Swiss Ribons Judgement

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL/APPELLATE JURISDICTION
WRIT PETITION (CIVIL) NO. 99 OF 2018
Swiss Ribbons Pvt. Ltd. & Anr. …..Petitioners
VERSUS
Union of India & Ors. …..Respondents
WITH

Signature Not Verified

SPECIAL LEAVE PETITION (CIVIL) NO. 28623 OF 2018
Digitally signed by R
NATARAJAN
Date: 2019.01.25
12:26:58 IST
Reason:
1
JUDGMENT
R.F. Nariman, J.
1. The present petitions assail the constitutional validity of various
provisions of the Insolvency and Bankruptcy Code, 2016 [―Insolvency
Code‖ or ―Code‖]. Since we are deciding only questions relating to the
constitutional validity of the Code, we are not going into the individual
facts of any case.
2. Shri Mukul Rohatgi, learned Senior Advocate, appearing in Writ
Petition (Civil) No. 99 of 2018, has first and foremost argued that the
members of the National Company Law Tribunal [―NCLT‖] and certain
members of the National Company Law Appellate Tribunal [―NCLAT‖],
apart from the President, have been appointed contrary to this Court‘s
judgment in Madras Bar Association v. Union of India, (2015) 8
SCC 583 [―Madras Bar Association (III)‖], and that therefore, this
being so, all orders that are passed by such members, being passed
contrary to the judgment of this Court in the aforesaid case, ought to
be set aside. In any case, even assuming that the de facto doctrine
would apply to save such orders, it is clear that such members ought to
be restrained from passing any orders in future. In any case, until a
2
properly constituted committee, in accordance with the aforesaid
judgment, reappoints them, they ought not to be allowed to function.
He also argued that the administrative support for all tribunals should
be from the Ministry of Law and Justice. However, even today, NCLT
and NCLAT are functioning under the Ministry of Corporate Affairs.
This again needs to be corrected immediately. A further technical
violation also exists in that if the powers of the High Court are taken
away, the NCLAT, as an appellate forum, should have the same
convenience and expediency as existed prior to appeals going to the
NCLAT. Since the NCLAT, as an appellate court, has a seat only at
New Delhi, this would render the remedy inefficacious inasmuch as
persons would have to travel from Tamil Nadu, Calcutta, and Bombay
to New Delhi, whereas earlier, they could have approached the
respective High Courts in their States. This again is directly contrary to
Madras Bar Association v. Union of India, (2014) 10 SCC 1
[―Madras Bar Association (II)‖], and to paragraph 123 in particular.
Apart from the aforesaid technical objection, Shri Rohatgi assailed the
legislative scheme that is contained in Section 7 of the Code, stating
that there is no real difference between financial creditors and
operational creditors. According to him, both types of creditors would
3
give either money in terms of loans or money‘s worth in terms of goods
and services. Thus, there is no intelligible differentia between the two
types of creditors, regard being had to the object sought to be
achieved by the Code, namely, insolvency resolution, and if that is not
possible, then ultimately, liquidation. Relying upon Shayara Bano v.
Union of India, (2017) 9 SCC 1 [―Shayara Bano‖], he argued that
such classification will not only be discriminatory, but also manifestly
arbitrary, as under Sections 8 and 9 of the Code, an operational debtor
is not only given notice of default, but is entitled to dispute the
genuineness of the claim. In the case of a financial debtor, on the other
hand, no notice is given and the financial debtor is not entitled to
dispute the claim of the financial creditor. It is enough that a default as
defined occurs, after which, even if the claim is disputed and even if
there be a set-off and counterclaim, yet, the Code gets triggered at the
behest of a financial creditor, without the corporate debtor being able
to justify the fact that a genuine dispute is raised, which ought to be left
for adjudication before ordinary courts and/or tribunals. Shri Rohatgi
then argued that assuming that a valid distinction exists between
financial and operational creditors, there is hostile discrimination
against operational creditors. First and foremost, unless they amount
4
to 10% of the aggregate of the amount of debt owed, they have no
voice in the committee of creditors. In any case, Sections 21 and 24 of
the Code are discriminatory and manifestly arbitrary in that operational
creditors do not have even a single vote in the committee of creditors
which has very important functions to perform in the resolution process
of corporate debtors. Shri Rohatgi then went on to assail the
establishment of information utilities that are set up under the Code.
According to him, under Section 210 of the Code, there can be private
information utilities whose sole object would be to make a profit.
Further, the said information utility is not only to collect financial data,
but also to check whether a default has or has not occurred.
Certification of such agency cannot substitute for adjudication. Thus,
the certificate of an information utility is in the nature of a preliminary
decree issued without any hearing and without any process of
adjudication. Shri Rohatgi next argued that Section 12A of the Code is
contrary to the directions of this Court in its order in Uttara Foods and
Feeds Pvt. Ltd. v. Mona Pharmachem, Civil Appeal No. 18520/2017
[decided on 13.11.2017], and that instead of following the said order,
Section 12A now derails the settlement process by requiring the
approval of at least ninety per cent of the voting share of the committee
5
of creditors. Unbridled and uncanalized power is given to the
committee of creditors to reject legitimate settlements entered into
between creditors and the corporate debtors. Shri Rohatgi then argued
that the resolution professional, having been given powers of
adjudication under the Code and Regulations, grant of adjudicatory
power to a non-judicial authority is violative of basic aspects of
dispensation of justice and access to justice. Lastly, a four-fold attack
was raised against Section 29A, in particular, clause (c) thereof. First
and foremost, Shri Rohatgi stated that the vested rights of erstwhile
promoters to participate in the recovery process of a corporate debtor
have been impaired by retrospective application of Section 29A.
Section 29A, in any case, is contrary to the object sought to be
achieved by the Code, in particular, speedy disposal of the resolution
process as it will inevitably lead to challenges before the Adjudicating
Authority and Appellate Authority, which will slow down and delay the
insolvency resolution process. In particular, so far as Section 29A(c) is
concerned, a blanket ban on participation of all promoters of corporate
debtors, without any mechanism to weed out those who are
unscrupulous and have brought the company to the ground, as against
persons who are efficient managers, but who have not been able to
6
pay their debts due to various other reasons, would not only be
manifestly arbitrary, but also be treating unequals as equals. Also,
according to Shri Rohatgi, maximization of value of assets is an
important goal to be achieved in the resolution process. Section 29A is
contrary to such goal as an erstwhile promoter, who may outbid all
other applicants and may have the best resolution plan, would be kept
out at the threshold, thereby impairing the object of maximization of
value of assets. Another argument that was made was that under
Section 29A(c), a person‘s account may be classified as a non-
performing asset [―NPA‖] in accordance with the guidelines of the
Reserve Bank of India [―RBI‖], despite him not being a wilful defaulter.
Also, the period of one year referred to in clause (c) is again wholly
arbitrary and without any basis either in rationality or in law. Shri
Rohatgi then trained his gun on Section 29A(j), and stated that persons
who may be related parties in the sense that they may be relatives of
the erstwhile promoters are also debarred, despite the fact that they
may have no business connection with the erstwhile promoters who
have been rendered ineligible by Section 29A.
3. Shri K.V. Viswanathan, learned Senior Advocate, appearing in
Writ Petition No.822 of 2018, strongly supported Shri Rohatgi and
7
argued the same points with great clarity and with various nuances of
his own, which will be reflected in our judgment. Followed by Shri
Viswanathan, Shri A.K. Gupta, Shri Pulkit Deora, Shri Devanshu Sajlan
and Shri Deepak Joshi also made submissions with particular regard to
discrimination against operational creditors.
4. As against these submissions, Shri K.K. Venugopal, the learned
Attorney General for India, and Shri Tushar Mehta, learned Solicitor
General for India, appearing for the Union of India, and Shri Rakesh
Dwivedi, learned Senior Advocate, appearing for the Reserve Bank of
India, countered all the aforesaid submissions. They argued with
reference to our judgments and Committee Reports that till the
Insolvency Code was enacted, the regime of previous legislation had
failed to maximize the value of stressed assets and had focused on
reviving the corporate debtor with the same erstwhile management. All
these legislations had failed, as a result of which, the Code was
enacted to reorganize insolvency resolution of corporate debtors in a
time bound manner to maximize the value of assets of such person.
They further argued that there is a paradigm shift from the erstwhile
management of a corporate debtor being in possession of stressed
assets to creditors who now assume control from the erstwhile
8
management and are able to approve resolution plans of other better
and more efficient managers, which would not only be in the interest of
the corporate debtor itself but in the interest of all stakeholders,
namely, all creditors, workers, and shareholders other than
shareholdings of the erstwhile management. They referred to the
Statement of Objects and Reasons, the Preamble, and various
provisions of the Code, and to the Rules and Regulations made
thereunder, to buttress their submissions. In particular, they referred to
judgments which mandated a judicial hands-off when it came to laws
relating to economic regulation. They argued that the legislature must
get the maximum free play in the joints to experiment and come up
with solutions to problems that have seemed intractable earlier. In
particular, in combating the individual points made by the learned
counsel appearing on behalf of the petitioners, they argued that none
of the members of the NCLT or the NCLAT had been appointed
contrary to the judgments of this Court in Union of India v. R. Gandhi,
President, Madras Bar Association (2010) 11 SCC 1 [―Madras Bar
Association (I)‖] and Madras Bar Association (III) (supra). They
referred to affidavits filed before this Court to show that all such
members had been appointed by a Committee consisting of two
9
Supreme Court Judges and two bureaucrats, in conformity with the
aforesaid judgments. When it came to classification between financial
and operational creditors, they argued that the differentiation between
the two types of creditors occurs from the nature of the contracts
entered into with them. Financial contracts involve large sums of
money given by fewer persons, whereas operational creditors are
much larger in number and the quantum of dues is generally small.
Financial creditors have specified repayment schedules and
agreements which entitle such creditors to recall the loan in totality on
defaults being made, which the operational creditors do not have.
Further, financial creditors are, from the start, involved with the
assessment of viability of corporate debtors and are, therefore, better
equipped to engage in restructuring of loans as well as reorganization
of the corporate debtor‘s business in the event of financial stress. All
these differentiae are not only intelligible, but directly relate to the
objects sought to be achieved by the Code. Insofar as Section 7,
relatable to financial creditors, and Sections 8 and 9, which relate to
operational creditors are concerned, it is a fallacy to say that no notice
is issued to the financial debtor on defaults made, as financial debtors
are fully aware of the loan structure and the defaults that have been
10
made. Further, this Court‘s judgment in Innoventive Industries Ltd. v.
ICICI Bank and Anr., (2018) 1 SCC 407 [―Innoventive Industries‖]
has made it clear that under Section 7(5) of the Code, the Adjudicating
Authority, in being ―satisfied‖ that there is a default, has to issue notice
to the corporate debtor, hear the corporate debtor, and then adjudicate
upon the same. The reason why disputes raised by financial debtors
are not gone into at the stage of triggering the Code is because the
evidence of financial debts are contained in the documents of
information utilities, banks, and financial institutions. Disputes which
may be raised can be raised at the stage of filing of claims once the
resolution process is underway. Also, by the very nature of financial
debts, set-off and counterclaims by financial debtors are very rare and,
in any case, wholly independent of the loan that has been granted to
them. Insofar as operational creditors having no vote in the committee
of creditors is concerned, this is because operational creditors are
typically interested only in getting payment for supply of goods or
services made by them, whereas financial creditors are typically
involved in seeing that the entirety of their loan gets repaid, for which
they are better equipped to go into the viability of corporate
enterprises, both at the stage of grant of the loan and at the stage of
11
default. Also, the interests of operational creditors, when a resolution
plan is to be approved, are well looked-after as the minimum that the
operational creditors are to be paid is the liquidation value of assets.
Apart from this, their interests are to be placed at par with the interests
of financial creditors, and if this is not done, then the Adjudicating
Authority intervenes to reject or modify resolution plans until the same
is done. In the 80 cases that have been resolved since the Code has
come into force, figures were also shown to this Court to indicate that
not only are the operational creditors paid before the financial creditors
under the resolution plan, but that the initial recovery of what is owed
to them is slightly higher than what is owed to financial creditors.
Insofar as Section 12A is concerned, they argued that once an
application by a creditor is admitted by the Adjudicating Authority, the
proceeding becomes a proceeding in rem and is no longer an
individual proceeding but a collective proceeding. This being the case,
it is important that when a resolution process is to begin and a
committee of creditors is formed, it is that committee that is best
equipped to deal with applications for withdrawal or settlement after
admission of an insolvency petition. Ninety per cent of such creditors
have been given this task as once the proceeding is in rem, to halt
12
such proceeding, which is for the benefit of all creditors generally, can
only be if all or most of them agree to the same. They argued that the
resolution professional has no adjudicatory powers under the Code or
the Regulations, but is only to collate information. Even when he
exercises his discretion to exercise his best judgment in certain
situations, he does so administratively, and is subject to an
adjudicatory body overseeing the same. When it comes to Section 29A
of the Code, they argued that Section 29A does not disturb any vested
or existing rights, as a resolution applicant does not have any vested or
existing rights that can be disturbed, as has been held in ArcelorMittal
India Private Limited v. Satish Kumar Gupta and Ors., Civil Appeal
Nos. 9402-9405/2018 [decided on 04.10.2018] [―ArcelorMittal‖].
Further, merely because this Section relies on antecedent facts for its
application, does not mean that it is retrospective. Also, Section 29A
subserves a very important object of the Code, which is to see that
undesirable persons who are mentioned in all its clauses are rendered
ineligible to submit resolution plans so that such persons may not
come into the management of stressed corporate debtors. They also
argued that Section 29A is not aimed at only persons who have
committed acts of malfeasance, but also persons who are otherwise
13
unfit to be put in the saddle of the management of the corporate
debtor, such as undischarged insolvents and persons who have been
removed as directors under Section 164 of the Companies Act, 2013
(for not filing financial statements or annual returns for any continuous
period of 3 financial years, for example). They further argued that a
period of one year is sufficient period within which a person, whose
account has been declared NPA, should clear its dues. They referred
to the RBI Regulations dealing with NPAs and stated that even before
a person‘s account is declared NPA, a long rope is given for such
person to clear off its debts. It is only when it does not do so, that its
account is declared NPA in the first instance. Also, once the said
guidelines are perused, it is clear that an account, which has been
NPA for one year, is declared as substandard asset and it is for this
reason that the one year period is given in Section 29A(c), which is
based on reason, and is not arbitrary.
5. Shri C.U. Singh, appearing on behalf of the Asset Reconstruction
Company of India Limited, referred to the pre-existing state of
legislation before the Code was enacted, and referred in detail to how
all such legislations had failed to produce the necessary results. He
also relied upon extracts from the Insolvency Act, 1986 of the United
14
Kingdom to buttress his point that worldwide, Insolvency Acts have
moved away from mere liquidation so as to first concentrate on
reconstruction of corporate debtors. Also, according to him, Section
29A is not a Section aimed at malfeasance; it is aimed at rendering
ineligible persons who are undesirable in the widest sense of the term,
i.e., persons who are unfit to take over the management of a corporate
debtor.
PROLOGUE: THE PRE-EXISTING STATE OF THE LAW
6. Having heard the rival contentions, it is important to first clear the
air on what was the background which led to the enactment of the
Insolvency Code. The erstwhile regime which led to the enactment of
the Insolvency Code was discussed by the Bankruptcy Law Reforms
Committee [―BLRC‖] in its Report dated 04.11.2015 as follows:
―The current state of the bankruptcy process for firms

is a highly fragmented framework. Powers of the
creditor and the debtor under insolvency are provided
for under different Acts. Given the conflicts between
creditors and debtors in the resolution of insolvency as
described in Section 3.2.2, the chances for
consistency and efficiency in resolution are low when
rights are separately defined. It is problematic that
these different laws are implemented in different
judicial fora. Cases that are decided at the
tribunal/BIFR often come for review to the High Courts.
This gives rise to two types of problems in
15
implementation of the resolution framework. The first
is the lack of clarity of jurisdiction. In a situation where
one forum decides on matters relating to the rights of
the creditor, while another decides on those relating to
the rights of the debtor, the decisions are readily
appealed against and either stayed or overturned in a
higher court. Ideally, if economic value is indeed to be
preserved, there must be a single forum that hears
both sides of the case and makes a judgment based
on both. A second problem exacerbates the problems
of multiple judicial fora. The fora entrusted with
adjudicating on matters relating to insolvency and
bankruptcy may not have the business or financial
expertise, information or bandwidth to decide on such
matters. This leads to delays and extensions in
arriving at an outcome, and increases the vulnerability
to appeals of the outcome.
The uncertainty that these problems give rise to shows
up in case law on matters of insolvency and
bankruptcy in India. Judicial precedent is set by ―case
law‖ which helps flesh out the statutory laws. These
may also, in some cases, pronounce new substantive
law where the statute and precedent are silent. (Ravi,
2015) reviews judgments of the High Courts on BIFR
cases, the DRTs and DRATs, as well as a review of
important judgments of the Supreme Court that have
had a significant impact on the interpretation of
existing insolvency legislation. The judgments
reviewed are those after June 2002 when the
SARFAESI Act came into effect. It is illustrative of
both debtor and creditor led process of corporate
insolvency, and reveals a matrix of fragmented and
contrary outcomes, rather than coherent and
consistent, being set as precedents.
In such an environment of legislative and judicial
uncertainty, the outcomes on insolvency and
bankruptcy are poor. World Bank (2014) reports that
the average time to resolve insolvency is four years in
India, compared to 0.8 years in Singapore and 1 year
16
in London. Sengupta and Sharma, 2015 compare the
number of new cases that file for corporate insolvency
in the U.K., which has a robust insolvency law, to the
status of cases registered at the BIFR under SICA,
1985, as well as those filed for liquidation under
Companies Act, 1956. They compare this with the
number of cases files in the UK, and find a significantly
higher turnover in the cases that are filed and cleared
through the insolvency process in the UK. If we are to
bring financing patterns back on track with the global
norm, we must create a legal framework to make debt
contracts credible channels of financing.
This calls for a deeper redesign of the entire resolution
process, rather than working on strengthening any
single piece of it. India is not unusual in requiring this.
In all countries, bankruptcy laws undergo significant
changes over the period of two decades or more. For
example, the insolvency resolution framework in the
UK is the Insolvency Act of 1986, which was
substantially modified with the Insolvency Act of 2000,
and the Enterprise Act of 2002. The first Act for
bankruptcy resolution in the US that lasted for a
significant time was the Bankruptcy Act of 1889. This
was followed by the Act of 1938, the Reform Act of
1978, the Act of 1984, the Act of 1994, a related
consumer protection Act of 2005. Singapore proposed
a bankruptcy reform in 2013, while there are significant
changes that are being proposed in the US and the
Italian bankruptcy framework this year in 2015.
Several of these are structural reforms with
fundamental implications on resolving insolvency….‖
The BLRC went on to state:
―[…..] India is one of the youngest republics in the

world, with a high concentration of the most dynamic
entrepreneurs. Yet these game changers and growth
drivers are crippled by an environment that takes
some of the longest times and highest costs by world
17
standards to resolve any problems that arise while
repaying dues on debt. This problem leads to grave
consequences: India has some of the lowest credit
compared to the size of the economy. This is a
troublesome state to be in, particularly for a young
emerging economy with the entrepreneurial dynamism
of India.‖
xxx xxx xxx
―Speed is of essence for the working of the bankruptcy
code, for two reasons. First, while the ‗calm period‘
can help keep an organization afloat, without the full
clarity of ownership and control, significant decisions
cannot be made. Without effective leadership, the firm
will tend to atrophy and fail. The longer the delay, the
more likely it is that liquidation will be the only answer.
Second, the liquidation value tends to go down with
time as many assets suffer from a high economic rate
of depreciation.
From the viewpoint of creditors, a good realization can
generally be obtained if the firm is sold as a going
concern. Hence, when delays induce liquidation, there
is value destruction. Further, even in liquidation, the
realization is lower when there are delays. Hence,
delays cause value destruction. Thus, achieving a
high recovery rate is primarily about identifying and
combating the sources of delay.
This same idea is found in FSLRC‘s (Financial Sector
Legislative Reforms Commission) treatment of the
failure of financial firms. The most important objective
in designing a legal framework for dealing with firm
failure is the need for speed.‖
The pre-existing scenario has been noticed in some of our judgments.
In Madras Petrochem Ltd. and Anr. v. Board for Industrial and
18
Financial Reconstruction and Ors., (2016) 4 SCC 1, this Court
found:
―40.……The Eradi Committee Report relating to

insolvency and winding up of companies dated 31-7-
2000, observed that out of 3068 cases referred to
BIFR from 1987 to 2000 all but 1062 cases have been
disposed of. Out of the cases disposed of, 264 cases
were revived, 375 cases were under negotiation for
revival process, 741 cases were recommended for
winding up, and 626 cases were dismissed as not
maintainable. These facts and figures speak for
themselves and place a big question mark on the utility
of the Sick Industrial Companies (Special Provisions)
Act, 1985. The Committee further pointed out that
effectiveness of the Sick Industrial Companies
(Special Provisions) Act, 1985 as has been pointed out
earlier, has been severely undermined by reason of
the enormous delays involved in the disposal of cases
by BIFR. (See Paras 5.8, 5.9 and 5.15 of the Report.)
Consequently, the Committee recommended that the
Sick Industrial Companies (Special Provisions) Act,
1985 be repealed and the provisions thereunder for
revival and rehabilitation should be telescoped into the
structure of the Companies Act, 1956 itself.‖
(emphasis supplied)
xxx xxx xxx
―43.……In fact, another interesting document is the
Report on Trend and Progress of Banking in India
2011-2012 for the year ended 30-6-2012 submitted by
Reserve Bank of India to the Central Government in
terms of Section 36(2) of the Banking Regulation Act,
1949. In Table IV.14 the Report provides statistics
regarding trends in non-performing assets bank-wise,
group-wise. As per the said Table, the opening
balance of non-performing assets in public sector
banks for the year 2011-2012 was Rs 746 billion but
the closing balance for 2011-2012 was Rs 1172 billion
19
only. The total amount recovered through the
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 during
2011-2012 registered a decline compared to the
previous year, but, even then, the amounts recovered
under the said Act constituted 70% of the total amount
recovered. The amounts recovered under the
Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 constituted only 28%. All this
would go to show that the amounts that public sector
banks and financial institutions have to recover are in
staggering figures and at long last at least one
statutory measure has proved to be of some efficacy.
This Court would be loathe to give such an
interpretation as would thwart the recovery process
under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
Act, 2002 which Act alone seems to have worked to
some extent at least.‖
Similarly, in Innoventive Industries (supra), this Court found:
―13. One of the important objectives of the Code is to

bring the insolvency law in India under a single unified
umbrella with the object of speeding up of the
insolvency process. As per the data available with the
World Bank in 2016, insolvency resolution in India took
4.3 years on an average, which was much higher
when compared with the United Kingdom (1 year),
USA (1.5 years) and South Africa (2 years). The World
Bank‘s Ease of Doing Business Index, 2015, ranked
India as country number 135 out of 190 countries on
the ease of resolving insolvency based on various
indicia.‖
Further, this Court in ArcelorMittal (supra) observed:
―62. Previous legislation, namely, the Sick Industrial

