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

- **Citation:** [2019] 3 S.C.R. 535
- **Court:** Supreme Court of India
- **Decided:** 2019-01-25
- **Bench:** R. F. Nariman, Navin Sinha
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/swiss-ribbons-pvt-ltd-anr-v-union-of-india-ors-33596
- **Pages:** 128

## Headnote

Insolvency and Bankruptcy Code, 2016:
Constitutional validity of - Held: Provisions of the Code passes
constitutional muster.
ss. 5(7), 5(8), 5(20), 7(1), 7(4), 7(5), 8 and 9 - Classification
between financial creditor and operational creditor - Whether
discriminatory, arbitrary, and violative of Art. 14 - Held: 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 - Thus,
there is an intelligible differentia between the two which has a direct
relation to the objects sought to be achieved by the Code - Thus,
there is no discrimination - Constitution of India - Art. 14.
ss. 3, 3(9)(c), 214(e), 60, 65, 75, 7, 8 and 9 - Notice, hearing,
and set-off or counterclaim qua financial debts - Triggering of
insolvency resolution process by financial creditors and operational
creditors - Submission that the difference in the triggering process
at behest of financial creditors and operational creditors is
discriminatory and arbitrary - Held: A financial creditor has to
prove "default" as opposed to an operational creditor who merely
"claims" a right to payment of a liability or obligation in respect of
a debt which may be due - In view thereof, the differentiation in the
triggering of insolvency resolution process by financial creditors
u/s. 7 and by operational creditors u/ss. 8 and 9 becomes clear -
Insolvency and Bankruptcy Board of India (Information Utilities)
Regulations, 2017 - Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 - Form I.
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ss. 21, 24, 28 and 30(2)(b) r/w s. 31 - Operational creditors
- Right to vote in the committee of creditors - Plea that operational
creditor do not have even a single vote in committee of creditors -
Held: Financial creditors are best equipped to assess viability and
feasibility of the business of the corporate debtor and 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 -
Resolution plan cannot pass muster u/s. 30(2)(b) rw s. 31 unless a
minimum payment is made to operational creditors, being not less
than liquidation value - Regulation 38 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 - Thus, the
operational creditors are not discriminated against nor Art. 14 has
been infracted either on the ground of equals being treated unequally
or on the ground of manifest arbitrariness - Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 - Regulation 38 -
Constitution of India - Art. 14.
ss.12A(as amended) and 60 - s. 12A wherein withdrawal of
application admitted u/ss 7, 9 or 10, with approval of ninety per
cent voting shares of the committee of creditors - s. 12A if violative
of Art. 14 - Held: s. 12A is not violative of Art. 14 - ILC Report has
explained that 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 -
In any case, the figure of ninety per cent, in the absence of anything
further to show that it is arbitrary, must pertain to the domain of
legislative policy - Also, 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 u/s. 60 -
Insolvency and Bankruptcy (Second Amendment) Act, 2018 -
Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Persons) Regulat

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535
[2019] 3 S.C.R. 535
SWISS RIBBONS PVT. LTD. & ANR.
v.
UNION OF INDIA & ORS.
(Writ Petition (Civil) No. 99 of 2018)
JANUARY 25, 2019
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
Insolvency and Bankruptcy Code, 2016:
Constitutional validity of - Held: Provisions of the Code passes
constitutional muster.
ss. 5(7), 5(8), 5(20), 7(1), 7(4), 7(5), 8 and 9 - Classification
between financial creditor and operational creditor - Whether
discriminatory, arbitrary, and violative of Art. 14 - Held: 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 - Thus,
there is an intelligible differentia between the two which has a direct
relation to the objects sought to be achieved by the Code - Thus,
there is no discrimination - Constitution of India - Art. 14.
ss. 3, 3(9)(c), 214(e), 60, 65, 75, 7, 8 and 9 - Notice, hearing,
and set-off or counterclaim qua financial debts - Triggering of
insolvency resolution process by financial creditors and operational
creditors - Submission that the difference in the triggering process
at behest of financial creditors and operational creditors is
discriminatory and arbitrary - Held: A financial creditor has to
prove "default" as opposed to an operational creditor who merely
"claims" a right to payment of a liability or obligation in respect of
a debt which may be due - In view thereof, the differentiation in the
triggering of insolvency resolution process by financial creditors
u/s. 7 and by operational creditors u/ss. 8 and 9 becomes clear -
Insolvency and Bankruptcy Board of India (Information Utilities)
Regulations, 2017 - Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 - Form I.
