khare, Ms. Jasveen Kaur, S.S. Shroff, M/s. CyrilAmarchand Mangaldas, Ananga Bhattacharyya, Rohit Rao N., KiranKumar Kondaparthi, M/s Veritas Legis, Milank Chaudhary, SarojanandJha, Ashly Cherian, S.K. Raza, Parveen Kumar, Rajesh Singh,O.P. Gaggar, Aditya Gaggar, Suresh K., Ms. Suruchi Aggarwal,R.R. Gupta, Ms. Ankita Prakash, Ms. Sindhu T.P., M/s Indian Law,Raghav Bansal (for M/s. Parekh & Co.), Dr. Vinod Kumar Tewari,A.K. Shukla, Vivek Tiwari, Vinay Rai, Pramod Tiwari, KanwalChaudhary, Jasbir Singh Malik, Udit Gupta, Digant Kakkad, VishwasShah, Masoom Shah, Pulkit Deora (for M/s. Udit Kishan And Associates), E

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AArvind Kumar Gupta, Ms. Henna George, Ms. Purti Marwaha,Ms. V.S. Lakshmi, A.V. Balan, Chandrashekhar A. Chakalabbi,S.K. Pandey, Anshul Raj, Awanish Kumar, M/s. Dharmaprabhas LawAssociates, Pragya Ohri, Abhirup Dasgupta, Ishaan Duggal, MohitD.Ram, Sanjay Kapur, Ms. Megha Karnwal, Bharath Gangadharan,Ms. Shubhra Kapur, Ms. Madhumita Bhattacharjee, Ms. Srija Choudhury,BRajendra Barot, Vivek Shetty, Ms. Liz Mathew, Jahan A. Chokshi,Ms. Sansriti, Eklavya Dwivedi, Navneet R., Raghav Mehrotra, VipinKumar Jai, Vipul Jai, Shailly Dinkar, Hitesh Kr. Sharma, Rajesh Singh,Rajendra Beniwal, Rajesh P., Vishal Thakur, Arvind Kumar Shukla, AlokShukla, N.P. Gaur, Hardik Luthra, Kunal Yadav, Nihal Ahmad, Ms. ReetuCSharma, Ms. Neena Shukla, Atul Sharma, Arveena Sharma, Ashu Kansal,Ms. Varsha Banerjee, Karan Batura, Ms. Stuti Vats, Manmayi Sharma,T. V. S. Raghavendra Sreyas, M/s Gayatri Gulati, M/s Sneh Dhillon,Rajesh Kumar-I, Anant Gautam, Ms. Shruti Vats, Ms. KhushbooAggarwal, Anmol Mehta, Ms. Diksha Rai, Ms. Palak Mahajan, IshanBisht, Vishrov Mukherjee, Pukhrambam Ramesh Kumar, Ameya VikramDMishra, Ms. Catherine Ayallore, Priyadarshi Banerjee, Pratibhanu SinghKharola, Ms. Priyanka M.P., K. Amrit Kumar Sharma, Vigro Mukherjee,Nitin P., Meka Venkata Rama Krishna, P.S. Sudheer, Rishi Maheshwari,Ms. Anne Mathew, Bharat Sood, Ms. Shruti Jose, Mahesh Agarwal,Himanshu Satija, Jay Zaveri, Anshuman Srivastava, Sikhil Suri, RishiEAgrawala, Karan Luthra, Ms. Devika Mohan, Raghav Shankar,Simranjeet Singh, Ms. Aastha Mehta, Divyang Chandiramani, VrindaBhandari, Ravi Raghunath, Dhananjay B. Ray, Mukunda Rao,Venkataraman Rao, Soumik Ghosal, Rajesh Kumaram, Ms. NeehaNagpal, Ms. Devanshi Singh, Arshit Anand, Gunjan Adhwani, Ms. ShallyBhasin, Nishant Rao, Rajesh Kumar, E. C. Agrawala, Puneet SinghFBindra, Ms. Simran Jeet, Saad M. Shervani, Abhishek Singh, JamalAnand, Ytharth Kumar, Vanshdeep Dalmia, Pranaya Goyal, AbhishekSharma, Yash Badkur, Harshvardhan Jha, Yugandhara Pawar Jha,Ms. Mayuri Shukla, Abhishek Chaoudhary, Ms. Divya Roy, LakshyajitSingh Bagdwal, Sarvesh Bisaria, Ashish Azad, Parkash Chandra Sharma,GMrs. S. Usha Reddy, Balaji Srinivasan, Alok Kumar, Ms. Somya Yadava,Ms. Jagriti Mahajan, Siddhant Tripathi, Ms. Prarthna Dogra, Ms. SnigdhaSingh, Ramesh Thakur, Mahesh K. Chaudhary, Ms. Kusum Lata, NareshKaushik, Vardhman Kaushik, Manoj Joshi, Omung Raj Gupta,D. Singh, Ms. Rebbeca Dats, Rahul Sharma, Siddhant Manral, Mrs.Lalita Kaushik, Keshav Gupta, Ms. Ana Bansal, Anil Kumar, DevanshuH

Sajlan, Deepak Joshi, Aakash Lamba, T. Mahipal, Sahil Monga, UtkarshMaria, Nakul Gandhi, M/s. Karanjawala & Co., Ashish Rana, HarshitGarg, Senthil Jagadeesan, M. P. Vinod, Sandeep Sudhakar Deshmukh,Vinod Sharma, Nikhil Jain, Rajiv Shankar Dvivedi, Anupam Lal Das,Mohit D. Ram, Aakarsh Kamra, Ms. Usha Nandini. V, Ms. Pallavi Pratap,Mayank Pandey, Shantanu Sagar, Anurag Kishore, Som Raj Choudhury,Abhishek Agarwal, Sudarsh Menon, Ms. Meera Mathur, Arun Aggarwal,Advs. for the appearing parties.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. The present petitions assail theconstitutional validity of various provisions of the Insolvency andBankruptcy Code, 2016 [“Insolvency Code” or “Code”]. Since weare deciding only questions relating to the constitutional validity of theCode, we are not going into the individual facts of any case.

2. Shri Mukul Rohatgi, learned Senior Advocate, appearing in WritPetition (Civil) No. 99 of 2018, has first and foremost argued that themembers of the National Company Law Tribunal [“NCLT”] and certainmembers of the National Company Law Appellate Tribunal [“NCLAT”],apart from the President, have been appointed contrary to this Court’sjudgment in Madras Bar Association v. Union of India, (2015) 8SCC 583 [“Madras Bar Association (III)”], and that therefore, thisbeing so, all orders that are passed by such members, being passedcontrary to the judgment of this Court in the aforesaid case, ought to beset aside. In any case, even assuming that the de facto doctrine wouldapply to save such orders, it is clear that such members ought to berestrained from passing any orders in future. In any case, until a properlyconstituted committee, in accordance with the aforesaid judgment,reappoints them, they ought not to be allowed to function. He also arguedthat the administrative support for all tribunals should be from the Ministryof Law and Justice. However, even today, NCLT and NCLAT arefunctioning under the Ministry of Corporate Affairs. This again needs tobe corrected immediately. A further technical violation also exists in thatif the powers of the High Court are taken away, the NCLAT, as anappellate forum, should have the same convenience and expediency asexisted prior to appeals going to the NCLAT. Since the NCLAT, as anappellate court, has a seat only at New Delhi, this would render theremedy inefficacious inasmuch as persons would have to travel fromTamil Nadu, Calcutta, and Bombay to New Delhi, whereas earlier, they AB

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Acould have approached the respective High Courts in their States. Thisagain is directly contrary to Madras Bar Association v. Union ofIndia, (2014) 10 SCC 1 [“Madras Bar Association (II)”], and toparagraph 123 in particular. Apart from the aforesaid technical objection,Shri Rohatgi assailed the legislative scheme that is contained in Section7 of the Code, stating that there is no real difference between financialBcreditors and operational creditors. According to him, both types ofcreditors would give either money in terms of loans or money’s worth interms of goods and services. Thus, there is no intelligible differentiabetween the two types of creditors, regard being had to the object soughtto be achieved by the Code, namely, insolvency resolution, and if that isCnot possible, then ultimately, liquidation. Relying upon Shayara Bano v.Union of India, (2017) 9 SCC 1 [“Shayara Bano”], he argued thatsuch classification will not only be discriminatory, but also manifestlyarbitrary, as under Sections 8 and 9 of the Code, an operational debtor isnot 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, noDnotice is given and the financial debtor is not entitled to dispute the claimof 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-offand counterclaim, yet, the Code gets triggered at the behest of a financialcreditor, without the corporate debtor being able to justify the fact that aEgenuine dispute is raised, which ought to be left for adjudication beforeordinary courts and/or tribunals. Shri Rohatgi then argued that assumingthat a valid distinction exists between financial and operational creditors,there is hostile discrimination against operational creditors. First andforemost, unless they amount to 10% of the aggregate of the amount ofdebt owed, they have no voice in the committee of creditors. In anyFcase, Sections 21 and 24 of the Code are discriminatory and manifestlyarbitrary in that operational creditors do not have even a single vote inthe committee of creditors which has very important functions to performin the resolution process of corporate debtors. Shri Rohatgi then wenton to assail the establishment of information utilities that are set up underGthe Code. According to him, under Section 210 of the Code, there canbe private information utilities whose sole object would be to make aprofit. Further, the said information utility is not only to collect financialdata, 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 preliminaryH

decree issued without any hearing and without any process ofadjudication. Shri Rohatgi next argued that Section 12A of the Code iscontrary to the directions of this Court in its order in Uttara Foods andFeeds 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 approvalof at least ninety per cent of the voting share of the committee ofcreditors. Unbridled and uncanalized power is given to the committee ofcreditors to reject legitimate settlements entered into between creditorsand the corporate debtors. Shri Rohatgi then argued that the resolutionprofessional, having been given powers of adjudication under the Codeand Regulations, grant of adjudicatory power to a non-judicial authorityis violative of basic aspects of dispensation of justice and access tojustice. Lastly, a four-fold attack was raised against Section 29A, inparticular, clause (c) thereof. First and foremost, Shri Rohatgi statedthat the vested rights of erstwhile promoters to participate in the recoveryprocess of a corporate debtor have been impaired by retrospectiveapplication of Section 29A. Section 29A, in any case, is contrary to theobject sought to be achieved by the Code, in particular, speedy disposalof the resolution process as it will inevitably lead to challenges beforethe Adjudicating Authority and Appellate Authority, which will slow downand delay the insolvency resolution process. In particular, so far as Section29A(c) is concerned, a blanket ban on participation of all promoters ofcorporate debtors, without any mechanism to weed out those who areunscrupulous and have brought the company to the ground, as againstpersons who are efficient managers, but who have not been able to paytheir debts due to various other reasons, would not only be manifestlyarbitrary, but also be treating unequals as equals. Also, according to ShriRohatgi, maximization of value of assets is an important goal to beachieved in the resolution process. Section 29A is contrary to such goalas an erstwhile promoter, who may outbid all other applicants and mayhave the best resolution plan, would be kept out at the threshold, therebyimpairing the object of maximization of value of assets. Another argumentthat was made was that under Section 29A(c), a person’s account maybe classified as a non-performing asset [“NPA”] in accordance with theguidelines of the Reserve Bank of India [“RBI”], despite him not beinga wilful defaulter. Also, the period of one year referred to in clause (c) isagain wholly arbitrary and without any basis either in rationality or inlaw. Shri Rohatgi then trained his gun on Section 29A(j), and stated that ABCDEFG

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Apersons who may be related parties in the sense that they may be relativesof the erstwhile promoters are also debarred, despite the fact that theymay have no business connection with the erstwhile promoters whohave been rendered ineligible by Section 29A.

3. Shri K.V. Viswanathan, learned Senior Advocate, appearing inBWrit Petition No.822 of 2018, strongly supported Shri Rohatgi and arguedthe 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 DeepakJoshi also made submissions with particular regard to discriminationagainst operational creditors.C4. As against these submissions, Shri K.K. Venugopal, the learnedAttorney General for India, and Shri Tushar Mehta, learned SolicitorGeneral for India, appearing for the Union of India, and Shri RakeshDwivedi, learned Senior Advocate, appearing for the Reserve Bank ofIndia, countered all the aforesaid submissions. They argued withDreference to our judgments and Committee Reports that till the InsolvencyCode was enacted, the regime of previous legislation had failed tomaximize the value of stressed assets and had focused on reviving thecorporate debtor with the same erstwhile management. All theselegislations had failed, as a result of which, the Code was enacted toEreorganize insolvency resolution of corporate debtors in a time boundmanner to maximize the value of assets of such person. They furtherargued that there is a paradigm shift from the erstwhile management ofa corporate debtor being in possession of stressed assets to creditorswho now assume control from the erstwhile management and are ableto approve resolution plans of other better and more efficient managers,Fwhich would not only be in the interest of the corporate debtor itself butin the interest of all stakeholders, namely, all creditors, workers, andshareholders other than shareholdings of the erstwhile management. Theyreferred to the Statement of Objects and Reasons, the Preamble, andvarious provisions of the Code, and to the Rules and Regulations madeGthereunder, to buttress their submissions. In particular, they referred tojudgments which mandated a judicial hands-off when it came to lawsrelating to economic regulation. They argued that the legislature mustget the maximum free play in the joints to experiment and come up withsolutions to problems that have seemed intractable earlier. In particular,in combating the individual points made by the learned counsel appearingH

on behalf of the petitioners, they argued that none of the members of theNCLT or the NCLAT had been appointed contrary to the judgments ofthis Court in Union of India v. R. Gandhi, President, Madras BarAssociation (2010) 11 SCC 1 [“Madras Bar Association (I)”] andMadras Bar Association (III) (supra). They referred to affidavitsfiled before this Court to show that all such members had been appointedby a Committee consisting of two Supreme Court Judges and twobureaucrats, in conformity with the aforesaid judgments. When it cameto classification between financial and operational creditors, they arguedthat the differentiation between the two types of creditors occurs fromthe nature of the contracts entered into with them. Financial contractsinvolve large sums of money given by fewer persons, whereas operationalcreditors are much larger in number and the quantum of dues is generallysmall. Financial creditors have specified repayment schedules andagreements which entitle such creditors to recall the loan in totality ondefaults being made, which the operational creditors do not have. Further,financial creditors are, from the start, involved with the assessment ofviability of corporate debtors and are, therefore, better equipped to engagein restructuring of loans as well as reorganization of the corporate debtor’sbusiness in the event of financial stress. All these differentiae are notonly intelligible, but directly relate to the objects sought to be achievedby the Code. Insofar as Section 7, relatable to financial creditors, andSections 8 and 9, which relate to operational creditors are concerned, itis a fallacy to say that no notice is issued to the financial debtor ondefaults made, as financial debtors are fully aware of the loan structureand the defaults that have been made. Further, this Court’s judgment inInnoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC407 [“Innoventive Industries”] has made it clear that under Section7(5) of the Code, the Adjudicating Authority, in being “satisfied” thatthere is a default, has to issue notice to the corporate debtor, hear thecorporate debtor, and then adjudicate upon the same. The reason whydisputes raised by financial debtors are not gone into at the stage oftriggering the Code is because the evidence of financial debts arecontained in the documents of information utilities, banks, and financialinstitutions. Disputes which may be raised can be raised at the stage offiling of claims once the resolution process is underway. Also, by thevery nature of financial debts, set-off and counterclaims by financialdebtors are very rare and, in any case, wholly independent of the loanthat has been granted to them. Insofar as operational creditors having AB

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Ano vote in the committee of creditors is concerned, this is becauseoperational creditors are typically interested only in getting payment forsupply of goods or services made by them, whereas financial creditorsare typically involved in seeing that the entirety of their loan gets repaid,for which they are better equipped to go into the viability of corporateenterprises, both at the stage of grant of the loan and at the stage ofBdefault. Also, the interests of operational creditors, when a resolutionplan is to be approved, are well looked-after as the minimum that theoperational creditors are to be paid is the liquidation value of assets.Apart from this, their interests are to be placed at par with the interestsof financial creditors, and if this is not done, then the AdjudicatingCAuthority intervenes to reject or modify resolution plans until the same isdone. In the 80 cases that have been resolved since the Code has comeinto force, figures were also shown to this Court to indicate that not onlyare the operational creditors paid before the financial creditors underthe resolution plan, but that the initial recovery of what is owed to them

is slightly higher than what is owed to financial creditors. Insofar asDSection 12A is concerned, they argued that once an application by acreditor is admitted by the Adjudicating Authority, the proceeding becomesa proceeding in rem and is no longer an individual proceeding but acollective proceeding. This being the case, it is important that when aresolution process is to begin and a committee of creditors is formed, itEis that committee that is best equipped to deal with applications forwithdrawal or settlement afteradmission of an insolvency petition. Ninetyper cent of such creditors have been given this task as once theproceeding is in rem, to halt such proceeding, which is for the benefit ofall creditors generally, can only be if all or most of them agree to thesame. They argued that the resolution professional has no adjudicatoryFpowers under the Code or the Regulations, but is only to collateinformation. Even when he exercises his discretion to exercise his bestjudgment in certain situations, he does so administratively, and is subjectto an adjudicatory body overseeing the same. When it comes to Section29A of the Code, they argued that Section 29A does not disturb anyGvested or existing rights, as a resolution applicant does not have anyvested or existing rights that can be disturbed, as has been held inArcelorMittal India Private Limited v. Satish Kumar Gupta andOrs., Civil Appeal Nos. 9402-9405/2018 [decided on 04.10.2018][“ArcelorMittal”]. Further, merely because this Section relies onantecedent facts for its application, does not mean that it is retrospective.H

Also, Section 29A subserves a very important object of the Code, whichis to see that undesirable persons who are mentioned in all its clausesare rendered ineligible to submit resolution plans so that such personsmay not come into the management of stressed corporate debtors. Theyalso argued that Section 29A is not aimed at only persons who havecommitted acts of malfeasance, but also persons who are otherwiseunfit to be put in the saddle of the management of the corporate debtor,such as undischarged insolvents and persons who have been removedas directors under Section 164 of the Companies Act, 2013 (for not filingfinancial statements or annual returns for any continuous period of 3financial years, for example). They further argued that a period of oneyear is sufficient period within which a person, whose account has beendeclared NPA, should clear its dues. They referred to the RBI Regulationsdealing with NPAs and stated that even before a person’s account isdeclared 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 thefirst instance. Also, once the said guidelines are perused, it is clear thatan account, which has been NPA for one year, is declared as substandardasset and it is for this reason that the one year period is given in Section29A(c), which is based on reason, and is not arbitrary.

5. Shri C.U. Singh, appearing on behalf of the AssetReconstruction Company of India Limited, referred to the pre-existingstate of legislation before the Code was enacted, and referred in detailto how all such legislations had failed to produce the necessary results.He also relied upon extracts from the Insolvency Act, 1986 of the UnitedKingdom to buttress his point that worldwide, Insolvency Acts havemoved away from mere liquidation so as to first concentrate onreconstruction of corporate debtors. Also, according to him, Section 29Ais not a Section aimed at malfeasance; it is aimed at rendering ineligiblepersons who are undesirable in the widest sense of the term, i.e., personswho are unfit to take over the management of a corporate debtor.

PROLOGUE: THEPRE-EXISTINGSTATEOFTHELAW

PROLOGUE: THEPRE-EXISTINGSTATEOFTHELAW

6. Having heard the rival contentions, it is important to first clearthe air on what was the background which led to the enactment of theInsolvency Code. The erstwhile regime which led to the enactment ofthe Insolvency Code was discussed by the Bankruptcy Law ReformsCommittee [“BLRC”] in its Report dated 04.11.2015 as follows:

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“The current state of the bankruptcy process for firms is a highlyfragmented framework. Powers of the creditor and the debtorunder insolvency are provided for under different Acts. Given theconflicts between creditors and debtors in the resolution ofinsolvency as described in Section 3.2.2, the chances forconsistency and efficiency in resolution are low when rights areseparately defined. It is problematic that these different laws areimplemented in different judicial fora. Cases that are decided atthe tribunal/BIFR often come for review to the High Courts. Thisgives rise to two types of problems in implementation of theresolution framework. The first is the lack of clarity of jurisdiction.In a situation where one forum decides on matters relating to therights of the creditor, while another decides on those relating tothe rights of the debtor, the decisions are readily appealed againstand either stayed or overturned in a higher court. Ideally, ifeconomic value is indeed to be preserved, there must be a singleforum that hears both sides of the case and makes a judgmentbased on both. A second problem exacerbates the problems ofmultiple judicial fora. The fora entrusted with adjudicating onmatters relating to insolvency and bankruptcy may not have thebusiness or financial expertise, information or bandwidth to decideon such matters. This leads to delays and extensions in arrivingat an outcome, and increases the vulnerability to appeals of theoutcome.

