SWISS RIBBONS PVT. LTD. & ANR. v. UNION OF INDIA & ORS.

, 2019 4 SCC
17, 2 Judges- R. F. NARIMAN AND NAVIN SINHA, JJ.
The present petitions assail the constitutional validity of various provisions of the
Insolvency and Bankruptcy Code, 2016 [“Insolvency Code” or “Code”].

UNCITRAL Legislative Guide on Insolvency (hereinafter “UNCITRAL Guidelines“) was a significant

benchmark in setting the principles of the new insolvency law in India

report of the Bankruptcy Law Reforms Committee Report (hereinafter “BLRC

Report”) emphasized on structuring an insolvency legislative framework that aimed to achieve
insolvency and bankruptcy issues efficiently.

E. The Validity of Section 12A Upheld

Section 12A of IBC which deals with the procedure for withdrawal of
applications[32] was challenged in the instant case on the ground that it permits
CoC to dominate the proceedings by conferring on it uncanalised and unbridled
powers exercising which it can reject such withdrawal if not agreed by at least
ninety percent of the voting participants of CoC. Furthermore, there is no
provision permitting the withdrawal of application after its admission by the
adjudicating authority.

The Apex Court observed that once the insolvency proceedings are triggered
under section 7 to 9 of IBC through creditor’s petition, the proceeding becomes
collective proceeding and the same may not be axed by an individual creditor.
Moreover, the Supreme Court made it quite lucid that notwithstanding the phase
where NCLT been sought for withdrawal or settlement before the constitution of
CoC it may allow or disallow the application for same under Rule 11 of NCLT, Rules
2016.[33] The Apex Court also clarified that in applicable conditions that are given
that CoC unpragmatically discards a fair and impartial settlement or withdrawal
claim, NCLT can set aside the decree of CoC.

H. Section 29A is Prospective and Constitutionally Valid

Since its inception the Code have been continuously under the judicial scrutiny
and requirement of modifications is perceived by Courts in a myriad of cases. In
November 2017, Section 29A was added to the Code which provides for substantial
disqualifications for resolution applicant.[37] For instance, if a person is a willful
defaulter under the provisions of RBI Regulation Act, 1949, is an undischarged
insolvent, has been convicted for an offence punishable with imprisonment of
more than 2 years, disqualified under Companies Act 2013 from acting as a
director etc., would be disqualified from being a resolution applicant. It was
argued that section 29A has retrospective application and thus it impairs the
bestowed rights of former promoters to be a participant in the process of recovery
and therefore leads to a multiplicity of pending litigations and delay in the
resolution process.

A blanket ban on the eligibility of promoters of the corporate defaulter to act as a

resolution applicant without embodying exceptions for the efficient promoters
would render the Section arbitrary per se. Barring the relatives of the erstwhile
promoters under Section 29A(j),[38] irrespective of the fact that they are barely
associated with the business of the promoter is wholly unreasonable.

The Apex Court for this matter relied upon its ruling in the landmark case
of Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors.[39] wherein the
Apex Court observed that the resolution applicants by section 29A(c) have no
bestowed right to put resolution plans.[40] Therefore, their conferred rights were
not swayed with the retrospective application of Section 29A of IBC. A statue
cannot be said to stem retrospective forces simply for it alters existing rights or
for a portion of requirements for its action is derived from a time precursor to its
passing.

Moreover, the Court answered on the contention relating to the arbitrariness of

the Section as it imposes a blanket ban on promoters altogether and lumps both
unethical and sincere promoter by stating it did not find argument pragmatic that
the section reads unequal with equals as disqualification condition is not based
only on malfeasance. The Court stated that it is very much cogent to exclude the
person who is unable to service his own debts from proposing a resolution plan.
Pertaining to this Section, it was also argued that the resolution process aims at
maximization of asset and section 29A is contrary to the same. The Apex Court
observed that the bar of the disqualified person continues over resolution as well
as liquidation. Further, as far as the argument related to the ineligibility of the
relatives is concerned, the Supreme Court stated that restriction mentioned under
Section 29A(j) is applicable only when the relative essentially have a business
connection with the resolution applicant.

Background:
A. Need for the Code:
1. 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:
2. In relation to the conflicts between creditors and debtors in the resolution of
insolvency, 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 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.
3. 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.
4. 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.
5. In Madras Petrochem Ltd. and Anr. v. Board for Industrial and Financial
Reconstruction and Ors., (2016) 4 SCC 1, the Court found that there was
inordinate delay in the decision making process under SICA and hence the Court
opined that the Act be repealed and the provisions thereunder for revival and
rehabilitation should be telescoped into the structure of the Companies Act, 1956
itself.

6. In Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC 407, this
court held that 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.

7. Further, this Court in ArcelorMittal India Private Limited v. Satish Kumar

Gupta and Ors observed that Previous legislation, namely, the Sick Industrial
Companies (Special Provisions) Act, 1985, and the 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.

8. 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. 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.
9. The Preamble of the Code provides that- 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.” 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 not up to the mark. Even in liquidation, the
liquidator can sell the business of the corporate debtor as a going concern.
10. 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 its entrepreneurial skills, resuscitate the
corporate debtor to achieve all these ends.

B. Circuit Benches:
11. In Madras Bar Association v. Union of India, (2014) 10 SCC 1, while
examining the validity of Section 5 of the NTT Act, it was held that- 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. 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.” The Attorney General assured 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.
12. As of January 2021, five new Benches of NCLT have been announced at Jaipur,
Cuttack, Kochi, Indore and Amaravati, bringing the total number of Benches to
16 (including the Principal Bench). The NCLAT now functions at a strength of
5 courts, 4 at the Principal Bench in New Delhi and the 5th at NCLAT, Chennai.