Companies (Special Provisions) Act, 1985, and the
20
Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, which made provision for
rehabilitation of sick companies and repayment of
loans availed by them, were found to have completely
failed. This was taken note of by our judgment
in Madras Petrochem Ltd. v. Board for Industrial and
Financial Reconstruction, (2016) 4 SCC 1……‖
xxx xxx xxx
―63. These two enactments were followed by the
Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest Act, 2002. As
has been noted hereinabove, amounts recovered
under the said Act recorded improvement over the
previous two enactments, but this was yet found to be
inadequate.‖
JUDICIAL HANDS-OFF QUA ECONOMIC LEGISLATION
7. In the United States, at one point of time, Justice Stephen Field‘s
dissents of the 19th Century were translated into majority opinions in
the early 20th Century. This was referred to as the Lochner era, in
which the U.S. Supreme Court, over a period of 40 years, consistently
struck down legislation which was economic in nature as such
legislation did not, according to the Court, square with property rights.
As a result, a large number of minimum wage laws, maximum hours of
work in factories laws, child labour laws, etc. were struck down. The
result, as is well known, is that President Roosevelt initiated a court-
packing plan in which he sought to get authorization from Congress to
21
appoint additional judges to the Supreme Court, who would have then
overruled the Lochner line of precedents. As it turned out, that became
unnecessary as Justice Roberts switched his vote so that a 5:4
majority from 1937 onwards upheld economic legislation. It is important
to note that the dissents of Justice Holmes and Justice Brandeis now
became the law. Justice Holmes had, in his dissent in Lochner v. New
York, 198 U.S. 45 (1905), stated:
―This case is decided upon an economic theory

which a large part of the country does not entertain. If
it were a question whether I agreed with that theory, I
should desire to study it further and long before
making up my mind. But I do not conceive that to be
my duty, because I strongly believe that my agreement
or disagreement has nothing to do with the right of a
majority to embody their opinions in law. It is settled by
various decisions of this court that state constitutions
and state laws may regulate life in many ways which
we, as legislators, might think as injudicious, or, if you
like, as tyrannical, as this, and which, equally with this,
interfere with the liberty to contract. Sunday laws and
usury laws are ancient examples. A more modern one
is the prohibition of lotteries. The liberty of the citizen
to do as he likes so long as he does not interfere with
the liberty of others to do the same, which has been a
shibboleth for some well-known writers, is interfered
with by school laws, by the Post Office, by every state
or municipal institution which takes his money for
purposes thought desirable, whether he likes it or not.
The Fourteenth Amendment does not enact Mr.
Herbert Spencer‘s Social Statics. The other day, we
sustained the Massachusetts vaccination law.
Jacobson v. Massachusetts, 197 U. S. 11. United
22
States and state statutes and decisions cutting down
the liberty to contract by way of combination are
familiar to this court. Northern Securities Co. v. United
States, 193 U. S. 197. Two years ago, we upheld the
prohibition of sales of stock on margins or for future
delivery in the constitution of California. Otis v.
Parker, 187 U. S. 606. The decision sustaining an
eight hour law for miners is still recent. Holden v.
Hardy, 169 U. S. 366. Some of these laws embody
convictions or prejudices which judges are likely to
share. Some may not. But a constitution is not
intended to embody a particular economic theory,
whether of paternalism and the organic relation of the
citizen to the State or of laissez faire.
It is made for people of fundamentally differing
views, and the accident of our finding certain opinions
natural and familiar or novel and even shocking ought
not to conclude our judgment upon the question
whether statutes embodying them conflict with the
Constitution of the United States.
General propositions do not decide concrete
cases. The decision will depend on a judgment or
intuition more subtle than any articulate major premise.
But I think that the proposition just stated, if it is
accepted, will carry us far toward the end. Every
opinion tends to become a law. I think that the word
liberty in the Fourteenth Amendment is perverted
when it is held to prevent the natural outcome of a
dominant opinion, unless it can be said that a rational
and fair man necessarily would admit that the statute
proposed would infringe fundamental principles as
they have been understood by the traditions of our
people and our law. It does not need research to show
that no such sweeping condemnation can be passed
upon the statute before us. A reasonable man might
think it a proper measure on the score of health. Men
whom I certainly could not pronounce unreasonable
would uphold it as a first instalment of a general
regulation of the hours of work. Whether in the latter
23
aspect it would be open to the charge of inequality I
think it unnecessary to discuss.‖1
Similarly, in New State Ice Co. v. Liebman, 285 U.S. 262 (1932),
Justice Brandeis echoed Justice Holmes as follows:
―The discoveries in physical science, the

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

economic is a grave responsibility. Denial of the right
to experiment may be fraught with serious
consequences to the Nation. It is one of the happy
incidents of the federal system that a single
courageous State may, if its citizens choose, serve as
a laboratory; and try novel social and economic
experiments without risk to the rest of the country. This
Court has the power to prevent an experiment. We
may strike down the statute which embodies it on the
1
Lochner v. New York, 198 U.S. 45, 75-76 (1905).
24
ground that, in our opinion, the measure is arbitrary,
capricious or unreasonable. We have power to do this,
because the due process clause has been held by the
Court applicable to matters of substantive law as well
as to matters of procedure. But in the exercise of this
high power, we must be ever on our guard, lest we
erect our prejudices into legal principles. If we would
guide by the light of reason, we must let our minds be
bold.‖2
The Lochner doctrine was finally buried in Ferguson v. Skrupa, 372
U.S. 726 (1962), where the Supreme Court held:
―Both the District Court in the present case and

the Pennsylvania court in Stone adopted the
philosophy of Adams v. Tanner, and cases like it, that
it is the province of courts to draw on their own views
as to the morality, legitimacy, and usefulness of a
particular business in order to decide whether a statute
bears too heavily upon that business and, by so doing,
violates due process. Under the system of government
created by our Constitution, it is up to legislatures, not
courts, to decide on the wisdom and utility of
legislation. There was a time when the Due Process
Clause was used by this Court to strike down laws
which were thought unreasonable, that is, unwise or
incompatible with some particular economic or social
philosophy. In this manner, the Due Process Clause
was used, for example, to nullify laws prescribing
maximum hours for work in bakeries, Lochner v. New
York, 198 U. S. 45 (1905), outlawing ―yellow dog‖
contracts, Coppage v. Kansas, 236 U. S. 1 (1915),
setting minimum wages for women, Adkins v.
Children’s Hospital, 261 U. S. 525 (1923), and fixing
2
New State Ice Co. v. Liebman, 285 U.S. 262, 310-311 (1932).
25
the weight of loaves of bread, Jay Burns Baking Co. v.
Bryan, 264 U. S. 504 (1924). This intrusion by the
judiciary into the realm of legislative value judgments
was strongly objected to at the time, particularly by Mr.
Justice Holmes and Mr. Justice Brandeis. Dissenting
from the Court‘s invalidating a state statute which
regulated the resale price of theatre and other tickets,
Mr. Justice Holmes said,
―I think the proper course is to recognize that
a state Legislature can do whatever it sees fit
to do unless it is restrained by some express
prohibition in the Constitution of the United
States or of the State, and that Courts should
be careful not to extend such prohibitions
beyond their obvious meaning by reading into
them conceptions of public policy that the
particular Court may happen to entertain.
And, in an earlier case, he had emphasized that,
‗The criterion of constitutionality is not whether we
believe the law to be for the public good‘ [Adkins v.
Children’s Hospital, 261 U. S. 525, 567, 570 (1923)
(dissenting opinion)].
The doctrine that prevailed in Lochner, Coppage,
Adkins, Burns, and like cases - that due process
authorizes courts to hold laws unconstitutional when
they believe the legislature has acted unwisely - has
long since been discarded. We have returned to the
original constitutional proposition that courts do not
substitute their social and economic beliefs for the
judgment of legislative bodies, who are elected to pass
laws. As this Court stated in a unanimous opinion in
1941, ―We are not concerned… with the wisdom,
need, or appropriateness of the legislation. [Olsen v.
Nebraska ex rel. Western Reference & Bond Assn.,
313 U. S. 236, 246 (1941)]‖
Legislative bodies have broad scope to
experiment with economic problems, and this Court
does not sit to, ―subject the state to an intolerable
supervision hostile to the basic principles of our
26
government and wholly beyond the protection which
the general clause of the Fourteenth Amendment was
intended to secure‖ [Sproles v. Binford, 286 U.S. 374,
388 (1932)]. It is now settled that States ―have power
to legislate against what are found to be injurious
practices in their internal commercial and business
affairs, so long as their laws do not run afoul of some
specific federal constitutional prohibition, or of some
valid federal law‖ [Lincoln Federal Labor Union, etc. v.
Northwestern Iron & Metal Co., 335 U.S. 525, 536
(1949)].
In the face of our abandonment of the use of the
―vague contours‖ [Adkins v. Children’s Hospital, 261 U.
S. 525, 535 (1923)] of the Due Process Clause to
nullify laws which a majority of the Court believed to be
economically unwise, reliance on Adams v. Tanner is
as mistaken as would be adherence to Adkins v.
Children’s Hospital, overruled by West Coast Hotel Co.
v. Parrish, 300 U. S. 379 (1937). Not only has the
philosophy of Adams been abandoned, but also this
Court, almost 15 years ago, expressly pointed to
another opinion of this Court as having ―clearly
undermined‖ Adams. [Lincoln Federal Labor Union,
etc. v. Northwestern Iron & Metal Co., 335 U.S. 525
(1949)]. We conclude that the Kansas Legislature was
free to decide for itself that legislation was needed to
deal with the business of debt adjusting.
Unquestionably, there are arguments showing that the
business of debt adjusting has social utility, but such
arguments are properly addressed to the legislature,
not to us. We refuse to sit as a ―superlegislature to
weigh the wisdom of legislation,‖ [Day-Brite Lighting,
Inc., v. Missouri, 342 U.S. 421, 423 (1923)] and we
emphatically refuse to go back to the time when courts
used the Due Process Clause ―to strike down state
laws, regulatory of business and industrial conditions,
because they may be unwise, improvident, or out of
harmony with a particular school of thought‖
[Williamson v. Lee Optical Co., 348 U.S. 483, 488
27
(1955)]. Nor are we able or willing to draw lines by
calling a law ―prohibitory‖ or ―regulatory.‖ Whether the
legislature takes for its textbook Adam Smith, Herbert
Spencer, Lord Keynes, or some other is no concern of
ours. The Kansas debt adjusting statute may be wise
or unwise. But relief, if any be needed, lies not with us,
but with the body constituted to pass laws for the State
of Kansas.
Nor is the statute‘s exception of lawyers a denial
of equal protection of the laws to nonlawyers. Statutes
create many classifications which do not deny equal
protection; it is only ―invidious discrimination‖ which
offends the Constitution. The business of debt
adjusting gives rise to a relationship of trust in which
the debt adjuster will, in a situation of insolvency, be
marshalling assets in the manner of a proceeding in
bankruptcy. The debt adjuster‘s client may need
advice as to the legality of the various claims against
him remedies existing under state laws governing
debtor-creditor relationships, or provisions of the
Bankruptcy Act - advice which a nonlawyer cannot
lawfully give him. If the State of Kansas wants to limit
debt adjusting to lawyers, the Equal Protection Clause
does not forbid it. We also find no merit in the
contention that the Fourteenth Amendment is violated
by the failure of the Kansas statute‘s title to be as
specific as appellee thinks it ought to be under the
Kansas Constitution.‖3
(emphasis supplied)
8. In this country, this Court in R.K. Garg v. Union of India, (1981)
4 SCC 675 has held:
3
Ferguson v. Skrupa, 372 U.S. 726, 728-733 (1962).
28
―8. Another rule of equal importance is that laws
relating to economic activities should be viewed with
greater latitude than laws touching civil rights such as
freedom of speech, religion etc. It has been said by no
less a person than Holmes, J., that the legislature
should be allowed some play in the joints, because it
has to deal with complex problems which do not admit
of solution through any doctrinaire or strait-jacket
formula and this is particularly true in case of
legislation dealing with economic matters, where,
having regard to the nature of the problems required to
be dealt with, greater play in the joints has to be
allowed to the legislature. The court should feel more
inclined to give judicial deference to legislative
judgment in the field of economic regulation than in
other areas where fundamental human rights are
involved. Nowhere has this admonition been more
felicitously expressed than in Morey v. Doud [351 US
457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J.,
said in his inimitable style:
―In the utilities, tax and economic regulation

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

directed to practical problems, that the economic
mechanism is highly sensitive and complex, that many
problems are singular and contingent, that laws are
29
not abstract propositions and do not relate to abstract
units and are not to be measured by abstract
symmetry‖; ―that exact wisdom and nice adaption of
remedy are not always possible‖ and that ―judgment is
largely a prophecy based on meagre and
uninterpreted experience‖. Every legislation,
particularly in economic matters is essentially empiric
and it is based on experimentation or what one may
call trial and error method and therefore it cannot
provide for all possible situations or anticipate all
possible abuses. There may be crudities and
inequities in complicated experimental economic
legislation but on that account alone it cannot be
struck down as invalid. The courts cannot, as pointed
out by the United States Supreme Court in Secretary
of Agriculture v. Central Roig Refining Company [94 L
Ed 381 : 338 US 604 (1950)] be converted into
tribunals for relief from such crudities and inequities.
There may even be possibilities of abuse, but that too
cannot of itself be a ground for invalidating the
legislation, because it is not possible for any
legislature to anticipate as if by some divine
prescience, distortions and abuses of its legislation
which may be made by those subject to its provisions
and to provide against such distortions and abuses.
Indeed, howsoever great may be the care bestowed
on its framing, it is difficult to conceive of a legislation
which is not capable of being abused by perverted
human ingenuity. The Court must therefore adjudge
the constitutionality of such legislation by the
generality of its provisions and not by its crudities or
inequities or by the possibilities of abuse of any of its
provisions. If any crudities, inequities or possibilities of
abuse come to light, the legislature can always step in
and enact suitable amendatory legislation. That is the
essence of pragmatic approach which must guide and
inspire the legislature in dealing with complex
economic issues.‖
(emphasis supplied)
xxx xxx xxx
30
19. It is true that certain immunities and exemptions
are granted to persons investing their unaccounted
money in purchase of Special Bearer Bonds but that is
an inducement which has to be offered for unearthing
black money. Those who have successfully evaded
taxation and concealed their income or wealth despite
the stringent tax laws and the efforts of the tax
department are not likely to disclose their unaccounted
money without some inducement by way of immunities
and exemptions and it must necessarily be left to the
legislature to decide what immunities and exemptions
would be sufficient for the purpose. It would be outside
the province of the Court to consider if any particular
immunity or exemption is necessary or not for the
purpose of inducing disclosure of black money. That
would depend upon diverse fiscal and economic
considerations based on practical necessity and
administrative expediency and would also involve a
certain amount of experimentation on which the Court
would be least fitted to pronounce. The Court would
not have the necessary competence and expertise to
adjudicate upon such an economic issue. The Court
cannot possibly assess or evaluate what would be the
impact of a particular immunity or exemption and
whether it would serve the purpose in view or not.
There are so many imponderables that would enter
into the determination that it would be wise for the
Court not to hazard an opinion where even economists
may differ. The Court must while examining the
constitutional validity of a legislation of this kind, ―be
resilient, not rigid, forward looking, not static, liberal,
not verbal‖ and the Court must always bear in mind the
constitutional proposition enunciated by the Supreme
Court of the United States in Munn v. Illinois [94 US
13] , namely, ―that courts do not substitute their social
and economic beliefs for the judgment of legislative
bodies‖. The Court must defer to legislative judgment
in matters relating to social and economic policies and
must not interfere, unless the exercise of legislative
judgment appears to be palpably arbitrary. The Court
31
should constantly remind itself of what the Supreme
Court of the United States said in Metropolis Theater
Company v. City of Chicago [57 L Ed 730 : 228 US 61
(1912)] :
―The problems of government are practical
ones and may justify, if they do not require,
rough accommodations, illogical it may be,
and unscientific. But even such criticism
should not be hastily expressed. What is best
is not always discernible, the wisdom of any
choice may be disputed or condemned. Mere
error of government are not subject to our
judicial review.‖
It is true that one or the other of the immunities or
exemptions granted under the provisions of the Act
may be taken advantage of by resourceful persons by
adopting ingenious methods and devices with a view
to avoiding or saving tax. But that cannot be helped
because human ingenuity is so great when it comes to
tax avoidance that it would be almost impossible to
frame tax legislation which cannot be abused.
Moreover, as already pointed out above, the trial and
error method is inherent in every legislative effort to
deal with an obstinate social or economic issue and if
it is found that any immunity or exemption granted
under the Act is being utilized for tax evasion or
avoidance not intended by the legislature, the Act can
always be amended and the abuse terminated. We are
accordingly of the view that none of the provisions of
the Act is violative of Article 14 and its constitutional
validity must be upheld.‖
(emphasis supplied)
Likewise, in Bhavesh D. Parish v. Union of India, (2000) 5 SCC 471,
this Court held:
32
―26. The services rendered by certain informal sectors
of the Indian economy could not be belittled. However,
in the path of economic progress, if the informal
system was sought to be replaced by a more
organized system, capable of better regulation and
discipline, then this was an economic philosophy
reflected by the legislation in question. Such a
philosophy might have its merits and demerits. But
these were matters of economic policy. They are best
left to the wisdom of the legislature and in policy
matters the accepted principle is that the courts should
not interfere. Moreover in the context of the changed
economic scenario the expertise of people dealing with
the subject should not be lightly interfered with. The
consequences of such interdiction can have large-
scale ramifications and can put the clock back for a
number of years. The process of rationalization of the
infirmities in the economy can be put in serious
jeopardy and, therefore, it is necessary that while
dealing with economic legislations, this Court, while
not jettisoning its jurisdiction to curb arbitrary action or
unconstitutional legislation, should interfere only in
those few cases where the view reflected in the
legislation is not possible to be taken at all.‖
xxx xxx xxx
―30. Before we conclude there is another matter which

we must advert to. It has been brought to our notice
that Section 45-S of the Act has been challenged in
various High Courts and a few of them have granted
the stay of provisions of Section 45-S. When
considering an application for staying the operation of
a piece of legislation, and that too pertaining to
economic reform or change, then the courts must bear
in mind that unless the provision is manifestly unjust or
glaringly unconstitutional, the courts must show judicial
restraint in staying the applicability of the same. Merely
because a statute comes up for examination and some
arguable point is raised, which persuades the courts to
33
consider the controversy, the legislative will should not
normally be put under suspension pending such
consideration. It is now well settled that there is always
a presumption in favour of the constitutional validity of
any legislation, unless the same is set aside after final
hearing and, therefore, the tendency to grant stay of
legislation relating to economic reform, at the interim
stage, cannot be understood. The system of checks
and balances has to be utilized in a balanced manner
with the primary objective of accelerating economic
growth rather than suspending its growth by doubting
its constitutional efficacy at the threshold itself.‖
(emphasis supplied)
In DG of Foreign Trade v. Kanak Exports, (2016) 2 SCC 226, this
Court has held:
―109. Therefore, it cannot be denied that the

Government has a right to amend, modify or even
rescind a particular scheme. It is well settled that in
complex economic matters every decision is
necessarily empiric and it is based on experimentation
or what one may call trial and error method and
therefore, its validity cannot be tested on any rigid prior
considerations or on the application of any straitjacket
formula. In Balco Employees’ Union v. Union of India
[Balco Employees’ Union v. Union of India, (2002) 2
SCC 333], the Supreme Court held that laws, including
executive action relating to economic activities should
be viewed with greater latitude than laws touching civil
rights such as freedom of speech, religion, etc. that the
legislature should be allowed some play in the joints
because it has to deal with complex problems which
do not admit of solution through any doctrine or
straitjacket formula and this is particularly true in case
of legislation dealing with economic matters, where
having regard to the nature of the problems greater
latitude require to be allowed to the legislature……‖
34
It is with this background, factual and legal, that the constitutional
validity of the Insolvency and Bankruptcy Code, 2016 has to be
viewed.
THE RAISON D’ÊTRE FOR THE INSOLVENCY AND BANKRUPTCY CODE
9. The Statement of Objects and Reasons for the Code have been
referred to in Innoventive Industries (supra) which states:
―12. ……The Statement of Objects and Reasons of the