The uncertainty that these problems give rise to shows up in caselaw on matters of insolvency and bankruptcy in India. Judicialprecedent is set by “case law” which helps flesh out the statutorylaws. These may also, in some cases, pronounce new substantivelaw where the statute and precedent are silent. (Ravi, 2015)reviews judgments of the High Courts on BIFR cases, the DRTsand DRATs, as well as a review of important judgments of theSupreme Court that have had a significant impact on theinterpretation of existing insolvency legislation. The judgmentsreviewed are those after June 2002 when the SARFAESI Actcame into effect. It is illustrative of both debtor and creditor ledprocess of corporate insolvency, and reveals a matrix offragmented and contrary outcomes, rather than coherent andconsistent, being set as precedents.

In such an environment of legislative and judicial uncertainty, theoutcomes on insolvency and bankruptcy are poor. World Bank(2014) reports that the average time to resolve insolvency is fouryears in India, compared to 0.8 years in Singapore and 1 year inLondon. Sengupta and Sharma, 2015 compare the number ofnew cases that file for corporate insolvency in the U.K., whichhas a robust insolvency law, to the status of cases registered atthe BIFR under SICA, 1985, as well as those filed for liquidationunder Companies Act, 1956. They compare this with the numberof cases files in the UK, and find a significantly higher turnover inthe cases that are filed and cleared through the insolvency processin the UK. If we are to bring financing patterns back on trackwith the global norm, we must create a legal framework to makedebt 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. Indiais not unusual in requiring this. In all countries, bankruptcy lawsundergo significant changes over the period of two decades ormore. For example, the insolvency resolution framework in theUK is the Insolvency Act of 1986, which was substantially modifiedwith the Insolvency Act of 2000, and the Enterprise Act of 2002.The first Act for bankruptcy resolution in the US that lasted for asignificant time was the Bankruptcy Act of 1889. This wasfollowed by the Act of 1938, the Reform Act of 1978, the Act of1984, the Act of 1994, a related consumer protection Act of 2005.Singapore proposed a bankruptcy reform in 2013, while there aresignificant changes that are being proposed in the US and theItalian bankruptcy framework this year in 2015. Several of theseare structural reforms with fundamental implications on resolvinginsolvency….”

The BLRC went on to state:

“[…..] India is one of the youngest republics in the world, with ahigh concentration of the most dynamic entrepreneurs. Yet thesegame changers and growth drivers are crippled by an environmentthat takes some of the longest times and highest costs by worldstandards to resolve any problems that arise while repaying dueson debt. This problem leads to grave consequences: India hassome of the lowest credit compared to the size of the economy.

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This is a troublesome state to be in, particularly for a youngemerging economy with the entrepreneurial dynamism of India.”

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“Speed is of essence for the working of the bankruptcy code, fortwo reasons. First, while the ‘calm period’ can help keep anorganization 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, themore likely it is that liquidation will be the only answer. Second,the liquidation value tends to go down with time as many assetssuffer from a high economic rate of depreciation.

From the viewpoint of creditors, a good realization can generallybe obtained if the firm is sold as a going concern. Hence, whendelays induce liquidation, there is value destruction. Further, evenin liquidation, the realization is lower when there are delays. Hence,delays cause value destruction. Thus, achieving a high recoveryrate is primarily about identifying and combating the sources ofdelay.

This same idea is found in FSLRC’s (Financial Sector LegislativeReforms Commission) treatment of the failure of financial firms.The most important objective in designing a legal framework fordealing with firm failure is the need for speed.”

The pre-existing scenario has been noticed in some of ourjudgments. In Madras Petrochem Ltd. and Anr. v. Board forIndustrial and Financial Reconstruction and Ors., (2016) 4 SCC 1,this Court found:

“40.……The Eradi Committee Report relating to insolvency andwinding up of companies dated 31-7-2000, observed that out of3068 cases referred to BIFR from 1987 to 2000 all but 1062 caseshave been disposed of. Out of the cases disposed of, 264 caseswere revived, 375 cases were under negotiation for revival process,741 cases were recommended for winding up, and 626 cases weredismissed as not maintainable. These facts and figures speak forthemselves and place a big question mark on the utility of the SickIndustrial Companies (Special Provisions) Act, 1985. TheCommittee further pointed out that effectiveness of the Sick

Industrial Companies (Special Provisions) Act, 1985 as has beenpointed out earlier, has been severely undermined by reason ofthe enormous delays involved in the disposal of cases by BIFR.(See Paras 5.8, 5.9 and 5.15 of the Report.) Consequently, theCommittee recommended that the Sick Industrial Companies(Special Provisions) Act, 1985 be repealed and the provisionsthereunder for revival and rehabilitation should be telescoped intothe structure of the Companies Act, 1956 itself.”

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“43.……In fact, another interesting document is the Report onTrend and Progress of Banking in India 2011-2012 for the yearended 30-6-2012 submitted by Reserve Bank of India to the CentralGovernment in terms of Section 36(2) of the Banking RegulationAct, 1949. In Table IV.14 the Report provides statistics regardingtrends in non-performing assets bank-wise, group-wise. As perthe said Table, the opening balance of non-performing assets inpublic sector banks for the year 2011-2012 was Rs 746 billion butthe closing balance for 2011-2012 was Rs 1172 billion only. Thetotal amount recovered through the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 during 2011-2012 registered a decline comparedto the previous year, but, even then, the amounts recovered underthe said Act constituted 70% of the total amount recovered. Theamounts recovered under the Recovery of Debts Due to Banksand Financial Institutions Act, 1993 constituted only 28%. All thiswould go to show that the amounts that public sector banks andfinancial institutions have to recover are in staggering figures andat long last at least one statutory measure has proved to be ofsome efficacy. This Court would be loathe to give such aninterpretation as would thwart the recovery process under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 which Act alone seemsto 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 theinsolvency law in India under a single unified umbrella with the A

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Further, this Court in ArcelorMittal (supra) observed:

“62. Previous legislation, namely, the Sick Industrial CompaniesC(Special Provisions) Act, 1985, and the Recovery of Debts Dueto Banks and Financial Institutions Act, 1993, which madeprovision for rehabilitation of sick companies and repayment ofloans availed by them, were found to have completely failed. Thiswas taken note of by our judgment in Madras PetrochemLtd. v. Board for Industrial and FinancialDReconstruction, (2016) 4 SCC 1……”

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“63. These two enactments were followed by the Securitizationand Reconstruction of Financial Assets and Enforcement ofESecurities Interest Act, 2002. As has been noted hereinabove,amounts recovered under the said Act recorded improvement overthe previous two enactments, but this was yet found to beinadequate.”

JUDICIALHANDS-OFFQUAECONOMICLEGISLATION

F7. In the United States, at one point of time, Justice Stephen Field’sdissents of the 19[th] Century were translated into majority opinions in theearly 20[th] Century. This was referred to as the Lochner era, in whichthe U.S. Supreme Court, over a period of 40 years, consistently struckdown legislation which was economic in nature as such legislation didnot, according to the Court, square with property rights. As a result, aGlarge number of minimum wage laws, maximum hours of work in factorieslaws, child labour laws, etc. were struck down. The result, as is wellknown, is that President Roosevelt initiated a court-packing plan in whichhe sought to get authorization from Congress to appoint additional judgesto the Supreme Court, who would have then overruled the Lochner lineHof precedents. As it turned out, that became unnecessary as Justice Roberts switched his vote so that a 5:4 majority from 1937 onwardsupheld economic legislation. It is important to note that the dissents ofJustice Holmes and Justice Brandeis now became the law. Justice Holmeshad, 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 partof the country does not entertain. If it were a question whether Iagreed with that theory, I should desire to study it further and longbefore making up my mind. But I do not conceive that to be myduty, because I strongly believe that my agreement or disagreementhas nothing to do with the right of a majority to embody theiropinions in law. It is settled by various decisions of this court thatstate constitutions and state laws may regulate life in many wayswhich we, as legislators, might think as injudicious, or, if you like,as tyrannical, as this, and which, equally with this, interfere withthe liberty to contract. Sunday laws and usury laws are ancientexamples. A more modern one is the prohibition of lotteries. Theliberty of the citizen to do as he likes so long as he does not interferewith the liberty of others to do the same, which has been ashibboleth for some well-known writers, is interfered with by schoollaws, by the Post Office, by every state or municipal institutionwhich takes his money for purposes thought desirable, whetherhe likes it or not. The Fourteenth Amendment does not enact Mr.Herbert Spencer’s Social Statics. The other day, we sustainedthe Massachusetts vaccination law. Jacobson v. Massachusetts,197 U. S. 11. United States and state statutes and decisions cuttingdown the liberty to contract by way of combination are familiar tothis court. Northern Securities Co. v. United States, 193 U. S.197. Two years ago, we upheld the prohibition of sales of stockon margins or for future delivery in the constitution ofCalifornia. Otis v. Parker, 187 U. S. 606. The decision sustainingan eight hour law for miners is still recent. Holden v. Hardy, 169U. S. 366. Some of these laws embody convictions or prejudiceswhich judges are likely to share. Some may not. But a constitutionis not intended to embody a particular economic theory, whetherof paternalism and the organic relation of the citizen to the Stateor of laissez faire.

It is made for people of fundamentally differing views, and theaccident of our finding certain opinions natural and familiar ornovel and even shocking ought not to conclude our judgment upon A

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the question whether statutes embodying them conflict with theConstitution of the United States.

General propositions do not decide concrete cases. The decisionwill depend on a judgment or intuition more subtle than any articulatemajor premise. But I think that the proposition just stated, if it isBaccepted, will carry us far toward the end. Every opinion tends tobecome a law. I think that the word liberty in the FourteenthAmendment is perverted when it is held to prevent the naturaloutcome of a dominant opinion, unless it can be said that a rationaland fair man necessarily would admit that the statute proposedwould infringe fundamental principles as they have beenCunderstood by the traditions of our people and our law. It does notneed research to show that no such sweeping condemnation canbe passed upon the statute before us. A reasonable man mightthink it a proper measure on the score of health. Men whom Icertainly could not pronounce unreasonable would uphold it as aDfirst instalment of a general regulation of the hours of work.Whether in the latter aspect it would be open to the charge ofinequality I think it unnecessary to discuss.”[1]

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Similarly, in New State Ice Co. v. Liebman, 285 U.S. 262 (1932),Justice Brandeis echoed Justice Holmes as follows:

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“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 fieldsexperimentation has, for two centuries, been not only free butencouraged. Some people assert that our present plight is due, inFpart, to the limitations set by courts upon experimentation in thefields of social and economic science; and to the discouragementto which proposals for betterment there have been subjectedotherwise. There must be power in the States and the Nation toremould, through experimentation, our economic practices andinstitutions to meet changing social and economic needs. I cannotGbelieve that the framers of the Fourteenth Amendment, or theStates which ratified it, intended to deprive us of the power tocorrect the evils of technological unemployment and excessproductive capacity which have attended progress in the usefularts.

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

To stay experimentation in things social and economic is a graveresponsibility. Denial of the right to experiment may be fraughtwith serious consequences to the Nation. It is one of the happyincidents of the federal system that a single courageous Statemay, if its citizens choose, serve as a laboratory; and try novelsocial and economic experiments without risk to the rest of thecountry. This Court has the power to prevent an experiment. Wemay strike down the statute which embodies it on the ground that,in our opinion, the measure is arbitrary, capricious or unreasonable.We have power to do this, because the due process clause hasbeen held by the Court applicable to matters of substantive law aswell as to matters of procedure. But in the exercise of this highpower, we must be ever on our guard, lest we erect our prejudicesinto legal principles. If we would guide by the light of reason, wemust 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 Pennsylvaniacourt in Stone adopted the philosophy of Adams v. Tanner, andcases like it, that it is the province of courts to draw on their ownviews as to the morality, legitimacy, and usefulness of a particularbusiness in order to decide whether a statute bears too heavilyupon that business and, by so doing, violates due process. Underthe system of government created by our Constitution, it is up tolegislatures, not courts, to decide on the wisdom and utility oflegislation. There was a time when the Due Process Clause wasused by this Court to strike down laws which were thoughtunreasonable, that is, unwise or incompatible with some particulareconomic or social philosophy. In this manner, the Due ProcessClause was used, for example, to nullify laws prescribing maximumhours 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 forwomen, Adkins v. Children’s Hospital, 261 U. S. 525 (1923),and fixing the weight of loaves of bread, Jay Burns Baking Co.v. Bryan, 264 U. S. 504 (1924). This intrusion by the judiciaryinto the realm of legislative value judgments was strongly objected 2 New State Ice Co. v. Liebman, 285 U.S. 262, 310-311 (1932).

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to at the time, particularly by Mr. Justice Holmes and Mr. JusticeBrandeis.Dissenting from the Court’s invalidating a state statutewhich regulated the resale price of theatre and other tickets, Mr.Justice Holmes said, “I think the proper course is to recognize that a state Legislaturecan do whatever it sees fit to do unless it is restrained by someexpress prohibition in the Constitution of the United States orof the State, and that Courts should be careful not to extendsuch prohibitions beyond their obvious meaning by reading intothem conceptions of public policy that the particular Court mayhappen to entertain.

And, in an earlier case, he had emphasized that, ‘The criterion ofconstitutionality is not whether we believe the law to be for thepublic 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 holdlaws unconstitutional when they believe the legislature has actedunwisely - has long since been discarded. We have returned tothe original constitutional proposition that courts do not substitutetheir social and economic beliefs for the judgment of legislativebodies, who are elected to pass laws.As this Court stated in aunanimous opinion in 1941, “We are not concerned… with thewisdom, 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 economicproblems, and this Court does not sit to, “subject the state to anintolerable supervision hostile to the basic principles of ourgovernment and wholly beyond the protection which the generalclause of the Fourteenth Amendment was intended to secure”[Sproles v. Binford, 286 U.S. 374, 388 (1932)]. It is now settledthat States “have power to legislate against what are found to beinjurious practices in their internal commercial and business affairs,so long as their laws do not run afoul of some specific federalconstitutional prohibition, or of some valid federal law” [LincolnFederal 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)] ofthe Due Process Clause to nullify laws which a majority of theCourt 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 ofAdams been abandoned, but also this Court, almost 15 years ago,expressly pointed to another opinion of this Court as having “clearlyundermined” Adams.[Lincoln Federal Labor Union, etc. v.Northwestern Iron & Metal Co., 335 U.S. 525 (1949)]. Weconclude that the Kansas Legislature was free to decide for itselfthat legislation was needed to deal with the business of debtadjusting. Unquestionably, there are arguments showing that thebusiness of debt adjusting has social utility, but such argumentsare properly addressed to the legislature, not to us. We refuse tosit as a “superlegislature to weigh the wisdom of legislation,” [Day-Brite Lighting, Inc., v. Missouri, 342 U.S. 421, 423 (1923)] andwe emphatically refuse to go back to the time when courts usedthe Due Process Clause “to strike down state laws, regulatory ofbusiness 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 (1955)].Norare we able or willing to draw lines by calling a law “prohibitory”or “regulatory.” Whether the legislature takes for its textbook AdamSmith, Herbert Spencer, Lord Keynes, or some other is no concernof ours. The Kansas debt adjusting statute may be wise or unwise.But relief, if any be needed, lies not with us, but with the bodyconstituted to pass laws for the State of Kansas.

Nor is the statute’s exception of lawyers a denial of equal protectionof the laws to nonlawyers. Statutes create many classificationswhich do not deny equal protection; it is only “invidiousdiscrimination” which offends the Constitution. The business ofdebt adjusting gives rise to a relationship of trust in which the debtadjuster will, in a situation of insolvency, be marshalling assets inthe manner of a proceeding in bankruptcy. The debt adjuster’sclient may need advice as to the legality of the various claimsagainst him remedies existing under state laws governing debtor-creditor relationships, or provisions of the Bankruptcy Act - advice ABC

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which a nonlawyer cannot lawfully give him. If the State of Kansaswants to limit debt adjusting to lawyers, the Equal Protection Clausedoes not forbid it. We also find no merit in the contention that theFourteenth Amendment is violated by the failure of the Kansasstatute’s title to be as specific as appellee thinks it ought to beunder the Kansas Constitution.”[3]

8. In this country, this Court in R.K. Garg v. Union of India,(1981) 4 SCC 675 has held:

“8. Another rule of equal importance is that laws relating toeconomic activities should be viewed with greater latitude thanlaws touching civil rights such as freedom of speech, religion etc.It has been said by no less a person than Holmes, J., that thelegislature should be allowed some play in the joints, because ithas to deal with complex problems which do not admit of solutionthrough any doctrinaire or strait-jacket formula and this isparticularly true in case of legislation dealing with economicmatters, where, having regard to the nature of the problemsrequired to be dealt with, greater play in the joints has to be allowedto the legislature. The court should feel more inclined to give judicialdeference to legislative judgment in the field of economic regulationthan in other areas where fundamental human rights are involved.Nowhere has this admonition been more felicitously expressedthan 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 aregood reasons for judicial self-restraint if not judicial deferenceto legislative judgment. The legislature after all has theaffirmative responsibility. The courts have only the power todestroy, not to reconstruct. When these are added to thecomplexity of economic regulation, the uncertainty, the liabilityto error, the bewildering conflict of the experts, and the numberof times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom andinstitutional prestige and stability.”

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

The Court must always remember that “legislation is directed topractical problems, that the economic mechanism is highly sensitiveand complex, that many problems are singular and contingent,that laws are not abstract propositions and do not relate to abstractunits and are not to be measured by abstract symmetry”; “thatexact wisdom and nice adaption of remedy are not always possible”and that “judgment is largely a prophecy based on meagre anduninterpreted experience”. Every legislation, particularly ineconomic matters is essentially empiric and it is based onexperimentation or what one may call trial and error method andtherefore it cannot provide for all possible situations or anticipateall possible abuses. There may be crudities and inequities incomplicated experimental economic legislation but on that accountalone it cannot be struck down as invalid.The courts cannot, aspointed out by the United States Supreme Court in Secretary ofAgriculture v. Central Roig Refining Company [94 L Ed 381 :338 US 604 (1950)] be converted into tribunals for relief fromsuch crudities and inequities. There may even be possibilities ofabuse, but that too cannot of itself be a ground for invalidating thelegislation, because it is not possible for any legislature to anticipateas if by some divine prescience, distortions and abuses of itslegislation which may be made by those subject to its provisionsand to provide against such distortions and abuses. Indeed,howsoever great may be the care bestowed on its framing, it isdifficult to conceive of a legislation which is not capable of beingabused by perverted human ingenuity. The Court must thereforeadjudge the constitutionality of such legislation by the generalityof its provisions and not by its crudities or inequities or by thepossibilities of abuse of any of its provisions.If any crudities,inequities or possibilities of abuse come to light, the legislaturecan always step in and enact suitable amendatory legislation. Thatis the essence of pragmatic approach which must guide and inspirethe legislature in dealing with complex economic issues.”

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19. It is true that certain immunities and exemptions are grantedto persons investing their unaccounted money in purchase ofSpecial Bearer Bonds but that is an inducement which has to be AB

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offered for unearthing black money. Those who have successfullyevaded taxation and concealed their income or wealth despite thestringent tax laws and the efforts of the tax department are notlikely to disclose their unaccounted money without someinducement by way of immunities and exemptions and it mustnecessarily be left to the legislature to decide what immunitiesand exemptions would be sufficient for the purpose. It would beoutside the province of the Court to consider if any particularimmunity or exemption is necessary or not for the purpose ofinducing disclosure of black money. That would depend upondiverse fiscal and economic considerations based on practicalnecessity and administrative expediency and would also involve acertain amount of experimentation on which the Court would beleast fitted to pronounce. The Court would not have the necessarycompetence and expertise to adjudicate upon such an economicissue. The Court cannot possibly assess or evaluate what wouldbe the impact of a particular immunity or exemption and whetherit would serve the purpose in view or not. There are so manyimponderables that would enter into the determination that it wouldbe wise for the Court not to hazard an opinion where eveneconomists may differ. The Court must while examining theconstitutional validity of a legislation of this kind, “be resilient, notrigid, forward looking, not static, liberal, not verbal” and the Courtmust always bear in mind the constitutional proposition enunciatedby the Supreme Court of the United States in Munn v. Illinois [94US 13] , namely, “that courts do not substitute their social andeconomic beliefs for the judgment of legislative bodies”. The Courtmust defer to legislative judgment in matters relating to social andeconomic policies and must not interfere, unless the exercise oflegislative judgment appears to be palpably arbitrary.The Courtshould constantly remind itself of what the Supreme Court of theUnited States said in Metropolis Theater Company v. City ofChicago [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 maybe, and unscientific. But even such criticism should not behastily expressed. What is best is not always discernible, thewisdom of any choice may be disputed or condemned. Mereerror of government are not subject to our judicial review.”