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ss. 21, 24, 28 and 30(2)(b) r/w s. 31 - Operational creditors
- Right to vote in the committee of creditors - Plea that operational
creditor do not have even a single vote in committee of creditors -
Held: Financial creditors are best equipped to assess viability and
feasibility of the business of the corporate debtor and 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 -
Resolution plan cannot pass muster u/s. 30(2)(b) rw s. 31 unless a
minimum payment is made to operational creditors, being not less
than liquidation value - Regulation 38 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 - Thus, the
operational creditors are not discriminated against nor Art. 14 has
been infracted either on the ground of equals being treated unequally
or on the ground of manifest arbitrariness - Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 - Regulation 38 -
Constitution of India - Art. 14.
ss.12A(as amended) and 60 - s. 12A wherein withdrawal of
application admitted u/ss 7, 9 or 10, with approval of ninety per
cent voting shares of the committee of creditors - s. 12A if violative
of Art. 14 - Held: s. 12A is not violative of Art. 14 - ILC Report has
explained that 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 -
In any case, the figure of ninety per cent, in the absence of anything
further to show that it is arbitrary, must pertain to the domain of
legislative policy - Also, 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 u/s. 60 -
Insolvency and Bankruptcy (Second Amendment) Act, 2018 -
Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Persons) Regulations, 2016 - Reg 30A.
 s. 210 - Private Information Utilities - Evidence provided
by private information utilities - Plea that Private Information
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Utilities not governed by proper norms and evidence of loan default
in records of such utility not conclusive evidence - Held: Regulations
20 and 21 makes 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 and an information utility shall expeditiously
undertake the process of authentication and verification of
information - Evidence provided by private information utilities is
only prima facie evidence of default which is rebuttable by the
corporate debtor - Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations,
2016 - Regulations 20 and 21
ss. 18, 41, 42 and 28 - Resolution professional - Adjudicatory
power, under the Code and the Regulations - Held: It is clear from
the Code as well as the Regulations that the resolution professional
has no adjudicatory powers - Resolution professional is given
administrative as opposed to quasi-judicial powers - 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 - 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 - Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 - Regulations 10, 12, 13,
14, and 35A.
s. 29A(as amended) - Retrospective application - Submission
that vested rights of erstwhile promoters to participate in the recovery
process of a corporate debtor have been impaired by retrospective
application of s. 29A - Held: A statute is not retrospective merely
because it affects existing rights or merely because a part of the
requisites for its action is drawn from a time antecedent to its passing
- Resolution applicant has no vested right for consideration or
approval of its resolution plan - By application of s. 29A, no vested
right is taken away - Since a resolution applicant who applies u/s.
29A(c) has no vested right to apply for being considered as a
resolution applicant, submission cannot be accepted.
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s. 29A and s.35(1)(f) proviso - s. 29A if restricted to
malfeasance - Submission that s. 29A puts a blanket ban on
participation of all promoters of corporate debtors, without any
mechanism to weed out the unscrupulous as against the efficient
manager but who have not been able to pay off their debts due to
other reasons - Held: s. 29A not restricted to malfeasance -
Legislative purpose which permeates s. 29A continues to permeate
the Section when it applies not merely to resolution applicants, but
to liquidation also.
s. 29(A)(c) - One year period in s. 29A - Non-performing
asset - Plea that u/s. 29A(c), a person's account may be classified
as a non- performing asset even though he is not a wilful defaulter;
and that the period of one year referred in clause (c) is wholly
arbitrary and without any basis either in rationality or in law -
Held: A person is a defaulter when an installment 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, this grace period is given to such person to pay off the
debt - If a person is unable to repay a loan taken, in whole or in
part, within this period of one year and three months, he would be
ineligible to become a resolution applicant - This legislative policy
cannot be found fault with - Neither can the period of one year be
found fault with.