Code reads as under:
―Statement of Objects and Reasons.—There is no
single law in India that deals with insolvency and
bankruptcy. Provisions relating to insolvency and
bankruptcy for companies can be found in the Sick
Industrial Companies (Special Provisions) Act, 1985,
the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, the Securitisation and
Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 and the Companies Act,
2013. These statutes provide for creation of multiple
fora such as Board of Industrial and Financial
Reconstruction (BIFR), Debts Recovery Tribunal
(DRT) and National Company Law Tribunal (NCLT)
and their respective Appellate Tribunals. Liquidation of
companies is handled by the High Courts. Individual
bankruptcy and insolvency is dealt with under the
Presidency Towns Insolvency Act, 1909, and the
Provincial Insolvency Act, 1920 and is dealt with by the
Courts. The existing framework for insolvency and
bankruptcy is inadequate, ineffective and results in
undue delays in resolution, therefore, the proposed
legislation.
35
2. The objective of the Insolvency and Bankruptcy
Code, 2015 is to consolidate and amend the laws
relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals in
a time-bound manner for maximization of value of
assets of such persons, to promote entrepreneurship,
availability of credit and balance the interests of all the
stakeholders including alteration in the priority of
payment of government dues and to establish an
Insolvency and Bankruptcy Fund, and matters
connected therewith or incidental thereto. An effective
legal framework for timely resolution of insolvency and
bankruptcy would support development of credit
markets and encourage entrepreneurship. It would
also improve Ease of Doing Business, and facilitate
more investments leading to higher economic growth
and development.
3. The Code seeks to provide for designating NCLT
and DRT as the Adjudicating Authorities for corporate
persons and firms and individuals, respectively, for
resolution of insolvency, liquidation and bankruptcy.
The Code separates commercial aspects of insolvency
and bankruptcy proceedings from judicial aspects. The
Code also seeks to provide for establishment of the
Insolvency and Bankruptcy Board of India (Board) for
regulation of insolvency professionals, insolvency
professional agencies and information utilities. Till the
Board is established, the Central Government shall
exercise all powers of the Board or designate any
financial sector regulator to exercise the powers and
functions of the Board. Insolvency professionals will
assist in completion of insolvency resolution,
liquidation and bankruptcy proceedings envisaged in
the Code. Information Utilities would collect, collate,
authenticate and disseminate financial information to
facilitate such proceedings. The Code also proposes
to establish a fund to be called the Insolvency and
Bankruptcy Fund of India for the purposes specified in
the Code.
36
4. The Code seeks to provide for amendments in the
Indian Partnership Act, 1932, the Central Excise Act,
1944, Customs Act, 1962, the Income Tax Act, 1961,
the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, the Finance Act, 1994, the
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, the
Sick Industrial Companies (Special Provisions) Repeal
Act, 2003, the Payment and Settlement Systems Act,
2007, the Limited Liability Partnership Act, 2008, and
the Companies Act, 2013.
5. The Code seeks to achieve the above objectives.‖
(emphasis in original)
10. The Preamble of the Code states as follows:
―An Act to consolidate and amend the laws relating to

reorganization and insolvency resolution of corporate
persons, partnership firms and individuals in a time-
bound manner for maximization of value of assets of
such persons, to promote entrepreneurship, availability
of credit and balance the interests of all the
stakeholders including alteration in the order of priority
of payment of Government dues and to establish an
Insolvency and Bankruptcy Board of India, and for
matters connected therewith or incidental thereto.‖
11. As is discernible, the Preamble gives an insight into what is
sought to be achieved by the Code. The Code is first and foremost, a
Code for reorganization and insolvency resolution of corporate debtors.
Unless such reorganization is effected in a time-bound manner, the
value of the assets of such persons will deplete. Therefore,
37
maximization of value of the assets of such persons so that they are
efficiently run as going concerns is another very important objective of
the Code. This, in turn, will promote entrepreneurship as the persons in
management of the corporate debtor are removed and replaced by
entrepreneurs. When, therefore, a resolution plan takes off and the
corporate debtor is brought back into the economic mainstream, it is
able to repay its debts, which, in turn, enhances the viability of credit in
the hands of banks and financial institutions. Above all, ultimately, the
interests of all stakeholders are looked after as the corporate debtor
itself becomes a beneficiary of the resolution scheme – workers are
paid, the creditors in the long run will be repaid in full, and
shareholders/investors are able to maximize their investment. Timely
resolution of a corporate debtor who is in the red, by an effective legal
framework, would go a long way to support the development of credit
markets. Since more investment can be made with funds that have
come back into the economy, business then eases up, which leads,
overall, to higher economic growth and development of the Indian
economy. What is interesting to note is that the Preamble does not, in
any manner, refer to liquidation, which is only availed of as a last resort
if there is either no resolution plan or the resolution plans submitted are
38
not up to the mark. Even in liquidation, the liquidator can sell the
business of the corporate debtor as a going concern. [See
ArcelorMittal (supra) at paragraph 83, footnote 3].
12. It can thus be seen that the primary focus of the legislation is to
ensure revival and continuation of the corporate debtor by protecting
the corporate debtor from its own management and from a corporate
death by liquidation. The Code is thus a beneficial legislation which
puts the corporate debtor back on its feet, not being a mere recovery
legislation for creditors. The interests of the corporate debtor have,
therefore, been bifurcated and separated from that of its promoters /
those who are in management. Thus, the resolution process is not
adversarial to the corporate debtor but, in fact, protective of its
interests. The moratorium imposed by Section 14 is in the interest of
the corporate debtor itself, thereby preserving the assets of the
corporate debtor during the resolution process. The timelines within
which the resolution process is to take place again protects the
corporate debtor‘s assets from further dilution, and also protects all its
creditors and workers by seeing that the resolution process goes
through as fast as possible so that another management can, through
39
its entrepreneurial skills, resuscitate the corporate debtor to achieve all
these ends.
APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT NOT CONTRARY

TO THIS COURT’S JUDGMENTS.
13. Shri Rohatgi has argued that contrary to the judgments in
Madras Bar Association (I) (supra) and Madras Bar Association (III)
(supra), Section 412(2) of the Companies Act, 2013 continued on the
statute book, as a result of which, the two Judicial Members of the
Selection Committee get outweighed by three bureaucrats.
14. On 03.01.2018, the Companies Amendment Act, 2017 was
brought into force by which Section 412 of the Companies Act, 2013
was amended as follows:
―412. Selection of Members of Tribunal and

Appellate Tribunal.—
xxx xxx xxx
(2) The Members of the Tribunal and the
Technical Members of the Appellate Tribunal shall
be appointed on the recommendation of a
Selection Committee consisting of—
(a) Chief Justice of India or his nominee—
Chairperson;
(b) a senior Judge of the Supreme Court or
Chief Justice of High Court—Member;
(c) Secretary in the Ministry of Corporate
Affairs—Member; and
40
(d) Secretary in the Ministry of Law and
Justice—Member.
(2-A) Where in a meeting of the Selection
Committee, there is equality of votes on any
matter, the Chairperson shall have a casting
vote.‖
This was brought into force by a notification dated 09.02.2018.
However, an additional affidavit has been filed during the course of
these proceedings by the Union of India. This affidavit is filed by one
Dr. Raj Singh, Regional Director (Northern Region) of the Ministry of
Corporate Affairs. This affidavit makes it clear that, acting in
compliance with the directions of the Supreme Court in the aforesaid
judgments, a Selection Committee was constituted to make
appointments of Members of the NCLT in the year 2015 itself. Thus, by
an Order dated 27.07.2015, (i) Justice Gogoi (as he then was), (ii)
Justice Ramana, (iii) Secretary, Department of Legal Affairs, Ministry of
Law and Justice, and (iv) Secretary, Corporate Affairs, were
constituted as the Selection Committee. This Selection Committee was
reconstituted on 22.02.2017 to make further appointments. In
compliance of the directions of this Court, advertisements dated
10.08.2015 were issued inviting applications for Judicial and Technical
Members as a result of which, all the present Members of the NCLT
41
and NCLAT have been appointed. This being the case, we need not
detain ourselves any further with regard to the first submission of Shri
Rohatgi.
NCLAT BENCH ONLY AT DELHI.
15. It has been argued by Shri Rohatgi that as per our judgment in
Madras Bar Association (II) (supra), paragraph 123 states as follows:
―123. We shall first examine the validity of Section 5 of

the NTT Act. The basis of challenge to the above
provision has already been narrated by us while
dealing with the submissions advanced on behalf of
the petitioners with reference to the fourth contention.
According to the learned counsel for the petitioners,
Section 5(2) of the NTT Act mandates that NTT would
ordinarily have its sittings in the National Capital
Territory of Delhi. According to the petitioners, the
aforesaid mandate would deprive the litigating
assessee the convenience of approaching the
jurisdictional High Court in the State to which he
belongs. An assessee may belong to a distant/remote
State, in which eventuality, he would not merely have
to suffer the hardship of travelling a long distance, but
such travel would also entail uncalled for financial
expense. Likewise, a litigant assessee from a far-flung
State may find it extremely difficult and inconvenient to
identify an Advocate who would represent him before
NTT, since the same is mandated to be ordinarily
located in the National Capital Territory of Delhi. Even
though we have expressed the view, that it is open to
Parliament to substitute the appellate jurisdiction
vested in the jurisdictional High Courts and constitute
courts/tribunals to exercise the said jurisdiction, we are
of the view, that while vesting jurisdiction in an
42
alternative court/tribunal, it is imperative for the
legislature to ensure that redress should be available
with the same convenience and expediency as it was
prior to the introduction of the newly created
court/tribunal. Thus viewed, the mandate incorporated
in Section 5(2) of the NTT Act to the effect that the
sittings of NTT would ordinarily be conducted in the
National Capital Territory of Delhi, would render the
remedy inefficacious, and thus unacceptable in law.
The instant aspect of the matter was considered by
this Court with reference to the Administrative
Tribunals Act, 1985 in S.P. Sampath Kumar case [S.P.
Sampath Kumar v. Union of India, (1987) 1 SCC 124 :
(1987) 2 ATC 82] and L. Chandra Kumar case [L.
Chandra Kumar v. Union of India, (1997) 3 SCC 261 :
1997 SCC (L&S) 577], wherein it was held that
permanent Benches needed to be established at the
seat of every jurisdictional High Court. And if that was
not possible, at least a Circuit Bench required to be
established at every place where an aggrieved party
could avail of his remedy. The position on the above
issue is no different in the present controversy. For the
above reason, Section 5(2) of the NTT Act is in clear
breach of the law declared by this Court.‖
(emphasis supplied)
16. The learned Attorney General has assured us that this judgment
will be followed and Circuit Benches will be established as soon as it is
practicable. In this view of the matter, we record this submission and
direct the Union of India to set up Circuit Benches of the NCLAT within
a period of 6 months from today.
THE TRIBUNALS ARE FUNCTIONING UNDER THE WRONG MINISTRY
43
17. Shri Mukul Rohatgi argued that in Madras Bar Association (I)
(supra), paragraph 120(xii) specifically reads as follows:
―120 We may tabulate the corrections required to set

right the defects in Parts I-B and I-C of the Act:
xxx xxx xxx
(xii) The administrative support for all Tribunals
should be from the Ministry of Law and Justice.
Neither the Tribunals nor their members shall
seek or be provided with facilities from the
respective sponsoring or parent Ministries or
Department concerned.
xxx xxx xxx‖
Even though eight years have passed since the date of this judgment,
the administrative support for these tribunals continues to be from the
Ministry of Corporate Affairs. This needs to be rectified at the earliest.
18. However, the learned Attorney General pointed out Article 77(3)
of the Constitution of India and Delhi International Airport Limited v.
International Lease Finance Corporation and Ors., (2015) 8 SCC
446, which state that once rules of business are allocated among
various Ministries, such allocation is mandatory in nature. According to
him, therefore, the rules of business, having allocated matters which
arise under the Insolvency Code to the Ministry of Corporate Affairs,
are mandatory in nature and have to be followed.
44
19. It is obvious that the rules of business, being mandatory in
nature, and having to be followed, are to be so followed by the
executive branch of the Government. As far as we are concerned, we
are bound by the Constitution Bench judgment in Madras Bar
Association (I) (supra). This statement of the law has been made
eight years ago. It is high time that the Union of India follow, both in
letter and spirit, the judgment of this Court.
CLASSIFICATION BETWEEN FINANCIAL CREDITOR AND OPERATIONAL
CREDITOR NEITHER DISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OF
ARTICLE 14 OF THE CONSTITUTION OF INDIA.
20. The tests for violation of Article 14 of the Constitution of India,
when legislation is challenged as being violative of the principle of
equality, have been settled by this Court time and again. Since equality
is only among equals, no discrimination results if the Court can be
shown that there is an intelligible differentia which separates two kinds
of creditors so long as there is some rational relation between the
creditors so differentiated, with the object sought to be achieved by the
legislation. This aspect of Article 14 has been laid down in judgments
too numerous to cite, from the very inception.
45
21. Another development of the law is that legislation can be struck
down as being manifestly arbitrary. This has been laid down by the
recent Constitution Bench decision in Shayara Bano (supra) as
follows:
―95. On a reading of this judgment in Natural

Resources Allocation case [Natural Resources
Allocation, In re, Special Reference No. 1 of 2012,
(2012) 10 SCC 1], it is clear that this Court did not
read McDowell [State of A.P. v. McDowell and Co.,
(1996) 3 SCC 709] as being an authority for the
proposition that legislation can never be struck down
as being arbitrary. Indeed the Court, after referring to
all the earlier judgments, and Ajay Hasia [Ajay Hasia v.
Khalid Mujib Sehravardi, (1981) 1 SCC 722 : 1981
SCC (L&S) 258] in particular, which stated that
legislation can be struck down on the ground that it is
―arbitrary‖ under Article 14, went on to conclude that
―arbitrariness‖ when applied to legislation cannot be
used loosely. Instead, it broad based the test, stating
that if a constitutional infirmity is found, Article 14 will
interdict such infirmity. And a constitutional infirmity is
found in Article 14 itself whenever legislation is
―manifestly arbitrary‖ i.e. when it is not fair, not
reasonable, discriminatory, not transparent, capricious,
biased, with favouritism or nepotism and not in pursuit
of promotion of healthy competition and equitable
treatment. Positively speaking, it should conform to
norms which are rational, informed with reason and
guided by public interest, etc.
96. Another Constitution Bench decision in
Subramanian Swamy v. CBI [Subramanian Swamy v.
CBI, (2014) 8 SCC 682 : (2014) 6 SCC (Cri) 42 :
(2014) 3 SCC (L&S) 36] dealt with a challenge to
Section 6-A of the Delhi Special Police Establishment
Act, 1946. This section was ultimately struck down as
46
being discriminatory and hence violative of Article 14.
A specific reference had been made to the
Constitution Bench by the reference order in
Subramanian Swamy v. CBI [Subramanian Swamy v.
CBI, (2005) 2 SCC 317 : 2005 SCC (L&S) 241] and
after referring to several judgments including Ajay
Hasia [Ajay Hasia v. Khalid Mujib Sehravardi, (1981) 1
SCC 722 : 1981 SCC (L&S) 258], Mardia Chemicals
[Mardia Chemicals Ltd. v. Union of India, (2004) 4
SCC 311], Malpe Vishwanath Acharya [Malpe
Vishwanath Acharya v. State of Maharashtra, (1998) 2
SCC 1] and McDowell [State of A.P. v. McDowell and
Co., (1996) 3 SCC 709], the reference, inter alia, was
as to whether arbitrariness and unreasonableness,
being facets of Article 14, are or are not available as
grounds to invalidate a legislation.
97. After referring to the submissions of the counsel,

and several judgments on the discrimination aspect of
Article 14, this Court held: (Subramanian Swamy case
[Subramanian Swamy v. CBI, (2014) 8 SCC 682 :
(2014) 6 SCC (Cri) 42 : (2014) 3 SCC (L&S) 36] , SCC
pp. 721-22, paras 48-49)
―48. In E.P. Royappa [E.P. Royappa v. State of
T.N., (1974) 4 SCC 3 : 1974 SCC (L&S) 165] , it
has been held by this Court that the basic
principle which informs both Articles 14 and 16
are equality and inhibition against discrimination.
This Court observed in para 85 as under: (SCC p.
38)
‗85. … From a positivistic point of view,
equality is antithetic to arbitrariness. In fact
equality and arbitrariness are sworn enemies;
one belongs to the rule of law in a republic
while the other, to the whim and caprice of an
absolute monarch. Where an act is arbitrary,
it is implicit in it that it is unequal both
according to political logic and constitutional
law and is therefore violative of Article 14,
and if it affects any matter relating to public
47
employment, it is also violative of Article 16.
Articles 14 and 16 strike at arbitrariness in
State action and ensure fairness and equality
of treatment.‘
Court’s approach
49. Where there is challenge to the constitutional
validity of a law enacted by the legislature, the
Court must keep in view that there is always a
presumption of constitutionality of an enactment,
and a clear transgression of constitutional
principles must be shown. The fundamental
nature and importance of the legislative process
needs to be recognised by the Court and due
regard and deference must be accorded to the
legislative process. Where the legislation is
sought to be challenged as being unconstitutional
and violative of Article 14 of the Constitution, the
Court must remind itself to the principles relating
to the applicability of Article 14 in relation to
invalidation of legislation. The two dimensions of
Article 14 in its application to legislation and
rendering legislation invalid are now well
recognised and these are: (i) discrimination,
based on an impermissible or invalid
classification, and (ii) excessive delegation of
powers; conferment of uncanalised and unguided
powers on the executive, whether in the form of
delegated legislation or by way of conferment of
authority to pass administrative orders—if such
conferment is without any guidance, control or
checks, it is violative of Article 14 of the
Constitution. The Court also needs to be mindful
that a legislation does not become
unconstitutional merely because there is another
view or because another method may be
considered to be as good or even more effective,
like any issue of social, or even economic policy.
It is well settled that the courts do not substitute
their views on what the policy is.‖
48
xxx xxx xxx
100. To complete the picture, it is important to note

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

42. We have already seen that one of the tests for
challenging the constitutionality of subordinate
legislation is that subordinate legislation should
not be manifestly arbitrary. Also, it is settled law
that subordinate legislation can be challenged on
any of the grounds available for challenge against
plenary legislation. [See Indian Express
Newspapers (Bombay) (P) Ltd. v. Union of India
[Indian Express Newspapers (Bombay) (P) Ltd. v.
Union of India, (1985) 1 SCC 641 : 1985 SCC
(Tax) 121] , SCC at p. 689, para 75.]
43. The test of ―manifest arbitrariness‖ is well
explained in two judgments of this Court. In
Khoday Distilleries Ltd. v. State of Karnataka
[Khoday Distilleries Ltd. v. State of Karnataka,
(1996) 10 SCC 304], this Court held: (SCC p. 314,
para 13)
‗13. It is next submitted before us that the
amended Rules are arbitrary, unreasonable
and cause undue hardship and, therefore,
violate Article 14 of the Constitution. Although
the protection of Article 19(1)(g) may not be
available to the appellants, the Rules must,
undoubtedly, satisfy the test of Article 14,
which is a guarantee against arbitrary action.
However, one must bear in mind that what is
being challenged here under Article 14 is not
executive action but delegated legislation.
49
The tests of arbitrary action which apply to
executive actions do not necessarily apply to
delegated legislation. In order that delegated
legislation can be struck down, such
legislation must be manifestly arbitrary; a law
which could not be reasonably expected to
emanate from an authority delegated with the
law-making power. In Indian Express
Newspapers (Bombay) (P) Ltd. v. Union of
India [Indian Express Newspapers (Bombay)
(P) Ltd. v. Union of India, (1985) 1 SCC 641 :
1985 SCC (Tax) 121], this Court said that a
piece of subordinate legislation does not
carry the same degree of immunity which is
enjoyed by a statute passed by a competent
legislature. A subordinate legislation may be
questioned under Article 14 on the ground
that it is unreasonable; “unreasonable not in
the sense of not being reasonable, but in the
sense that it is manifestly arbitrary‖. Drawing
a comparison between the law in England
and in India, the Court further observed that
in England the Judges would say,
―Parliament never intended the authority to
make such rules; they are unreasonable and
ultra vires‖. In India, arbitrariness is not a
separate ground since it will come within the
embargo of Article 14 of the Constitution. But
subordinate legislation must be so arbitrary
that it could not be said to be in conformity
with the statute or that it offends Article 14 of
the Constitution.‘
44. Also, in Sharma Transport v. State of A.P.
[Sharma Transport v. State of A.P., (2002) 2 SCC
188], this Court held: (SCC pp. 203-04, para 25)
‗25. … The tests of arbitrary action applicable
to executive action do not necessarily apply
to delegated legislation. In order to strike
down a delegated legislation as arbitrary it
has to be established that there is manifest
50
arbitrariness. In order to be described as
arbitrary, it must be shown that it was not
reasonable and manifestly arbitrary. The
expression ―arbitrarily‖ means: in an
unreasonable manner, as fixed or done
capriciously or at pleasure, without adequate
determining principle, not founded in the
nature of things, non-rational, not done or
acting according to reason or judgment,
depending on the will alone.‘‖
101. It will be noticed that a Constitution Bench of this

Court in Indian Express Newspapers (Bombay) (P)
Ltd. v. Union of India [Indian Express Newspapers
(Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641
: 1985 SCC (Tax) 121] stated that it was settled law
that subordinate legislation can be challenged on any
of the grounds available for challenge against plenary
legislation. This being the case, there is no rational
distinction between the two types of legislation when it
comes to this ground of challenge under Article 14.
The test of manifest arbitrariness, therefore, as laid
down in the aforesaid judgments would apply to
invalidate legislation as well as subordinate legislation
under Article 14. Manifest arbitrariness, therefore,
must be something done by the legislature
capriciously, irrationally and/or without adequate
determining principle. Also, when something is done
which is excessive and disproportionate, such
legislation would be manifestly arbitrary. We are,
therefore, of the view that arbitrariness in the sense of
manifest arbitrariness as pointed out by us above
would apply to negate legislation as well under Article
14.‖
This judgment has since been followed in Gopal Jha v. The Hon’ble
Supreme Court of India, Writ Petition (Civil) No. 745/2018 [decided
51
on 25.10.2018] (at paragraph 27); Indian Young Lawyers
Associations and Ors. v. State of Kerala and Ors., Writ Petition
(Civil) No. 373/2006 [decided on 28.09.2018]; Joseph Shine v. Union
of India, Writ Petition (Criminal) No. 194/2017 [decided on 27.09.2018]
(at paragraphs 110, 195, 197); K.S. Puttaswamy v. Union of India,
Writ Petition (Civil) No. 494/2012 [decided on 26.09.2018] (at
paragraphs 77, 78, 416, 724, 725, 1160); Navtej Singh Johar and
Ors. v. Union of India, (2018) 10 SCC 1 (at paragraphs 253, 353,
411, 637.9); Lok Prahari v. State of Uttar Pradesh and Ors., (2018)
6 SCC 1 (at paragraph 35); and Nikesh Tarachand Shah v. Union of
India and Ors., (2018) 11 SCC 1 (at paragraph 23).
22. Sections 5(7) and 5(8) of the Code define ―financial creditor‖ and
―financial debt‖ as follows:
―5. Definitions.—In this Part, unless the context

otherwise requires,—
xxx xxx xxx
(7) ―financial creditor‖ means any person to whom
a financial debt is owed and includes a person to
whom such debt has been legally assigned or
transferred to;
(8) ―financial debt‖ means a debt along with
interest, if any, which is disbursed against the
52
consideration for the time value of money and
includes—
(a) money borrowed against the payment of
interest;
(b) any amount raised by acceptance under
any acceptance credit facility or its de-
materialised equivalent;
(c) any amount raised pursuant to any note
purchase facility or the issue of bonds, notes,
debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of
any lease or hire purchase contract which is
deemed as a finance or capital lease under
the Indian Accounting Standards or such
other accounting standards as may be
prescribed;
(e) receivables sold or discounted other than
any receivables sold on non-recourse basis;
(f) any amount raised under any other
transaction, including any forward sale or
purchase agreement, having the commercial
effect of a borrowing;
Explanation.—For the purposes of this sub-
clause,—
(i) any amount raised from an allottee
under a real estate project shall be deemed
to be an amount having the commercial
effect of a borrowing; and
(ii) the expressions, ―allottee‖ and ―real
estate project‖ shall have the meanings
respectively assigned to them in clauses
(d) and (zn) of Section 2 of the Real Estate
(Regulation and Development) Act, 2016
(16 of 2016);
(g) any derivative transaction entered into in
connection with protection against or benefit
from fluctuation in any rate or price and for
calculating the value of any derivative
53
transaction, only the market value of such
transaction shall be taken into account;
(h) any counter-indemnity obligation in
respect of a guarantee, indemnity, bond,
documentary letter of credit or any other
instrument issued by a bank or financial
institution;
(i) the amount of any liability in respect of any
of the guarantee or indemnity for any of the
items referred to in sub-clauses (a) to (h) of
this clause;
xxx xxx xxx‖
Section 5(20) defines ―operational creditor‖ as follows:

xxx xxx xxx
(20) ―operational creditor‖ means a person to whom
an operational debt is owed and includes any
person to whom such debt has been legally
assigned or transferred;
xxx xxx xxx‖
Section 7 of the Code states:
―7. Initiation of corporate insolvency resolution