It is true that one or the other of the immunities or exemptionsgranted under the provisions of the Act may be taken advantageof by resourceful persons by adopting ingenious methods anddevices with a view to avoiding or saving tax. But that cannot behelped because human ingenuity is so great when it comes to taxavoidance that it would be almost impossible to frame tax legislationwhich cannot be abused. Moreover, as already pointed out above,the trial and error method is inherent in every legislative effort todeal with an obstinate social or economic issue and if it is foundthat any immunity or exemption granted under the Act is beingutilized for tax evasion or avoidance not intended by the legislature,the Act can always be amended and the abuse terminated. Weare accordingly of the view that none of the provisions of the Actis violative of Article 14 and its constitutional validity must beupheld.”

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

“26. The services rendered by certain informal sectors of theIndian economy could not be belittled. However, in the path ofeconomic progress, if the informal system was sought to bereplaced by a more organized system, capable of better regulationand discipline, then this was an economic philosophy reflected bythe legislation in question. Such a philosophy might have its meritsand demerits. But these were matters of economic policy. Theyare best left to the wisdom of the legislature and in policy mattersthe accepted principle is that the courts should not interfere.Moreover in the context of the changed economic scenario theexpertise of people dealing with the subject should not be lightlyinterfered with. The consequences of such interdiction can havelarge-scale ramifications and can put the clock back for a numberof years. The process of rationalization of the infirmities in theeconomy can be put in serious jeopardy and, therefore, it isnecessary that while dealing with economic legislations, this Court,while not jettisoning its jurisdiction to curb arbitrary action orunconstitutional legislation, should interfere only in those few caseswhere the view reflected in the legislation is not possible to betaken at all.”

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“30. Before we conclude there is another matter which we mustadvert to. It has been brought to our notice that Section 45-S ofthe Act has been challenged in various High Courts and a few ofthem have granted the stay of provisions of Section 45-S. Whenconsidering an application for staying the operation of a piece oflegislation, and that too pertaining to economic reform or change,then the courts must bear in mind that unless the provision ismanifestly unjust or glaringly unconstitutional, the courts must showjudicial restraint in staying the applicability of the same. Merelybecause a statute comes up for examination and some arguablepoint is raised, which persuades the courts to consider thecontroversy, the legislative will should not normally be put undersuspension pending such consideration. It is now well settled thatthere is always a presumption in favour of the constitutional validityof any legislation, unless the same is set aside after final hearingand, therefore, the tendency to grant stay of legislation relating toeconomic reform, at the interim stage, cannot be understood. Thesystem of checks and balances has to be utilized in a balancedmanner with the primary objective of accelerating economic growthrather than suspending its growth by doubting its constitutionalefficacy at the threshold itself.”

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 aright to amend, modify or even rescind a particular scheme. It iswell settled that in complex economic matters every decision isnecessarily empiric and it is based on experimentation or whatone may call trial and error method and therefore, its validity cannotbe tested on any rigid prior considerations or on the application ofany straitjacket formula. In Balco Employees’ Union v. Unionof India [Balco Employees’ Union v. Union of India, (2002) 2SCC 333], the Supreme Court held that laws, including executiveaction relating to economic activities should be viewed with greaterlatitude than laws touching civil rights such as freedom of speech,religion, etc. that the legislature should be allowed some play inthe joints because it has to deal with complex problems which do not admit of solution through any doctrine or straitjacket formulaand this is particularly true in case of legislation dealing witheconomic matters, where having regard to the nature of theproblems greater latitude require to be allowed to thelegislature……”

It is with this background, factual and legal, that the constitutionalvalidity of the Insolvency and Bankruptcy Code, 2016 has to be viewed.

THERAISOND’ÊTREFORTHE INSOLVENCYAND BANKRUPTCY CODE

9. The Statement of Objects and Reasons for the Code havebeen referred to in Innoventive Industries (supra) which states:

“12. ……The Statement of Objects and Reasons of the Codereads as under:

“Statement of Objects and Reasons.—There is no single law inIndia that deals with insolvency and bankruptcy. Provisions relatingto insolvency and bankruptcy for companies can be found in theSick Industrial Companies (Special Provisions) Act, 1985, theRecovery of Debts Due to Banks and Financial Institutions Act,1993, the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002 and the CompaniesAct, 2013. These statutes provide for creation of multiple forasuch as Board of Industrial and Financial Reconstruction (BIFR),Debts Recovery Tribunal (DRT) and National Company LawTribunal (NCLT) and their respective Appellate Tribunals.Liquidation of companies is handled by the High Courts. Individualbankruptcy and insolvency is dealt with under the PresidencyTowns Insolvency Act, 1909, and the Provincial Insolvency Act,1920 and is dealt with by the Courts. The existing frameworkfor insolvency and bankruptcy is inadequate, ineffective andresults in undue delays in resolution, therefore, the proposedlegislation.

2. The objective of the Insolvency and Bankruptcy Code, 2015is to consolidate and amend the laws relating to reorganizationand insolvency resolution of corporate persons, partnershipfirms and individuals in a time-bound manner for maximizationof value of assets of such persons, to promoteentrepreneurship, availability of credit and balance theinterests of all the stakeholders including alteration in the A

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priority of payment of government dues and to establish anInsolvency and Bankruptcy Fund, and matters connectedtherewith or incidental thereto. An effective legal frameworkfor timely resolution of insolvency and bankruptcy wouldsupport development of credit markets and encourageentrepreneurship. It would also improve Ease of DoingBusiness, and facilitate more investments leading to highereconomic growth and development.

3. The Code seeks to provide for designating NCLT and DRT asthe Adjudicating Authorities for corporate persons and firms andindividuals, respectively, for resolution of insolvency, liquidationand bankruptcy. The Code separates commercial aspects ofinsolvency and bankruptcy proceedings from judicial aspects. TheCode also seeks to provide for establishment of the Insolvencyand Bankruptcy Board of India (Board) for regulation of insolvencyprofessionals, insolvency professional agencies and informationutilities. Till the Board is established, the Central Government shallexercise all powers of the Board or designate any financial sectorregulator to exercise the powers and functions of the Board.Insolvency professionals will assist in completion of insolvencyresolution, liquidation and bankruptcy proceedings envisaged inthe Code. Information Utilities would collect, collate, authenticateand disseminate financial information to facilitate such proceedings.The Code also proposes to establish a fund to be called theInsolvency and Bankruptcy Fund of India for the purposes specifiedin the Code.

4. The Code seeks to provide for amendments in the IndianPartnership Act, 1932, the Central Excise Act, 1944, CustomsAct, 1962, the Income Tax Act, 1961, the Recovery of DebtsDue to Banks and Financial Institutions Act, 1993, the FinanceAct, 1994, the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002, the Sick IndustrialCompanies (Special Provisions) Repeal Act, 2003, the Paymentand Settlement Systems Act, 2007, the Limited Liability PartnershipAct, 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 toreorganization and insolvency resolution of corporate persons,partnership firms and individuals in a time-bound manner formaximization of value of assets of such persons, to promoteentrepreneurship, availability of credit and balance the interestsof all the stakeholders including alteration in the order of priorityof payment of Government dues and to establish an Insolvencyand Bankruptcy Board of India, and for matters connectedtherewith or incidental thereto.”

11. As is discernible, the Preamble gives an insight into what issought to be achieved by the Code. The Code is first and foremost, aCode for reorganization and insolvency resolution of corporate debtors.Unless such reorganization is effected in a time-bound manner, the valueof the assets of such persons will deplete. Therefore, maximization ofvalue of the assets of such persons so that they are efficiently run asgoing concerns is another very important objective of the Code. This, inturn, will promote entrepreneurship as the persons in management ofthe corporate debtor are removed and replaced by entrepreneurs. When,therefore, a resolution plan takes off and the corporate debtor is broughtback into the economic mainstream, it is able to repay its debts, which, inturn, enhances the viability of credit in the hands of banks and financialinstitutions. Above all, ultimately, the interests of all stakeholders arelooked after as the corporate debtor itself becomes a beneficiary of theresolution scheme – workers are paid, the creditors in the long run willbe repaid in full, and shareholders/investors are able to maximize theirinvestment. Timely resolution of a corporate debtor who is in the red, byan effective legal framework, would go a long way to support thedevelopment of credit markets. Since more investment can be madewith funds that have come back into the economy, business then easesup, which leads, overall, to higher economic growth and development ofthe Indian economy. What is interesting to note is that the Preambledoes not, in any manner, refer to liquidation, which is only availed of as alast resort if there is either no resolution plan or the resolution planssubmitted are not up to the mark. Even in liquidation, the liquidator cansell the business of the corporate debtor as a going concern. [SeeArcelorMittal (supra) at paragraph 83, footnote 3].

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A12. It can thus be seen that the primary focus of the legislation isto ensure revival and continuation of the corporate debtor by protectingthe corporate debtor from its own management and from a corporatedeath by liquidation. The Code is thus a beneficial legislation which putsthe corporate debtor back on its feet, not being a mere recovery legislationfor creditors. The interests of the corporate debtor have, therefore, beenBbifurcated and separated from that of its promoters / those who are inmanagement. Thus, the resolution process is not adversarial to thecorporate debtor but, in fact, protective of its interests. The moratoriumimposed by Section 14 is in the interest of the corporate debtor itself,thereby preserving the assets of the corporate debtor during the resolutionCprocess. The timelines within which the resolution process is to takeplace again protects the corporate debtor’s assets from further dilution,and also protects all its creditors and workers by seeing that the resolutionprocess goes through as fast as possible so that another managementcan, through its entrepreneurial skills, resuscitate the corporate debtor toachieve all these ends.DAPPOINTMENTOFMEMBERSOFTHE NCLTANDTHE NCLATNOTCONTRARYTOTHIS COURT’SJUDGMENTS.

13. Shri Rohatgi has argued that contrary to the judgments inMadras Bar Association (I) (supra) and Madras Bar AssociationE(III) (supra), Section 412(2) of the Companies Act, 2013 continued onthe statute book, as a result of which, the two Judicial Members of theSelection Committee get outweighed by three bureaucrats.

14. On 03.01.2018, the Companies Amendment Act, 2017 wasbrought into force by which Section 412 of the Companies Act, 2013was amended as follows:F

“412. Selection of Members of Tribunal and AppellateTribunal.—

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(2) The Members of the Tribunal and the Technical Members ofGthe Appellate Tribunal shall be appointed on the recommendationof 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 ofHHigh Court—Member;

(c) Secretary in the Ministry of Corporate Affairs—Member;and (d) Secretary in the Ministry of Law and Justice—Member.(2-A) Where in a meeting of the Selection Committee, there isequality of votes on any matter, the Chairperson shall have a castingvote.”

This was brought into force by a notification dated 09.02.2018.However, an additional affidavit has been filed during the course of theseproceedings by the Union of India. This affidavit is filed by one Dr. RajSingh, Regional Director (Northern Region) of the Ministry of CorporateAffairs. This affidavit makes it clear that, acting in compliance with thedirections of the Supreme Court in the aforesaid judgments, a SelectionCommittee was constituted to make appointments of Members of theNCLT 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 SelectionCommittee. This Selection Committee was reconstituted on 22.02.2017to make further appointments. In compliance of the directions of thisCourt, advertisements dated 10.08.2015 were issued inviting applicationsfor Judicial and Technical Members as a result of which, all the presentMembers of the NCLT and NCLAT have been appointed. This beingthe case, we need not detain ourselves any further with regard to thefirst submission of Shri Rohatgi.

NCLAT BENCHONLYAT DELHI.

15. It has been argued by Shri Rohatgi that as per our judgment inMadras Bar Association (II) (supra), paragraph 123 states as follows:

“123. We shall first examine the validity of Section 5 of the NTTAct. The basis of challenge to the above provision has alreadybeen narrated by us while dealing with the submissions advancedon 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 itssittings in the National Capital Territory of Delhi. According tothe petitioners, the aforesaid mandate would deprive the litigatingassessee the convenience of approaching the jurisdictional High A

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Court in the State to which he belongs. An assessee may belongto a distant/remote State, in which eventuality, he would not merelyhave to suffer the hardship of travelling a long distance, but suchtravel would also entail uncalled for financial expense. Likewise,a litigant assessee from a far-flung State may find it extremelydifficult and inconvenient to identify an Advocate who wouldrepresent him before NTT, since the same is mandated to beordinarily located in the National Capital Territory of Delhi. Eventhough we have expressed the view, that it is open to Parliamentto substitute the appellate jurisdiction vested in the jurisdictionalHigh Courts and constitute courts/tribunals to exercise the saidjurisdiction, we are of the view, that while vesting jurisdiction inan alternative court/tribunal, it is imperative for the legislature toensure that redress should be available with the same convenienceand expediency as it was prior to the introduction of the newlycreated court/tribunal. Thus viewed, the mandate incorporated inSection 5(2) of the NTT Act to the effect that the sittings of NTTwould ordinarily be conducted in the National Capital Territory ofDelhi, would render the remedy inefficacious, and thusunacceptable in law. The instant aspect of the matter wasconsidered by this Court with reference to the AdministrativeTribunals Act, 1985 in S.P. Sampath Kumar case [S.P. SampathKumar v. Union of India, (1987) 1 SCC 124 : (1987) 2 ATC 82]and L. Chandra Kumar case [L. Chandra Kumar v. Union ofIndia, (1997) 3 SCC 261 : 1997 SCC (L&S) 577], wherein it washeld that permanent Benches needed to be established at the seatof every jurisdictional High Court. And if that was not possible, atleast a Circuit Bench required to be established at every placewhere an aggrieved party could avail of his remedy. The positionon the above issue is no different in the present controversy. Forthe above reason, Section 5(2) of the NTT Act is in clear breachof the law declared by this Court.”

16. The learned Attorney General has assured us that thisjudgment will be followed and Circuit Benches will be established assoon as it is practicable. In this view of the matter, we record thissubmission and direct the Union of India to set up Circuit Benches of theNCLAT within a period of 6 months from today.

THETRIBUNALSAREFUNCTIONINGUNDERTHEWRONGMINISTRY

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 thedefects in Parts I-B and I-C of the Act:

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(xii) The administrative support for all Tribunals should be fromthe Ministry of Law and Justice. Neither the Tribunals northeir members shall seek or be provided with facilities fromthe respective sponsoring or parent Ministries or Departmentconcerned.

Even though eight years have passed since the date of this judgment,the administrative support for these tribunals continues to be from theMinistry of Corporate Affairs. This needs to be rectified at the earliest.

18. However, the learned Attorney General pointed out Article77(3) of the Constitution of India and Delhi International AirportLimited v. International Lease Finance Corporation and Ors.,(2015) 8 SCC 446, which state that once rules of business are allocatedamong various Ministries, such allocation is mandatory in nature.According to him, therefore, the rules of business, having allocated matterswhich arise under the Insolvency Code to the Ministry of CorporateAffairs, are mandatory in nature and have to be followed.

19. It is obvious that the rules of business, being mandatory innature, and having to be followed, are to be so followed by the executivebranch of the Government. As far as we are concerned, we are boundby the Constitution Bench judgment in Madras Bar Association (I)(supra). This statement of the law has been made eight years ago. It ishigh time that the Union of India follow, both in letter and spirit, thejudgment of this Court.

CLASSIFICATIONBETWEENFINANCIALCREDITORANDOPERATIONALCREDITORNEITHERDISCRIMINATORY, NORARBITRARY, NORVIOLATIVEOFARTICLE 14 OFTHE CONSTITUTIONOF INDIA.

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Aequality, have been settled by this Court time and again. Since equality isonly among equals, no discrimination results if the Court can be shownthat there is an intelligible differentia which separates two kinds ofcreditors so long as there is some rational relation between the creditorsso differentiated, with the object sought to be achieved by the legislation.This aspect of Article 14 has been laid down in judgments too numerousBto cite, from the very inception.

21. Another development of the law is that legislation can be struckdown as being manifestly arbitrary. This has been laid down by the recentConstitution Bench decision in Shayara Bano (supra) as follows:

C“95. On a reading of this judgment in Natural ResourcesAllocation case [Natural Resources Allocation, In re, SpecialReference No. 1 of 2012, (2012) 10 SCC 1], it is clear that thisCourt did not read McDowell [State of A.P. v. McDowell andCo., (1996) 3 SCC 709] as being an authority for the propositionthat legislation can never be struck down as being arbitrary. IndeedDthe Court, after referring to all the earlier judgments, and AjayHasia [Ajay Hasia v. Khalid Mujib Sehravardi, (1981) 1 SCC722 : 1981 SCC (L&S) 258] in particular, which stated thatlegislation can be struck down on the ground that it is “arbitrary”under Article 14, went on to conclude that “arbitrariness” whenEapplied to legislation cannot be used loosely. Instead, it broad basedthe test, stating that if a constitutional infirmity is found, Article 14will interdict such infirmity. And a constitutional infirmity is foundin Article 14 itself whenever legislation is “manifestly arbitrary”i.e. when it is not fair, not reasonable, discriminatory, nottransparent, capricious, biased, with favouritism or nepotism andFnot in pursuit of promotion of healthy competition and equitabletreatment. Positively speaking, it should conform to norms whichare rational, informed with reason and guided by public interest,etc.

96. Another Constitution Bench decision in Subramanian Swamyv. CBI [Subramanian Swamy v. CBI, (2014) 8 SCC 682 : (2014)6 SCC (Cri) 42 : (2014) 3 SCC (L&S) 36] dealt with a challengeto Section 6-A of the Delhi Special Police Establishment Act, 1946.This section was ultimately struck down as being discriminatoryand hence violative of Article 14. A specific reference had beenmade to the Constitution Bench by the reference order in G

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Subramanian Swamy v. CBI [Subramanian Swamy v. CBI,(2005) 2 SCC 317 : 2005 SCC (L&S) 241] and after referring toseveral judgments including Ajay Hasia [Ajay Hasia v. KhalidMujib 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 [MalpeVishwanath Acharya v. State of Maharashtra, (1998) 2 SCC1] and McDowell [State of A.P. v. McDowell and Co., (1996) 3SCC 709], the reference, inter alia, was as to whether arbitrarinessand unreasonableness, being facets of Article 14, are or are notavailable as grounds to invalidate a legislation.

97. After referring to the submissions of the counsel, and severaljudgments on the discrimination aspect of Article 14, this Courtheld: (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) 4SCC 3 : 1974 SCC (L&S) 165] , it has been held by this Courtthat the basic principle which informs both Articles 14 and 16are equality and inhibition against discrimination. This Courtobserved in para 85 as under: (SCC p. 38)

‘85. … From a positivistic point of view, equality is antitheticto arbitrariness. In fact equality and arbitrariness are swornenemies; one belongs to the rule of law in a republic while theother, to the whim and caprice of an absolute monarch. Wherean act is arbitrary, it is implicit in it that it is unequal bothaccording to political logic and constitutional law and is thereforeviolative of Article 14, and if it affects any matter relating topublic employment, it is also violative of Article 16. Articles 14and 16 strike at arbitrariness in State action and ensure fairnessand equality of treatment.’

Court’s approach

49. Where there is challenge to the constitutional validity of a lawenacted by the legislature, the Court must keep in view that thereis always a presumption of constitutionality of an enactment, anda clear transgression of constitutional principles must be shown.The fundamental nature and importance of the legislative process AB

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needs to be recognised by the Court and due regard and deferencemust be accorded to the legislative process. Where the legislationis sought to be challenged as being unconstitutional and violativeof Article 14 of the Constitution, the Court must remind itself tothe principles relating to the applicability of Article 14 in relationto invalidation of legislation. The two dimensions of Article 14 inits application to legislation and rendering legislation invalid arenow well recognised and these are: (i) discrimination, based onan impermissible or invalid classification, and (ii) excessivedelegation of powers; conferment of uncanalised and unguidedpowers on the executive, whether in the form of delegatedlegislation or by way of conferment of authority to passadministrative 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 notbecome unconstitutional merely because there is another view orbecause another method may be considered to be as good oreven more effective, like any issue of social, or even economicpolicy. It is well settled that the courts do not substitute their viewson what the policy is.”

