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TMI Blog2019 (1) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... valuate 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. The 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. 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 perta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution applicant. The reason is not far to see. A person who cannot service a debt for the aforesaid period is obviously a 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. Related party - Held that:- The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so fail. 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 - the 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adv., Mr. Abhinav Raghuvanshi, Adv., Mr. Anupam Prakash, Adv., Mr. utkarsh Maria, Adv., Mr. Sahil Monga, Adv., For M/s. Karanjawala Co., AOR, Mr. Bishwajit Dubey, Adv., Mr. Spandan Biswal, Adv., Mr. Manpreet Lamba, Adv., Ms. Srideepa Bhattacharyya, Adv., Ms. Surabhi Khattar, Adv., Mr. Prafful Goyal, Adv., For M/s. Cyril Amarchand Mangaldas, AOR, Mr. Anurag Kishore, AOR, Mr. Anurag Sharma, Adv., Mr. Mayank Pandey, AOR, Mr. Arvind Kumar Sharma, AOR, Mrs. S. Usha Reddy, AOR, M/s. Parekh Co., AOR, Mrs. Anil Katiyar, AOR, Mr. S. S. Shroff, AOR, Mr. O. P. Gaggar, AOR, Mr. E. C. Agrawala, AOR, Mr. Gurmeet Singh Makker, AOR, Mr. Shantanu Sagar, AOR And M/s. D.S.K. Legal, AOR 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ], 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utions 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such proceeding, which is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction 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 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 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage time to resolve insolvency is four years in India, compared to 0.8 years in Singapore and 1 year 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r judgments. In Madras Petrochem Ltd. and Anr. v. Board for Industrial and 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 31-72000, 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 shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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. New State Ice Co. v. Liebman, 285 U.S. 262, 310-311 (1932). 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88 (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 adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 econo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic issues. (emphasis supplied) xxx xxx xxx 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitutional validity must be upheld. (emphasis supplied) Likewise, in Bhavesh D. Parish v. Union of India, (2000) 5 SCC 471, this Court held: 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 largescale 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 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 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 TRE 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 Enf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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. 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 timebound manner for maximization of value of assets of such persons, to promote entrepreneurship, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eath 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. 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 Associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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. 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 FINANC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 : ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered 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. 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 arbitrarine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed legislation as arbitrary it has to be established that there is manifest arbitrariness. In order to be described as arbitrary, it must be shown that it was not reasonable and manifestly arbitrary. The expression arbitrarily means: in an unreasonable manner, as fixed or done capriciously or at pleasure, without adequate determining principle, not founded in the nature of things, non-rational, not done or acting according to reason or judgment, depending on the will alone. (emphasis in original) 101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 subclause,- (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 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-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided 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. (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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 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- (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 fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the authorised representative for any class of creditors shall not affect the validity of any decision taken by the committee. (4) The interim resolution professional shall provide the list of creditors in each class to the respective authorised representative appointed by the Adjudicating Authority. (5) The interim resolution professional or the resolution professional, as the case may be, shall provide an updated list of creditors in each class to the respective authorised representative as and when the list is updated. Clarification: The authorised representative shall have no role in receipt or verification of claims of creditors of the class he represents. (6) The interim resolution professional or the resolution professional, as the case may be, shall provide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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, involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important and are set out as under: 3. Definitions.-In this Code, unless the context otherwise requires,- xxx xxx xxx (9) core services means services rendered by an information utility for- xxx xxx xxx (c) authenticating and verifying the financial information submitted by a person; and xxx xxx xxx 214. Obligations of information utility.-For the purposes of providing core services to any person, every information utility shall- xxx xxx xxx (e) get the information received from various persons authenticated by all concerned parties before storing such information; xxx xxx xxx 31. It is clear from these Sections that information in respect of debts incurred by financial debtors is easily available through information utilities which, under the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 [ Information Utilities Regulations ], are to satisfy themselves that information provided as to the debt is accurate. This is done by giving notice to the corporate debtor who then has an opportunity to correct such information. 32. Apart from the record maintained by such utility, Form I appended to the Insolvency an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be set-off against the claim Details of any security held, the value of the security, and the date it was given Details 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 documents attached to this claim in order to prove the existence and non-payment of claim due to the financial creditor (Signature of financial creditor or person authorised to act on his behalf) [Please enclose the authority if this is being submitted on behalf of the financial creditor] Name in BLOCK LETTERS Position with or in relation to creditor Address of person signing * PAN number, passport, AADHAAR Card or the identity card issued by the Election Commission of India. DECLARATION I, [Name of claimant], currently residing at [insert address], do hereby declare and state as follows: 1. [Name of corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral 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. 38. In this context, it is important to differentiate between claim , debt and default . Each of these terms is separately defined as follows: 3. Definitions.-In this Code, unless the context otherwise requires,- xxx xxx xxx (6) claim means- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial 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 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king 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 opportunities that are available. The commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design of the Code is based on ensuring that all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution. Thus, it was agreed that once the CIRP is initiated, it is no longer a proceeding only between the applicant creditor and the corporate debtor but is envisaged to be a proceeding involving all creditors of the debtor. The intent of the Code is to discourage individual actions for enforcement and settlement to the exclusion of the general benefit of all creditors. (emphasis in original) 29.2 On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority, 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 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 togeth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FI 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: 20. Acceptance and receipt of information.-(1) An information utility shall accept information submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate 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; (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) tan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it. (2) The list of creditors shall be (a) available for inspection by the persons who submitted proofs of claim; (b) available for inspection by members, partners, directors and guarantors of the corporate debtor; (c) displayed on the website, if any, of the corporate debtor; (d) filed with the Adjudicating Authority; and (e) presented at the first meeting of the committee. 14. Determination of amount of claim.-(1) Where the amount claimed by a creditor is not precise due to any contingency or other reason, the interim resolution professional or the resolution professional, as the case may be, shall make the best estimate of the amount of the claim based on the information available with him. (2) The interim resolution professional or the resolution professional, as the case may be, shall revise the amounts of claims admitted, including the estimates of claims made under sub-regulation (1), as soon as may be practicable, when he comes across additional information warranting such revision. It is clear from a reading of these Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... replace one resolution professional with another, in case they are unhappy with his performance. Thus, the resolution professional is really a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority. CONSTITUTIONAL VALIDITY OF SECTION 29A. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Code. Keeping out 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 substandard, 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 substandard asset would then be NPA which has remained as such for a perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prudent to wait and allow industry experience to emerge for a few years before any amendment is made to the NPA holding period under section 29A(c). In relation to applicability of section 29A(c), the Committee also discussed that it must be clarified that the disqualification pursuant to section 29A(c) shall be applicable if such NPA accounts are held by the resolution applicant or its connected persons at the time of submission of the resolution plan to the RP. (emphasis in original) RELATED PARTY 73. A constitutional challenge has been raised against Section 29A(j) read with the definition of related party . Related party is defined in the Code as follows: 5. Definitions.-In this Part, unless the context otherwise req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch person; or (iv) provision of essential technical information to, or from, the corporate debtor; (24A) related party , in relation to an individual, means- (a) a person who is a relative of the individual or a relative of the spouse of the individual; (b) a partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the individual is a partner; (c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual; (d) a private company in which the individual is a director and holds along with his relatives, more than two per cent. of its share capital; (e) a public company in which the individual is a director and holds along with relatives, more than two per cent. of its paid-up share capital; (f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual; (g) a limited liability partnership or a partnership firm whose partners or employees in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 convi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 showcause 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntentions 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: 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 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 agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce, 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 twentyfour 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; (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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