process by financial creditor.—(1) A financial
creditor either by itself or jointly with other financial
creditors, or any other person on behalf of the financial
creditor, as may be notified by the Central
Government, may file an application for initiating
corporate insolvency resolution process against a
corporate debtor before the Adjudicating Authority
when a default has occurred.
Explanation.—For the purposes of this sub-section,
a default includes a default in respect of a financial
54
debt owed not only to the applicant financial creditor
but to any other financial creditor of the corporate
debtor.
(2) The financial creditor shall make an application
under sub-section (1) in such form and manner and
accompanied with such fee as may be prescribed.
(3) The financial creditor shall, along with the
application furnish—
(a) record of the default recorded with the
information utility or such other record or
evidence of default as may be specified;
(b) the name of the resolution professional
proposed to act as an interim resolution
professional; and
(c) any other information as may be specified by
the Board.
(4) The Adjudicating Authority shall, within fourteen
days of the receipt of the application under sub-section
(2), ascertain the existence of a default from the
records of an information utility or on the basis of other
evidence furnished by the financial creditor under sub-
section (3).
(5) Where the Adjudicating Authority is satisfied that—
(a) a default has occurred and the application
under sub-section (2) is complete, and there is no
disciplinary proceedings pending against the
proposed resolution professional, it may, by order,
admit such application; or
(b) default has not occurred or the application
under sub-section (2) is incomplete or any
disciplinary proceeding is pending against the
proposed resolution professional, it may, by order,
reject such application:
Provided that the Adjudicating Authority shall,
before rejecting the application under clause (b) of
sub-section (5), give a notice to the applicant to
rectify the defect in his application within seven
days of receipt of such notice from the
Adjudicating Authority.
55
(6) The corporate insolvency resolution process shall
commence from the date of admission of the
application under sub-section (5).
(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to
the financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to
the financial creditor, within seven days of
admission or rejection of such application, as the
case may be.‖
23. A perusal of the definition of ―financial creditor‖ and ―financial
debt‖ makes it clear that a financial debt is a debt together with
interest, if any, which is disbursed against the consideration for time
value of money. It may further be money that is borrowed or raised in
any of the manners prescribed in Section 5(8) or otherwise, as Section
5(8) is an inclusive definition. On the other hand, an ―operational debt‖
would include a claim in respect of the provision of goods or services,
including employment, or a debt in respect of payment of dues arising
under any law and payable to the Government or any local authority.
24. A financial creditor may trigger the Code either by itself or jointly
with other financial creditors or such persons as may be notified by the
Central Government when a ―default‖ occurs. The Explanation to
Section 7(1) also makes it clear that the Code may be triggered by
such persons in respect of a default made to any other financial
56
creditor of the corporate debtor, making it clear that once triggered, the
resolution process under the Code is a collective proceeding in rem
which seeks, in the first instance, to rehabilitate the corporate debtor.
Under Section 7(4), the Adjudicating Authority shall, within the
prescribed period, ascertain the existence of a default on the basis of
evidence furnished by the financial creditor; and under Section 7(5),
the Adjudicating Authority has to be satisfied that a default has
occurred, when it may, by order, admit the application, or dismiss the
application if such default has not occurred. On the other hand, under
Sections 8 and 9, an operational creditor may, on the occurrence of a
default, deliver a demand notice which must then be replied to within
the specified period. What is important is that at this stage, if an
application is filed before the Adjudicating Authority for initiating the
corporate insolvency resolution process, the corporate debtor can
prove that the debt is disputed. When the debt is so disputed, such
application would be rejected.
25. The argument of learned counsel on behalf of the petitioners is
that in point of fact, there is no intelligible differentia having relation to
the objects sought to be achieved by the Code between financial and
operational creditors and indeed, nowhere in the world has this
57
distinction been made. The BLRC Report presents what according to it
is the rationale for the reason to differentiate between financial and
operational creditors. The Report states as follows:
―While both types of creditors can trigger the IRP

under the Code, the evidence presented to trigger
varies. Since financial creditors have electronic
records of the liabilities filed in the Information Utilities
of Section 4.3, incontrovertible event of default on any
financial credit contract can be readily verifiable by
accessing this system. The evidence submitted of
default by the debtor to the operational creditor may be
in either electronic or physical form, since all
operational creditors may or may not have electronic
filings of the debtors‘ liability. Till such time that the
Information Utilities are ubiquitous, financial creditors
may establish default in a manner similar to
operational creditors.‖
Similarly, the Insolvency and Bankruptcy Bill in the Notes on Clause 8
states:
―Clause 8 lays down the procedure for the initiation of

the corporate insolvency resolution process by an
operational creditor. This procedure differs from the
procedure applicable to financial creditors as
operational debts (such as trade debts, salary or wage
claims) tend to be small amounts (in comparison to
financial debts) or are recurring in nature and may not
be accurately reflected on the records of information
utilities at all times. The possibility of disputed debts in
relation to operational creditors is also higher in
comparison to financial creditors such as banks and
financial institutions. Accordingly, the process for
initiation of the insolvency resolution process differs for
an operational creditor…… This ensures that
58
operational creditors, whose debt claims are usually
smaller, are not able to put the corporate debtor into
the insolvency resolution process prematurely or
initiate the process for extraneous considerations. It
may also facilitate informal negotiations between such
creditors and the corporate debtor, which may result in
a restructuring of the debt outside the formal
proceedings.‖
However, the Insolvency Law Committee [―ILC‖], in its Report of March
2018 dealt with debenture holders and fixed deposit holders, who are
also financial creditors, and are numerous. The Report then went on to
state:
―10.6 For certain securities, a trustee or an agent may

already be appointed as per the terms of the security
instrument. For example, a debenture trustee would be
appointed if debentures exceeding 500 have been
issued [Section 71(5), Companies Act, 2013] or if
secured debentures are issued [Rule 18(1)(c),
Companies (Share Capital and Debenture) Rules,
2014]. Such creditors may be represented through
such pre-appointed trustees or agents. For other
classes of creditors which exceed a certain threshold
in number, like home buyers or security holders for
whom no trustee or agent has already been appointed
under a debt instrument or otherwise, an insolvency
professional (other than the IRP) shall be appointed by
the NCLT on the request of the IRP. It is to be noted
that as the agent or trustee or insolvency professional,
i.e. the authorised representative for the creditors
discussed above and executors, guarantors, etc. as
discussed in paragraph 9 of this Report, shall be a part
of the CoC, they cannot be related parties to the
corporate debtor in line with the spirit of proviso to
section 21(2).‖
59
xxx xxx xxx
―10.8 In light of the deliberation above, the Committee

felt that a mechanism requires to be provided in the
Code to mandate representation in meetings of
security holders, deposit holders, and all other classes
of financial creditors which exceed a certain number,
through an authorised representative. This can be
done by adding a new provision to section 21 of the
Code. Such a representative may either be a trustee
or an agent appointed under the terms of the debt
agreement of such creditors, otherwise an insolvency
professional may be appointed by the NCLT for each
such class of financial creditors. Additionally, the
representative shall act and attend the meetings on
behalf of the respective class of financial creditors and
shall vote on behalf of each of the financial creditor to
the extent of the voting share of each such creditor,
and as per their instructions. To ensure adequate
representation by the authorised representative of the
financial creditors, a specific provision laying down the
rights and duties of such authorised representatives
may be inserted. Further, the requisite threshold for
the number of creditors and manner of voting may be
specified by IBBI through regulations to enable
efficient voting by the representative. Also, regulation
25 may also be amended to enable voting through
electronic means such as e-mail, to address any
technical issues which may arise due to a large
number of creditors voting at the same time.‖
Given this Report, the Code was amended and Section 21(6A) and
21(6B) were added, which are set out hereinbelow:
―21. Committee of creditors.—

xxx xxx xxx
(6-A) Where a financial debt—
60
(a) is in the form of securities or deposits and the
terms of the financial debt provide for appointment
of a trustee or agent to act as authorised
representative for all the financial creditors, such
trustee or agent shall act on behalf of such
financial creditors;
(b) is owed to a class of creditors exceeding the
number as may be specified, other than the
creditors covered under clause (a) or sub-section
(6), the interim resolution professional shall make
an application to the Adjudicating Authority along
with the list of all financial creditors, containing the
name of an insolvency professional, other than
the interim resolution professional, to act as their
authorised representative who shall be appointed
by the Adjudicating Authority prior to the first
meeting of the committee of creditors;
(c) is represented by a guardian, executor or
administrator, such person shall act as authorised
representative on behalf of such financial
creditors,
and such authorised representative under clause (a) or
clause (b) or clause (c) shall attend the meetings of the
committee of creditors, and vote on behalf of each
financial creditor to the extent of his voting share.
(6-B) The remuneration payable to the authorised

representative—
(i) under clauses (a) and (c) of sub-section (6-A),
if any, shall be as per the terms of the financial
debt or the relevant documentation; and
(ii) under clause (b) of sub-section (6-A) shall be
as specified which shall form part of the
insolvency resolution process costs.‖
Also, Regulations 16A and 16B of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons)
61
Regulations, 2016 [―CIRP Regulations‖] were added, with effect from
04.07.2018, as follows:
―16A. Authorised representative.—(1) The interim

resolution professional shall select the insolvency
professional, who is the choice of the highest number
of financial creditors in the class in Form CA received
under sub-regulation (1) of regulation 12, to act as the
authorised representative of the creditors of the
respective class:
Provided that the choice for an insolvency
professional to act as authorised representative in
Form CA received under sub-regulation (2) of
regulation 12 shall not be considered.
(2) The interim resolution professional shall apply to
the Adjudicating Authority for appointment of the
authorised representatives selected under sub-
regulation (1) within two days of the verification of
claims received under sub-regulation (1) of regulation
12.
(3) Any delay in appointment of the authorised
representative for any class of creditors shall not affect
the validity of any decision taken by the committee.
(4) The interim resolution professional shall provide
the list of creditors in each class to the respective
authorised representative appointed by the
(5) The interim resolution professional or the resolution
professional, as the case may be, shall provide an
updated list of creditors in each class to the respective
authorised representative as and when the list is
updated.
Clarification: The authorised representative shall
have no role in receipt or verification of claims of
creditors of the class he represents.
professional, as the case may be, shall provide
62
electronic means of communication between the
authorised representative and the creditors in the
class.
(7) The voting share of a creditor in a class shall be in
proportion to the financial debt which includes an
interest at the rate of eight per cent per annum unless
a different rate has been agreed to between the
parties.
(8) The authorised representative of creditors in a
class shall be entitled to receive fee for every meeting
of the committee attended by him in the following
manner, namely:
Number of creditors in Fee per meeting of the
the class committee (Rs.)
10-100 15,000
101-1000 20,000
More than 1000 25,000
(9) The authorised representative shall circulate the
agenda to creditors in a class and announce the voting
window at least twenty-four hours before the window
opens for voting instructions and keep the voting
window open for at least twelve hours.
16B. Committee with only creditors in a class.—

Where the corporate debtor has only creditors in a
class and no other financial creditor eligible to join the
committee, the committee shall consist of only the
authorised representative(s).‖
26. It is obvious that debenture holders and persons with home
loans may be numerous and, therefore, have been statutorily dealt
with by the aforesaid change made in the Code as well as the
63
Regulations. However, as a general rule, it is correct to say that
financial creditors, which involve banks and financial institutions, would
certainly be smaller in number than operational creditors of a corporate
debtor.
27. According to us, it is clear that most financial creditors,
particularly banks and financial institutions, are secured creditors
whereas most operational creditors are unsecured, payments for
goods and services as well as payments to workers not being secured
by mortgaged documents and the like. The distinction between
secured and unsecured creditors is a distinction which has obtained
since the earliest of the Companies Acts both in the United Kingdom
and in this country. Apart from the above, the nature of loan
agreements with financial creditors is different from contracts with
operational creditors for supplying goods and services. Financial
creditors generally lend finance on a term loan or for working capital
that enables the corporate debtor to either set up and/or operate its
business. On the other hand, contracts with operational creditors are
relatable to supply of goods and services in the operation of business.
Financial contracts generally involve large sums of money. By way of
contrast, operational contracts have dues whose quantum is generally
64
less. In the running of a business, operational creditors can be many
as opposed to financial creditors, who lend finance for the set up or
working of business. Also, financial creditors have specified repayment
schedules, and defaults entitle financial creditors to recall a loan in
totality. Contracts with operational creditors do not have any such
stipulations. Also, the forum in which dispute resolution takes place is
completely different. Contracts with operational creditors can and do
have arbitration clauses where dispute resolution is done privately.
Operational debts also tend to be recurring in nature and the possibility
of genuine disputes in case of operational debts is much higher when
compared to financial debts. A simple example will suffice. Goods that
are supplied may be substandard. Services that are provided may be
substandard. Goods may not have been supplied at all. All these qua
operational debts are matters to be proved in arbitration or in the
courts of law. On the other hand, financial debts made to banks and
financial institutions are well-documented and defaults made are easily
verifiable.
28. Most importantly, financial creditors are, from the very beginning,
involved with assessing the viability of the corporate debtor. They can,
and therefore do, engage in restructuring of the loan as well as
65
reorganization of the corporate debtor‘s business when there is
financial stress, which are things operational creditors do not and
cannot do. Thus, preserving the corporate debtor as a going concern,
while ensuring maximum recovery for all creditors being the objective
of the Code, financial creditors are clearly different from operational
creditors and therefore, there is obviously an intelligible differentia
between the two which has a direct relation to the objects sought to be
achieved by the Code.
NOTICE, HEARING, AND SET-OFF OR COUNTERCLAIM QUA FINANCIAL DEBTS.
29. This Court, in Innoventive Industries (supra) stated as follows:
―27. The scheme of the Code is to ensure that when a

default takes place, in the sense that a debt becomes
due and is not paid, the insolvency resolution process
begins. Default is defined in Section 3(12) in very wide
terms as meaning non-payment of a debt once it
becomes due and payable, which includes non-
payment of even part thereof or an instalment amount.
For the meaning of ―debt‖, we have to go to Section
3(11), which in turn tells us that a debt means a liability
of obligation in respect of a ―claim‖ and for the
meaning of ―claim‖, we have to go back to Section 3(6)
which defines ―claim‖ to mean a right to payment even
if it is disputed. The Code gets triggered the moment
default is of rupees one lakh or more (Section 4). The
corporate insolvency resolution process may be
triggered by the corporate debtor itself or a financial
creditor or operational creditor. A distinction is made
by the Code between debts owed to financial creditors
66
and operational creditors. A financial creditor has been
defined under Section 5(7) as a person to whom a
financial debt is owed and a financial debt is defined in
Section 5(8) to mean a debt which is disbursed against
consideration for the time value of money. As opposed
to this, an operational creditor means a person to
whom an operational debt is owed and an operational
debt under Section 5(21) means a claim in respect of
provision of goods or services.
28. When it comes to a financial creditor triggering the
process, Section 7 becomes relevant. Under the
Explanation to Section 7(1), a default is in respect of a
financial debt owed to any financial creditor of the
corporate debtor — it need not be a debt owed to the
applicant financial creditor. Under Section 7(2), an
application is to be made under sub-section (1) in such
form and manner as is prescribed, which takes us to
the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016. Under Rule 4, the
application is made by a financial creditor in Form 1
accompanied by documents and records required
therein. Form 1 is a detailed form in 5 parts, which
requires particulars of the applicant in Part I,
particulars of the corporate debtor in Part II, particulars
of the proposed interim resolution professional in Part
III, particulars of the financial debt in Part IV and
documents, records and evidence of default in Part V.
Under Rule 4(3), the applicant is to dispatch a copy of
the application filed with the Adjudicating Authority by
registered post or speed post to the registered office of
the corporate debtor. The speed, within which the
Adjudicating Authority is to ascertain the existence of a
default from the records of the information utility or on
the basis of evidence furnished by the financial
creditor, is important. This it must do within 14 days of
the receipt of the application. It is at the stage of
Section 7(5), where the Adjudicating Authority is to be
satisfied that a default has occurred, that the corporate
debtor is entitled to point out that a default has not
67
occurred in the sense that the ―debt‖, which may also
include a disputed claim, is not due. A debt may not be
due if it is not payable in law or in fact. The moment
the Adjudicating Authority is satisfied that a default has
occurred, the application must be admitted unless it is
incomplete, in which case it may give notice to the
applicant to rectify the defect within 7 days of receipt of
a notice from the Adjudicating Authority. Under sub-
section (7), the Adjudicating Authority shall then
communicate the order passed to the financial creditor
and corporate debtor within 7 days of admission or
rejection of such application, as the case may be.
29. The scheme of Section 7 stands in contrast with
the scheme under Section 8 where an operational
creditor is, on the occurrence of a default, to first
deliver a demand notice of the unpaid debt to the
operational debtor in the manner provided in Section
8(1) of the Code. Under Section 8(2), the corporate
debtor can, within a period of 10 days of receipt of the
demand notice or copy of the invoice mentioned in
sub-section (1), bring to the notice of the operational
creditor the existence of a dispute or the record of the
pendency of a suit or arbitration proceedings, which is
pre-existing—i.e. before such notice or invoice was
received by the corporate debtor. The moment there is
existence of such a dispute, the operational creditor
gets out of the clutches of the Code.
30. On the other hand, as we have seen, in the case of
a corporate debtor who commits a default of a financial
debt, the Adjudicating Authority has merely to see the
records of the information utility or other evidence
produced by the financial creditor to satisfy itself that a
default has occurred. It is of no matter that the debt is
disputed so long as the debt is ―due‖ i.e. payable
unless interdicted by some law or has not yet become
due in the sense that it is payable at some future date.
It is only when this is proved to the satisfaction of the
Adjudicating Authority that the Adjudicating Authority
may reject an application and not otherwise.‖
68
30. Section 3(9)(c) read with Section 214(e) of the Code are
important and are set out as under:
―3. Definitions.—In this Code, unless the context

xxx xxx xxx
(9) ―core services‖ means services rendered by an
information utility for—
xxx xxx xxx
(c) authenticating and verifying the financial
information submitted by a person; and
xxx xxx xxx‖
―214. Obligations of information utility.—For the

purposes of providing core services to any person,
every information utility shall—
xxx xxx xxx
(e) get the information received from various
persons authenticated by all concerned
parties before storing such information;
xxx xxx xxx‖
31. It is clear from these Sections that information in respect of debts
incurred by financial debtors is easily available through information
utilities which, under the Insolvency and Bankruptcy Board of India
(Information Utilities) Regulations, 2017 [―Information Utilities
Regulations‖], are to satisfy themselves that information provided as
to the debt is accurate. This is done by giving notice to the corporate
debtor who then has an opportunity to correct such information.
69
32. Apart from the record maintained by such utility, Form I
appended to the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016, makes it clear that the following
are other sources which evidence a financial debt:
(a) Particulars of security held, if any, the date of its

creation, its estimated value as per the creditor;
(b) Certificate of registration of charge issued by the
registrar of companies (if the corporate debtor is a
company);
(c) Order of a court, tribunal or arbitral panel
adjudicating on the default;
(d) Record of default with the information utility;
(e) Details of succession certificate, or probate of a
will, or letter of administration, or court decree (as
may be applicable), under the Indian Succession
Act, 1925;
(f) The latest and complete copy of the financial
contract reflecting all amendments and waivers to
date;
(g) A record of default as available with any credit
information company;
(h) Copies of entries in a bankers book in accordance
with the Bankers Books Evidence Act, 1891.
33. Rule 4 (3) of the aforesaid Rules states as follows:
―4. Application by financial creditor.—

xxx xxx xxx
(3) The applicant shall dispatch forthwith, a
copy of the application filed with the
Adjudicating Authority, by registered post or
speed post to the registered office of the
corporate debtor.
xxx xxx xxx‖
70
Section 420 of the Companies Act, 2013 states as follows:
―420. Orders of Tribunal.—(1) The Tribunal may,

after giving the parties to any proceeding before it, a
reasonable opportunity of being heard, pass such
orders thereon as it thinks fit.
(2) The Tribunal may, at any time within two years
from the date of the order, with a view to rectifying any
mistake apparent from the record, amend any order
passed by it, and shall make such amendment, if the
mistake is brought to its notice by the parties:
Provided that no such amendment shall be made in
respect of any order against which an appeal has been
preferred under this Act.
(3) The Tribunal shall send a copy of every order
passed under this section to all the parties concerned.‖
Rules 11, 34, and 37 of the National Company Law Tribunal Rules,
2016 [―NCLT Rules‖] state as follows:
―11. Inherent Powers.—Nothing in these rules shall be

deemed to limit or otherwise affect the inherent powers
of the Tribunal to make such orders as may be
necessary for meeting the ends of justice or to prevent
abuse of the process of the Tribunal.‖
xxx xxx xxx
34. General Procedure.—(1) In a situation not
provided for in these rules, the Tribunal may, for
reasons to be recorded in writing, determine the
procedure in a particular case in accordance with the
principles of natural justice.
71
(2) The general heading in all proceedings before the
Tribunal, in all advertisements and notices shall be in
Form No. NCLT 4.
(3) Every petition or application or reference shall be
filed in form as provided in Form No. NCLT 1 with
attachments thereto accompanied by Form No. NCLT
2 and in case of an interlocutory application, the same
shall be filed in Form No. NCLT 1 accompanied by
such attachments thereto along with Form No. NCLT
3.
(4) Every petition or application including interlocutory
application shall be verified by an affidavit in Form No.
NCLT 6. Notice to be issued by the Tribunal to the
opposite party shall be in Form NCLT 5.‖
xxx xxx xxx
―37. Notice to Opposite Party.- (1) The Tribunal shall
issue notice to the respondent to show cause against
the application or petition on a date of hearing to be
specified in the Notice. Such notice in Form No. NCLT
5 shall be accompanied by a copy of the application
with supporting documents.
(2) If the respondent does not appear on the date
specified in the notice in Form No. NCLT 5, the
Tribunal, after according reasonable opportunity to the
respondent, shall forthwith proceed ex-parte to
dispose of the application.
(3) If the respondent contests to the notice received
under sub-rule (1), it may, either in person or through
an authorised representative, file a reply accompanied
with an affidavit and along with copies of such
documents on which it relies, with an advance service
to the petitioner or applicant, to the Registry before the
date of hearing and such reply and copies of
documents shall form part of the record.‖
72
A conjoint reading of all these Rules makes it clear that at the stage of
the Adjudicating Authority‘s satisfaction under Section 7(5) of the
Code, the corporate debtor is served with a copy of the application filed
with the Adjudicating Authority and has the opportunity to file a reply
before the said authority and be heard by the said authority before an
order is made admitting the said application. What is also of relevance
is that in order to protect the corporate debtor from being dragged into
the corporate insolvency resolution process malafide, the Code
prescribes penalties. Thus, Section 65 of the Code reads as follows:
―65. Fraudulent or malicious initiation of