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

“Violation of fundamental rights

42. We have already seen that one of the tests for challengingthe constitutionality of subordinate legislation is that subordinatelegislation should not be manifestly arbitrary. Also, it is settledlaw that subordinate legislation can be challenged on any of thegrounds available for challenge against plenary legislation. [SeeIndian Express Newspapers (Bombay) (P) Ltd. v. Union ofIndia [Indian Express Newspapers (Bombay) (P) Ltd. v. Unionof 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 twojudgments of this Court. In Khoday Distilleries Ltd. v. State ofKarnataka [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 arearbitrary, unreasonable and cause undue hardship and, therefore,violate Article 14 of the Constitution. Although the protectionof Article 19(1)(g) may not be available to the appellants, theRules must, undoubtedly, satisfy the test of Article 14, which isa guarantee against arbitrary action. However, one must bearin mind that what is being challenged here under Article 14 isnot executive action but delegated legislation. The tests ofarbitrary action which apply to executive actions do notnecessarily apply to delegated legislation. In order thatdelegated legislation can be struck down, such legislationmust be manifestly arbitrary; a law which could not bereasonably expected to emanate from an authoritydelegated with the law-making power. In Indian ExpressNewspapers (Bombay) (P) Ltd. v. Union of India [IndianExpress Newspapers (Bombay) (P) Ltd. v. Union of India,(1985) 1 SCC 641 : 1985 SCC (Tax) 121], this Court said thata piece of subordinate legislation does not carry the same degreeof immunity which is enjoyed by a statute passed by a competentlegislature. A subordinate legislation may be questionedunder 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 acomparison between the law in England and in India, the Courtfurther 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, arbitrarinessis not a separate ground since it will come within theembargo of Article 14 of the Constitution. But subordinatelegislation must be so arbitrary that it could not be said tobe in conformity with the statute or that it offends Article14 of the Constitution.’

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

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‘25. … The tests of arbitrary action applicable to executive actiondo not necessarily apply to delegated legislation. In order to strikedown a delegated legislation as arbitrary it has to be establishedthat there is manifest arbitrariness. In order to be described asarbitrary, it must be shown that it was not reasonable andmanifestly arbitrary. The expression “arbitrarily” means: in anunreasonable manner, as fixed or done capriciously or at pleasure,without adequate determining principle, not founded in the natureof things, non-rational, not done or acting according to reason orjudgment, depending on the will alone.’”

(emphasis in original)

(emphasis in original)

101. It will be noticed that a Constitution Bench of this Court inIndian Express Newspapers (Bombay) (P) Ltd. v. Union ofIndia [Indian Express Newspapers (Bombay) (P) Ltd. v. Unionof India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that itwas settled law that subordinate legislation can be challenged onany of the grounds available for challenge against plenarylegislation. This being the case, there is no rational distinctionbetween the two types of legislation when it comes to this groundof challenge under Article 14. The test of manifest arbitrariness,therefore, as laid down in the aforesaid judgments would apply toinvalidate legislation as well as subordinate legislation under Article14. Manifest arbitrariness, therefore, must be something done bythe legislature capriciously, irrationally and/or without adequatedetermining principle. Also, when something is done which isexcessive and disproportionate, such legislation would be manifestlyarbitrary. We are, therefore, of the view that arbitrariness in thesense of manifest arbitrariness as pointed out by us above wouldapply to negate legislation as well under Article 14.”

This judgment has since been followed in Gopal Jha v. TheHon’ble Supreme Court of India, Writ Petition (Civil) No. 745/2018[decided on 25.10.2018] (at paragraph 27); Indian Young LawyersAssociations and Ors. v. State of Kerala and Ors., Writ Petition(Civil) No. 373/2006 [decided on 28.09.2018]; Joseph Shine v. Unionof 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 paragraphs77, 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); LokPrahari v. State of Uttar Pradesh and Ors., (2018) 6 SCC 1 (atparagraph 35); and Nikesh Tarachand Shah v. Union of India andOrs., (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 otherwiserequires,—

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(7) “financial creditor” means any person to whom a financialdebt is owed and includes a person to whom such debt has beenlegally assigned or transferred to;

(8) “financial debt” means a debt along with interest, if any, whichis disbursed against the consideration for the time value of moneyand includes—

(a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptancecredit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facilityor the issue of bonds, notes, debentures, loan stock or anysimilar instrument; (d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as a finance or capitallease under the Indian Accounting Standards or such otheraccounting standards as may be prescribed; (e) receivables sold or discounted other than any receivablessold on non-recourse basis; (f) any amount raised under any other transaction, includingany forward sale or purchase agreement, having the commercialeffect of a borrowing; Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estateproject shall be deemed to be an amount having thecommercial effect of a borrowing; and A

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(ii) the expressions, “allottee” and “real estate project” shallhave the meanings respectively assigned to them in clauses(d) and (zn) of Section 2 of the Real Estate (Regulation andDevelopment) Act, 2016 (16 of 2016); (g) any derivative transaction entered into in connection withprotection against or benefit from fluctuation in any rate or priceand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account; B

(h) any counter-indemnity obligation in respect of a guarantee,indemnity, bond, documentary letter of credit or any other instrumentissued by a bank or financial institution; C

(i) the amount of any liability in respect of any of the guarantee orindemnity for any of the items referred to in sub-clauses (a) to(h) of this clause;

DSection 5(20) defines “operational creditor” as follows:

“5. Definitions.—In this Part, unless the context otherwiserequires,—

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(20) “operational creditor” means a person to whom anoperational debt is owed and includes any person to whomsuch debt has been legally assigned or transferred; E

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Section 7 of the Code states:

“7. Initiation of corporate insolvency resolution process byfinancial creditor.—(1) A financial creditor either by itself orjointly with other financial creditors, or any other person on behalfof the financial creditor, as may be notified by the CentralGovernment, may file an application for initiating corporateinsolvency resolution process against a corporate debtor beforethe Adjudicating Authority when a default has occurred.

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Explanation.—For the purposes of this sub-section, a defaultincludes a default in respect of a financial debt owed not only tothe applicant financial creditor but to any other financial creditorof the corporate debtor.

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

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

(a) record of the default recorded with the information utilityor such other record or evidence of default as may be specified; (b) the name of the resolution professional proposed to act asan interim resolution professional; and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of thereceipt of the application under sub-section (2), ascertain theexistence of a default from the records of an information utility oron the basis of other evidence furnished by the financial creditorunder sub-section (3).

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application undersub-section (2) is complete, and there is no disciplinaryproceedings pending against the proposed resolutionprofessional, it may, by order, admit such application; or (b) default has not occurred or the application undersub-section (2) is incomplete or any disciplinary proceeding ispending against the proposed resolution professional, it may,by order, reject such application:

Provided that the Adjudicating Authority shall, before rejectingthe application under clause (b) of sub-section (5), give a noticeto the applicant to rectify the defect in his application withinseven days of receipt of such notice from the AdjudicatingAuthority.

(6) The corporate insolvency resolution process shall commencefrom 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 financialcreditor and the corporate debtor; A

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A(b) the order under clause (b) of sub-section (5) to the financialcreditor, within seven days of admission or rejection of suchapplication, as the case may be.”

23. A perusal of the definition of “financial creditor” and “financialdebt” makes it clear that a financial debt is a debt together with interest,Bif any, which is disbursed against the consideration for time value ofmoney. It may further be money that is borrowed or raised in any of themanners prescribed in Section 5(8) or otherwise, as Section 5(8) is aninclusive definition. On the other hand, an “operational debt” would includea claim in respect of the provision of goods or services, includingemployment, or a debt in respect of payment of dues arising under anyClaw and payable to the Government or any local authority.

24. A financial creditor may trigger the Code either by itself orjointly with other financial creditors or such persons as may be notifiedby the Central Government when a “default” occurs. The Explanationto Section 7(1) also makes it clear that the Code may be triggered byDsuch persons in respect of a default made to any other financial creditorof the corporate debtor, making it clear that once triggered, the resolutionprocess under the Code is a collective proceeding in rem which seeks, inthe first instance, to rehabilitate the corporate debtor. Under Section 7(4),the Adjudicating Authority shall, within the prescribed period, ascertainthe existence of a default on the basis of evidence furnished by theEfinancial creditor; and under Section 7(5), the Adjudicating Authorityhas to be satisfied that a default has occurred, when it may, by order,admit the application, or dismiss the application if such default has notoccurred. On the other hand, under Sections 8 and 9, an operationalcreditor may, on the occurrence of a default, deliver a demand noticeFwhich must then be replied to within the specified period. What is importantis that at this stage, if an application is filed before the AdjudicatingAuthority for initiating the corporate insolvency resolution process, thecorporate debtor can prove that the debt is disputed. When the debt is sodisputed, such application would be rejected.

G25. The argument of learned counsel on behalf of the petitionersis that in point of fact, there is no intelligible differentia having relation tothe objects sought to be achieved by the Code between financial andoperational creditors and indeed, nowhere in the world has this distinctionbeen made. The BLRC Report presents what according to it is therationale for the reason to differentiate between financial and operationalHcreditors. 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 creditorshave electronic records of the liabilities filed in the InformationUtilities of Section 4.3, incontrovertible event of default on anyfinancial credit contract can be readily verifiable by accessingthis system. The evidence submitted of default by the debtor tothe operational creditor may be in either electronic or physicalform, since all operational creditors may or may not have electronicfilings of the debtors’ liability. Till such time that the InformationUtilities are ubiquitous, financial creditors may establish default ina manner similar to operational creditors.”

Similarly, the Insolvency and Bankruptcy Bill in the Notes on Clause8 states:

Similarly, the Insolvency and Bankruptcy Bill in the Notes on Clause8 states:

“Clause 8 lays down the procedure for the initiation of the corporateinsolvency resolution process by an operational creditor. Thisprocedure differs from the procedure applicable to financialcreditors as operational debts (such as trade debts, salary or wageclaims) tend to be small amounts (in comparison to financial debts)or are recurring in nature and may not be accurately reflected onthe records of information utilities at all times. The possibility ofdisputed debts in relation to operational creditors is also higher incomparison to financial creditors such as banks and financialinstitutions. Accordingly, the process for initiation of the insolvencyresolution process differs for an operational creditor…… Thisensures that operational creditors, whose debt claims are usuallysmaller, are not able to put the corporate debtor into the insolvencyresolution process prematurely or initiate the process for extraneousconsiderations. It may also facilitate informal negotiations betweensuch creditors and the corporate debtor, which may result in arestructuring of the debt outside the formal proceedings.”

However, the Insolvency Law Committee [“ILC”], in its Reportof March 2018 dealt with debenture holders and fixed deposit holders,who are also financial creditors, and are numerous. The Report thenwent on to state:

“10.6 For certain securities, a trustee or an agent may already beappointed as per the terms of the security instrument. For example,a debenture trustee would be appointed if debentures exceeding A

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500 have been issued [Section 71(5), Companies Act, 2013] or ifsecured debentures are issued [Rule 18(1)(c), Companies (ShareCapital and Debenture) Rules, 2014]. Such creditors may berepresented through such pre-appointed trustees or agents. Forother classes of creditors which exceed a certain threshold innumber, like home buyers or security holders for whom no trusteeor agent has already been appointed under a debt instrument orotherwise, an insolvency professional (other than the IRP) shallbe appointed by the NCLT on the request of the IRP. It is to benoted that as the agent or trustee or insolvency professional, i.e.the authorised representative for the creditors discussed aboveand executors, guarantors, etc. as discussed in paragraph 9 ofthis Report, shall be a part of the CoC, they cannot be relatedparties to the corporate debtor in line with the spirit of proviso tosection 21(2).”

xxx xxx xxx

“10.8 In light of the deliberation above, the Committee felt that amechanism requires to be provided in the Code to mandaterepresentation in meetings of security holders, deposit holders,and all other classes of financial creditors which exceed a certainnumber, through an authorised representative. This can be doneby adding a new provision to section 21 of the Code. Such arepresentative may either be a trustee or an agent appointed underthe terms of the debt agreement of such creditors, otherwise aninsolvency professional may be appointed by the NCLT for eachsuch class of financial creditors. Additionally, the representativeshall act and attend the meetings on behalf of the respective classof financial creditors and shall vote on behalf of each of thefinancial creditor to the extent of the voting share of each suchcreditor, and as per their instructions. To ensure adequaterepresentation by the authorised representative of the financialcreditors, a specific provision laying down the rights and duties ofsuch authorised representatives may be inserted. Further, therequisite threshold for the number of creditors and manner ofvoting may be specified by IBBI through regulations to enableefficient voting by the representative. Also, regulation 25 mayalso be amended to enable voting through electronic means suchas e-mail, to address any technical issues which may arise due toa 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—

(a) is in the form of securities or deposits and the terms of thefinancial debt provide for appointment of a trustee or agent toact as authorised representative for all the financial creditors,such trustee or agent shall act on behalf of such financialcreditors; (b) is owed to a class of creditors exceeding the number asmay be specified, other than the creditors covered under clause(a) or sub-section (6), the interim resolution professional shallmake an application to the Adjudicating Authority along withthe list of all financial creditors, containing the name of aninsolvency professional, other than the interim resolutionprofessional, to act as their authorised representative who shallbe appointed by the Adjudicating Authority prior to the firstmeeting of the committee of creditors;

(c) is represented by a guardian, executor or administrator,such person shall act as authorised representative on behalf ofsuch financial creditors, and such authorised representative under clause (a) or clause (b)or clause (c) shall attend the meetings of the committee ofcreditors, and vote on behalf of each financial creditor to the extentof 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, shallbe as per the terms of the financial debt or the relevantdocumentation; and

(ii) under clause (b) of sub-section (6-A) shall be as specifiedwhich shall form part of the insolvency resolution processcosts.”

Also, Regulations 16A and 16B of the Insolvency and BankruptcyBoard of India (Insolvency Resolution Process for Corporate Persons)

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ARegulations, 2016 [“CIRP Regulations”] were added, with effect from04.07.2018, as follows:

“16A. Authorised representative.—(1) The interim resolutionprofessional shall select the insolvency professional, who is thechoice of the highest number of financial creditors in the class inForm CA received under sub-regulation (1) of regulation 12, toact as the authorised representative of the creditors of therespective class:

B

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

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(2) The interim resolution professional shall apply to theAdjudicating Authority for appointment of the authorisedrepresentatives selected under sub-regulation (1) within two daysof the verification of claims received under sub-regulation (1) ofregulation 12.

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

(4) The interim resolution professional shall provide the list ofEcreditors in each class to the respective authorised representativeappointed by the Adjudicating Authority.

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

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Clarification: The authorised representative shall have no role inreceipt or verification of claims of creditors of the class herepresents.

(6) The interim resolution professional or the resolutionprofessional, as the case may be, shall provide electronic meansof communication between the authorised representative and thecreditors in the class.

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(7) The voting share of a creditor in a class shall be in proportionto the financial debt which includes an interest at the rate of eight H

per cent per annum unless a different rate has been agreed tobetween the parties.

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

B

Number of creditors in Fee per meeting of the the class committee (Rs.) 10-100 15,000 101-1000 20,000 CMore than 1000 25,000

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

16B. Committee with only creditors in a class.—Where thecorporate debtor has only creditors in a class and no other financialcreditor eligible to join the committee, the committee shall consistof only the authorised representative(s).”

26. It is obvious that debenture holders and persons with homeloans may be numerous and, therefore, have been statutorily dealt withby the aforesaid change made in the Code as well as the Regulations.However, as a general rule, it is correct to say that financial creditors,which involve banks and financial institutions, would certainly be smallerin 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 whereasmost operational creditors are unsecured, payments for goods andservices as well as payments to workers not being secured by mortgageddocuments and the like. The distinction between secured and unsecuredcreditors is a distinction which has obtained since the earliest of theCompanies Acts both in the United Kingdom and in this country. Apartfrom the above, the nature of loan agreements with financial creditors is D

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Adifferent from contracts with operational creditors for supplying goodsand services. Financial creditors generally lend finance on a term loanor for working capital that enables the corporate debtor to either set upand/or operate its business. On the other hand, contracts with operationalcreditors are relatable to supply of goods and services in the operationof business. Financial contracts generally involve large sums of money.BBy way of contrast, operational contracts have dues whose quantum isgenerally less. In the running of a business, operational creditors can bemany as opposed to financial creditors, who lend finance for the set upor working of business. Also, financial creditors have specified repaymentschedules, and defaults entitle financial creditors to recall a loan in totality.CContracts with operational creditors do not have any such stipulations.Also, the forum in which dispute resolution takes place is completelydifferent. Contracts with operational creditors can and do have arbitrationclauses where dispute resolution is done privately. Operational debtsalso tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financialDdebts. A simple example will suffice. Goods that are supplied may besubstandard. Services that are provided may be substandard. Goodsmay not have been supplied at all. All these qua operational debts arematters to be proved in arbitration or in the courts of law. On the otherhand, financial debts made to banks and financial institutions are well-Edocumented and defaults made are easily verifiable.

28. Most importantly, financial creditors are, from the verybeginning, involved with assessing the viability of the corporate debtor.They can, and therefore do, engage in restructuring of the loan as wellas reorganization of the corporate debtor’s business when there isFfinancial stress, which are things operational creditors do not and cannotdo. Thus, preserving the corporate debtor as a going concern, whileensuring maximum recovery for all creditors being the objective of theCode, financial creditors are clearly different from operational creditorsand therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved byGthe Code.

NOTICE, HEARING, ANDSET-OFFORCOUNTERCLAIMQUAFINANCIAL

DEBTS.

29. This Court, in Innoventive Industries (supra) stated asfollows:H

“27. The scheme of the Code is to ensure that when a defaulttakes place, in the sense that a debt becomes due and is not paid,the insolvency resolution process begins. Default is defined inSection 3(12) in very wide terms as meaning non-payment of adebt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For themeaning of “debt”, we have to go to Section 3(11), which in turntells 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 toSection 3(6) which defines “claim” to mean a right to paymenteven if it is disputed. The Code gets triggered the moment defaultis of rupees one lakh or more (Section 4). The corporate insolvencyresolution process may be triggered by the corporate debtor itselfor a financial creditor or operational creditor. A distinction is madeby the Code between debts owed to financial creditors andoperational creditors. A financial creditor has been defined underSection 5(7) as a person to whom a financial debt is owed and afinancial debt is defined in Section 5(8) to mean a debt which isdisbursed against consideration for the time value of money. Asopposed to this, an operational creditor means a person to whoman operational debt is owed and an operational debt under Section5(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 Section7(1), a default is in respect of a financial debt owed to any financialcreditor of the corporate debtor — it need not be a debt owed tothe applicant financial creditor. Under Section 7(2), an applicationis to be made under sub-section (1) in such form and manner as isprescribed, which takes us to the Insolvency and Bankruptcy(Application to Adjudicating Authority) Rules, 2016. Under Rule4, the application is made by a financial creditor in Form 1accompanied by documents and records required therein. Form 1is a detailed form in 5 parts, which requires particulars of theapplicant in Part I, particulars of the corporate debtor in Part II,particulars of the proposed interim resolution professional in PartIII, particulars of the financial debt in Part IV and documents,records and evidence of default in Part V. Under Rule 4(3), theapplicant is to dispatch a copy of the application filed with the ABCD

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ABCD

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Adjudicating Authority by registered post or speed post to theregistered office of the corporate debtor. The speed, within whichthe Adjudicating Authority is to ascertain the existence of a defaultfrom the records of the information utility or on the basis of evidencefurnished by the financial creditor, is important. This it must dowithin 14 days of the receipt of the application. It is at the stage ofSection 7(5), where the Adjudicating Authority is to be satisfiedthat a default has occurred, that the corporate debtor is entitled topoint out that a default has not occurred in the sense that the“debt”, which may also include a disputed claim, is not due. Adebt may not be due if it is not payable in law or in fact. Themoment the Adjudicating Authority is satisfied that a default hasoccurred, the application must be admitted unless it is incomplete,in which case it may give notice to the applicant to rectify thedefect within 7 days of receipt of a notice from the AdjudicatingAuthority. Under sub-section (7), the Adjudicating Authority shallthen communicate the order passed to the financial creditor andcorporate debtor within 7 days of admission or rejection of suchapplication, as the case may be.