C. THE TRIBUNALS ARE FUNCTIONING UNDER THE WRONG

MINISTRY
13. In Union of India v. R. Gandhi, President, Madras Bar Association (2010) 11
SCC 1, it was held that 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. Accordingly, the court directed that the
Union of India follow, both in letter and spirit, the judgment of this Court.
D. CLASSIFICATION BETWEEN FINANCIAL CREDITOR AND
OPERATIONAL CREDITOR:
14. 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.
15. In Shyara Bano, this Hon’ble Court held: 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.
16. In Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India (1985) 1
SCC 641, it was held that 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.
17. 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.
18. 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 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.
19. 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.
20. 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.
21. 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 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 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. 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 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.
22. This Court, in Innoventive Industries stated as follows: “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 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. 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 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. 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
preexisting—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. 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.
23. Section 3(9)(c) read with Section 214(e) of the Code are important. Section 3 (9)
“core services” means services rendered by an information utility for— (c)
authenticating and verifying the financial information submitted by a person; and
xxx xxx xxx” Section 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”. 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.
Apart from the record maintained by such utility, Form I appended to the
Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,
2016, provides additional sources which evidence a financial debt, which are:
(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.
24. 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. Section 65 provides for penalty
against 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. Also, punishment is prescribed under
Section 75 for furnishing false information in an application made by a financial
creditor which further deters a financial creditor from wrongly invoking the
provisions of Section 7. 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. Equally, counterclaims 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.
25. The trigger for a financial creditor’s application is non-payment of dues when
they arise under loan agreements. 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
for this shift in legislative policy are: 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.
26. 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 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 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.
27. 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 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
28. 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
liquidation value.
29. Regulation 38 provides for 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” This 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.Therefore operational creditors
are not 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.

Follow up:
In Indus Biotech Private Limited v. Kotak India Venture (Offshore)
Fund (earlier known as Kotak India Venture Limited) & Ors., the
Court relied upon Vidya Drolia to hold that a dispute would be
non arbitrable when a proceeding is in rem and an IBC
proceeding would be in rem only when the petition is admitted.
The Bench “…clarified that in any proceeding which is pending
before the Adjudicating Authority under Section 7 of IB Code, if
such petition is admitted upon the Adjudicating Authority recording
the satisfaction with regard to the default and the debt being due
from the corporate debtor, any application under Section 8 of the
Act, 1996 made thereafter will not be maintainable. In a situation
where the petition under Section 7 of IB Code is yet to be admitted
and, in such proceedings, if an application under Section 8 of the
Act, 1996 is filed, the Adjudicating Authority is duty bound to first
decide the application under Section 7 of the IB Code by recording
a satisfaction with regard to there being default or not, even if the
 application under Section 8 of Act, 1996 is kept along for
consideration. In such event, the natural consequence of the
consideration made therein on Section 7 of IB Code application
would befall on the application under Section 8 of the Act, 1996.”

E. Challenge to Section 12A:

30. Section 12A was inserted by the Insolvency and Bankruptcy (Second
Amendment) Act, 2018 with retrospective effect from 06.06.2018 and provides
for withdrawal of application admitted under Section 7, 9 or 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. 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. Further, Regulation 30A of
the CIRP Regulations provides for 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, 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.
31. 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. 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. 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. 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 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

F. EVIDENCE PROVIDED BY PRIVATE INFORMATION UTILITIES:

ONLY PRIMA FACIE EVIDENCE OF DEFAULT:
32. The purpose of setting up 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 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.” 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: “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.”
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 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, 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.

G. Powers of Resolution professional:

33. The resolution professional is given administrative as opposed to quasi-judicial
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 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. 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. Unlike the liquidator, the resolution professional cannot
act in a number of matters without the approval of the committee of creditors
under Section 28 of the Code, which can, by a two-thirds majority, replace one
resolution professional with another, in case they are unhappy with his
performance. Thus, the resolution professional is really a facilitator of the
resolution process, whose administrative functions are overseen by the
committee of creditors and by the Adjudicating Authority.

H. Validity of Section 29A:

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. 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 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. 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.
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. 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.” 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……”
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.
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 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.
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 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
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.

Further, it is a wellknown 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 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. 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 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 through any other person on his behalf”.
All such property is liable to be forfeited. 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 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.
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 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.

EXEMPTION OF MICRO, SMALL, AND MEDIUM ENTERPRISES

FROM SECTION 29A
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.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.” Section 240A has been inserted in the Code with retrospective effect
which provides that 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.

SECTION 53 OF THE CODE DOES NOT VIOLATE ARTICLE 14. 82.

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.” “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 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.” 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, 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.

I. Courts not to interfere with economic policy:

34. The Lochner doctrine was followed in New State Ice Co. v. Liebman, 285 U.S.
262 (1932), where 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. This Court has the power to prevent an experiment. We may
strike down the statute which embodies it on the ground that, in our opinion, the
measure is arbitrary, capricious or unreasonable. But in the exercise of this high
power, we must be ever on our guard, lest we erect our prejudices into legal
principles.
35. In R.K. Garg v. Union of India, (1981) 4 SCC 675, the SC held: “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. 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.
36. In Bhavesh D. Parish v. Union of India, (2000) 5 SCC 471, this Court held:
“matters of economic policy 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. 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.”
37.