proceedings.—(1) If, any person initiates the
insolvency resolution process or liquidation
proceedings fraudulently or with malicious intent for
any purpose other than for the resolution of
insolvency, or liquidation, as the case may be, the
Adjudicating Authority may impose upon such person
a penalty which shall not be less than one lakh rupees,
but may extend to one crore rupees.
(2) If, any person initiates voluntary liquidation
proceedings with the intent to defraud any person, the
Adjudicating Authority may impose upon such person
a penalty which shall not be less than one lakh rupees
but may extend to one crore rupees.‖
34. Also, punishment is prescribed under Section 75 for furnishing
false information in an application made by a financial creditor which
73
further deters a financial creditor from wrongly invoking the provisions
of Section 7. Section 75 reads as under:
―75. Punishment for false information furnished in

application.—Where any person furnishes information
in the application made under Section 7, which is false
in material particulars, knowing it to be false or omits
any material fact, knowing it to be material, such
person shall be punishable with fine which shall not be
less than one lakh rupees, but may extend to one
crore rupees.‖
35. Insofar as set-off and counterclaim is concerned, a set-off of
amounts due from financial creditors is a rarity. Usually, financial debts
point only in one way – amounts lent have to be repaid. However, it is
not as if a legitimate set-off is not to be considered at all. Such set-off
may be considered at the stage of filing of proof of claims during the
resolution process by the resolution professional, his decision being
subject to challenge before the Adjudicating Authority under Section
60. Section 60(5)(c) reads as follows:
―60. Adjudicating Authority for corporate

persons.—
xxx xxx xxx
(5) Notwithstanding anything to the contrary contained
in any other law for the time being in force, the
National Company Law Tribunal shall have jurisdiction
to entertain or dispose of—
xxx xxx xxx
74
(c) any question of priorities or any question
of law or facts, arising out of or in relation to
the insolvency resolution or liquidation
proceedings of the corporate debtor or
corporate person under this Code.‖
36. Equally, counterclaims, by their very definition, are independent
rights which are not taken away by the Code but are preserved for the
stage of admission of claims during the resolution plan. Also, there is
nothing in the Code which interdicts the corporate debtor from pursuing
such counterclaims in other judicial fora. Form C dealing with
submission of claims by financial creditors in the CIRP Regulations
states thus:
―FORM C
SUBMISSION OF CLAIM BY FINANCIAL
CREDITORS
[Under Regulation 8 of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016]
[Date]
From
[Name and address of the financial creditor, including
address of its registered office and principal office]
To
The Interim Resolution Professional/Resolution
Professional,
[Name of the Insolvency Resolution Professional /
Resolution Professional]
[Address as set out in public announcement]
Subject: Submission of claim and proof of claim.
75
Madam/Sir,
[Name of the financial creditor], hereby submits this
claim in respect of the corporate insolvency resolution
process of [name of corporate debtor]. The details for
the same are set out below:
Relevant Particulars
Name1of the financial creditor
Identification number of the financial

creditor
(If an incorporated body, provide
identification number and proof of
incorporation. If a partnership or
individual provide identification
records* of all the partners or the
individual)
Address
3 and email address of the
financial
. creditor for correspondence
Total 4amount of claim
(including
. any interest as at the
insolvency commencement date)
Details
5 of documents by reference to
which. the debt can be substantiated
Details
6 of how and when debt incurred
.
Details
7 of any mutual credit, mutual
debts,. or other mutual dealings
between the corporate debtor and the
creditor which may be set-off against
the claim
Details
8 of any security held, the value
of the. security, and the date it was
given
76
Details
9 of the bank account to which
the amount
. of the claim or any part
thereof can be transferred pursuant to
a resolution plan
List of
1 documents attached to this
claim 0in order to prove the existence
and non-payment
. of claim due to the
financial creditor
(Signature of financial creditor or person authorised
to act on his behalf)
[Please enclose the authority if this is being
submitted on behalf of the financial creditor]
Name in BLOCK LETTERS
Position with or in relation to creditor
Address of person signing
* PAN number, passport, AADHAAR Card or the

identity card issued by the Election Commission of
India.
DECLARATION
I, [Name of claimant], currently residing at [insert address],
do hereby declare and state as follows:
1. [Name of corporate debtor], the corporate
debtor was, at the insolvency
commencement date, being the ………… day
of ………… 20……, actually indebted to me
for a sum of Rs. [insert amount of claim].
2. In respect of my claim of the said sum or any
part thereof, I have relied on the documents
specified below:
[Please list the documents relied on as
evidence of claim].
3. The said documents are true, valid and
genuine to the best of my knowledge,
77
information and belief and no material facts
have been concealed therefrom.
4. In respect of the said sum or any part thereof,
neither I, nor any person, by my order, to my
knowledge or belief, for my use, had or
received any manner of satisfaction or
security whatsoever, save and except the
following:
[Please state details of any mutual credit,
mutual debts, or other mutual dealings
between the corporate debtor and the
creditor which may be set-off against the
claim].
5. I am/I am not a related party of the corporate
debtor, as defined under Section 5(24) of the
Code.
6. I am eligible to join committee of creditors by
virtue of proviso to Section 21(2) of the Code
even though I am a related party of the
corporate debtor.
Date:
Place:
(Signature of the claimant)
VERIFICATION
I, [Name] the claimant hereinabove, do hereby verify
that the contents of this proof of claim are true and
correct to my knowledge and belief and no material
fact has been concealed therefrom.
Verified at … on this …… day of ………, 20…
(Signature of claimant)
[Note: In the case of company or limited liability

partnership, the declaration and verification shall be
made by the director/manager/secretary/designated
partner and in the case of other entities, an officer
authorised for the purpose by the entity.]‖
78
37. The trigger for a financial creditor‘s application is non-payment of
dues when they arise under loan agreements. It is for this reason that
Section 433(e) of the Companies Act, 1956 has been repealed by the
Code and a change in approach has been brought about. Legislative
policy now is to move away from the concept of ―inability to pay debts‖
to ―determination of default‖. The said shift enables the financial
creditor to prove, based upon solid documentary evidence, that there
was an obligation to pay the debt and that the debtor has failed in such
obligation. Four policy reasons have been stated by the learned
Solicitor General for this shift in legislative policy. First is predictability
and certainty. Secondly, the paramount interest to be safeguarded is
that of the corporate debtor and admission into the insolvency
resolution process does not prejudice such interest but, in fact,
protects it. Thirdly, in a situation of financial stress, the cause of default
is not relevant; protecting the economic interest of the corporate debtor
is more relevant. Fourthly, the trigger that would lead to liquidation can
only be upon failure of the resolution process.
79
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

xxx xxx xxx
(6) ―claim‖ means—
(a) a right to payment, whether or not such
right is reduced to judgment, fixed, disputed,
undisputed, legal, equitable, secured or
unsecured;
(b) right to remedy for breach of contract
under any law for the time being in force, if
such breach gives rise to a right to payment,
whether or not such right is reduced to
judgment, fixed, matured, unmatured,
disputed, undisputed, secured or unsecured;
xxx xxx xxx
(11) ―debt‖ means a liability or obligation in respect of
a claim which is due from any person and includes a
financial debt and operational debt;
(12) ―default‖ means non-payment of debt when whole
or any part or instalment of the amount of debt has
become due and payable and is not paid by the debtor
or the corporate debtor, as the case may be;
xxx xxx xxx‖
Whereas a ―claim‖ gives rise to a ―debt‖ only when it becomes ―due‖, a
―default‖ occurs only when a ―debt‖ becomes ―due and payable‖ and is
not paid by the debtor. It is for this reason that a financial creditor has
to prove ―default‖ as opposed to an operational creditor who merely
80
―claims‖ a right to payment of a liability or obligation in respect of a
debt which may be due. When this aspect is borne in mind, the
differentiation in the triggering of insolvency resolution process by
financial creditors under Section 7 and by operational creditors under
Sections 8 and 9 of the Code becomes clear.
SECTIONS 21 AND 24 AND ARTICLE 14: OPERATIONAL CREDITORS HAVE NO
VOTE IN THE COMMITTEE OF CREDITORS.
39. Section 21 of the Code reads as follows:
―21. Committee of creditors.—(1) The interim

resolution professional shall after collation of all claims
received against the corporate debtor and
determination of the financial position of the corporate
debtor, constitute a committee of creditors.
(2) The committee of creditors shall comprise all
financial creditors of the corporate debtor:
Provided that a financial creditor or the authorised
representative of the financial creditor referred to in
sub-section (6) or sub-section (6-A) or sub-section (5)
of Section 24, if it is a related party of the corporate
debtor, shall not have any right of representation,
participation or voting in a meeting of the committee of
creditors:
Provided further that the first proviso shall not apply
to a financial creditor, regulated by a financial sector
regulator, if it is a related party of the corporate debtor
solely on account of conversion or substitution of debt
into equity shares or instruments convertible into
equity shares, prior to the insolvency commencement
date.
81
(3) Subject to sub-sections (6) and (6-A), where the
corporate debtor owes financial debts to two or more
financial creditors as part of a consortium or
agreement, each such financial creditor shall be part of
the committee of creditors and their voting share shall
be determined on the basis of the financial debts owed
to them.
(4) Where any person is a financial creditor as well as
an operational creditor,—
(a) such person shall be a financial creditor to
the extent of the financial debt owed by the
corporate debtor, and shall be included in the
committee of creditors, with voting share
proportionate to the extent of financial debts
owed to such creditor;
(b) such person shall be considered to be an
operational creditor to the extent of the
operational debt owed by the corporate
debtor to such creditor.
(5) Where an operational creditor has assigned or
legally transferred any operational debt to a financial
creditor, the assignee or transferee shall be
considered as an operational creditor to the extent of
such assignment or legal transfer.
(6) Where the terms of the financial debt extended as
part of a consortium arrangement or syndicated facility
provide for a single trustee or agent to act for all
financial creditors, each financial creditor may—
(a) authorize the trustee or agent to act on his
behalf in the committee of creditors to the
extent of his voting share;
(b) represent himself in the committee of
creditors to the extent of his voting share;
(c) appoint an insolvency professional (other
than the resolution professional) at his own
cost to represent himself in the committee of
creditors to the extent of his voting share; or
82
(d) exercise his right to vote to the extent of
his voting share with one or more financial
creditors jointly or severally.
(6-A) Where a financial debt—
(a) is in the form of securities or deposits and
the terms of the financial debt provide for
appointment of a trustee or agent to act as
authorised representative for all the financial
creditors, such trustee or agent shall act on
behalf of such financial creditors;
(b) is owed to a class of creditors exceeding
the number as may be specified, other than
the creditors covered under clause (a) or sub-
section (6), the interim resolution professional
shall make an application to the Adjudicating
Authority along with the list of all financial
creditors, containing the name of an
insolvency professional, other than the
interim resolution professional, to act as their
authorised representative who shall be
appointed by the Adjudicating Authority prior
to the first meeting of the committee of
creditors;
(c) is represented by a guardian, executor or
administrator, such person shall act as
authorised representative on behalf of such
financial creditors,
and such authorised representative under clause (a) or
clause (b) or clause (c) shall attend the meetings of
the committee of creditors, and vote on behalf of each
financial creditor to the extent of his voting share.
(6-B) The remuneration payable to the authorised
representative—
(i) under clauses (a) and (c) of sub-section
(6-A), if any, shall be as per the terms of the
financial debt or the relevant documentation;
and
83
(ii) under clause (b) of sub-section (6-A) shall
be as specified which shall form part of the
insolvency resolution process costs.
(7) The Board may specify the manner of voting and
the determining of the voting share in respect of
financial debts covered under sub-sections (6) and (6-
A).
(8) Save as otherwise provided in this Code, all
decisions of the committee of creditors shall be taken
by a vote of not less than fifty-one per cent. of voting
share of the financial creditors:
Provided that where a corporate debtor does not
have any financial creditors, the committee of creditors
shall be constituted and shall comprise of such
persons to exercise such functions in such manner as
may be specified.
(9) The committee of creditors shall have the right to
require the resolution professional to furnish any
financial information in relation to the corporate debtor
at any time during the corporate insolvency resolution
process.
(10) The resolution professional shall make available
any financial information so required by the committee
of creditors under sub-section (9) within a period of
seven days of such requisition.‖
40. Section 24(3), 24(4), and Section 28, which are also material,
read as follows:
―24. Meeting of committee of creditors.—

xxx xxx xxx
(3) The resolution professional shall give notice of
each meeting of the committee of creditors to—
(a) members of [committee of creditors,
including the authorised representatives
84
referred to in sub-sections (6) and (6-A) of
Section 21 and sub-section (5)];
(b) members of the suspended Board of
Directors or the partners of the corporate
persons, as the case may be;
(c) operational creditors or their
representatives if the amount of their
aggregate dues is not less than ten per cent
of the debt.
(4) The directors, partners and one representative of
operational creditors, as referred to in sub-section (3),
may attend the meetings of committee of creditors, but
shall not have any right to vote in such meetings:
Provided that the absence of any such director,
partner or representative of operational creditors, as
the case may be, shall not invalidate proceedings of
such meeting.
xxx xxx xxx‖
xxx xxx xxx
―28. Approval of committee of creditors for certain

actions.—(1) Notwithstanding anything contained in
any other law for the time being in force, the resolution
professional, during the corporate insolvency
resolution process, shall not take any of the following
actions without the prior approval of the committee of
creditors namely—
(a) raise any interim finance in excess of the
amount as may be decided by the committee
of creditors in their meeting;
(b) create any security interest over the
assets of the corporate debtor;
(c) change the capital structure of the
corporate debtor, including by way of
issuance of additional securities, creating a
new class of securities or buying back or
redemption of issued securities in case the
corporate debtor is a company;
85
(d) record any change in the ownership
interest of the corporate debtor;
(e) give instructions to financial institutions
maintaining accounts of the corporate debtor
for a debit transaction from any such
accounts in excess of the amount as may be
decided by the committee of creditors in their
meeting;
(f) undertake any related party transaction;
(g) amend any constitutional documents of
the corporate debtor;
(h) delegate its authority to any other person;
(i) dispose of or permit the disposal of shares
of any shareholder of the corporate debtor or
their nominees to third parties;
(j) make any change in the management of
the corporate debtor or its subsidiary;
(k) transfer rights or financial debts or
operational debts under material contracts
otherwise than in the ordinary course of
business;
(l) make changes in the appointment or terms
of contract of such personnel as specified by
the committee of creditors; or
(m) make changes in the appointment or
terms of contract of statutory auditors or
internal auditors of the corporate debtor.
(2) The resolution professional shall convene a
meeting of the committee of creditors and seek the
vote of the creditors prior to taking any of the actions
under sub-section (1).
(3) No action under sub-section (1) shall be approved
by the committee of creditors unless approved by a
vote of sixty-six per cent of the voting shares.
(4) Where any action under sub-section (1) is taken by
the resolution professional without seeking the
approval of the committee of creditors in the manner
as required in this section, such action shall be void.
86
(5) The committee of creditors may report the actions
of the resolution professional under sub-section (4) to
the Board for taking necessary actions against him
under this Code. Approval of committee of creditors for
certain actions.‖
41. In this regard, the BLRC Report states:

―The creditors committee will have the power to decide
the final solution by majority vote in the negotiations.
The majority vote requires more than or equal to 75
percent of the creditors committee by weight of the
total financial liabilities…… The Committee deliberated
on who should be on the creditors committee, given
the power of the creditors committee to ultimately keep
the entity as a going concern or liquidate it. The
Committee reasoned that members of the creditors
committee have to be creditors both with the capability
to assess viability, as well as to be willing to modify
terms of existing liabilities in negotiations. Typically,
operational creditors are neither able to decide on
matters regarding the insolvency of the entity, nor
willing to take the risk of postponing payments for
better future prospects for the entity. The Committee
concluded that, for the process to be rapid and
efficient, the Code will provide that the creditors
committee should be restricted to only the financial
creditors.‖
―The second is that any proposed solution must
explicitly account for the IRP costs and the liabilities of
the operational creditors within a reasonable period
from the approval of the solution if it is approved. The
Committee argues that there must be a
counterbalance to operational creditors not having a
vote on the creditors committee. Thus, they concluded
that the dues of the operational creditors must have
priority in being paid as an explicit part of the proposed
solution. This must be ensured by the RP in evaluating
a proposal before bringing it to the creditors
87
committee. If there is ambiguity about the coverage of
the liability in the information memorandum that the
RP presents to garner solutions, then the RP must
ensure that this is clearly stated and accounted for in
the proposed solution.‖
The Joint Parliamentary Committee Report of April, 2016 [―Joint
Parliamentary Committee Report‖] on the Insolvency and Bankruptcy
Code also agreed with these observations but modified Section 24 so
as to permit operational creditors to be present at the meetings of the
committee of creditors, albeit without voting rights, if operational
creditors aggregate to 10% or more of the total debts owed by the
corporate debtor.
The Joint Parliamentary Committee Report also opined as follows:
―21. Role of Operational Creditors - Clause 24

Some of the stakeholders in the memorandum/views
furnished before the Committee were of the opinion
that whereas operation creditor has right to make
application for initiation of corporate insolvency
resolution process, operational creditors like workmen,
employees, suppliers have not been given any
representation in the committee of creditors which is
pivotal in whole resolution process. In this regard, one
of the stakeholders has suggested that committee of
creditors may contain operational creditors as well,
with some thresholds.
In this context, while appreciating that the operational
creditors are important stakeholders in a company, the
88
Committee took note of the rationale of not including
operational creditors in the committee of creditors as
indicated in notes on Clause 21 appended with the Bill
which states as under:―
―The committee has to be composed of
members who have the capability to assess
the commercial viability of the corporate
debtor and who are willing to modify the
terms of the debt contracts in negotiations
between the creditors and the corporate
debtor. Operational creditors are typically not
able to decide on matters relating to
commercial viability of the corporate debtor,
nor are they typically willing to take the risk of
restructuring their debts in order to make the
corporate debtor a going concern. Similarly,
financial creditors who are also operational
creditors will be given representation on the
committee of creditors only to the extent of
their financial debts. Nevertheless, in order to
ensure that the financial creditors do not treat
the operational creditors unfairly, any
resolution plan must ensure that the
operational creditors receive an amount not
less than the liquidation value of their debt
(assuming the corporate debtor were to be
liquidated).
All decisions of the Committee shall be taken by a vote
of not less than seventy-five per cent of the voting
share. In the event there are no financial creditors for a
corporate debtor, the composition and decision-
making processes of the corporate debtor shall be
specified by the Insolvency and Bankruptcy Board.
The Committee shall also have the power to call for
information from the resolution professional.‖
The Committee after due deliberations are of the view
that, if not voting rights, operational creditors at least
should have presence in the committee of creditors to
89
present their views/concerns on important issues
considered at the meetings so that their
views/concerns are taken into account by the
committee of creditors while finalizing the resolution
plan.‖
(emphasis supplied)
The original Insolvency and Bankruptcy Bill did not allow operational
creditors to attend the committee of creditors at all. This Bill was
amended whilst in the form of a Bill, the Joint Parliamentary Committee
deciding as follows:
―The Committee, therefore, decided to modify clause

24(3) and (4) as given under:
Modified Clause 24(3)―
―The resolution professional shall give notice of each
meeting of the committee of creditors to-
(a) members of committee of creditors;
(b) members of the suspended Board of
Directors or the partners of the corporate
persons, as the case may be;
(c) operational creditors or their representatives
if the amount of their aggregate dues is not less
than ten per cent of the debt.‖
Modified Clause 24(4)―
―The directors, partners and one representative of
operational creditors as referred to in sub-section (3),
may attend the meetings of committee of creditors, but
shall not have any right to vote in such meetings:
Provided that the absence of any such director,
partner or representative of operational creditors, as
the case may be, shall not invalidate proceedings of
such meeting.‖
90
42. What is also of importance is the fact that Expert Committees
have been set up by the Government to oversee the working of the
Code. Thus, the report of the Insolvency Law Committee of March,
2018, after examining the working of the Code, thought it fit not to
amend the Code so as to give operational creditors the right to vote.
This was stated as follows:
―This rationale still holds true, and thus it was deemed

fit not to amend the constitution of the CoC. Further,
operational creditors whose aggregate dues are not
less than ten percent of the debt have a right to attend
the meetings of the CoC. Also, under the resolution
plan, they are guaranteed at least the liquidation
value.‖
―…The Committee agreed that presently, most of the
resolution plans are in the process of submission and
there is no empirical evidence to further the argument
that operational creditors do not receive a fair share in
the resolution process under the current scheme of the
Code. Hence, the Committee decided to continue with
the present arrangement without making any
amendments to the Code.‖
43. Under the Code, the committee of creditors is entrusted with the
primary responsibility of financial restructuring. They are required to
assess the viability of a corporate debtor by taking into account all
available information as well as to evaluate all alternative investment
91
opportunities that are available. The committee of creditors is required
to evaluate the resolution plan on the basis of feasibility and viability.
Thus, Section 30(4) states:
―30. Submission of resolution plan.—

xxx xxx xxx
(4) The committee of creditors may approve a
resolution plan by a vote of not less than sixty-six per
cent of voting share of the financial creditors, after
considering its feasibility and viability, and such other
requirements as may be specified by the Board:
Provided that the committee of creditors shall not
approve a resolution plan, submitted before the
commencement of the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2017, where the
resolution applicant is ineligible under Section 29A and
may require the resolution professional to invite a fresh
resolution plan where no other resolution plan is
available with it:
Provided further that where the resolution applicant
referred to in the first proviso is ineligible under clause
(c) of Section 29A, the resolution applicant shall be
allowed by the committee of creditors such period, not
exceeding thirty days, to make payment of overdue
amounts in accordance with the proviso to clause (c)
of Section 29A:
Provided also that nothing in the second proviso
shall be construed as extension of period for the
purposes of the proviso to sub-section (3) of Section
12, and the corporate insolvency resolution process
shall be completed within the period specified in that
sub-section.
Provided also that the eligibility criteria in Section
29A as amended by the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2018 (Ord. 6 of 2018)
92
shall apply to the resolution applicant who has not
submitted resolution plan as on the date of
commencement of the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2018.
xxx xxx xxx‖
It is important to bear in mind that once the resolution plan is approved
by the committee of creditors and thereafter by the Adjudicating
Authority, the aforesaid plan is binding on all stakeholders as follows:
―31. Approval of resolution plan.—(1) If the