29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on the occurrenceof a default, to first deliver a demand notice of the unpaid debt tothe operational debtor in the manner provided in Section 8(1) ofthe Code. Under Section 8(2), the corporate debtor can, within aperiod of 10 days of receipt of the demand notice or copy of theinvoice mentioned in sub-section (1), bring to the notice of theoperational creditor the existence of a dispute or the record of thependency of a suit or arbitration proceedings, which is pre-existing—i.e. before such notice or invoice was received by thecorporate 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 corporatedebtor who commits a default of a financial debt, the AdjudicatingAuthority has merely to see the records of the information utilityor other evidence produced by the financial creditor to satisfyitself that a default has occurred. It is of no matter that the debt isdisputed so long as the debt is “due” i.e. payable unless interdictedby 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 thesatisfaction of the Adjudicating Authority that the AdjudicatingAuthority may reject an application and not otherwise.”

30. Section 3(9)(c) read with Section 214(e) of the Code areimportant and are set out as under:

“3. Definitions.—In this Code, unless the context otherwiserequires,—

xxx xxx xxx

(9) “core services” means services rendered by an informationutility for—

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(c) authenticating and verifying the financial informationsubmitted by a person; and

“214. Obligations of information utility.—For the purposes ofproviding core services to any person, every information utilityshall—

xxx xxx xxx

(e) get the information received from various personsauthenticated by all concerned parties before storing suchinformation;

xxx xxx xxx”

31. It is clear from these Sections that information in respect ofdebts incurred by financial debtors is easily available through informationutilities which, under the Insolvency and Bankruptcy Board of India(Information Utilities) Regulations, 2017 [“Information UtilitiesRegulations”], are to satisfy themselves that information provided asto the debt is accurate. This is done by giving notice to the corporatedebtor who then has an opportunity to correct such information.

32. Apart from the record maintained by such utility, Form Iappended to the Insolvency and Bankruptcy (Application to AdjudicatingAuthority) Rules, 2016, makes it clear that the following are other sourceswhich evidence a financial debt:

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A(a) Particulars of security held, if any, the date of its creation, itsestimated value as per the creditor; (b) Certificate of registration of charge issued by the registrar ofcompanies (if the corporate debtor is a company);

(c) Order of a court, tribunal or arbitral panel adjudicating on theBdefault; (d) Record of default with the information utility; (e) Details of succession certificate, or probate of a will, or letterof administration, or court decree (as may be applicable), underthe Indian Succession Act, 1925; C

(f) The latest and complete copy of the financial contract reflectingall amendments and waivers to date; (g) A record of default as available with any credit informationcompany; D

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

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

“4. Application by financial creditor.—

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

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

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

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

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

(3) The Tribunal shall send a copy of every order passed underthis 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 deemedto limit or otherwise affect the inherent powers of the Tribunal tomake such orders as may be necessary for meeting the ends ofjustice or to prevent abuse of the process of the Tribunal.”

xxx xxx xxx

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

(2) The general heading in all proceedings before the Tribunal, inall advertisements and notices shall be in Form No. NCLT 4.

(3) Every petition or application or reference shall be filed in formas provided in Form No. NCLT 1 with attachments theretoaccompanied by Form No. NCLT 2 and in case of an interlocutoryapplication, the same shall be filed in Form No. NCLT 1accompanied by such attachments thereto along with Form No.NCLT 3.

(4) Every petition or application including interlocutory applicationshall be verified by an affidavit in Form No. NCLT 6. Notice tobe issued by the Tribunal to the opposite party shall be in FormNCLT 5.”

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“37. Notice to Opposite Party.- (1) The Tribunal shall issue noticeto the respondent to show cause against the application or petitionon a date of hearing to be specified in the Notice. Such notice inForm No. NCLT 5 shall be accompanied by a copy of theapplication with supporting documents.

(2) If the respondent does not appear on the date specified in thenotice in Form No. NCLT 5, the Tribunal, after according A

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[2019] 3 S.C.R.

Areasonable opportunity to the respondent, shall forthwith proceedex-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 authorisedrepresentative, file a reply accompanied with an affidavit and alongBwith copies of such documents on which it relies, with an advanceservice to the petitioner or applicant, to the Registry before thedate of hearing and such reply and copies of documents shallform part of the record.”

A conjoint reading of all these Rules makes it clear that at theCstage of the Adjudicating Authority’s satisfaction under Section 7(5) ofthe Code, the corporate debtor is served with a copy of the applicationfiled with the Adjudicating Authority and has the opportunity to file areply before the said authority and be heard by the said authority beforean order is made admitting the said application. What is also of relevanceis that in order to protect the corporate debtor from being dragged intoDthe corporate insolvency resolution process malafide, the Code prescribespenalties. 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 orliquidation proceedings fraudulently or with malicious intent forEany purpose other than for the resolution of insolvency, orliquidation, as the case may be, the Adjudicating Authority mayimpose upon such person a penalty which shall not be less thanone lakh rupees, but may extend to one crore rupees.

(2) If, any person initiates voluntary liquidation proceedings withFthe intent to defraud any person, the Adjudicating Authority mayimpose upon such person a penalty which shall not be less thanone lakh rupees but may extend to one crore rupees.”

34. Also, punishment is prescribed under Section 75 for furnishingfalse information in an application made by a financial creditor whichGfurther deters a financial creditor from wrongly invoking the provisionsof Section 7. Section 75 reads as under:

“75. Punishment for false information furnished inapplication.—Where any person furnishes information in theapplication made under Section 7, which is false in material H

particulars, knowing it to be false or omits any material fact,knowing it to be material, such person shall be punishable withfine which shall not be less than one lakh rupees, but may extendto one crore rupees.”

35. Insofar as set-off and counterclaim is concerned, a set-off ofamounts due from financial creditors is a rarity. Usually, financial debtspoint only in one way – amounts lent have to be repaid. However, it isnot as if a legitimate set-off is not to be considered at all. Such set-offmay be considered at the stage of filing of proof of claims during theresolution process by the resolution professional, his decision being subjectto challenge before the Adjudicating Authority under Section 60. Section60(5)(c) reads as follows:

“60. Adjudicating Authority for corporate persons.—

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(5) Notwithstanding anything to the contrary contained in any otherlaw for the time being in force, the National Company LawTribunal shall have jurisdiction to entertain or dispose of—

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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 orliquidation proceedings of the corporate debtor or corporateperson under this Code.”

36. Equally, counterclaims, by their very definition, are independentrights which are not taken away by the Code but are preserved for thestage of admission of claims during the resolution plan. Also, there isnothing in the Code which interdicts the corporate debtor from pursuingsuch counterclaims in other judicial fora. Form C dealing with submissionof 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 ofIndia (Insolvency Resolution Process for Corporate Persons)Regulations, 2016]

[Date]

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AFrom

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

To

The Interim Resolution Professional/Resolution Professional, B

[Name of the Insolvency Resolution Professional / ResolutionProfessional]

[Address as set out in public announcement]

Subject: Submission of claim and proof of claim.C

Madam/Sir,

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

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SWISS RIBBONS PVT. LTD. v. UNION OF INDIA[R. F. NARIMAN, J.]

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

DECLARATION

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

1. [Name of corporate debtor], the corporate debtor was, atthe insolvency commencement date, being the …………day of ………… 20……, actually indebted to me for asum 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 bestof my knowledge, information and belief and no materialfacts have been concealed therefrom.

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4. In respect of the said sum or any part thereof, neither I, norany person, by my order, to my knowledge or belief, for myuse, had or received any manner of satisfaction or securitywhatsoever, save and except the following:

[Please state details of any mutual credit, mutual debts, orother mutual dealings between the corporate debtor andthe creditor which may be set-off against the claim].

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

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

Date:Place:

(Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that thecontents of this proof of claim are true and correct to my knowledgeand 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, thedeclaration and verification shall be made by the director/manager/secretary/designated partner and in the case of other entities, anofficer authorised for the purpose by the entity.]”

37. The trigger for a financial creditor’s application is non-paymentof dues when they arise under loan agreements. It is for this reason thatSection 433(e) of the Companies Act, 1956 has been repealed by theCode and a change in approach has been brought about. Legislativepolicy now is to move away from the concept of “inability to pay debts”to “determination of default”. The said shift enables the financial creditorto prove, based upon solid documentary evidence, that there was anobligation 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 thecorporate debtor and admission into the insolvency resolution processdoes not prejudice such interest but, in fact, protects it. Thirdly, in asituation of financial stress, the cause of default is not relevant; protectingthe economic interest of the corporate debtor is more relevant. Fourthly,the trigger that would lead to liquidation can only be upon failure of theresolution process.

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 otherwiserequires,—

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(6) “claim” means—

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

(11) “debt” means a liability or obligation in respect of a claimwhich is due from any person and includes a financial debt andoperational debt;

(12) “default” means non-payment of debt when whole or anypart or instalment of the amount of debt has become due andpayable and is not paid by the debtor or the corporate debtor, asthe case may be;

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 A

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Ahas to prove “default” as opposed to an operational creditor who merely“claims” a right to payment of a liability or obligation in respect of a debtwhich may be due. When this aspect is borne in mind, the differentiationin the triggering of insolvency resolution process by financial creditorsunder Section 7 and by operational creditors under Sections 8 and 9 ofthe Code becomes clear.B

SECTIONS 21 AND 24 ANDARTICLE 14: OPERATIONALCREDITORSHAVENOVOTEINTHECOMMITTEEOFCREDITORS.

39. Section 21 of the Code reads as follows:

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

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

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Provided that a financial creditor or the authorised representativeof 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 thecorporate debtor, shall not have any right of representation,participation or voting in a meeting of the committee of creditors:

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

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(3) Subject to sub-sections (6) and (6-A), where the corporatedebtor owes financial debts to two or more financial creditors aspart of a consortium or agreement, each such financial creditorshall be part of the committee of creditors and their voting shareshall be determined on the basis of the financial debts owed tothem.

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

(a) such person shall be a financial creditor to the extent of thefinancial debt owed by the corporate debtor, and shall be H

included in the committee of creditors, with voting shareproportionate to the extent of financial debts owed to suchcreditor;

(b) such person shall be considered to be an operational creditorto the extent of the operational debt owed by the corporatedebtor to such creditor.

(5) Where an operational creditor has assigned or legallytransferred any operational debt to a financial creditor, theassignee 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 aconsortium arrangement or syndicated facility provide for a singletrustee or agent to act for all financial creditors, each financialcreditor may—

(a) authorize the trustee or agent to act on his behalf in thecommittee of creditors to the extent of his voting share; (b) represent himself in the committee of creditors to the extentof his voting share;

(c) appoint an insolvency professional (other than the resolutionprofessional) at his own cost to represent himself in thecommittee of creditors to the extent of his voting share; or (d) exercise his right to vote to the extent of his voting sharewith 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 thefinancial debt provide for appointment of a trustee or agent toact as authorised representative for all the financial creditors,such trustee or agent shall act on behalf of such financialcreditors; (b) is owed to a class of creditors exceeding the number asmay be specified, other than the creditors covered under clause(a) or sub-section (6), the interim resolution professional shallmake an application to the Adjudicating Authority along withthe list of all financial creditors, containing the name of an A

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insolvency professional, other than the interim resolutionprofessional, to act as their authorised representative who shallbe appointed by the Adjudicating Authority prior to the firstmeeting of the committee of creditors;

(c) is represented by a guardian, executor or administrator,such person shall act as authorised representative on behalf ofsuch financial creditors, and such authorised representative under clause (a) or clause (b)or clause (c) shall attend the meetings of the committee ofcreditors, and vote on behalf of each financial creditor to the extentof 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, shallbe as per the terms of the financial debt or the relevantdocumentation; and

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

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

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

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

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

(10) The resolution professional shall make available any financialinformation 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.—

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(3) The resolution professional shall give notice of each meetingof the committee of creditors to—

(a) members of[committee of creditors, including the authorisedrepresentatives referred to in sub-sections (6) and (6-A) ofSection 21 and sub-section (5)]; (b) members of the suspended Board of Directors or thepartners of the corporate persons, as the case may be;

(c) operational creditors or their representatives if the amountof their aggregate dues is not less than ten per cent of thedebt.

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

Provided that the absence of any such director, partner orrepresentative of operational creditors, as the case may be, shallnot invalidate proceedings of such meeting.

xxx xxx xxx

“28. Approval of committee of creditors for certainactions.—(1) Notwithstanding anything contained in any otherlaw for the time being in force, the resolution professional, duringthe corporate insolvency resolution process, shall not take any ofthe following actions without the prior approval of the committeeof creditors namely—

(a) raise any interim finance in excess of the amount as maybe decided by the committee of creditors in their meeting; (b) create any security interest over the assets of the corporatedebtor; A

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(c) change the capital structure of the corporate debtor,including by way of issuance of additional securities, creatinga new class of securities or buying back or redemption of issuedsecurities in case the corporate debtor is a company; (d) record any change in the ownership interest of the corporatedebtor; B

(e) give instructions to financial institutions maintainingaccounts of the corporate debtor for a debit transaction fromany such accounts in excess of the amount as may be decidedby the committee of creditors in their meeting; C

(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 shareholderof the corporate debtor or their nominees to third parties; D

(j) make any change in the management of the corporate debtoror its subsidiary; (k) transfer rights or financial debts or operational debts undermaterial contracts otherwise than in the ordinary course ofEbusiness;

(l) make changes in the appointment or terms of contract ofsuch personnel as specified by the committee of creditors; or (m) make changes in the appointment or terms of contract ofFstatutory auditors or internal auditors of the corporate debtor.

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

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

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

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(5) The committee of creditors may report the actions of theresolution professional under sub-section (4) to the Board for takingnecessary actions against him under this Code. Approval ofcommittee of creditors for certain actions.”

41. In this regard, the BLRC Report states:

“The creditors committee will have the power to decide the finalsolution by majority vote in the negotiations. The majority voterequires more than or equal to 75 percent of the creditors committeeby weight of the total financial liabilities…… The Committeedeliberated on who should be on the creditors committee, giventhe power of the creditors committee to ultimately keep the entityas a going concern or liquidate it. The Committee reasoned thatmembers of the creditors committee have to be creditors bothwith the capability to assess viability, as well as to be willing tomodify terms of existing liabilities in negotiations. Typically,operational creditors are neither able to decide on matters regardingthe insolvency of the entity, nor willing to take the risk of postponingpayments for better future prospects for the entity. The Committeeconcluded that, for the process to be rapid and efficient, the Codewill provide that the creditors committee should be restricted toonly the financial creditors.”

“The second is that any proposed solution must explicitly accountfor the IRP costs and the liabilities of the operational creditorswithin a reasonable period from the approval of the solution if it isapproved. The Committee argues that there must be acounterbalance to operational creditors not having a vote on thecreditors committee. Thus, they concluded that the dues of theoperational creditors must have priority in being paid as an explicitpart of the proposed solution. This must be ensured by the RP inevaluating a proposal before bringing it to the creditors committee.If there is ambiguity about the coverage of the liability in theinformation memorandum that the RP presents to garner solutions,then the RP must ensure that this is clearly stated and accountedfor in the proposed solution.”

The Joint Parliamentary Committee Report of April, 2016 [“JointParliamentary Committee Report”] on the Insolvency and BankruptcyCode also agreed with these observations but modified Section 24 so as A

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Ato permit operational creditors to be present at the meetings of thecommittee of creditors, albeit without voting rights, if operational creditorsaggregate to 10% or more of the total debts owed by the corporatedebtor.

The Joint Parliamentary Committee Report also opined as follows:

B“21. Role of Operational Creditors - Clause 24

Some of the stakeholders in the memorandum/views furnishedbefore the Committee were of the opinion that whereas operationcreditor has right to make application for initiation of corporateinsolvency resolution process, operational creditors like workmen,employees, suppliers have not been given any representation inthe committee of creditors which is pivotal in whole resolutionprocess. In this regard, one of the stakeholders has suggestedthat committee of creditors may contain operational creditors aswell, with some thresholds.

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In this context, while appreciating that the operational creditorsare important stakeholders in a company, the Committee took noteof the rationale of not including operational creditors in thecommittee of creditors as indicated in notes on Clause 21 appendedwith the Bill which states as under:¯

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“The committee has to be composed of members who havethe capability to assess the commercial viability of the corporatedebtor and who are willing to modify the terms of the debtcontracts in negotiations between the creditors and thecorporate debtor. Operational creditors are typically not ableto decide on matters relating to commercial viability of thecorporate debtor, nor are they typically willing to take the riskof restructuring their debts in order to make the corporatedebtor a going concern. Similarly, financial creditors who arealso operational creditors will be given representation on thecommittee of creditors only to the extent of their financial debts.Nevertheless, in order to ensure that the financial creditors donot treat the operational creditors unfairly, any resolution planmust ensure that the operational creditors receive an amountnot less than the liquidation value of their debt (assuming thecorporate debtor were to be liquidated).

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All decisions of the Committee shall be taken by a vote of not lessthan seventy-five per cent of the voting share. In the event thereare no financial creditors for a corporate debtor, the compositionand decision-making processes of the corporate debtor shall bespecified by the Insolvency and Bankruptcy Board. TheCommittee shall also have the power to call for information fromthe resolution professional.”

The Committee after due deliberations are of the view that, if notvoting rights, operational creditors at least should have presencein the committee of creditors to present their views/concerns onimportant issues considered at the meetings so that their views/concerns are taken into account by the committee of creditorswhile finalizing the resolution plan.”

The original Insolvency and Bankruptcy Bill did not allowoperational creditors to attend the committee of creditors at all. This Billwas amended whilst in the form of a Bill, the Joint ParliamentaryCommittee 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 ofthe committee of creditors to- (a) members of committee of creditors; (b) members of the suspended Board of Directors or thepartners of the corporate persons, as the case may be;

(c) operational creditors or their representatives if the amountof their aggregate dues is not less than ten per cent of thedebt.”

Modified Clause 24(4)¯

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

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AProvided that the absence of any such director, partner orrepresentative of operational creditors, as the case may be, shallnot invalidate proceedings of such meeting.”

42. What is also of importance is the fact that Expert Committeeshave been set up by the Government to oversee the working of theBCode. Thus, the report of the Insolvency Law Committee of March,2018, after examining the working of the Code, thought it fit not to amendthe Code so as to give operational creditors the right to vote. This wasstated as follows:

“This rationale still holds true, and thus it was deemed fit not toamend the constitution of the CoC. Further, operational creditorsCwhose aggregate dues are not less than ten percent of the debthave a right to attend the meetings of the CoC. Also, under theresolution plan, they are guaranteed at least the liquidation value.”

“…The Committee agreed that presently, most of the resolutionplans are in the process of submission and there is no empiricalDevidence to further the argument that operational creditors do notreceive a fair share in the resolution process under the currentscheme of the Code. Hence, the Committee decided to continuewith the present arrangement without making any amendmentsto the Code.”

E43. Under the Code, the committee of creditors is entrusted with the primary responsibility of financial restructuring. They are required toassess the viability of a corporate debtor by taking into account allavailable information as well as to evaluate all alternative investmentopportunities that are available. The committee of creditors is requiredto evaluate the resolution plan on the basis of feasibility and viability.FThus, Section 30(4) states:

“30. Submission of resolution plan.—

xxx xxx xxx

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

Provided that the committee of creditors shall not approve aresolution plan, submitted before the commencement of theInsolvency and Bankruptcy Code (Amendment) Ordinance, 2017, H

where the resolution applicant is ineligible under Section 29A andmay require the resolution professional to invite a fresh resolutionplan where no other resolution plan is available with it:

Provided further that where the resolution applicant referred to inthe first proviso is ineligible under clause (c) of Section 29A, theresolution applicant shall be allowed by the committee of creditorssuch period, not exceeding thirty days, to make payment of overdueamounts in accordance with the proviso to clause (c) of Section29A:

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

Provided also that the eligibility criteria in Section 29A as amendedby the Insolvency and Bankruptcy Code (Amendment) Ordinance,2018 (Ord. 6 of 2018) shall apply to the resolution applicant whohas not submitted resolution plan as on the date of commencementof the Insolvency and Bankruptcy Code (Amendment) Ordinance,2018.

It is important to bear in mind that once the resolution plan isapproved by the committee of creditors and thereafter by the AdjudicatingAuthority, the aforesaid plan is binding on all stakeholders as follows:

“31. Approval of resolution plan.—(1) If the AdjudicatingAuthority is satisfied that the resolution plan as approved by thecommittee of creditors under sub-section (4) of Section 30 meetsthe requirements as referred to in sub-section (2) of Section 30, itshall by order approve the resolution plan which shall be bindingon 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 anorder for approval of resolution plan under this sub-section, satisfythat the resolution plan has provisions for its effectiveimplementation.

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A44. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viabilityand feasibility of the business of the corporate debtor. Even at the timeof granting loans, these banks and financial institutions undertake adetailed market study which includes a techno-economic valuation report,evaluation of business, financial projection, etc. Since this detailed studyBhas already been undertaken before sanctioning a loan, and since financialcreditors have trained employees to assess viability and feasibility, theyare in a good position to evaluate the contents of a resolution plan. Onthe other hand, operational creditors, who provide goods and services,are involved only in recovering amounts that are paid for such goods andCservices, and are typically unable to assess viability and feasibility ofbusiness. The BLRC Report, already quoted above, makes this abundantlyclear.

45. Quite apart from this, the United Nations Commission onInternational Trade Law, in its Legislative Guide on Insolvency LawD[“UNCITRAL Guidelines”] recognizes the importance of ensuringequitable treatment to similarly placed creditors and states as follows:

“Ensuring equitable treatment of similarly situatedcreditors

7. The objective of equitable treatment is based on the notion that,in collective proceedings, creditors with similar legal rights shouldbe treated fairly, receiving a distribution on their claim in accordancewith their relative ranking and interests. This key objectiverecognizes that all creditors do not need to be treated identically,but in a manner that reflects the different bargains they havestruck with the debtor. This is less relevant as a defining factorwhere there is no specific debt contract with the debtor, such asin the case of damage claimants (e.g. for environmental damage)and tax authorities. Even though the principle of equitable treatmentmay be modified by social policy on priorities and give way to theprerogatives pertaining to holders of claims or interests that arise,for example, by operation of law, it retains its significance by 12UNCITRAL Legislative Guide on Insolvency Law ensuring thatthe priority accorded to the claims of a similar class affects allmembers of the class in the same manner. The policy of equitabletreatment permeates many aspects of an insolvency law, includingthe application of the stay or suspension, provisions to set aside E

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acts and transactions and recapture value for the insolvency estate,classification of claims, voting procedures in reorganization anddistribution mechanisms. An insolvency law should addressproblems of fraud and favouritism that may arise in cases offinancial distress by providing, for example, that acts andtransactions detrimental to equitable treatment of creditors canbe avoided.”

46. The NCLAT has, while looking into viability and feasibility ofresolution plans that are approved by the committee of creditors, alwaysgone into whether operational creditors are given roughly the sametreatment as financial creditors, and if they are not, such plans are eitherrejected or modified so that the operational creditors’ rights aresafeguarded. It may be seen that a resolution plan cannot pass musterunder Section 30(2)(b) read with Section 31 unless a minimum paymentis made to operational creditors, being not less than liquidation value.Further, on 05.10.2018, Regulation 38 has been amended. Prior to theamendment, Regulation 38 read as follows:

“38. Mandatory contents of the resolution plan.— (1) Aresolution plan shall identify specific sources of funds that will beused to pay the—

(a) insolvency resolution process costs and provide that the[insolvency resolution process costs, to the extent unpaid, willbe paid] in priority to any other creditor;

(b) liquidation value due to operational creditors and providefor such payment in priority to any financial creditor whichshall in any event be made before the expiry of thirty daysafter the approval of a resolution plan by the AdjudicatingAuthority; and

(c) liquidation value due to dissenting financial creditors andprovide that such payment is made before any recoveries aremade by the financial creditors who voted in favour of theresolution plan.”

Post amendment, Regulation 38 reads as follows:

“38. Mandatory contents of the resolution plan.—(1) Theamount due to the operational creditors under a resolution planshall be given priority in payment over financial creditors.

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A(1-A) A resolution plan shall include a statement as to how it hasdealt with the interests of all stakeholders, including financialcreditors and operational creditors, of the corporate debtor.

47. The aforesaid Regulation further strengthens the rights ofBoperational creditors by statutorily incorporating the principle of fair andequitable dealing of operational creditors’ rights, together with priority inpayment over financial creditors.

48. For all the aforesaid reasons, we do not find that operationalcreditors are discriminated against or that Article 14 has been infractedCeither on the ground of equals being treated unequally or on the groundof manifest arbitrariness.

SECTION 12AISNOTVIOLATIVEOFARTICLE 14

49. Section 12A was inserted by the Insolvency and Bankruptcy(Second Amendment) Act, 2018 with retrospective effect fromD06.06.2018. It reads as follows:

“12-A. Withdrawal of application admitted under Section 7,9 or 10.—The Adjudicating Authority may allow the withdrawalof application admitted under Section 7 or Section 9 or Section 10,on an application made by the applicant with the approval of ninetyEper cent voting share of the committee of creditors, in such manneras may be specified.”

50. The ILC Report of March 2018, which led to the insertion ofSection 12A, stated as follows:

“29.1 Under rule 8 of the CIRP Rules, the NCLT may permitFwithdrawal of the application on a request by the applicant beforeits admission. However, there is no provision in the Code or theCIRP Rules in relation to permissibility of withdrawal postadmission of a CIRP application. It was observed by theCommittee that there have been instances where on account ofsettlement between the applicant creditor and the corporate debtor,Gjudicial permission for withdrawal of CIRP was granted[Lokhandwala Kataria Construction Pvt. Ltd. v. NinusFinance & Investment Manager LLP, Civil Appeal No. 9279 of2017; Mothers Pride Dairy India Private Limited v. PortraitAdvertising and Marketing Private Limited, Civil Appeal No.9286/2017; Uttara Foods and Feeds Private Limited v. Mona H

Pharmacem, Civil Appeal No. 18520/2017]. This practice wasdeliberated in light of the objective of the Code as encapsulated inthe BLRC Report, that the design of the Code is based on ensuringthat “all key stakeholders will participate to collectively assessviability. The law must ensure that all creditors who have thecapability and the willingness to restructure their liabilitiesmust be part of the negotiation process. The liabilities of allcreditors who are not part of the negotiation process mustalso be met in any negotiated solution.” Thus, it was agreedthat once the CIRP is initiated, it is no longer a proceeding onlybetween the applicant creditor and the corporate debtor but isenvisaged to be a proceeding involving all creditors of the debtor.The intent of the Code is to discourage individual actions forenforcement and settlement to the exclusion of the general benefitof all creditors.

(emphasis in original)

(emphasis in original)

29.2 On a review of the multiple NCLT and NCLAT judgmentsin this regard, the consistent pattern that emerged was that asettlement may be reached amongst all creditors and the debtor,for the purpose of a withdrawal to be granted, and not only theapplicant creditor and the debtor. On this basis read with the intentof the Code, the Committee unanimously agreed that the relevantrules may be amended to provide for withdrawal post admissionif the CoC approves of such action by a voting share of ninety percent. It was specifically discussed that rule 11 of the NationalCompany Law Tribunal Rules, 2016 may not be adopted for thisaspect of CIRP at this stage (as observed by the Hon’ble SupremeCourt in the case of Uttara Foods and Feeds Private Limited v.Mona Pharmacem, Civil Appeal No. 18520/2017) and evenotherwise, as the issue can be specifically addressed by amendingrule 8 of the CIRP Rules.”

51. Before this Section was inserted, this Court, under Article142, was passing orders allowing withdrawal of applications aftercreditors’ 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 forwithdrawal under Section 12-A shall be submitted to the interim AB

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Aresolution professional or the resolution professional, as the casemay be, in Form FA of the Schedule before issue of invitation forexpression of interest under Regulation 36A.

(2) The application in sub-regulation (1) shall be accompanied bya bank guarantee towards estimated cost incurred for purposesBof 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 daysof receipt of the application, whichever is later.

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

(5) The Adjudicating Authority may, by order, approve theapplication submitted under sub-regulation (4).”D

This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt.Ltd. v. Mr. S. Rajagopal & Ors., SLP (Civil) No. 31557/2018, hasstated that Regulation 30A(1) is not mandatory but is directory for thesimple reason that on the facts of a given case, an application forwithdrawal may be allowed in exceptional cases even after issue ofEinvitation for expression of interest under Regulation 36A.

52. It is clear that once the Code gets triggered by admission of acreditor’s petition under Sections 7 to 9, the proceeding that is beforethe Adjudicating Authority, being a collective proceeding, is a proceedingin rem. Being a proceeding in rem, it is necessary that the body which isFto oversee the resolution process must be consulted before any individualcorporate debtor is allowed to settle its claim. A question arises as towhat is to happen before a committee of creditors is constituted (as perthe timelines that are specified, a committee of creditors can be appointedat any time within 30 days from the date of appointment of the interimresolution professional). We make it clear that at any stage where theGcommittee of creditors is not yet constituted, a party can approach theNCLT directly, which Tribunal may, in exercise of its inherent powersunder Rule 11 of the NCLT Rules, 2016, allow or disallow an applicationfor withdrawal or settlement. This will be decided after hearing all theconcerned parties and considering all relevant factors on the facts ofHeach case.

53. The main thrust against the provision of Section 12A is thefact that ninety per cent of the committee of creditors has to allowwithdrawal. This high threshold has been explained in the ILC Report asall financial creditors have to put their heads together to allow suchwithdrawal as, ordinarily, an omnibus settlement involving allcreditorsought, ideally, to be entered into. This explains why ninety per cent,which is substantially all the financial creditors, have to grant their approvalto an individual withdrawal or settlement. In any case, the figure ofninety per cent, in the absence of anything further to show that it isarbitrary, must pertain to the domain of legislative policy, which has beenexplained by the Report (supra). Also, it is clear, that under Section 60 ofthe Code, the committee of creditors do not have the last word on thesubject. If the committee of creditors arbitrarily rejects a just settlementand/or withdrawal claim, the NCLT, and thereafter, the NCLAT canalways set aside such decision under Section 60 of the Code. For allthese reasons, we are of the view that Section 12A also passesconstitutional muster.

EVIDENCEPROVIDEDBYPRIVATEINFORMATIONUTILITIES: ONLYPRIMAFACIEEVIDENCEOFDEFAULT

54. A frontal attack was made by Shri Mukul Rohatgi on the groundthat private information utilities that have been set up are not governedby proper norms. Also, the evidence by way of loan default contained inthe records of such utility cannot be conclusive evidence of what isstated therein. The BLRC Report had stated:

“Under the present arrangements, considerable time can be lostbefore all parties obtain this information. Disputes about thesefacts can take up years to resolve in court…… Hence, theCommittee envisions a competitive industry of “information utilities”who hold an array of information about all firms at all times. Whenthe IRP commences, within less than a day, undisputed andcomplete information would become available to all personsinvolved in the IRP and thus address this source of delay.”

55. The setting up of information utilities was preceded by a regimeof information companies which were referred to as credit informationcompanies [“CICs”], as recommended by the Siddiqui Working Groupin 1999. The Attorney General pointed out, in his written submission,that:

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A“In 2013, the RBI constituted another Committee under thechairmanship of Aditya Puri, MD, HDFC Bank to examinereporting formats used by CICs and other related issues. TheCommittee’s report led to the standardization of data formats forreporting corporate, consumer and MFI data by all creditinstitutions and streamlining the process of data submission byBcredit institutions to CICs. In 2015, all credit institutions weredirected by RBI to become members of all the CICs and submitcurrent and historical data about specified borrower to them andto update it regularly.

The purpose of setting up the above regime of information utilitieswas to reduce information asymmetry for improved credit riskassessment and to improve recovery processes.

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The setting up of IUs marks a shift in the above position as notonly is the information with IUs used to reduce informationasymmetry, but it is also to be treated as prima facie evidence ofDthe transaction for the purpose of IBC proceedings. This assistsin improving the timelines for the resolution process.”

56. The Information Utilities Regulations, in particular Regulations20 and 21, make it clear that on receipt of information of default, aninformation utility shall expeditiously undertake the process ofEauthentication and verification of information. Regulations 20 and 21read as follows:

“20. Acceptance and receipt of information.—(1) Aninformation utility shall accept information submitted by a user inForm C of the Schedule.

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(2) On receipt of the information submitted under sub-regulation

(1), the information utility shall—

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

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(i) the unique identifier of the information;

(ii) the terms and conditions of authentication and verificationof information; and H

(iii) the manner in which the information may be accessedby other parties.

21. Information of default.—(1) On receipt of information ofdefault, an information utility shall expeditiously undertake theprocesses of authentication and verification of the information.

(2) On completion of the processes of authentication andverification under sub-regulation (1), the information utility shallcommunicate the information of default, and the status ofauthentication 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 whichthe information of default has been received.”

57. The aforesaid Regulations also make it clear that apart fromthe stringent requirements as to registration of such utility, the momentinformation of default is received, such information has to becommunicated to all parties and sureties to the debt. Apart from this, theutility is to expeditiously undertake the process of authentication andverification of information, which will include authentication andverification from the debtor who has defaulted. This being the case,coupled with the fact that such evidence, as has been conceded by thelearned Attorney General, is only prima facie evidence of default, whichis rebuttable by the corporate debtor, makes it clear that the challengebased on this ground must also fail.

RESOLUTIONPROFESSIONALHASNOADJUDICATORYPOWERS.

58. It is clear from a reading of the Code as well as the Regulationsthat the resolution professional has no adjudicatory powers. Section 18of the Code lays down the duties of an interim resolution professional asfollows:

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

(a) collect all information relating to the assets, finances andoperations of the corporate debtor for determining the financialposition of the corporate debtor, including information relatingto—

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(i) business operations for the previous two years;

(ii) financial and operational payments for the previous twoyears;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified; (b) receive and collate all the claims submitted by creditors tohim, pursuant to the public announcement made under Sections13 and 15;

(c) constitute a committee of creditors; (d) monitor the assets of the corporate debtor and manage itsoperations until a resolution professional is appointed by thecommittee of creditors; (e) file information collected with the information utility, ifnecessary; and (f) take control and custody of any asset over which thecorporate debtor has ownership rights as recorded in thebalance sheet of the corporate debtor, or with information utilityor the depository of securities or any other registry that recordsthe ownership of assets including—

(i) assets over which the corporate debtor has ownershiprights which may be located in a foreign country;

(ii) assets that may or may not be in possession of thecorporate debtor;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(v) securities including shares held in any subsidiary of thecorporate debtor, financial instruments, insurance policies;

(vi) assets subject to the determination of ownership by acourt or authority;

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

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 thecorporate debtor held under trust or under contractualarrangements including bailment; (b) assets of any Indian or foreign subsidiary of the corporatedebtor; and

(c) such other assets as may be notified by the CentralGovernment in consultation with any financial sectorregulator.”

59. Under the CIRP Regulations, the resolution professional hasto vet and verify claims made, and ultimately, determine the amount ofeach claim as follows:

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

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

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

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

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

13. Verification of claims.—(1) The interim resolutionprofessional 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 A

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creditors along with the amount claimed by them, the amount oftheir claims admitted and the security interest, if any, in respect ofsuch claims, and update it.

(2) The list of creditors shall be –

(a) available for inspection by the persons who submitted proofsof claim; B

(b) available for inspection by members, partners, directorsand guarantors of the corporate debtor;

(c) displayed on the website, if any, of the corporate debtor; C

(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 amountclaimed by a creditor is not precise due to any contingency orother reason, the interim resolution professional or the resolutionprofessional, as the case may be, shall make the best estimate ofthe amount of the claim based on the information available withhim.

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(2) The interim resolution professional or the resolutionprofessional, as the case may be, shall revise the amounts of claimsadmitted, including the estimates of claims made under sub-regulation (1), as soon as may be practicable, when he comesacross additional information warranting such revision.”

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It is clear from a reading of these Regulations that the resolutionprofessional is given administrative as opposed to quasi-judicial powers.FIn fact, even when the resolution professional is to make a “determination”under Regulation 35A, he is only to apply to the Adjudicating Authorityfor appropriate relief based on the determination made as follows:

“35A. Preferential and other transactions.—(1) On or beforethe seventy-fifth day of the insolvency commencement date, theresolution professional shall form an opinion whether the corporatedebtor has been subjected to any transaction covered undersections 43, 45, 50 or 66.

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(2) Where the resolution professional is of the opinion that thecorporate debtor has been subjected to any transactions covered H

under sections 43, 45, 50 or 66, he shall make a determination onor before the one hundred and fifteenth day of the insolvencycommencement date, under intimation to the Board.

(3) Where the resolution professional makes a determination undersub-regulation (2), he shall apply to the Adjudicating Authority forappropriate relief on or before the one hundred and thirty-fifthday of the insolvency commencement date.

60. As opposed to this, the liquidator, in liquidation proceedingsunder the Code, has to consolidate and verify the claims, and eitheradmit or reject such claims under Sections 38 to 40 of the Code. Sections41 and 42, by way of contrast between the powers of the liquidator andthat of the resolution professional, are set out hereinbelow:

“41. Determination of valuation of claims.—The liquidatorshall determine the value of claims admitted under Section 40 insuch manner as may be specified by the Board.

42. Appeal against the decision of liquidator.—A creditor mayappeal to the Adjudicating Authority against the decision of theliquidator accepting or rejecting the claims within fourteen daysof the receipt of such decision.”

It is clear from these Sections that when the liquidator“determines” the value of claims admitted under Section 40, suchdetermination is a “decision”, which is quasi-judicial in nature, and whichcan be appealed against to the Adjudicating Authority under Section 42of the Code.

61. Unlike the liquidator, the resolution professional cannot act ina number of matters without the approval of the committee of creditorsunder Section 28 of the Code, which can, by a two-thirds majority, replaceone resolution professional with another, in case they are unhappy withhis performance. Thus, the resolution professional is really a facilitatorof the resolution process, whose administrative functions are overseenby the committee of creditors and by the Adjudicating Authority.

CONSTITUTIONALVALIDITYOF SECTION 29A.

62. Section 29A reads as follows:

“29A. Persons not eligible to be resolution applicant.—Aperson shall not be eligible to submit a resolution plan, if such A

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person, or any other person acting jointly or in concert with suchperson—

(a) is an undischarged insolvent;

(b) is a wilful defaulter in accordance with the guidelines ofthe Reserve Bank of India issued under the Banking RegulationAct, 1949 (10 of 1949);

(c) at the time of submission of the resolution plan has anaccount,] or an account of a corporate debtor under themanagement or control of such person or of whom such personis a promoter, classified as non-performing asset in accordancewith the guidelines of the Reserve Bank of India issued underthe Banking Regulation Act, 1949 (10 of 1949) or the guidelinesof a financial sector regulator issued under any other law forthe time being in force, and at least a period of one year haslapsed from the date of such classification till the date ofcommencement of the corporate insolvency resolution processof the corporate debtor:

Provided that the person shall be eligible to submit a resolutionplan if such person makes payment of all overdue amountswith interest thereon and charges relating to non-performingasset accounts before submission of resolution plan:

Provided further that nothing in this clause shall apply to aresolution applicant where such applicant is a financial entityand is not a related party to the corporate debtor.

Explanation I.—For the purposes of this proviso, theexpression “related party” shall not include a financial entity,regulated by a financial sector regulator, if it is a financialcreditor of the corporate debtor and is a related party of thecorporate debtor solely on account of conversion or substitutionof debt into equity shares or instruments convertible into equityshares, prior to the insolvency commencement date.