Adjudicating Authority is satisfied that the resolution
plan as approved by the committee of creditors under
sub-section (4) of Section 30 meets the requirements
as referred to in sub-section (2) of Section 30, it shall
by order approve the resolution plan which shall be
binding on the corporate debtor and its employees,
members, creditors, guarantors and other
stakeholders involved in the resolution plan:
Provided that the Adjudicating Authority shall,
before passing an order for approval of resolution plan
under this sub-section, satisfy that the resolution plan
has provisions for its effective implementation.
xxx xxx xxx‖
44. Since the financial creditors are in the business of money
lending, banks and financial institutions are best equipped to assess
viability and feasibility of the business of the corporate debtor. Even at
the time of granting loans, these banks and financial institutions
undertake a detailed market study which includes a techno-economic
93
valuation report, evaluation of business, financial projection, etc. Since
this detailed study has already been undertaken before sanctioning a
loan, and since financial creditors have trained employees to assess
viability and feasibility, they are in a good position to evaluate the
contents of a resolution plan. On the other hand, operational creditors,
who provide goods and services, are involved only in recovering
amounts that are paid for such goods and services, and are typically
unable to assess viability and feasibility of business. The BLRC
Report, already quoted above, makes this abundantly clear.
45. Quite apart from this, the United Nations Commission on
International Trade Law, in its Legislative Guide on Insolvency Law
[―UNCITRAL Guidelines‖] recognizes the importance of ensuring
equitable treatment to similarly placed creditors and states as follows:
“Ensuring equitable treatment of similarly situated

creditors
7. The objective of equitable treatment is based on the
notion that, in collective proceedings, creditors with
similar legal rights should be treated fairly, receiving a
distribution on their claim in accordance with their
relative ranking and interests. This key objective
recognizes that all creditors do not need to be treated
identically, but in a manner that reflects the different
bargains they have struck with the debtor. This is less
relevant as a defining factor where there is no specific
debt contract with the debtor, such as in the case of
94
damage claimants (e.g. for environmental damage)
and tax authorities. Even though the principle of
equitable treatment may be modified by social policy
on priorities and give way to the prerogatives
pertaining to holders of claims or interests that arise,
for example, by operation of law, it retains its
significance by 12 UNCITRAL Legislative Guide on
Insolvency Law ensuring that the priority accorded to
the claims of a similar class affects all members of the
class in the same manner. The policy of equitable
treatment permeates many aspects of an insolvency
law, including the application of the stay or
suspension, provisions to set aside acts and
transactions and recapture value for the insolvency
estate, classification of claims, voting procedures in
reorganization and distribution mechanisms. An
insolvency law should address problems of fraud and
favouritism that may arise in cases of financial distress
by providing, for example, that acts and transactions
detrimental to equitable treatment of creditors can be
avoided.‖
46. The NCLAT has, while looking into viability and feasibility of
resolution plans that are approved by the committee of creditors,
always gone into whether operational creditors are given roughly the
same treatment as financial creditors, and if they are not, such plans
are either rejected or modified so that the operational creditors‘ rights
are safeguarded. It may be seen that a resolution plan cannot pass
muster under Section 30(2)(b) read with Section 31 unless a minimum
payment is made to operational creditors, being not less than
95
liquidation value. Further, on 05.10.2018, Regulation 38 has been
amended. Prior to the amendment, Regulation 38 read as follows:
―38. Mandatory contents of the resolution plan.—

(1) A resolution plan shall identify specific sources of
funds that will be used to pay the—
(a) insolvency resolution process costs and
provide that the [insolvency resolution
process costs, to the extent unpaid, will be
paid] in priority to any other creditor;
(b) liquidation value due to operational
creditors and provide for such payment in
priority to any financial creditor which shall in
any event be made before the expiry of thirty
days after the approval of a resolution plan by
the Adjudicating Authority; and
(c) liquidation value due to dissenting
financial creditors and provide that such
payment is made before any recoveries are
made by the financial creditors who voted in
favour of the resolution plan.‖
Post amendment, Regulation 38 reads as follows:
―38. Mandatory contents of the resolution plan.—

(1) The amount due to the operational creditors under
a resolution plan shall be given priority in payment
over financial creditors.
(1-A) A resolution plan shall include a statement as to
how it has dealt with the interests of all stakeholders,
including financial creditors and operational creditors,
of the corporate debtor.
xxx xxx xxx‖
96
47. The aforesaid Regulation further strengthens the rights of
operational creditors by statutorily incorporating the principle of fair and
equitable dealing of operational creditors‘ rights, together with priority
in payment over financial creditors.
48. For all the aforesaid reasons, we do not find that operational
creditors are discriminated against or that Article 14 has been infracted
either on the ground of equals being treated unequally or on the
ground of manifest arbitrariness.
SECTION 12A IS NOT VIOLATIVE OF ARTICLE 14
49. Section 12A was inserted by the Insolvency and Bankruptcy
(Second Amendment) Act, 2018 with retrospective effect from
06.06.2018. It reads as follows:
―12-A. Withdrawal of application admitted under

Section 7, 9 or 10.—The Adjudicating Authority may
allow the withdrawal of application admitted under
Section 7 or Section 9 or Section 10, on an application
made by the applicant with the approval of ninety per
cent voting share of the committee of creditors, in such
manner as may be specified.‖
50. The ILC Report of March 2018, which led to the insertion of
Section 12A, stated as follows:
97
―29.1 Under rule 8 of the CIRP Rules, the NCLT may
permit withdrawal of the application on a request by
the applicant before its admission. However, there is
no provision in the Code or the CIRP Rules in relation
to permissibility of withdrawal post admission of a
CIRP application. It was observed by the Committee
that there have been instances where on account of
settlement between the applicant creditor and the
corporate debtor, judicial permission for withdrawal of
CIRP was granted [Lokhandwala Kataria Construction
Pvt. Ltd. v. Ninus Finance & Investment Manager LLP,
Civil Appeal No. 9279 of 2017; Mothers Pride Dairy
India Private Limited v. Portrait Advertising and
Marketing Private Limited, Civil Appeal No. 9286/2017;
Uttara Foods and Feeds Private Limited v. Mona
Pharmacem, Civil Appeal No. 18520/2017]. This
practice was deliberated in light of the objective of the
Code as encapsulated in the BLRC Report, that the
design of the Code is based on ensuring that ―all key
stakeholders will participate to collectively assess
viability. The law must ensure that all creditors who
have the capability and the willingness to restructure
their liabilities must be part of the negotiation process.
The liabilities of all creditors who are not part of the
negotiation process must also be met in any
negotiated solution.‖ Thus, it was agreed that once the
CIRP is initiated, it is no longer a proceeding only
between the applicant creditor and the corporate
debtor but is envisaged to be a proceeding involving
all creditors of the debtor. The intent of the Code is to
discourage individual actions for enforcement and
settlement to the exclusion of the general benefit of all
creditors.
29.2 On a review of the multiple NCLT and NCLAT

judgments in this regard, the consistent pattern that
emerged was that a settlement may be reached
amongst all creditors and the debtor, for the purpose
of a withdrawal to be granted, and not only the
98
applicant creditor and the debtor. On this basis read
with the intent of the Code, the Committee
unanimously agreed that the relevant rules may be
amended to provide for withdrawal post admission if
the CoC approves of such action by a voting share of
ninety per cent. It was specifically discussed that rule
11 of the National Company Law Tribunal Rules, 2016
may not be adopted for this aspect of CIRP at this
stage (as observed by the Hon‘ble Supreme Court in
the case of Uttara Foods and Feeds Private Limited v.
Mona Pharmacem, Civil Appeal No. 18520/2017) and
even otherwise, as the issue can be specifically
addressed by amending rule 8 of the CIRP Rules.‖
51. Before this Section was inserted, this Court, under Article 142,
was passing orders allowing withdrawal of applications after creditors‘
applications had been admitted by the NCLT or the NCLAT.
Regulation 30A of the CIRP Regulations states as under:
―30A. Withdrawal of application.—(1) An application

for withdrawal under Section 12-A shall be submitted
to the interim resolution professional or the resolution
professional, as the case may be, in Form FA of the
Schedule before issue of invitation for expression of
interest under Regulation 36A.
(2) The application in sub-regulation (1) shall be
accompanied by a bank guarantee towards estimated
cost incurred for purposes of clauses (c) and (d) of
Regulation 31 till the date of application.
(3) The committee shall consider the application made
under sub-regulation (1) within seven days of its
constitution or seven days of receipt of the application,
whichever is later.
99
(4) Where the application is approved by the
committee with ninety percent voting share, the
resolution professional shall submit the application
under sub-regulation (1) to the Adjudicating Authority
on behalf of the applicant, within three days of such
approval.
(5) The Adjudicating Authority may, by order, approve
the application submitted under sub-regulation (4).‖
This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt. Ltd.
v. Mr. S. Rajagopal & Ors., SLP (Civil) No. 31557/2018, has stated
that Regulation 30A(1) is not mandatory but is directory for the simple
reason that on the facts of a given case, an application for withdrawal
may be allowed in exceptional cases even after issue of invitation for
expression of interest under Regulation 36A.
52. It is clear that once the Code gets triggered by admission of a
creditor‘s petition under Sections 7 to 9, the proceeding that is before
the Adjudicating Authority, being a collective proceeding, is a
proceeding in rem. Being a proceeding in rem, it is necessary that the
body which is to oversee the resolution process must be consulted
before any individual corporate debtor is allowed to settle its claim. A
question arises as to what is to happen before a committee of creditors
is constituted (as per the timelines that are specified, a committee of
creditors can be appointed at any time within 30 days from the date of
100
appointment of the interim resolution professional). We make it clear
that at any stage where the committee of creditors is not yet
constituted, a party can approach the NCLT directly, which Tribunal
may, in exercise of its inherent powers under Rule 11 of the NCLT
Rules, 2016, allow or disallow an application for withdrawal or
settlement. This will be decided after hearing all the concerned parties
and considering all relevant factors on the facts of each case.
53. The main thrust against the provision of Section 12A is the fact
that ninety per cent of the committee of creditors has to allow
withdrawal. This high threshold has been explained in the ILC Report
as all financial creditors have to put their heads together to allow such
withdrawal as, ordinarily, an omnibus settlement involving all creditors
ought, ideally, to be entered into. This explains why ninety per cent,
which is substantially all the financial creditors, have to grant their
approval to an individual withdrawal or settlement. In any case, the
figure of ninety per cent, in the absence of anything further to show
that it is arbitrary, must pertain to the domain of legislative policy,
which has been explained by the Report (supra). Also, it is clear, that
under Section 60 of the Code, the committee of creditors do not have
the last word on the subject. If the committee of creditors arbitrarily
101
rejects a just settlement and/or withdrawal claim, the NCLT, and
thereafter, the NCLAT can always set aside such decision under
Section 60 of the Code. For all these reasons, we are of the view that
Section 12A also passes constitutional muster.
EVIDENCE PROVIDED BY PRIVATE INFORMATION UTILITIES: ONLY PRIMA FACIE

EVIDENCE OF DEFAULT
54. A frontal attack was made by Shri Mukul Rohatgi on the ground
that private information utilities that have been set up are not governed
by proper norms. Also, the evidence by way of loan default contained
in the records of such utility cannot be conclusive evidence of what is
stated therein. The BLRC Report had stated:
―Under the present arrangements, considerable time

can be lost before all parties obtain this information.
Disputes about these facts can take up years to
resolve in court…… Hence, the Committee envisions a
competitive industry of ―information utilities‖ who hold
an array of information about all firms at all times.
When the IRP commences, within less than a day,
undisputed and complete information would become
available to all persons involved in the IRP and thus
address this source of delay.‖
55. The setting up of information utilities was preceded by a regime
of information companies which were referred to as credit information
102
companies [―CICs‖], as recommended by the Siddiqui Working Group
in 1999. The Attorney General pointed out, in his written submission,
that:
―In 2013, the RBI constituted another Committee under

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

information utilities was to reduce information
asymmetry for improved credit risk assessment and to
improve recovery processes.
The setting up of IUs marks a shift in the above

position as not only is the information with IUs used to
reduce information asymmetry, but it is also to be
treated as prima facie evidence of the transaction for
the purpose of IBC proceedings. This assists in
improving the timelines for the resolution process.‖
56. The Information Utilities Regulations, in particular Regulations 20
and 21, make it clear that on receipt of information of default, an
information utility shall expeditiously undertake the process of
authentication and verification of information. Regulations 20 and 21
read as follows:
103
―20. Acceptance and receipt of information.—(1) An
information utility shall accept information submitted by
a user in Form C of the Schedule.
(2) On receipt of the information submitted under sub-
regulation (1), the information utility shall—
(a) assign a unique identifier to the information,
including records of debt;
(b) acknowledge its receipt, and notify the user
of—
(i) the unique identifier of the information;
(ii) the terms and conditions of authentication
and verification of information; and
(iii) the manner in which the information may
be accessed by other parties.
21. Information of default.—(1) On receipt of

information of default, an information utility shall
expeditiously undertake the processes of
authentication and verification of the information.
(2) On completion of the processes of authentication
and verification under sub-regulation (1), the
information utility shall communicate the information of
default, and the status of authentication to registered
users who are—
(a) creditors of the debtor who has defaulted;
(b) parties and sureties, if any, to the debt in
respect of which the information of default
has been received.‖
57. The aforesaid Regulations also make it clear that apart from the
stringent requirements as to registration of such utility, the moment
information of default is received, such information has to be
communicated to all parties and sureties to the debt. Apart from this,
the utility is to expeditiously undertake the process of authentication
104
and verification of information, which will include authentication and
verification from the debtor who has defaulted. This being the case,
coupled with the fact that such evidence, as has been conceded by the
learned Attorney General, is only prima facie evidence of default,
which is rebuttable by the corporate debtor, makes it clear that the
challenge based on this ground must also fail.
RESOLUTION PROFESSIONAL HAS NO ADJUDICATORY POWERS.
58. It is clear from a reading of the Code as well as the Regulations
that the resolution professional has no adjudicatory powers. Section 18
of the Code lays down the duties of an interim resolution professional
as follows:
―18. Duties of interim resolution professional.—(1)

The interim resolution professional shall perform the
following duties, namely—
(a) collect all information relating to the assets,
finances and operations of the corporate debtor
for determining the financial position of the
corporate debtor, including information relating
to—
(i) business operations for the previous two
years;
(ii) financial and operational payments for the
previous two years;
(iii) list of assets and liabilities as on the
initiation date; and
(iv) such other matters as may be specified;
105
(b) receive and collate all the claims submitted by creditors
to him, pursuant to the public announcement made under
Sections 13 and 15;
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage
its operations until a resolution professional is appointed by
the committee of creditors;
(e) file information collected with the information utility, if
necessary; and
(f) take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the
balance sheet of the corporate debtor, or with information
utility or the depository of securities or any other registry
that records the ownership of assets including—
(i) assets over which the corporate debtor
has ownership rights which may be located in
a foreign country;
(ii) assets that may or may not be in
possession of the corporate debtor;
(iii) tangible assets, whether movable or
immovable;
(iv) intangible assets including intellectual
property;
(v) securities including shares held in any
subsidiary of the corporate debtor, financial
instruments, insurance policies;
(vi) assets subject to the determination of
ownership by a court or authority;
(g) to perform such other duties as may be
specified by the Board.
Explanation.—For the purposes of this
section, the term ―assets‖ shall not include
the following, namely—
(a) assets owned by a third party in
possession of the corporate debtor held
under trust or under contractual
arrangements including bailment;
106
(b) assets of any Indian or foreign subsidiary
of the corporate debtor; and
(c) such other assets as may be notified by
the Central Government in consultation with
any financial sector regulator.‖
59. Under the CIRP Regulations, the resolution professional has to
vet and verify claims made, and ultimately, determine the amount of
each claim as follows:
―10. Substantiation of claims.—The interim

resolution professional or the resolution professional,
as the case may be, may call for such other evidence
or clarification as he deems fit from a creditor for
substantiating the whole or part of its claim.‖
xxx xxx xxx
―12. Submission of proof of claims.—(1) Subject to
sub-regulation (2), a creditor shall submit claim with
proof on or before the last date mentioned in the public
announcement.
(2) A creditor, who fails to submit claim with proof
within the time stipulated in the public announcement,
may submit the claim with proof to the interim
resolution professional or the resolution professional,
as the case may be, on or before the ninetieth day of
the insolvency commencement date.
(3) Where the creditor in sub-regulation (2) is a
financial creditor under regulation 8, it shall be
included in the committee from the date of admission
of such claim:
Provided that such inclusion shall not affect the
validity of any decision taken by the committee prior to
such inclusion.
107
13. Verification of claims.—(1) The interim resolution
professional or the resolution professional, as the case
may be, shall verify every claim, as on the insolvency
commencement date, within seven days from the last
date of the receipt of the claims, and thereupon
maintain a list of creditors containing names of
creditors along with the amount claimed by them, the
amount of their claims admitted and the security
interest, if any, in respect of such claims, and update
it.
(2) The list of creditors shall be –
(a) available for inspection by the persons
who submitted proofs of claim;
(b) available for inspection by members,
partners, directors and guarantors of the
corporate debtor;
(c) displayed on the website, if any, of the
corporate debtor;
(d) filed with the Adjudicating Authority; and
(e) presented at the first meeting of the
committee.
14. Determination of amount of claim.—(1) Where

the amount claimed by a creditor is not precise due to
any contingency or other reason, the interim resolution
professional or the resolution professional, as the case
may be, shall make the best estimate of the amount of
the claim based on the information available with him.
professional, as the case may be, shall revise the
amounts of claims admitted, including the estimates of
claims made under sub-regulation (1), as soon as may
be practicable, when he comes across additional
information warranting such revision.‖
It is clear from a reading of these Regulations that the resolution
professional is given administrative as opposed to quasi-judicial
108
powers. In fact, even when the resolution professional is to make a
―determination‖ under Regulation 35A, he is only to apply to the
Adjudicating Authority for appropriate relief based on the determination
made as follows:
―35A. Preferential and other transactions.—(1) On

or before the seventy-fifth day of the insolvency
commencement date, the resolution professional shall
form an opinion whether the corporate debtor has
been subjected to any transaction covered under
sections 43, 45, 50 or 66.
(2) Where the resolution professional is of the opinion
that the corporate debtor has been subjected to any
transactions covered under sections 43, 45, 50 or 66,
he shall make a determination on or before the one
hundred and fifteenth day of the insolvency
commencement date, under intimation to the Board.
(3) Where the resolution professional makes a
determination under sub-regulation (2), he shall apply
to the Adjudicating Authority for appropriate relief on or
before the one hundred and thirty-fifth day of the
insolvency commencement date.
60. As opposed to this, the liquidator, in liquidation proceedings
under the Code, has to consolidate and verify the claims, and either
admit or reject such claims under Sections 38 to 40 of the Code.
Sections 41 and 42, by way of contrast between the powers of the
liquidator and that of the resolution professional, are set out
hereinbelow:
109
―41. Determination of valuation of claims.—The
liquidator shall determine the value of claims admitted
under Section 40 in such manner as may be specified
by the Board.
42. Appeal against the decision of liquidator.—A

creditor may appeal to the Adjudicating Authority
against the decision of the liquidator accepting or
rejecting the claims within fourteen days of the receipt
of such decision.‖
It is clear from these Sections that when the liquidator ―determines‖ the
value of claims admitted under Section 40, such determination is a
―decision‖, which is quasi-judicial in nature, and which can be appealed
against to the Adjudicating Authority under Section 42 of the Code.
61. Unlike the liquidator, the resolution professional cannot act in a
number of matters without the approval of the committee of creditors
under Section 28 of the Code, which can, by a two-thirds majority,
replace one resolution professional with another, in case they are
unhappy with his performance. Thus, the resolution professional is
really a facilitator of the resolution process, whose administrative
functions are overseen by the committee of creditors and by the
CONSTITUTIONAL VALIDITY OF SECTION 29A.
110
62. Section 29A reads as follows:
―29A. Persons not eligible to be resolution

applicant.—A person shall not be eligible to submit a
resolution plan, if such person, or any other person
acting jointly or in concert with such person—
(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the
guidelines of the Reserve Bank of India issued
under the Banking Regulation Act, 1949 (10 of
1949);
(c) at the time of submission of the resolution plan
has an account,] or an account of a corporate
debtor under the management or control of such
person or of whom such person is a promoter,
classified as non-performing asset in accordance
with the guidelines of the Reserve Bank of India
issued under the Banking Regulation Act, 1949
(10 of 1949) or the guidelines of a financial sector
regulator issued under any other law for the time
being in force, and at least a period of one year
has lapsed from the date of such classification till
the date of commencement of the corporate
insolvency resolution process of the corporate
debtor:
Provided that the person shall be eligible to
submit a resolution plan if such person makes
payment of all overdue amounts with interest
thereon and charges relating to non-performing
asset accounts before submission of resolution
plan:
Provided further that nothing in this clause shall
apply to a resolution applicant where such
applicant is a financial entity and is not a related
party to the corporate debtor.
Explanation I.—For the purposes of this
proviso, the expression ―related party‖ shall not
include a financial entity, regulated by a financial
sector regulator, if it is a financial creditor of the
111
corporate debtor and is a related party of the
corporate debtor solely on account of conversion
or substitution of debt into equity shares or
instruments convertible into equity shares, prior to
the insolvency commencement date.
Explanation II.—For the purposes of this
clause, where a resolution applicant has an
account, or an account of a corporate debtor
under the management or control of such person
or of whom such person is a promoter, classified
as non-performing asset and such account was
acquired pursuant to a prior resolution plan
approved under this Code, then, the provisions of
this clause shall not apply to such resolution
applicant for a period of three years from the date
of approval of such resolution plan by the
Adjudicating Authority under this Code;
(d) has been convicted for any offence punishable
with imprisonment—
(i) for two years or more under any Act
specified under the Twelfth Schedule; or
(ii) for seven years or more under any other
law for the time being in force:
Provided that this clause shall not apply to a
person after the expiry of a period of two years
from the date of his release from imprisonment:
Provided further that this clause shall not apply
in relation to a connected person referred to in
clause (iii) of Explanation I;
(e) is disqualified to act as a director under the
Companies Act, 2013 (18 of 2013):
Provided that this clause shall not apply in relation
to a connected person referred to in clause (iii) of
Explanation I;
(f) is prohibited by the Securities and Exchange
Board of India from trading in securities or
accessing the securities markets;
(g) has been a promoter or in the management or
control of a corporate debtor in which a
112
preferential transaction, undervalued transaction,
extortionate credit transaction or fraudulent
transaction has taken place and in respect of
which an order has been made by the
Adjudicating Authority under this Code:
Provided that this clause shall not apply if a
preferential transaction, undervalued transaction,
extortionate credit transaction or fraudulent
transaction has taken place prior to the
acquisition of the corporate debtor by the
resolution applicant pursuant to a resolution plan
approved under this Code or pursuant to a
scheme or plan approved by a financial sector
regulator or a court, and such resolution applicant
has not otherwise contributed to the preferential
transaction, undervalued transaction, extortionate
credit transaction or fraudulent transaction;
(h) has executed a guarantee in favour of a
creditor in respect of a corporate debtor against
which an application for insolvency resolution
made by such creditor has been admitted under
this Code and such guarantee has been invoked
by the creditor and remains unpaid in full or part;
(i) is subject to any disability, corresponding to
clauses (a) to (h), under any law in a jurisdiction
outside India; or
(j) has a connected person not eligible under
clauses (a) to (i).
Explanation I.—For the purposes of this clause,
the expression ―connected person‖ means—
(i) any person who is the promoter or in the
management or control of the resolution
applicant; or
(ii) any person who shall be the promoter or
in management or control of the business of
the corporate debtor during the
implementation of the resolution plan; or
113
(iii) the holding company, subsidiary
company, associate company or related party
of a person referred to in clauses (i) and (ii):
Provided that nothing in clause (iii) of
Explanation I shall apply to a resolution
applicant where such applicant is a financial
entity and is not a related party of the
corporate debtor:
Provided further that the expression
―related party‖ shall not include a financial
entity, regulated by a financial sector
regulator, if it is a financial creditor of the
corporate debtor and is a related party of the
corporate debtor solely on account of
conversion or substitution of debt into equity
shares or instruments convertible into equity
shares, prior to the insolvency
commencement date;
Explanation II.—For the purposes of this
section, ―financial entity‖ shall mean the following
entities which meet such criteria or conditions as
the Central Government may, in consultation with
the financial sector regulator, notify in this behalf,
namely—
(a) a scheduled bank;
(b) any entity regulated by a foreign central
bank or a securities market regulator or other
financial sector regulator of a jurisdiction
outside India which jurisdiction is compliant
with the Financial Action Task Force
Standards and is a signatory to the
International Organisation of Securities
Commissions Multilateral Memorandum of
Understanding;
(c) any investment vehicle, registered foreign
institutional investor, registered foreign
portfolio investor or a foreign venture capital
investor, where the terms shall have the
meaning assigned to them in regulation 2 of
114
the Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident
Outside India) Regulations, 2017 made under
the Foreign Exchange Management Act,
1999 (42 of 1999);
(d) an asset reconstruction company
registered with the Reserve Bank of India
under Section 3 of the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002
(54 of 2002);
(e) an Alternate Investment Fund registered
with the Securities and Exchange Board of
India;
(f) such categories of persons as may be
notified by the Central Government.‖
63. This Section was first introduced by the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017, which amended the
Insolvency and Bankruptcy Code on 23.11.2017. The Finance Minister
while moving the Amendment Bill stated as follows:
―The core and the soul of this new Ordinance is really