Explanation II.—For the purposes of this clause, where aresolution applicant has an account, or an account of a corporatedebtor under the management or control of such person or ofwhom such person is a promoter, classified as non-performingasset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisionsof this clause shall not apply to such resolution applicant for aperiod of three years from the date of approval of suchresolution plan by the Adjudicating Authority under this Code; (d) has been convicted for any offence punishable withimprisonment—

(i) for two years or more under any Act specified under theTwelfth Schedule; or

(ii) for seven years or more under any other law for the timebeing in force:

Provided that this clause shall not apply to a person after theexpiry of a period of two years from the date of his releasefrom imprisonment:

Provided further that this clause shall not apply in relation to aconnected person referred to in clause (iii) of Explanation I; (e) is disqualified to act as a director under the CompaniesAct, 2013 (18 of 2013):

Provided that this clause shall not apply in relation to a connectedperson referred to in clause (iii) of Explanation I; (f) is prohibited by the Securities and Exchange Board of Indiafrom trading in securities or accessing the securities markets; (g) has been a promoter or in the management or control of acorporate debtor in which a preferential transaction,undervalued transaction, extortionate credit transaction orfraudulent transaction has taken place and in respect of whichan order has been made by the Adjudicating Authority underthis Code:

Provided that this clause shall not apply if a preferentialtransaction, undervalued transaction, extortionate credittransaction or fraudulent transaction has taken place prior tothe acquisition of the corporate debtor by the resolutionapplicant pursuant to a resolution plan approved under this Codeor pursuant to a scheme or plan approved by a financial sectorregulator or a court, and such resolution applicant has not A

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otherwise contributed to the preferential transaction,undervalued transaction, extortionate credit transaction orfraudulent transaction; (h) has executed a guarantee in favour of a creditor in respectof a corporate debtor against which an application for insolvencyresolution made by such creditor has been admitted under thisCode and such guarantee has been invoked by the creditorand 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 orcontrol of the resolution applicant; or

(ii) any person who shall be the promoter or in managementor control of the business of the corporate debtor during theimplementation of the resolution plan; or

(iii) the holding company, subsidiary company, associatecompany or related party of a person referred to in clauses(i) and (ii):

Provided that nothing in clause (iii) of Explanation I shallapply to a resolution applicant where such applicant is afinancial entity and is not a related party of the corporatedebtor:

Provided further that the expression “related party” shallnot include a financial entity, regulated by a financial sectorregulator, if it is a financial creditor of the corporate debtorand is a related party of the corporate debtor solely on accountof conversion or substitution of debt into equity shares orinstruments convertible into equity shares, prior to theinsolvency commencement date; Explanation II.—For the purposes of this section, “financialentity” shall mean the following entities which meet suchcriteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in thisbehalf, namely—

(a) a scheduled bank;

(b) any entity regulated by a foreign central bank or asecurities market regulator or other financial sector regulatorof a jurisdiction outside India which jurisdiction is compliantwith the Financial Action Task Force Standards and is asignatory to the International Organisation of SecuritiesCommissions Multilateral Memorandum of Understanding;

(c) any investment vehicle, registered foreign institutionalinvestor, registered foreign portfolio investor or a foreignventure capital investor, where the terms shall have themeaning assigned to them in regulation 2 of the ForeignExchange Management (Transfer or Issue of Security by aPerson Resident Outside India) Regulations, 2017 made underthe Foreign Exchange Management Act, 1999 (42 of 1999); (d) an asset reconstruction company registered with theReserve Bank of India under Section 3 of the Securitisationand Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act, 2002 (54 of 2002); (e) an Alternate Investment Fund registered with theSecurities and Exchange Board of India; (f) such categories of persons as may be notified by theCentral Government.”

63. This Section was first introduced by the Insolvency andBankruptcy Code (Amendment) Ordinance, 2017, which amended theInsolvency and Bankruptcy Code on 23.11.2017. The Finance Ministerwhile 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 thatonce a company goes into the resolution process, then applicationswould be invited with regard to the potential resolution proposalsas far as the company is concerned or the enterprise is concerned.Now a number of ineligibility clauses were not there in the originalAct, and, therefore, Clause 29A introduces those who are noteligible to apply. For instance, there is a clause with regard to an A

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638SUPREME COURT REPORTS

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638SUPREME COURT REPORTS

Aundischarged insolvent who is not eligible to apply; a person whohas been disqualified under the Companies Act to act as a Directorcannot apply; and a person who is prohibited under the SEBI Actcannot apply. So these are statutory disqualifications. And, thereis also a disqualification in clause (c) with regard to those who arecorporate debtors and who, as on the date of the application makingBa bid, do not operationalize the account by paying the interestitself, i.e., you cannot say that I have an NPA. I am not makingthe account operational. The accounts will continue to be NPAsand yet I am going to apply for this. Effectively, this clause willmean that those, who are in management and on account of whomCthis insolvent or the non-performing asset has arisen, will now tryand say, I do not discharge any of the outstanding debts in termsof making the accounts operational, and yet I would like to applyand get the same enterprise back at a discounted value, for this isnot the object of this particular Act itself. So clause 5 has beenbrought in with that purpose in mind.”

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The Statement of Objects and Reasons for the aforesaidamendment states:

“2. The provisions for insolvency resolution and liquidation of aEcorporate person in the Code did not restrict or bar any personfrom submitting a resolution plan or participating in the acquisitionprocess of the assets of a company at the time of liquidation.Concerns have been raised that persons who, with their misconductcontributed to defaults of companies or are otherwise undesirable,Fmay misuse this situation due to lack of prohibition or restrictionsto participate in the resolution or liquidation process, and gain orregain control of the corporate debtor.This may undermine theprocesses laid down in the Code as the unscrupulous person wouldbe seen to be rewarded at the expense of creditors. In addition, inorder to check that the undesirable persons who may haveGsubmitted their resolution plans in the absence of such a provision,responsibility is also being entrusted on the committee of creditorsto give a reasonable period to repay overdue amounts and becomeeligible.”

This Court has held in ArcelorMittal (supra):

“27. A purposive interpretation of Section 29A, depending bothon the text and the context in which the provision was enacted,must, therefore, inform our interpretation of the same. We areconcerned 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 containedin the Ordinance of 2017 are different from the opening lines ofSection 29A as contained in the Amendment Act of 2017. What isimportant to note is that the phrase “persons acting in concert”is conspicuous by its absence in the Ordinance of 2017. Theconcepts of “promoter”, “management” and “control” whichwere contained in the opening lines of Section 29A under theOrdinance have now been transferred to sub-clause (c) in theAmendment Act of 2017. It is, therefore, important to note thatthe Amendment Act of 2017 opens with language which is ofwider import than that contained in the Ordinance of 2017, evincingan intention to rope in all persons who may be acting in concertwith the person submitting a resolution plan.

29. The opening lines of Section 29A of the Amendment Act referto a de facto as opposed to a de jure position of the personsmentioned therein. This is a typical instance of a “see throughprovision”, so that one is able to arrive at persons who are actuallyin “control”, whether jointly, or in concert, with other persons. Awooden, literal, interpretation would obviously not permit a tearingof the corporate veil when it comes to the “person” whoseeligibility is to be gone into. However, a purposeful and contextualinterpretation, such as is the felt necessity of interpretation ofsuch a provision as Section 29A, alone governs. For example, it iswell settled that a shareholder is a separate legal entity from thecompany in which he holds shares. This may be true generallyspeaking, but when it comes to a corporate vehicle that is set upfor the purpose of submission of a resolution plan, it is not onlypermissible but imperative for the competent authority to find outas to who are the constituent elements that make up such acompany. In such cases, the principle laid down in Salomon v. ASalomon and Co. Ltd. [1897] AC 22 will not apply. For it isimportant to discover in such cases as to who are the real individuals A

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[2019] 3 S.C.R.

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or entities who are acting jointly or in concert, and who have setup such a corporate vehicle for the purpose of submission of aresolution 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:

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“31. Parliament has introduced Section 29A into the IBC with aspecific purpose. The provisions of Section 29A are intended toensure that among others, persons responsible for insolvency ofthe corporate debtor do not participate in the resolutionprocess......”

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“32. …… The Court must bear in mind that Section 29A hasbeen enacted in the larger public interest and to facilitate effectivecorporate governance. Parliament rectified a loophole in the Actwhich allowed a back-door entry to erstwhile managements inthe CIRP. Section 30 of the IBC, as amended, also clarifies that aDresolution plan of a person who is ineligible under Section 29Awill not be considered by the CoC……”

RETROSPECTIVEAPPLICATION

64. It is settled law that a statute is not retrospective merelybecause it affects existing rights; nor is it retrospective merely becauseEa part of the requisites for its action is drawn from a time antecedent toits passing [See State Bank’s Staff Union (Madras Circle) v. Union ofIndia and Ors., (2005) 7 SCC 584 (at paragraph 21)]. In ArcelorMittal(supra), this Court has observed that a resolution applicant has no vestedright for consideration or approval of its resolution plan as follows:

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“79. Take the next stage under Section 30. A ResolutionProfessional has presented a resolution plan to the committee ofcreditors for its approval, but the committee of creditors does notapprove such plan after considering its feasibility and viability, asthe requisite vote of not less than 66% of the voting share of thefinancial creditors is not obtained. As has been mentionedhereinabove, the first proviso to Section 30(4) furnishes the answer,which is that all that can happen at this stage is to require theResolution Professional to invite a fresh resolution plan within thetime limits specified where no other resolution plan is availablewith him. It is clear that at this stage again no application before G

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the Adjudicating Authority could be entertained as there is novested right or fundamental right in the resolution applicant tohave its resolution plan approved, and as no adjudication has yettaken place.”

65. This being the case, it is clear that no vested right is takenaway by application of Section 29A. However, Shri Viswanathan pointedout the judgments in Ritesh Agarwal and Anr. v. SEBI and Ors.,(2008) 8 SCC 205 (at paragraph 25), K.S. Paripoornan v. State ofKerala and Ors., (1994) 5 SCC 593 (at paragraphs 60-66), DarshanSingh v. Ram Pal Singh and Anr., 1992 Supp (1) SCC 191 (at paragraph35), Pyare Lal Sharma v. Managing Director and Ors., (1989) 3SCC 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 andOrs. v. Income Tax Officer and Anr., (1976) 1 SCC 906 (at paragraphs6 and 11), to argue that if a Section operates on an antecedent set offacts, but affects a vested right, it can be held to be retrospective, andunless the legislature clearly intends such retrospectivity, the Sectionshould not be construed as such. Each of these judgments deals withdifferent situations in which penal and other enactments interfere withvested rights, as a result of which, they were held to be prospective innature. However, in our judgment in ArcelorMittal (supra), we havealready held that resolution applicants have no vested right to beconsidered as such in the resolution process. Shri Mukul Rohatgi, however,argued that this judgment is distinguishable as no question of constitutionalvalidity arose in this case, and no issue as to the vested right of a promoterfell for consideration. We are of the view that the observations made inArcelorMittal (supra) directly arose on the facts of the case in order to oust the Ruias as promoters from the pale of consideration of theirresolution plan, in which context, this Court held that they had no vestedright to be considered as resolution applicants. Accordingly, we followthe aforesaid judgment. Since a resolution applicant who applies underSection 29A(c) has no vested right to apply for being considered as aresolution applicant, this point is of no avail.

SECTION 29A(C) NOTRESTRICTEDTOMALFEASANCE

66. According to learned counsel for the petitioners, Section 29A(c)treats unequals as equals. A good erstwhile manager cannot be lumpedwith a bad erstwhile manager. Where an erstwhile manager is not guiltyof malfeasance or of acting contrary to the interests of the corporate A

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Adebtor, there is no reason why he should not be permitted to take part inthe resolution process. After all, say the counsel for the petitioners,maximization of value of the assets of the corporate debtor is an importantobjective to be achieved by the Code. Keeping out good erstwhilemanagers from the resolution process would go contrary to this objective.

B67. This objection by the petitioners was countered by the learnedAttorney General and Solicitor General, stating that the various clausesof Section 29A would show that a person need not be a criminal in orderto be kept out of the resolution process. For example, under Section29A(a), it is clear that a person may be an undischarged insolvent for nofault of his. Equally, under Section 29A(e), a person may be disqualifiedCto act as a director under the Companies Act, 2013, say, where he hasnot furnished the necessary financial statements on time [see Section164(2)(a)[4] of the Companies Act, 2013].

68. The learned counsel for some of the petitioners have alsoargued that the proviso to Section 35(1)(f) that was added by theDInsolvency and Bankruptcy Code (Amendment) Act, 2017 [dated19.01.2018] with retrospective effect from 23.11.2017 is manifestlyarbitrary and violative of Article 14 of the Constitution of India. Theproviso to Section 35(1)(f) reads as follows:

“35. Powers and duties of liquidator.—(1) Subject to theEdirections of the Adjudicating Authority, the liquidator shall havethe following powers and duties, namely:—

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4 “164. Disqualifications for appointment of director.—

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(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 continuousperiod of three financial years; or (b) has failed to repay the deposits accepted by it or pay interest thereon orto redeem any debentures on the due date or pay interest due thereon orpay any dividend declared and such failure to pay or redeem continues forGone year or more, shall be eligible to be re-appointed as a director of that company or appointedin other company for a period of five years from the date on which the saidcompany fails to do so:

Provided that where a person is appointed as a director of a company which isin default of clause (a) or clause (b), he shall not incur the disqualification for aperiod of six months from the date of his appointment.Hxxx xxx xxx”

(f) subject to Section 52, to sell the immovable and movableproperty and actionable claims of the corporate debtor inliquidation by public auction or private contract, with power totransfer such property to any person or body corporate, or tosell the same in parcels in such manner as may be specified:

Provided that the liquidator shall not sell the immovable andmovable property or actionable claims of the corporate debtorin liquidation to any person who is not eligible to be a resolutionapplicant.

69. According to the learned counsel for the petitioners, whenimmovable and movable property is sold in liquidation, it ought to be soldto any person, including persons who are not eligible to be resolutionapplicants as, often, it is the erstwhile promoter who alone may purchasesuch properties piecemeal by public auction or by private contract. Thesame rationale that has been provided earlier in this judgment will applyto this proviso as well – there is no vested right in an erstwhile promoterof a corporate debtor to bid for the immovable and movable property ofthe corporate debtor in liquidation. Further, given the categories of personswho are ineligible under Section 29A, which includes persons who aremalfeasant, or persons who have fallen foul of the law in some way, andpersons who are unable to pay their debts in the grace period allowed,are further, by this proviso, interdicted from purchasing assets of thecorporate debtor whose debts they have either wilfully not paid or havebeen unable to pay. The legislative purpose which permeates Section29A continues to permeate the Section when it applies not merely toresolution applicants, but to liquidation also. Consequently, this plea isalso rejected.

THEONE-YEARPERIODIN SECTION 29A(C) AND NPAS

70. It is clear that Section 29A goes to eligibility to submit aresolution plan. A wilful defaulter, in accordance with the guidelines ofthe RBI, would be a person who though able to pay, does not pay. AnNPA, on the other hand, refers to the account belonging to a person thatis declared as such under guidelines issued by the RBI. It is important atthis juncture to advert to the aforesaid guidelines. The RBI’s MasterCircular on Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining to Advances dated A

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A01.07.2015 [“RBI Master Circular”] consolidates instructions issuedupto 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--performingwhen it ceases to generate income for the bank.

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2.1.2 A non-performing asset (NPA) is a loan or an advancewhere;

i. interest and/ or instalment of principal remain overdue for aperiod of more than 90 days in respect of a term loan, C

ii. the account remains ‘out of order’ as indicated at paragraph2.2 below, in respect of an Overdraft/Cash Credit (OD/CC),

iii. the bill remains overdue for a period of more than 90 daysDin the case of bills purchased and discounted,

iv. the instalment of principal or interest thereon remains overduefor two crop seasons for short duration crops,

v. the instalment of principal or interest thereon remains overduefor one crop season for long duration crops, E

vi. the amount of liquidity facility remains outstanding for morethan 90 days, in respect of a securitization transactionundertaken in terms of guidelines on securitization datedFebruary 1, 2006.

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vii. in respect of derivative transactions, the overdue receivablesrepresenting positive mark-to-market value of a derivativecontract, if these remain unpaid for a period of 90 daysfrom the specified due date for payment.

2.1.3 In case of interest payments, banks should, classify an accountas NPA only if the interest due and charged during any quarter isnot serviced fully within 90 days from the end of the quarter.

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2.1.4 In addition, an account may also be classified as NPA interms of paragraph 4.2.4 of this Master Circular.”

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Clause 4 of the RBI Master Circular deals with asset classificationas follows:

“4. ASSET CLASSIFICATION

4.1 Categories of NPAs

Banks are required to classify non--performing assets furtherinto the following three categories based on the period for whichthe asset has remained non--performing and the realisability ofthe dues:

• Sub-standard Assets

• Doubtful Assets

• Loss Assets

4.1.1 Sub-standard Assets

With effect from March 31, 2005, a sub-standard asset wouldbe one, which has remained NPA for a period less than or equalto 12 months. Such an asset will have well defined creditweaknesses that jeopardize the liquidation of the debt and arecharacterized by the distinct possibility that the banks will sustainsome loss, if deficiencies are not corrected.

4.1.2 Doubtful Assets

With effect from March 31, 2005, an asset would be classifiedas doubtful if it has remained in the sub-standard category for aperiod of 12 months. A loan classified as doubtful has all theweaknesses inherent in assets that were classified assub-standard, with the added characteristic that the weaknessesmake collection or liquidation in full – on the basis of currentlyknown facts, conditions and values – highly questionable andimprobable.

4.1.3 Loss Assets

A loss asset is one where loss has been identified by the bank orinternal or external auditors or the RBI inspection but the amounthas not been written off wholly. In other words, such an asset isconsidered uncollectible and of such little value that its continuanceas a bankable asset is not warranted although there may be somesalvage or recovery value.

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A71. What is clear from the aforesaid circular is that accounts aredeclared NPA only if defaults made by a corporate debtor are not resolved(for example, interest on and/or instalment of the principal remainingoverdue 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 substandard assetwould then be NPA which has remained as such for a period of twelveBmonths. In short, a person is a defaulter when an instalment and/orinterest on the principal remains overdue for more than three months,after which, its account is declared NPA. During the period of one yearthereafter, since it is now classified as a substandard asset, this graceperiod is given to such person to pay off the debt. During this graceCperiod, it is clear that such person can bid along with other resolutionapplicants to manage the corporate debtor. What is important to bear inmind is also the fact that, prior to this one-year-three-month period, banksand financial institutions do not declare the accounts of corporate debtorsto be NPAs. As a matter of practice, they first try and resolve disputes with the corporate debtor, after which, the corporate debtor’s account isDdeclared NPA. As a matter of legislative policy therefore, quite apartfrom malfeasance, if a person is unable to repay a loan taken, in wholeor in part, within this period of one year and three months (which, in anycase, is after an earlier period where the corporate debtor and its financialcreditors sit together to resolve defaults that continue), it is stated to beEineligible to become a resolution applicant. The reason is not far to see.A person who cannot service a debt for the aforesaid period is obviouslya person who is ailing itself. The saying of Jesus comes to mind – “if theblind 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 beyondthe grace period referred to above, is unfit to be eligible to become aFresolution applicant. This policy cannot be found fault with. Neither canthe period of one year be found fault with, as this is a policy matterdecided by the RBI and which emerges from its Master Circular, asduring this period, an NPA is classified as a substandard asset. Theineligibility attaches only after this one year period is over as the NPAGnow gets classified as a doubtful asset.

72. The Committee set up by the Government to oversee theworking of the Code has, in its Report of March 2018, also consideredthis aspect of the matter and has opined as follows:

“14.8 In regards to the disqualification under clause (c) for havingHan NPA account, it was also stated to the Committee that the

time period for existence of the NPA account must be increasedfrom one year to three years. The reason provided was that adownturn in a typical business cycle was most likely to extendover a year. However, in the absence of any concrete data, theCommittee felt that there is no conclusive way to determine whatthe ideal time period for existence of an NPA should be for thedisqualification to apply. The Committee felt that the Code wasa relatively new legislation and therefore, it would be prudentto wait and allow industry experience to emerge for a fewyears before any amendment is made to the NPA holdingperiod under section 29A(c). In relation to applicability ofsection 29A(c), the Committee also discussed that it must beclarified that the disqualification pursuant to section 29A(c)shall be applicable if such NPA accounts are held by theresolution applicant or its connected persons at the time ofsubmission of the resolution plan to the RP.”

(emphasis in original)

RELATEDPARTY

73. A constitutional challenge has been raised against Section29A(j) read with the definition of “related party”. “Related party” isdefined in the Code as follows:

“5. Definitions.—In this Part, unless the context otherwiserequires,—

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(24) “related party”, in relation to a corporate debtor, means—

(a) a director or partner of the corporate debtor or a relativeof a director or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or arelative of a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in whicha director, partner, or manager of the corporate debtor or hisrelative is a partner; (d) a private company in which a director, partner or managerof the corporate debtor is a director and holds along with hisrelatives, more than two per cent of its share capital; AB

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(e) a public company in which a director, partner or managerof the corporate debtor is a director and holds along withrelatives, more than two per cent of its paid-up share capital; (f) anybody corporate whose board of directors, managingdirector or manager, in the ordinary course of business, actson the advice, directions or instructions of a director, partneror manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whosepartners or employees in the ordinary course of business, actson the advice, directions or instructions of a director, partneror manager of the corporate debtor; (h) any person on whose advice, directions or instructions, adirector, partner or manager of the corporate debtor isaccustomed to act;

(i) a body corporate which is a holding, subsidiary or an associatecompany of the corporate debtor, or a subsidiary of a holdingcompany to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent of votingrights in the corporate debtor on account of ownership or avoting agreement; (k) any person in whom the corporate debtor controls morethan twenty per cent of voting rights on account of ownershipor a voting agreement;

(l) any person who can control the composition of the board ofdirectors or corresponding governing body of the corporatedebtor; (m) any person who is associated with the corporate debtor onaccount of—

(i) participation in policy-making processes of the corporatedebtor; or

(ii) having more than two directors in common between thecorporate debtor and such person; or

(iii) interchange of managerial personnel between thecorporate 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 ofthe spouse of the individual; (b) a partner of a limited liability partnership, or a limited liabilitypartnership or a partnership firm, in which the individual is apartner;

(c) a person who is a trustee of a trust in which the beneficiaryof the trust includes the individual, or the terms of the trustconfers a power on the trustee which may be exercised forthe benefit of the individual; (d) a private company in which the individual is a director andholds along with his relatives, more than two per cent. of itsshare capital; (e) a public company in which the individual is a director andholds along with relatives, more than two per cent. of its paid-up share capital; (f) a body corporate whose board of directors, managing directoror manager, in the ordinary course of business, acts on theadvice, directions or instructions of the individual; (g) a limited liability partnership or a partnership firm whosepartners or employees in the ordinary course of business, acton the advice, directions or instructions of the individual; (h) a person on whose advice, directions or instructions, theindividual is accustomed to act;

(i) a company, where the individual or the individual along withits related party, own more than fifty per cent. of the sharecapital of the company or controls the appointment of the boardof directors of the company.

Explanation.—For the purposes of this clause,—

(a) “relative”, with reference to any person, means anyonewho is related to another, in the following manner, namely—

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(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 orbrother, their spouses shall also be included;”

74. What is argued by the petitioners is that the mere fact thatsomebody happens to be a relative of an ineligible person cannot begood enough to oust such person from becoming a resolution applicant,if he is otherwise qualified. We were urged, by Shri Viswanathan inparticular, to apply the doctrine of nexus that is well known and that hasbeen applied by this Court in several judgments in other legal contexts,more particularly, in Attorney General for India and Ors. v. AmratlalPrajivandas and Ors., (1994) 5 SCC 54. Paragraph 44 reads as under:

“44. It is contended by the counsel for the petitioners that extendingthe provisions of SAFEMA to the relatives, associates and other‘holders’ is again a case of overreaching or of over-breadth, as itmay be called — a case of excessive regulation. It is submittedthat the relatives or associates of a person falling under clause(a) or clause (b) of Section 2(2) of SAFEMA may have acquiredproperties of their own, may be by illegal means but there is noreason why those properties be forfeited under SAFEMA justbecause they are related to or are associates of the detenu orconvict, 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 orassociated with the convict/detenu, within the net of SAFEMA,and once he comes within the net, all his illegally acquired propertiescan be forfeited under the Act. In our opinion, the said contentionis based upon a misconception. SAFEMA is directed towardsforfeiture of “illegally acquired properties” of a person falling underclause (a) or clause (b) of Section 2(2). The relatives andassociates are brought in only for the purpose of ensuring that theillegally acquired properties of the convict or detenu, acquired orkept in their names, do not escape the net of the Act. It is a well-known fact that persons indulging in illegal activities screen theproperties acquired from such illegal activity in the names of theirrelatives and associates. Sometimes they transfer such propertiesto them, may be, with an intent to transfer the ownership and title.In fact, it is immaterial how such relative or associate holds theproperties of convict/detenu — whether as a benami or as a merename-lender or as a bona fide transferee for value or in any othermanner. He cannot claim those properties and must surrenderthem 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 itis proved that that property was acquired by the detenu — whetherin his own name or in the name of his relatives and associates. Itis to counteract the several devices that are or may be adopted bypersons mentioned in clauses (a) and (b) of Section 2(2) that theirrelatives and associates mentioned in clauses (c) and (d) of thesaid 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 ABC

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relatives and associates. Only the properties of the convict/detenuare sought to be forfeited, wherever they are. The idea is to reachhis properties in whosoever’s name they are kept or by whosoeverthey are held. The independent properties of relatives and friends,which are not traceable to the convict/detenu, are not sought tobe forfeited nor are they within the purview of SAFEMA [ Thatthis was the object of the Act is evident from para 4 of the preamblewhich states: “And whereas such persons have in many casesbeen holding the properties acquired by them through such gainsin the names of their relatives, associates and confidants.” Weare not saying that the preamble can be utilized for restricting thescope of the Act, we are only referring to it to ascertain the objectof the enactment and to reassure ourselves that the constructionplaced by us accords with the said object.] . We may proceed toexplain what we say. Clause (c) speaks of a relative of a personreferred to in clause (a) or clause (b) (which speak of a convictor a detenu). Similarly, clause (d) speaks of associates of suchconvict or detenu. If we look to Explanation (3) which specifieswho the associates referred to in clause (d) are, the matterbecomes clearer. ‘Associates’ means — (i) any individual whohad been or is residing in the residential premises (includingouthouses) of such person [‘such person’ refers to the convict ordetenu, as the case may be, referred to in clause (a) or clause(b)]; (ii) any individual who had been or is managing the affairsor keeping the accounts of such convict/detenu; (iii) anyassociation of persons, body of individuals, partnership firm orprivate company of which such convict/detenu had been or is amember, partner or director; (iv) any individual who had been oris a member, partner or director of an association of persons,body of individuals, partnership firm or private company referredto in clause (iii) at any time when such person had been or is amember, partner or director of such association of persons, bodyof individuals, partnership firm or private company; (v) any personwho had been or is managing the affairs or keeping the accountsof any association of persons, body of individuals, partnership firmor private company referred to in clause (iii); (vi) the trustee ofany 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 inwriting, considers that any properties of such convict/detenu areheld on his behalf by any other person, such other person. It wouldthus be clear that the connecting link or the nexus, as it may becalled, is the holding of property or assets of the convict/detenu ortraceable to such detenu/convict.Section 4 is equally relevant inthis context. It declares that “as from the commencement of thisAct, it shall not be lawful for any person to whom this Act appliesto hold any illegally acquired property either by himself or throughany other person on his behalf”. All such property is liable to beforfeited. The language of this section is indicative of the ambit ofthe Act. Clauses (c) and (d) in Section 2(2) and the Explanations(2) and (3) occurring therein shall have to be construed andunderstood in the light of the overall scheme and purpose of theenactment. The idea is to forfeit the illegally acquired propertiesof the convict/detenu irrespective of the fact that such propertiesare held by or kept in the name of or screened in the name of anyrelative or associate as defined in the said two Explanations. Theidea is not to forfeit the independent properties of such relativesor associates which they may have acquired illegally but only toreach the properties of the convict/detenu or properties traceableto him, wherever they are, ignoring all the transactions with respectto those properties. By way of illustration, take a case where aconvict/detenu purchases a property in the name of his relative orassociate — it does not matter whether he intends such a personto be a mere name-lender or whether he really intends that suchperson shall be the real owner and/or possessor thereof — orgifts away or otherwise transfers his properties in favour of anyof his relatives or associates, or purports to sell them to any of hisrelatives or associates — in all such cases, all the said transactionswill be ignored and the properties forfeited unless the convict/detenu or his relative/associate, as the case may be, establishesthat such property or properties are not “illegally acquiredproperties” within the meaning of Section 3(c). In this view of thematter, there is no basis for the apprehension that the independentlyacquired properties of such relatives and associates will also beforfeited even if they are in no way connected with the convict/detenu. So far as the holders (not being relatives and associates)

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Amentioned in Section 2(2)(e) are concerned, they are dealt withon a separate footing. If such person proves that he is a transfereein good faith for consideration, his property — even thoughpurchased from a convict/detenu — is not liable to be forfeited. Itis equally necessary to reiterate that the burden of establishingthat the properties mentioned in the show-cause notice issuedBunder Section 6, and which are held on that date by a relative oran associate of the convict/detenu, are not the illegally acquiredproperties of the convict/detenu, lies upon such relative/associate.He must establish that the said property has not been acquiredwith the monies or assets provided by the detenu/convict or thatCthey in fact did not or do not belong to such detenu/convict. Wedo not think that Parliament ever intended to say that the propertiesof all the relatives and associates, may be illegally acquired, willbe forfeited just because they happen to be the relatives orassociates of the convict/detenu. There ought to be the connectinglink between those properties and the convict/detenu, the burdenDof disproving which, as mentioned above, is upon the relative/associate.In this view of the matter, the apprehension andcontention of the petitioners in this behalf must be held to be basedupon a mistaken premise. The bringing in of the relatives andassociates or of the persons mentioned in clause (e) of SectionE2(2) is thus neither discriminatory nor incompetent apart from theprotection of Article 31-B.”

75. We are of the view that persons who act jointly or in concertwith others are connected with the business activity of the resolutionFapplicant. Similarly, all the categories of persons mentioned in Section5(24A) show that such persons must be “connected” with the resolutionapplicant within the meaning of Section 29A(j). This being the case, thesaid categories of persons who are collectively mentioned under thecaption “relative” obviously need to have a connection with the businessGactivity of the resolution applicant. In the absence of showing that suchperson is “connected” with the business of the activity of the resolutionapplicant, such person cannot possibly be disqualified under Section29A(j). All the categories in Section 29A(j) deal with persons, natural aswell as artificial, who are connected with the business activity of theresolution applicant. The expression “related party”, therefore, andH

“relative” contained in the definition Sections must be read noscitur asociis with the categories of persons mentioned in Explanation I, and soread, would include only persons who are connected with the businessactivity of the resolution applicant.

76. An argument was also made that the expression “connectedperson” in Explanation I, clause (ii) to Section 29A(j) cannot possiblyrefer to a person who may be in management or control of the businessof the corporate debtor in future. This would be arbitrary as the explanationwould then apply to an indeterminate person. This contention also needsto be repelled as Explanation I seeks to make it clear that if a person isotherwise covered as a “connected person”, this provision would alsocover a person who is in management or control of the business of thecorporate debtor during the implementation of a resolution plan. Therefore,any such person is not indeterminate at all, but is a person who is in thesaddle of the business of the corporate debtor either at an anterior pointof time or even during implementation of the resolution plan. This disposesof all the contentions raising questions as to the constitutional validity ofSection 29A(j).

EXEMPTIONOFMICRO, SMALL, ANDMEDIUMENTERPRISESFROM SECTION

29A

77. The ILC Report of March 2018 found that micro, small, andmedium enterprises form the foundation of the economy and are keydrivers of employment, production, economic growth, entrepreneurship,and financial inclusion.

78. Section 7 of the Micro, Small and Medium EnterprisesDevelopment Act, 2006 classifies enterprises depending upon whetherthey manufacture or produce goods, or are engaged in providing andrendering services as micro, small, or medium, depending upon certaininvestments made, as follows:

“7. Classification of enterprises.—(1) Notwithstandinganything contained in Section 11-B of the Industries (Developmentand Regulation) Act, 1951 (65 of 1951), the Central Governmentmay, for the purposes of this Act, by notification and having regardto the provisions of sub-sections (4) and (5), classify any class orclasses of enterprises, whether proprietorship, Hindu undividedfamily, associations of persons, co-operative society, partnershipfirm, company or undertaking, by whatever name called,—

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(a) in the case of the enterprises engaged in the manufactureor production of goods pertaining to any industry specified inthe First Schedule to the Industries (Development andRegulation) Act, 1951 (65 of 1951), as—

(i) a micro enterprise, where the investment in plant andmachinery does not exceed twenty-five lakh rupees;

(ii) a small enterprise, where the investment in plant andmachinery is more than twenty-five lakh rupees but doesnot exceed five crore rupees; or

(iii) a medium enterprise, where the investment in plant andmachinery is more than five crore rupees but does not exceedten crore rupees; (b) in the case of the enterprises engaged in providing orrendering of services, as—

(i) a micro enterprise, where the investment in equipmentdoes not exceed ten lakh rupees;

(ii) a small enterprise, where the investment in equipment ismore than ten lakh rupees but does not exceed two crorerupees; or

(iii) a medium enterprise, where the investment in equipmentis more than two crore rupees but does not exceed five crorerupees.

79. The ILC Report of 2018 exempted these industries fromSection 29A(c) and 29A(h) of the Code, their rationale for doing sobeing contained in paragraph 27.4 of the Report, which reads as follows:

“27.4 Regarding the first issue, the Code is clear that default ofINR one lakh or above triggers the right of a financial creditor oran operational creditor to file for insolvency. Thus, the financialcreditor or operational creditors of MSMEs may take it toinsolvency under the Code. However, given that MSMEs are thebedrock of the Indian economy, and the intent is not to push theminto liquidation and affect the livelihood of employees and workersof MSMEs, the Committee sought it fit to explicitly grant exemptions to corporate debtors which are MSMEs by permittinga promoter who is not a wilful defaulter, to bid for the MSME ininsolvency. The rationale for this relaxation is that a business ofan MSME attracts interest primarily from a promoter of an MSMEand may not be of interest to other resolution applicants.”

80. Thus, the rationale for excluding such industries from theeligibility criteria laid down in Section 29A(c) and 29A(h) is becausequa such industries, other resolution applicants may not be forthcoming,which then will inevitably lead not to resolution, but to liquidation. Followingupon the Insolvency Law Committee’s Report, Section 240A has beeninserted in the Code with retrospective effect from 06.06.2018 as follows:

“240-A. Application of this Code to micro, small and mediumenterprises.—(1) Notwithstanding anything to the contrarycontained in this Code, the provisions of clauses (c) and (h) ofSection 29A shall not apply to the resolution applicant in respectof corporate insolvency resolution process of any micro, smalland medium enterprises.

(2) Subject to sub-section (1), the Central Government may, inthe public interest, by notification, direct that any of the provisionsof this Code shall—

(a) not apply to micro, small and medium enterprises; or (b) apply to micro, small and medium enterprises, with suchmodifications 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 itis in session, for a total period of thirty days which may be comprisedin one session or in two or more successive sessions.

(4) If both Houses agree in disapproving the issue of notificationor both Houses agree in making any modification in the notification,the notification shall not be issued or shall be issued only in suchmodified form as may be agreed upon by both the Houses, as thecase may be.

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Asection (4) is prorogued or adjourned for more than fourconsecutive days.

(6) Every notification issued under this section shall be laid, assoon as may be after it is issued, before each House of Parliament.

Explanation.—For the purposes of this section, the expressionB“micro, small and medium enterprises” means any class or classesof enterprises classified as such under sub-section (1) of Section7 of the Micro, Small and Medium Enterprises Development Act,2006 (27 of 2006).”

81. It can thus be seen that when the Code has worked hardshipCto 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 theCommittee in enacting Section 240A. This is an important instance ofhow the executive continues to monitor the application of the Code, andDexempts a class of enterprises from the application of some of itsprovisions in deserving cases. This and other amendments that arerepeatedly being made to the Code, and to subordinate legislation madethereunder, based upon Committee Reports which are looking into theworking of the Code, would also show that the legislature is alive toserious anomalies that arise in the working of the Code and steps in toErectify them.

SECTION 53 OFTHE CODEDOESNOTVIOLATEARTICLE 14.

82. An argument has been made by counsel appearing on behalfof the petitioners that in the event of liquidation, operational creditorswill never get anything as they rank below all other creditors, includingFother unsecured creditors who happen to be financial creditors. This,according to them, would render Section 53 and in particular, Section53(1)(f) discriminatory and manifestly arbitrary and thus, violative ofArticle 14 of the Constitution of India.

Section 53(1) reads as follows:G

“53. Distribution of assets.—(1) Notwithstanding anything tothe contrary contained in any law enacted by the Parliament orany State Legislature for the time being in force, the proceedsfrom the sale of the liquidation assets shall be distributed in thefollowing order of priority and within such period and in suchH

manner as may be specified, namely—

(a) the insolvency resolution process costs and the liquidationcosts paid in full; (b) the following debts which shall rank equally between andamong the following—

(i) workmen’s dues for the period of twenty-four monthspreceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such securedcreditor has relinquished security in the manner set out inSection 52;

(c) wages and any unpaid dues owed to employees other thanworkmen for the period of twelve months preceding theliquidation commencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and among thefollowing:—

(i) any amount due to the Central Government and the StateGovernment including the amount to be received on accountof the Consolidated Fund of India and the Consolidated Fundof a State, if any, in respect of the whole or any part of theperiod of two years preceding the liquidation commencementdate;

(ii) debts owed to a secured creditor for any amount unpaidfollowing 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.

83. The BLRC Report, which led to the enactment of theInsolvency Code, in dealing with this aspect of the matter, has stated:

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a priority below the unsecured financial creditors in addition to allkinds of secured creditors for promoting the availability of creditand developing a market for unsecured financing (including thedevelopment of bond markets). In the long run, this would increasethe availability of finance, reduce the cost of capital, promoteentrepreneurship and lead to faster economic growth. Thegovernment also will be the beneficiary of this process as economicgrowth will increase revenues. Further, efficiency enhancementand consequent greater value capture through the proposedinsolvency regime will bring in additional gains to both the economyand the exchequer.”

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“For the remaining creditors who participate in the collective actionof Liquidation, the Committee debated on the waterfall of liabilitiesthat should hold in Liquidation in the new Code. Across differentjurisdictions, the observation is that secured creditors have firstpriority on the realizations, and that these are typically paid outnet of the costs of insolvency resolution and Liquidation. In orderto bring the practices in India in-line with the global practice, andto ensure that the objectives of this proposed Code is met, theCommittee recommends that the waterfall in Liquidation shouldbe as follows:

1. Costs of IRP and liquidation.

2. Secured creditors and Workmen dues capped up to threemonths from the start of IRP.

3. Employees capped up to three months.

4. Dues to unsecured financial creditors, debts payable toworkmen in respect of the period beginning twelve monthsbefore the liquidation commencement date and ending threemonths before the liquidation commencement date;

5. Any amount due to the State Government and the CentralGovernment in respect of the whole or any part of the periodof two years before the liquidation commencement date; anydebts of the secured creditor for any amount unpaid followingthe enforcement of security interest

6. Remaining debt

7. Surplus to shareholders.”

84. It will be seen that the reason for differentiating betweenfinancial debts, which are secured, and operational debts, which areunsecured, is in the relative importance of the two types of debts whenit comes to the object sought to be achieved by the Insolvency Code.We have already seen that repayment of financial debts infuses capitalinto the economy inasmuch as banks and financial institutions are able,with the money that has been paid back, to further lend such money toother entrepreneurs for their businesses. This rationale creates anintelligible differentia between financial debts and operational debts,which are unsecured, which is directly related to the object sought to beachieved by the Code. In any case, workmen’s dues, which are alsounsecured debts, have traditionally been placed above most other debts.Thus, it can be seen that unsecured debts are of various kinds, and solong as there is some legitimate interest sought to be protected, havingrelation to the object sought to be achieved by the statute in question,Article 14 does not get infracted. For these reasons, the challenge toSection 53 of the Code must also fail.

EPILOGUE

EPILOGUE

85. The Insolvency Code is a legislation which deals with economicmatters and, in the larger sense, deals with the economy of the countryas a whole. Earlier experiments, as we have seen, in terms of legislationshaving failed, ‘trial’ having led to repeated ‘errors’, ultimately led to theenactment of the Code. The experiment contained in the Code, judgedby the generality of its provisions and not by so-called crudities andinequities that have been pointed out by the petitioners, passesconstitutional muster. To stay experimentation in things economic is agrave responsibility, and denial of the right to experiment is fraught withserious consequences to the nation. We have also seen that the workingof the Code is being monitored by the Central Government by ExpertCommittees that have been set up in this behalf. Amendments havebeen made in the short period in which the Code has operated, both tothe Code itself as well as to subordinate legislation made under it. Thisprocess is an ongoing process which involves all stakeholders, includingthe petitioners.

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A86. We are happy to note that in the working of the Code, theflow of financial resource to the commercial sector in India has increasedexponentially as a result of financial debts being repaid. Approximately3300 cases have been disposed of by the Adjudicating Authority basedon out-of-court settlements between corporate debtors and creditorswhich themselves involved claims amounting to over INR 1,20,390 crores.BEighty cases have since been resolved by resolution plans being accepted.Of these eighty cases, the liquidation value of sixty-three such cases isINR 29,788.07 crores. However, the amount realized from the resolutionprocess is in the region of INR 60,000 crores, which is over 202% of theliquidation value. As a result of this, the Reserve Bank of India hasCcome out with figures which reflect these results. Thus, credit that hasbeen 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 2017-2018, and to INR 13195.20 crores forthe 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 croresDfor the first six months of 2018-2019. Ultimately, the total flow of resourcesto the commercial sector in India, both bank and non-bank, and domesticand foreign (relatable to the non-food sector) has gone up from a total ofINR 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.EThese figures show that the experiment conducted in enacting the Codeis proving to be largely successful. The defaulter’s paradise is lost. In itsplace, the economy’s rightful position has been regained. The result isthat all the petitions will now be disposed of in terms of this judgment.There will be no order as to costs.

F

Nidhi Jain

Petitions disposed of.

G

H