Clause 5, which is Section 29A of the original Bill. I
may just explain that once a company goes into the
resolution process, then applications would be invited
with regard to the potential resolution proposals as far
as the company is concerned or the enterprise is
concerned. Now a number of ineligibility clauses were
not there in the original Act, and, therefore, Clause
29A introduces those who are not eligible to apply. For
instance, there is a clause with regard to an
undischarged insolvent who is not eligible to apply; a
person who has been disqualified under the
Companies Act to act as a Director cannot apply; and
a person who is prohibited under the SEBI Act cannot
115
apply. So these are statutory disqualifications. And,
there is also a disqualification in clause (c) with regard
to those who are corporate debtors and who, as on the
date of the application making a bid, do not
operationalize the account by paying the interest itself,
i.e., you cannot say that I have an NPA. I am not
making the account operational. The accounts will
continue to be NPAs and yet I am going to apply for
this. Effectively, this clause will mean that those, who
are in management and on account of whom this
insolvent or the non-performing asset has arisen, will
now try and say, I do not discharge any of the
outstanding debts in terms of making the accounts
operational, and yet I would like to apply and get the
same enterprise back at a discounted value, for this is
not the object of this particular Act itself. So clause 5
has been brought in with that purpose in mind.‖
(emphasis supplied)
The Statement of Objects and Reasons for the aforesaid amendment
states:
―2. The provisions for insolvency resolution and

liquidation of a corporate person in the Code did not
restrict or bar any person from submitting a resolution
plan or participating in the acquisition process of the
assets of a company at the time of liquidation.
Concerns have been raised that persons who, with
their misconduct contributed to defaults of companies
or are otherwise undesirable, may misuse this
situation due to lack of prohibition or restrictions to
participate in the resolution or liquidation process, and
gain or regain control of the corporate debtor. This
may undermine the processes laid down in the Code
as the unscrupulous person would be seen to be
rewarded at the expense of creditors. In addition, in
order to check that the undesirable persons who may
have submitted their resolution plans in the absence of
116
such a provision, responsibility is also being entrusted
on the committee of creditors to give a reasonable
period to repay overdue amounts and become
eligible.‖
(emphasis supplied)
This Court has held in ArcelorMittal (supra):
―27. A purposive interpretation of Section 29A,

depending both on the text and the context in which
the provision was enacted, must, therefore, inform our
interpretation of the same. We are concerned in the
present matter with sub-clauses (c), (f), (i) and (j)
thereof.
28. It will be noticed that the opening lines of Section
29A contained in the Ordinance of 2017 are different
from the opening lines of Section 29A as contained in
the Amendment Act of 2017. What is important to note
is that the phrase ―persons acting in concert‖ is
conspicuous by its absence in the Ordinance of 2017.
The concepts of ―promoter‖, ―management‖ and
―control‖ which were contained in the opening lines of
Section 29A under the Ordinance have now been
transferred to sub-clause (c) in the Amendment Act of
2017. It is, therefore, important to note that the
Amendment Act of 2017 opens with language which is
of wider import than that contained in the Ordinance of
2017, evincing an intention to rope in all persons who
may be acting in concert with the person submitting a
resolution plan.
29. The opening lines of Section 29A of the
Amendment Act refer to a de facto as opposed to a de
jure position of the persons mentioned therein. This is
a typical instance of a ―see through provision‖, so that
one is able to arrive at persons who are actually in
―control‖, whether jointly, or in concert, with other
persons. A wooden, literal, interpretation would
117
obviously not permit a tearing of the corporate veil
when it comes to the ―person‖ whose eligibility is to be
gone into. However, a purposeful and contextual
interpretation, such as is the felt necessity of
interpretation of such a provision as Section 29A,
alone governs. For example, it is well settled that a
shareholder is a separate legal entity from the
company in which he holds shares. This may be true
generally speaking, but when it comes to a corporate
vehicle that is set up for the purpose of submission of
a resolution plan, it is not only permissible but
imperative for the competent authority to find out as to
who are the constituent elements that make up such a
company. In such cases, the principle laid down
in Salomon v. A Salomon and Co. Ltd. [1897] AC
22 will not apply. For it is important to discover in such
cases as to who are the real individuals or entities who
are acting jointly or in concert, and who have set up
such a corporate vehicle for the purpose of submission
of a resolution plan.‖
Similarly in Chitra Sharma v. Union of India, Writ Petition (Civil) No.
744 of 2017 [decided on 09.08.2018], this Court observed as follows:
―31. Parliament has introduced Section 29A into the

IBC with a specific purpose. The provisions of Section
29A are intended to ensure that among others,
persons responsible for insolvency of the corporate
debtor do not participate in the resolution process......‖
―32. …… The Court must bear in mind that Section

29A has been enacted in the larger public interest and
to facilitate effective corporate governance. Parliament
rectified a loophole in the Act which allowed a back-
door entry to erstwhile managements in the CIRP.
Section 30 of the IBC, as amended, also clarifies that
a resolution plan of a person who is ineligible under
Section 29A will not be considered by the CoC……‖
118
RETROSPECTIVE APPLICATION
64. It is settled law that a statute is not retrospective merely because
it affects existing rights; nor is it retrospective merely because a part of
the requisites for its action is drawn from a time antecedent to its
passing [See State Bank‘s Staff Union (Madras Circle) v. Union of
India and Ors., (2005) 7 SCC 584 (at paragraph 21)]. In ArcelorMittal
(supra), this Court has observed that a resolution applicant has no
vested right for consideration or approval of its resolution plan as
follows:
―79. Take the next stage under Section 30. A

Resolution Professional has presented a resolution
plan to the committee of creditors for its approval, but
the committee of creditors does not approve such plan
after considering its feasibility and viability, as the
requisite vote of not less than 66% of the voting share
of the financial creditors is not obtained. As has been
mentioned hereinabove, the first proviso to Section
30(4) furnishes the answer, which is that all that can
happen at this stage is to require the Resolution
Professional to invite a fresh resolution plan within the
time limits specified where no other resolution plan is
available with him. It is clear that at this stage again no
application before the Adjudicating Authority could be
entertained as there is no vested right or fundamental
right in the resolution applicant to have its resolution
plan approved, and as no adjudication has yet taken
place.‖
119
65. This being the case, it is clear that no vested right is taken away
by application of Section 29A. However, Shri Viswanathan pointed out
the judgments in Ritesh Agarwal and Anr. v. SEBI and Ors., (2008)
8 SCC 205 (at paragraph 25), K.S. Paripoornan v. State of Kerala
and Ors., (1994) 5 SCC 593 (at paragraphs 60-66), Darshan Singh v.
Ram Pal Singh and Anr., 1992 Supp (1) SCC 191 (at paragraph 35),
Pyare Lal Sharma v. Managing Director and Ors., (1989) 3 SCC
448 (at paragraph 21), P.D. Aggarwal and Ors. v. State of U.P. and
Ors., (1987) 3 SCC 622 (at paragraph 18), and Govind Das and Ors.
v. Income Tax Officer and Anr., (1976) 1 SCC 906 (at paragraphs 6
and 11), to argue that if a Section operates on an antecedent set of
facts, but affects a vested right, it can be held to be retrospective, and
unless the legislature clearly intends such retrospectivity, the Section
should not be construed as such. Each of these judgments deals with
different situations in which penal and other enactments interfere with
vested rights, as a result of which, they were held to be prospective in
nature. However, in our judgment in ArcelorMittal (supra), we have
already held that resolution applicants have no vested right to be
considered as such in the resolution process. Shri Mukul Rohatgi,
however, argued that this judgment is distinguishable as no question of
120
constitutional validity arose in this case, and no issue as to the vested
right of a promoter fell for consideration. We are of the view that the
observations made in ArcelorMittal (supra) directly arose on the facts
of the case in order to oust the Ruias as promoters from the pale of
consideration of their resolution plan, in which context, this Court held
that they had no vested right to be considered as resolution applicants.
Accordingly, we follow the aforesaid judgment. Since a resolution
applicant who applies under Section 29A(c) has no vested right to
apply for being considered as a resolution applicant, this point is of no
avail.
SECTION 29A(C) NOT RESTRICTED TO MALFEASANCE
66. According to learned counsel for the petitioners, Section 29A(c)
treats unequals as equals. A good erstwhile manager cannot be
lumped with a bad erstwhile manager. Where an erstwhile manager is
not guilty of malfeasance or of acting contrary to the interests of the
corporate debtor, there is no reason why he should not be permitted to
take part in the resolution process. After all, say the counsel for the
petitioners, maximization of value of the assets of the corporate debtor
is an important objective to be achieved by the Code. Keeping out
121
good erstwhile managers from the resolution process would go
contrary to this objective.
67. This objection by the petitioners was countered by the learned
Attorney General and Solicitor General, stating that the various clauses
of Section 29A would show that a person need not be a criminal in
order to be kept out of the resolution process. For example, under
Section 29A(a), it is clear that a person may be an undischarged
insolvent for no fault of his. Equally, under Section 29A(e), a person
may be disqualified to act as a director under the Companies Act,
2013, say, where he has not furnished the necessary financial
statements on time [see Section 164(2)(a) 4 of the Companies Act,
2013].
4
―164. Disqualifications for appointment of director.—
xxx xxx xxx
(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous
period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or
to redeem any debentures on the due date or pay interest due thereon or
pay any dividend declared and such failure to pay or redeem continues for
one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in
other company for a period of five years from the date on which the said company
fails to do so:
Provided that where a person is appointed as a director of a company which is in
default of clause (a) or clause (b), he shall not incur the disqualification for a period
of six months from the date of his appointment.
xxx xxx xxx‖
122
68. The learned counsel for some of the petitioners have also argued
that the proviso to Section 35(1)(f) that was added by the Insolvency
and Bankruptcy Code (Amendment) Act, 2017 [dated 19.01.2018] with
retrospective effect from 23.11.2017 is manifestly arbitrary and
violative of Article 14 of the Constitution of India. The proviso to
Section 35(1)(f) reads as follows:
―35. Powers and duties of liquidator.—(1) Subject to

the directions of the Adjudicating Authority, the
liquidator shall have the following powers and duties,
namely:—
xxx xxx xxx
(f) subject to Section 52, to sell the
immovable and movable property and
actionable claims of the corporate debtor in
liquidation by public auction or private
contract, with power to transfer such property
to any person or body corporate, or to sell the
same in parcels in such manner as may be
specified:
Provided that the liquidator shall not sell
the immovable and movable property or
actionable claims of the corporate debtor in
liquidation to any person who is not eligible to
be a resolution applicant.
xxx xxx xxx‖
69. According to the learned counsel for the petitioners, when
immovable and movable property is sold in liquidation, it ought to be
sold to any person, including persons who are not eligible to be
123
resolution applicants as, often, it is the erstwhile promoter who alone
may purchase such properties piecemeal by public auction or by
private contract. The same rationale that has been provided earlier in
this judgment will apply to this proviso as well – there is no vested right
in an erstwhile promoter of a corporate debtor to bid for the immovable
and movable property of the corporate debtor in liquidation. Further,
given the categories of persons who are ineligible under Section 29A,
which includes persons who are malfeasant, or persons who have
fallen foul of the law in some way, and persons who are unable to pay
their debts in the grace period allowed, are further, by this proviso,
interdicted from purchasing assets of the corporate debtor whose
debts they have either wilfully not paid or have been unable to pay.
The legislative purpose which permeates Section 29A continues to
permeate the Section when it applies not merely to resolution
applicants, but to liquidation also. Consequently, this plea is also
rejected.
THE ONE-YEAR PERIOD IN SECTION 29A(C) AND NPAS
70. It is clear that Section 29A goes to eligibility to submit a
resolution plan. A wilful defaulter, in accordance with the guidelines of
124
the RBI, would be a person who though able to pay, does not pay. An
NPA, on the other hand, refers to the account belonging to a person
that is declared as such under guidelines issued by the RBI. It is
important at this juncture to advert to the aforesaid guidelines. The
RBI‘s Master Circular on Prudential Norms on Income Recognition,
Asset Classification and Provisioning pertaining to Advances dated
01.07.2015 [―RBI Master Circular‖] consolidates instructions issued
upto 30.06.2015 on NPAs. Clause 2.1 defines NPAs as under:
―2. DEFINITIONS
2.1 Non-performing Assets
2.1.1 An asset, including a leased asset, becomes
non-performing when it ceases to generate income
for the bank.
2.1.2 A non-performing asset (NPA) is a loan or an
advance where;
i. interest and/ or instalment of principal
remain overdue for a period of more than
90 days in respect of a term loan,
ii. the account remains ‗out of order‘ as
indicated at paragraph 2.2 below, in
respect of an Overdraft/Cash Credit
(OD/CC),
iii. the bill remains overdue for a period of
more than 90 days in the case of bills
purchased and discounted,
iv. the instalment of principal or interest
thereon remains overdue for two crop
seasons for short duration crops,
125
v. the instalment of principal or interest
thereon remains overdue for one crop
season for long duration crops,
vi. the amount of liquidity facility remains
outstanding for more than 90 days, in
respect of a securitization transaction
undertaken in terms of guidelines on
securitization dated February 1, 2006.
vii. in respect of derivative transactions, the
overdue receivables representing
positive mark-to-market value of a
derivative contract, if these remain
unpaid for a period of 90 days from the
specified due date for payment.
2.1.3 In case of interest payments, banks should,
classify an account as NPA only if the interest due
and charged during any quarter is not serviced fully
within 90 days from the end of the quarter.
2.1.4 In addition, an account may also be classified
as NPA in terms of paragraph 4.2.4 of this Master
Circular.‖
Clause 4 of the RBI Master Circular deals with asset classification as
follows:
―4. ASSET CLASSIFICATION

4.1 Categories of NPAs
Banks are required to classify non-performing
assets further into the following three categories
based on the period for which the asset has
remained non-performing and the realisability of
the dues:
 Substandard Assets
 Doubtful Assets
 Loss Assets
4.1.1 Substandard Assets
126
With effect from March 31, 2005, a substandard
asset would be one, which has remained NPA for a
period less than or equal to 12 months. Such an
asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the
banks will sustain some loss, if deficiencies are not
corrected.
4.1.2 Doubtful Assets
With effect from March 31, 2005, an asset would
be classified as doubtful if it has remained in the
substandard category for a period of 12 months. A
loan classified as doubtful has all the weaknesses
inherent in assets that were classified as sub-
standard, with the added characteristic that the
weaknesses make collection or liquidation in full –
on the basis of currently known facts, conditions
and values – highly questionable and improbable.
4.1.3 Loss Assets
A loss asset is one where loss has been identified
by the bank or internal or external auditors or the
RBI inspection but the amount has not been written
off wholly. In other words, such an asset is
considered uncollectible and of such little value
that its continuance as a bankable asset is not
warranted although there may be some salvage or
recovery value.
xxx xxx xxx‖
71. What is clear from the aforesaid circular is that accounts are
declared NPA only if defaults made by a corporate debtor are not
resolved (for example, interest on and/or instalment of the principal
remaining overdue for a period of more than 90 days in respect of a
term loan). Post declaration of such NPA, what is clear is that a
127
substandard asset would then be NPA which has remained as such for
a period of twelve months. In short, a person is a defaulter when an
instalment and/or interest on the principal remains overdue for more
than three months, after which, its account is declared NPA. During the
period of one year thereafter, since it is now classified as a
substandard asset, this grace period is given to such person to pay off
the debt. During this grace period, it is clear that such person can bid
along with other resolution applicants to manage the corporate debtor.
What is important to bear in mind is also the fact that, prior to this one-
year-three-month period, banks and financial institutions do not declare
the accounts of corporate debtors to be NPAs. As a matter of practice,
they first try and resolve disputes with the corporate debtor, after
which, the corporate debtor‘s account is declared NPA. As a matter of
legislative policy therefore, quite apart from malfeasance, if a person is
unable to repay a loan taken, in whole or in part, within this period of
one year and three months (which, in any case, is after an earlier
period where the corporate debtor and its financial creditors sit
together to resolve defaults that continue), it is stated to be ineligible to
become a resolution applicant. The reason is not far to see. A person
who cannot service a debt for the aforesaid period is obviously a
128
person who is ailing itself. The saying of Jesus comes to mind – ―if the
blind lead the blind, both shall fall into the ditch.‖ The legislative policy,
therefore, is that a person who is unable to service its own debt
beyond the grace period referred to above, is unfit to be eligible to
become a resolution applicant. This policy cannot be found fault with.
Neither can the period of one year be found fault with, as this is a
policy matter decided by the RBI and which emerges from its Master
Circular, as during this period, an NPA is classified as a substandard
asset. The ineligibility attaches only after this one year period is over
as the NPA now gets classified as a doubtful asset.
72. The Committee set up by the Government to oversee the
working of the Code has, in its Report of March 2018, also considered
this aspect of the matter and has opined as follows:
―14.8 In regards to the disqualification under clause (c)

for having an NPA account, it was also stated to the
Committee that the time period for existence of the
NPA account must be increased from one year to
three years. The reason provided was that a downturn
in a typical business cycle was most likely to extend
over a year. However, in the absence of any concrete
data, the Committee felt that there is no conclusive
way to determine what the ideal time period for
existence of an NPA should be for the disqualification
to apply. The Committee felt that the Code was a
relatively new legislation and therefore, it would be
129
prudent to wait and allow industry experience to
emerge for a few years before any amendment is
made to the NPA holding period under section 29A(c).
In relation to applicability of section 29A(c), the
Committee also discussed that it must be clarified that
the disqualification pursuant to section 29A(c) shall be
applicable if such NPA accounts are held by the
resolution applicant or its connected persons at the
time of submission of the resolution plan to the RP.‖
RELATED PARTY
73. A constitutional challenge has been raised against Section 29A(j)
read with the definition of ―related party‖. ―Related party‖ is defined in
the Code as follows:

xxx xxx xxx
(24) ―related party‖, in relation to a corporate debtor,

means—
(a) a director or partner of the corporate debtor or
a relative of a director or partner of the corporate
debtor;
(b) a key managerial personnel of the corporate
debtor or a relative of a key managerial personnel
of the corporate debtor;
(c) a limited liability partnership or a partnership
firm in which a director, partner, or manager of the
corporate debtor or his relative is a partner;
(d) a private company in which a director, partner
or manager of the corporate debtor is a director
130
and holds along with his relatives, more than two
per cent of its share capital;
(e) a public company in which a director, partner
or manager of the corporate debtor is a director
and holds along with relatives, more than two per
cent of its paid-up share capital;
(f) anybody corporate whose board of directors,
managing director or manager, in the ordinary
course of business, acts on the advice, directions
or instructions of a director, partner or manager of
(g) any limited liability partnership or a partnership
firm whose partners or employees in the ordinary
or instructions of a director, partner or manager of
(h) any person on whose advice, directions or
instructions, a director, partner or manager of the
corporate debtor is accustomed to act;
(i) a body corporate which is a holding, subsidiary
or an associate company of the corporate debtor,
or a subsidiary of a holding company to which the
corporate debtor is a subsidiary;
(j) any person who controls more than twenty per
cent of voting rights in the corporate debtor on
account of ownership or a voting agreement;
(k) any person in whom the corporate debtor
controls more than twenty per cent of voting rights
on account of ownership or a voting agreement;
(l) any person who can control the composition of
the board of directors or corresponding governing
body of the corporate debtor;
(m) any person who is associated with the
corporate debtor on account of—
(i) participation in policy-making processes of
the corporate debtor; or
(ii) having more than two directors in common
between the corporate debtor and such
person; or
131
(iii) interchange of managerial personnel
between the corporate debtor and such
person; or
(iv) provision of essential technical
information to, or from, the corporate debtor;
(24A) ―related party‖, in relation to an individual,

means—
(a) a person who is a relative of the individual or a
relative of the spouse of the individual;
(b) a partner of a limited liability partnership, or a
limited liability partnership or a partnership firm, in
which the individual is a partner;
(c) a person who is a trustee of a trust in which
the beneficiary of the trust includes the individual,
or the terms of the trust confers a power on the
trustee which may be exercised for the benefit of
the individual;
(d) a private company in which the individual is a
director and holds along with his relatives, more
than two per cent. of its share capital;
(e) a public company in which the individual is a
director and holds along with relatives, more than
two per cent. of its paid-up share capital;
(f) a body corporate whose board of directors,
managing director or manager, in the ordinary
or instructions of the individual;
(g) a limited liability partnership or a partnership
firm whose partners or employees in the ordinary
course of business, act on the advice, directions
or instructions of the individual;
(h) a person on whose advice, directions or
instructions, the individual is accustomed to act;
(i) a company, where the individual or the
individual along with its related party, own more
than fifty per cent. of the share capital of the
132
company or controls the appointment of the board
of directors of the company.
Explanation.—For the purposes of this clause,—

(a) ―relative‖, with reference to any person,
means anyone who is related to another, in the
following manner, namely—
(i) members of a Hindu Undivided Family,
(ii) husband,
(iii) wife,
(iv) father,
(v) mother,
(vi) son,
(vii) daughter,
(viii) son's daughter and son,
(ix) daughter's daughter and son,
(x) grandson's daughter and son,
(xi) granddaughter's daughter and son,
(xii) brother,
(xiii) sister,
(xiv) brother's son and daughter,
(xv) sister's son and daughter,
(xvi) father's father and mother,
(xvii) mother's father and mother,
(xviii) father's brother and sister,
(xix) mother's brother and sister, and
(b) wherever the relation is that of a son,
daughter, sister or brother, their spouses shall
also be included;‖
74. What is argued by the petitioners is that the mere fact that
somebody happens to be a relative of an ineligible person cannot be
good enough to oust such person from becoming a resolution
applicant, if he is otherwise qualified. We were urged, by Shri
133
Viswanathan in particular, to apply the doctrine of nexus that is well
known and that has been applied by this Court in several judgments in
other legal contexts, more particularly, in Attorney General for India
and Ors. v. Amratlal Prajivandas and Ors., (1994) 5 SCC 54.
Paragraph 44 reads as under:
―44. It is contended by the counsel for the petitioners

that extending the provisions of SAFEMA to the
relatives, associates and other ‗holders‘ is again a
case of overreaching or of over-breadth, as it may be
called — a case of excessive regulation. It is submitted
that the relatives or associates of a person falling
under clause (a) or clause (b) of Section 2(2) of
SAFEMA may have acquired properties of their own,
may be by illegal means but there is no reason why
those properties be forfeited under SAFEMA just
because they are related to or are associates of the
detenu or convict, as the case may be. It is pointed out
that the definition of ‗relative‘ in Explanation (2) and of
‗associates‘ in Explanation (3) are so wide as to bring
in a person even distantly related or associated with
the convict/detenu, within the net of SAFEMA, and
once he comes within the net, all his illegally acquired
properties can be forfeited under the Act. In our
opinion, the said contention is based upon a
misconception. SAFEMA is directed towards forfeiture
of ―illegally acquired properties‖ of a person falling
under clause (a) or clause (b) of Section 2(2). The
relatives and associates are brought in only for the
purpose of ensuring that the illegally acquired
properties of the convict or detenu, acquired or kept in
their names, do not escape the net of the Act. It is a
well-known fact that persons indulging in illegal
activities screen the properties acquired from such
illegal activity in the names of their relatives and
associates. Sometimes they transfer such properties
134
to them, may be, with an intent to transfer the
ownership and title. In fact, it is immaterial how such
relative or associate holds the properties of
convict/detenu — whether as a benami or as a mere
name-lender or as a bona fide transferee for value or
in any other manner. He cannot claim those properties
and must surrender them to the State under the Act.
Since he is a relative or associate, as defined by the
Act, he cannot put forward any defence once it is
proved that that property was acquired by the detenu
— whether in his own name or in the name of his
relatives and associates. It is to counteract the several
devices that are or may be adopted by persons
mentioned in clauses (a) and (b) of Section 2(2) that
their relatives and associates mentioned in clauses (c)
and (d) of the said sub-section are also brought within
the purview of the Act. The fact of their holding or
possessing the properties of convict/detenu furnishes
the link between the convict/detenu and his relatives
and associates. Only the properties of the
convict/detenu are sought to be forfeited, wherever
they are. The idea is to reach his properties in
whosoever's name they are kept or by whosoever they
are held. The independent properties of relatives and
friends, which are not traceable to the convict/detenu,
are not sought to be forfeited nor are they within the
purview of SAFEMA [ That this was the object of the
Act is evident from para 4 of the preamble which
states: ―And whereas such persons have in many
cases been holding the properties acquired by them
through such gains in the names of their relatives,
associates and confidants.‖ We are not saying that the
preamble can be utilized for restricting the scope of the
Act, we are only referring to it to ascertain the object of
the enactment and to reassure ourselves that the
construction placed by us accords with the said
object.] . We may proceed to explain what we say.
Clause (c) speaks of a relative of a person referred to
in clause (a) or clause (b) (which speak of a convict or
a detenu). Similarly, clause (d) speaks of associates of
135
such convict or detenu. If we look to Explanation (3)
which specifies who the associates referred to in
clause (d) are, the matter becomes clearer.
‗Associates‘ means — (i) any individual who had been
or is residing in the residential premises (including
outhouses) of such person [‗such person‘ refers to the
convict or detenu, as the case may be, referred to in
clause (a) or clause (b)]; (ii) any individual who had
been or is managing the affairs or keeping the
accounts of such convict/detenu; (iii) any association
of persons, body of individuals, partnership firm or
private company of which such convict/detenu had
been or is a member, partner or director; (iv) any
individual who had been or is a member, partner or
director of an association of persons, body of
individuals, partnership firm or private company
referred to in clause (iii) at any time when such person
had been or is a member, partner or director of such
association of persons, body of individuals, partnership
firm or private company; (v) any person who had been
or is managing the affairs or keeping the accounts of
any association of persons, body of individuals,
partnership firm or private company referred to in
clause (iii); (vi) the trustee of any trust where (a) the
trust has been created by such convict/detenu; or (b)
the value of the assets contributed by such
convict/detenu to the trust amounts, on the date of
contribution not less than 20% of the value of the
assets of the trust on that date; and (vii) where the
competent authority, for reasons to be recorded in
writing, considers that any properties of such
convict/detenu are held on his behalf by any other
person, such other person. It would thus be clear that
the connecting link or the nexus, as it may be called, is
the holding of property or assets of the convict/detenu
or traceable to such detenu/convict. Section 4 is
equally relevant in this context. It declares that ―as
from the commencement of this Act, it shall not be
lawful for any person to whom this Act applies to hold
any illegally acquired property either by himself or
136
through any other person on his behalf‖. All such
property is liable to be forfeited. The language of this
section is indicative of the ambit of the Act. Clauses (c)
and (d) in Section 2(2) and the Explanations (2) and
(3) occurring therein shall have to be construed and
understood in the light of the overall scheme and
purpose of the enactment. The idea is to forfeit the
illegally acquired properties of the convict/detenu
irrespective of the fact that such properties are held by
or kept in the name of or screened in the name of any
relative or associate as defined in the said two
Explanations. The idea is not to forfeit the independent
properties of such relatives or associates which they
may have acquired illegally but only to reach the
properties of the convict/detenu or properties traceable
to him, wherever they are, ignoring all the transactions
with respect to those properties. By way of illustration,
take a case where a convict/detenu purchases a
property in the name of his relative or associate — it
does not matter whether he intends such a person to
be a mere name-lender or whether he really intends
that such person shall be the real owner and/or
possessor thereof — or gifts away or otherwise
transfers his properties in favour of any of his relatives
or associates, or purports to sell them to any of his
relatives or associates — in all such cases, all the said
transactions will be ignored and the properties forfeited
unless the convict/detenu or his relative/associate, as
the case may be, establishes that such property or
properties are not ―illegally acquired properties‖ within
the meaning of Section 3(c). In this view of the matter,
there is no basis for the apprehension that the
independently acquired properties of such relatives
and associates will also be forfeited even if they are in
no way connected with the convict/detenu. So far as
the holders (not being relatives and associates)
mentioned in Section 2(2)(e) are concerned, they are
dealt with on a separate footing. If such person proves
that he is a transferee in good faith for consideration,
his property — even though purchased from a
137
convict/detenu — is not liable to be forfeited. It is
equally necessary to reiterate that the burden of
establishing that the properties mentioned in the show-
cause notice issued under Section 6, and which are
held on that date by a relative or an associate of the
convict/detenu, are not the illegally acquired properties
of the convict/detenu, lies upon such
relative/associate. He must establish that the said
property has not been acquired with the monies or
assets provided by the detenu/convict or that they in
fact did not or do not belong to such detenu/convict.
We do not think that Parliament ever intended to say
that the properties of all the relatives and associates,
may be illegally acquired, will be forfeited just because
they happen to be the relatives or associates of the
convict/detenu. There ought to be the connecting link
between those properties and the convict/detenu, the
burden of disproving which, as mentioned above, is
upon the relative/associate. In this view of the matter,
the apprehension and contention of the petitioners in
this behalf must be held to be based upon a mistaken
premise. The bringing in of the relatives and
associates or of the persons mentioned in clause (e) of
Section 2(2) is thus neither discriminatory nor
incompetent apart from the protection of Article 31-B.‖
(emphasis supplied)
75. We are of the view that persons who act jointly or in concert with
others are connected with the business activity of the resolution
applicant. Similarly, all the categories of persons mentioned in Section
5(24A) show that such persons must be ―connected‖ with the
resolution applicant within the meaning of Section 29A(j). This being
the case, the said categories of persons who are collectively
138
mentioned under the caption ―relative‖ obviously need to have a
connection with the business activity of the resolution applicant. In the
absence of showing that such person is ―connected‖ with the business
of the activity of the resolution applicant, such person cannot possibly
be disqualified under Section 29A(j). All the categories in Section
29A(j) deal with persons, natural as well as artificial, who are
connected with the business activity of the resolution applicant. The
expression ―related party‖, therefore, and ―relative‖ contained in the
definition Sections must be read noscitur a sociis with the categories of
persons mentioned in Explanation I, and so read, would include only
persons who are connected with the business activity of the resolution
applicant.
76. An argument was also made that the expression ―connected
person‖ in Explanation I, clause (ii) to Section 29A(j) cannot possibly
refer to a person who may be in management or control of the
business of the corporate debtor in future. This would be arbitrary as
the explanation would then apply to an indeterminate person. This
contention also needs to be repelled as Explanation I seeks to make it
clear that if a person is otherwise covered as a ―connected person‖,
this provision would also cover a person who is in management or
139
control of the business of the corporate debtor during the
implementation of a resolution plan. Therefore, any such person is not
indeterminate at all, but is a person who is in the saddle of the
business of the corporate debtor either at an anterior point of time or
even during implementation of the resolution plan. This disposes of all
the contentions raising questions as to the constitutional validity of
Section 29A(j).
EXEMPTION OF MICRO, SMALL, AND MEDIUM ENTERPRISES FROM SECTION
29A
77. The ILC Report of March 2018 found that micro, small, and
medium enterprises form the foundation of the economy and are key
drivers of employment, production, economic growth,
entrepreneurship, and financial inclusion.
78. Section 7 of the Micro, Small and Medium Enterprises
Development Act, 2006 classifies enterprises depending upon whether
they manufacture or produce goods, or are engaged in providing and
rendering services as micro, small, or medium, depending upon certain
investments made, as follows:
140
―7. Classification of enterprises.—(1)
Notwithstanding anything contained in Section 11-B of
the Industries (Development and Regulation) Act,
1951 (65 of 1951), the Central Government may, for
the purposes of this Act, by notification and having
regard to the provisions of sub-sections (4) and (5),
classify any class or classes of enterprises, whether
proprietorship, Hindu undivided family, associations of
persons, co-operative society, partnership firm,
company or undertaking, by whatever name called,—
(a) in the case of the enterprises engaged in the
manufacture or production of goods pertaining to
any industry specified in the First Schedule to the
Industries (Development and Regulation) Act,
1951 (65 of 1951), as—
(i) a micro enterprise, where the investment
in plant and machinery does not exceed
twenty-five lakh rupees;
(ii) a small enterprise, where the investment
in plant and machinery is more than twenty-
five lakh rupees but does not exceed five
crore rupees; or
(iii) a medium enterprise, where the
investment in plant and machinery is more
than five crore rupees but does not exceed
ten crore rupees;
(b) in the case of the enterprises engaged in
providing or rendering of services, as—
(i) a micro enterprise, where the investment
in equipment does not exceed ten lakh
rupees;
(ii) a small enterprise, where the investment
in equipment is more than ten lakh rupees
but does not exceed two crore rupees; or
(iii) a medium enterprise, where the
investment in equipment is more than two
crore rupees but does not exceed five crore
rupees.
xxx xxx xxx‖
141
79. The ILC Report of 2018 exempted these industries from Section
29A(c) and 29A(h) of the Code, their rationale for doing so being
contained in paragraph 27.4 of the Report, which reads as follows:
―27.4 Regarding the first issue, the Code is clear that

default of INR one lakh or above triggers the right of a
financial creditor or an operational creditor to file for
insolvency. Thus, the financial creditor or operational
creditors of MSMEs may take it to insolvency under
the Code. However, given that MSMEs are the
bedrock of the Indian economy, and the intent is not to
push them into liquidation and affect the livelihood of
employees and workers of MSMEs, the Committee
sought it fit to explicitly grant exemptions to corporate
debtors which are MSMEs by permitting a promoter
who is not a wilful defaulter, to bid for the MSME in
insolvency. The rationale for this relaxation is that a
business of an MSME attracts interest primarily from a
promoter of an MSME and may not be of interest to
other resolution applicants.‖
(emphasis supplied)
80. Thus, the rationale for excluding such industries from the
eligibility criteria laid down in Section 29A(c) and 29A(h) is because
qua such industries, other resolution applicants may not be
forthcoming, which then will inevitably lead not to resolution, but to
liquidation. Following upon the Insolvency Law Committee‘s Report,
Section 240A has been inserted in the Code with retrospective effect
from 06.06.2018 as follows:
142
―240-A. Application of this Code to micro, small
and medium enterprises.—(1) Notwithstanding
anything to the contrary contained in this Code, the
provisions of clauses (c) and (h) of Section 29A shall
not apply to the resolution applicant in respect of
corporate insolvency resolution process of any micro,
small and medium enterprises.
(2) Subject to sub-section (1), the Central Government
may, in the public interest, by notification, direct that
any of the provisions of this Code shall—
(a) not apply to micro, small and medium
enterprises; or
(b) apply to micro, small and medium
enterprises, with such modifications as may
be specified in the notification.
(3) A draft of every notification proposed to be issued
under sub-section (2), shall be laid before each House
of Parliament, while it is in session, for a total period of
thirty days which may be comprised in one session or
in two or more successive sessions.
(4) If both Houses agree in disapproving the issue of
notification or both Houses agree in making any
modification in the notification, the notification shall not
be issued or shall be issued only in such modified form
as may be agreed upon by both the Houses, as the
case may be.
(5) The period of thirty days referred to in sub-section
(3) shall not include any period during which the
House referred to in sub-section (4) is prorogued or
adjourned for more than four consecutive days.
(6) Every notification issued under this section shall be
laid, as soon as may be after it is issued, before each
House of Parliament.
Explanation.—For the purposes of this section, the
expression ―micro, small and medium enterprises‖
means any class or classes of enterprises classified as
such under sub-section (1) of Section 7 of the Micro,
Small and Medium Enterprises Development Act, 2006
(27 of 2006).‖
143
81. It can thus be seen that when the Code has worked hardship to a
class of enterprises, the Committee constituted by the Government, in
overseeing the working of the Code, has been alive to such problems,
and the Government in turn has followed the recommendations of the
Committee in enacting Section 240A. This is an important instance of
how the executive continues to monitor the application of the Code,
and exempts a class of enterprises from the application of some of its
provisions in deserving cases. This and other amendments that are
repeatedly being made to the Code, and to subordinate legislation
made thereunder, based upon Committee Reports which are looking
into the working of the Code, would also show that the legislature is
alive to serious anomalies that arise in the working of the Code and
steps in to rectify them.
SECTION 53 OF THE CODE DOES NOT VIOLATE ARTICLE 14.
82. An argument has been made by counsel appearing on behalf of
the petitioners that in the event of liquidation, operational creditors will
never get anything as they rank below all other creditors, including
other unsecured creditors who happen to be financial creditors. This,
according to them, would render Section 53 and in particular, Section
144
53(1)(f) discriminatory and manifestly arbitrary and thus, violative of
Article 14 of the Constitution of India.
Section 53(1) reads as follows:
―53. Distribution of assets.—(1) Notwithstanding

anything to the contrary contained in any law enacted
by the Parliament or any State Legislature for the time
being in force, the proceeds from the sale of the
liquidation assets shall be distributed in the following
order of priority and within such period and in such
manner as may be specified, namely—
(a) the insolvency resolution process costs and
the liquidation costs paid in full;
(b) the following debts which shall rank equally
between and among the following—
(i) workmen's dues for the period of twenty-
four months preceding the liquidation
commencement date; and
(ii) debts owed to a secured creditor in the
event such secured creditor has relinquished
security in the manner set out in Section 52;
(c) wages and any unpaid dues owed to
employees other than workmen for the period of
twelve months preceding the liquidation
commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between
and among the following:—
(i) any amount due to the Central
Government and the State Government
including the amount to be received on
account of the Consolidated Fund of India
and the Consolidated Fund of a State, if any,
in respect of the whole or any part of the
period of two years preceding the liquidation
commencement date;
145
(ii) debts owed to a secured creditor for any
amount unpaid following the enforcement of
security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case
may be.
xxx xxx xxx‖
83. The BLRC Report, which led to the enactment of the Insolvency
Code, in dealing with this aspect of the matter, has stated:
―The Committee has recommended to keep the right of

the Central and State Government in the distribution
waterfall in liquidation at a priority below the unsecured
financial creditors in addition to all kinds of secured
creditors for promoting the availability of credit and
developing a market for unsecured financing (including
the development of bond markets). In the long run, this
would increase the availability of finance, reduce the
cost of capital, promote entrepreneurship and lead to
faster economic growth. The government also will be
the beneficiary of this process as economic growth will
increase revenues. Further, efficiency enhancement
and consequent greater value capture through the
proposed insolvency regime will bring in additional
gains to both the economy and the exchequer.‖
xxx xxx xxx
―For the remaining creditors who participate in the

collective action of Liquidation, the Committee debated
on the waterfall of liabilities that should hold in
Liquidation in the new Code. Across different
jurisdictions, the observation is that secured creditors
have first priority on the realizations, and that these
are typically paid out net of the costs of insolvency
resolution and Liquidation. In order to bring the
practices in India in-line with the global practice, and to
146
ensure that the objectives of this proposed Code is
met, the Committee recommends that the waterfall in
Liquidation should be as follows:
1. Costs of IRP and liquidation.
2. Secured creditors and Workmen dues capped
up to three months from the start of IRP.
3. Employees capped up to three months.
4. Dues to unsecured financial creditors, debts
payable to workmen in respect of the period
beginning twelve months before the liquidation
commencement date and ending three months
before the liquidation commencement date;
5. Any amount due to the State Government and
the Central Government in respect of the whole or
any part of the period of two years before the
liquidation commencement date; any debts of the
secured creditor for any amount unpaid following
the enforcement of security interest
6. Remaining debt
7. Surplus to shareholders.‖
84. It will be seen that the reason for differentiating between financial
debts, which are secured, and operational debts, which are unsecured,
is in the relative importance of the two types of debts when it comes to
the object sought to be achieved by the Insolvency Code. We have
already seen that repayment of financial debts infuses capital into the
economy inasmuch as banks and financial institutions are able, with
the money that has been paid back, to further lend such money to
other entrepreneurs for their businesses. This rationale creates an
intelligible differentia between financial debts and operational debts,
147
which are unsecured, which is directly related to the object sought to
be achieved by the Code. In any case, workmen‘s dues, which are also
unsecured debts, have traditionally been placed above most other
debts. Thus, it can be seen that unsecured debts are of various kinds,
and so long as there is some legitimate interest sought to be protected,
having relation to the object sought to be achieved by the statute in
question, Article 14 does not get infracted. For these reasons, the
challenge to Section 53 of the Code must also fail.
EPILOGUE
85. The Insolvency Code is a legislation which deals with economic
matters and, in the larger sense, deals with the economy of the country
as a whole. Earlier experiments, as we have seen, in terms of
legislations having failed, ‗trial‘ having led to repeated ‗errors‘,
ultimately led to the enactment of the Code. The experiment contained
in the Code, judged by the generality of its provisions and not by so-
called crudities and inequities that have been pointed out by the
petitioners, passes constitutional muster. To stay experimentation in
things economic is a grave responsibility, and denial of the right to
experiment is fraught with serious consequences to the nation. We
have also seen that the working of the Code is being monitored by the
148
Central Government by Expert Committees that have been set up in
this behalf. Amendments have been made in the short period in which
the Code has operated, both to the Code itself as well as to
subordinate legislation made under it. This process is an ongoing
process which involves all stakeholders, including the petitioners.
86. We are happy to note that in the working of the Code, the flow of
financial resource to the commercial sector in India has increased
exponentially as a result of financial debts being repaid. Approximately
3300 cases have been disposed of by the Adjudicating Authority based
on out-of-court settlements between corporate debtors and creditors
which themselves involved claims amounting to over INR 1,20,390
crores. Eighty cases have since been resolved by resolution plans
being accepted. Of these eighty cases, the liquidation value of sixty-
three such cases is INR 29,788.07 crores. However, the amount
realized from the resolution process is in the region of INR 60,000
crores, which is over 202% of the liquidation value. As a result of this,
the Reserve Bank of India has come out with figures which reflect
these results. Thus, credit that has been given by banks and financial
institutions to the commercial sector (other than food) has jumped up
from INR 4952.24 crores in 2016-2017, to INR 9161.09 crores in 2017-
149
2018, and to INR 13195.20 crores for the first six months of 2018-
2019. Equally, credit flow from non-banks has gone up from INR
6819.93 crores in 2016-2017, to INR 4718 crores for the first six
months of 2018-2019. Ultimately, the total flow of resources to the
commercial sector in India, both bank and non-bank, and domestic and
foreign (relatable to the non-food sector) has gone up from a total of
INR 14530.47 crores in 2016-2017, to INR 18469.25 crores in 2017-
2018, and to INR 18798.20 crores in the first six months of 2018-2019.
These figures show that the experiment conducted in enacting the
Code is proving to be largely successful. The defaulter‘s paradise is
lost. In its place, the economy‘s rightful position has been regained.
The result is that all the petitions will now be disposed of in terms of
this judgment. There will be no order as to costs.
……………………J.
(R.F. Nariman)
……………………J.
New Delhi (Navin Sinha)
January 25, 2019
150

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IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL/APPELLATE JURISDICTION

WRIT PETITION (CIVIL) NO. 99 OF 2018

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

Union of India & Ors. …..Respondents

WRIT PETITION (CIVIL) NO. 100 OF 2018

WRIT PETITION (CIVIL) NO. 459 OF 2018

WRIT PETITION (CIVIL) NO. 598 OF 2018

WRIT PETITION (CIVIL) NO. 775 OF 2018

WRIT PETITION (CIVIL) NO. 822 OF 2018

WRIT PETITION (CIVIL) NO. 849 OF 2018

WRIT PETITION (CIVIL) NO. 1221 OF 2018

Signature Not Verified

1. The present petitions assail the constitutional validity of various

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

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

facts of any case.

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

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

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

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

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

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

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

and NCLAT are functioning under the Ministry of Corporate Affairs.

This again needs to be corrected immediately. A further technical

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

convenience and expediency as existed prior to appeals going to the

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

New Delhi, this would render the remedy inefficacious inasmuch as

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

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

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

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

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

that there is no real difference between financial creditors and

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

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

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

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

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

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

such classification will not only be discriminatory, but also manifestly

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

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

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

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

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

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

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

then argued that assuming that a valid distinction exists between

financial and operational creditors, there is hostile discrimination

against operational creditors. First and foremost, unless they amount

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

the Code are discriminatory and manifestly arbitrary in that operational

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

which has very important functions to perform in the resolution process

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