ss. 29A(j) and 5(24A) - Related party - Plea that persons
who may be relatives of erstwhile promoters are debarred from
becoming a resolution applicant - Held: 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 s. 5(24A) show that such persons must be "connected"
with the resolution applicant within the meaning of s. 29A(j) - Thus,
the said categories of persons who are collectively mentioned 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 u/s. 29A(j) - Explanation I clause (ii) to s. 29A(j) makes
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
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implementation of a resolution plan - Thus, 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.
s. 29A - Exemption of micro, small and medium enterprises
from s. 29A - Justification of - Held: Justified - Rationale for
excluding such industries from the eligibility criteria laid down in
ss. 29A(c) and 29A(h) is because qua such industries, other
resolution applicants may not be forthcoming, which then will
inevitably lead not to resolution, but to liquidation - Micro, Small
and Medium Enterprises Development Act, 2006 - s. 7.
s. 53 - Distribution of assets - Submission that in the event of
liquidation, operational creditors would never get anything as they
rank below all other creditors, including other unsecured creditors
who happen to be financial creditors, thus s. 53(1)(f) discriminatory
and arbitrary thus, violative of Art. 14 - Held: s. 53 does not violate
Art. 14 - 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 - So long as there is some
legitimate interest sought to be protected, having relation to the
object sought to be achieved by the statute, Art. 14 does not get
infracted - Constitution of India - Art. 14.
Object and reasons for the Code - Explained.
Enactment and working of the Code - Explained.
Companies Act, 2013: s. 412 - Selection of members of
tribunal and appellate tribunal - Plea that appointment of members
of the NCLT and the NCLAT contrary to Madras Bar Association
(III)'s case - s. 412 whereby members of the tribunal and appellate
tribunal to be selected, two judicial members of the Selection
Committee get outweighed by three bureaucrats - Held: s. 412 has
been amended by the Companies Amendment Act, 2017 - Present
members of NCLT and NCLAT have been appointed by the Selection
Committee, reconstituted in compliance with the direction of this
Court.
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Judiciary: NCLAT Bench - Creation of Circuit Benches -
Submission that NCLAT Bench has a seat only at New Delhi and is
contrary to the judgment in Madras Bar Association (II) case -
Held: In view of the assurance by the Attorney General that Circuit
Benches would be established soon, issuance of direction to Union
of India to set up Circuit Benches of the NCLAT within the stipulated
period.
Constitution of India: Art. 77 - Submission that the tribunalsNCLT and NCLAT are functioning under the wrong Ministry-Ministry
of Corporate Affairs, however, as per the Madras Bar Association(I)
case the administrative support for all the tribunals should be from
the Ministry of Law and Justice - Held: Rules of business being
mandatory in nature and having to be followed, are to be followed
by the executive branch of the Government - However, this Court is
being bound by the Madras Bar Association(I), the Union of India
to follow the judgment, both in letter and spirit.
Disposing of the petitions, the Court
HELD:
CLASSIFICATION BETWEEN FINANCIAL CREDITOR
AND
OPERATIONAL
CREDITOR
NEITHER
DISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OF
ARTICLE 14
1.1 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. A
legislation can be struck down as being manifestly arbitrary. [Para
20, 21][586-A-C]
1.2 A perusal of the definition of "financial creditor" and
"financial debt" makes it clear that a financial debt is a debt
together with interest, if any, which is disbursed against the
consideration for time value of money. Money that is borrowed
or raised in any of the manners prescribed in Section 5(8) of the
Insolvency and Bankruptcy Code, 2016 or otherwise, as Section
5(8) is an inclusive definition. On the other hand, an "operational
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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. [Para 23][594-B-C]
1.3 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. Under Section 7(4), the
Adjudicating Authority shall, within the prescribed period,
ascertain the existence of a default on the basis of evidence
furnished by the financial creditor; and under Section 7(5), the
Adjudicating Authority has to be satisfied that a default has
occurred, when it may, by order, admit the application, or dismiss
the application if such default has not occurred. On the other
hand, under Sections 8 and 9, an operational creditor may, on the
occurrence of a default, deliver a demand notice which must then
be replied to within the specified period. What is important is
that at this stage, if an application is filed before the Adjudicating
Authority for initiating the corporate insolvency resolution
process, the corporate debtor can prove that the debt is disputed.
When the debt is so disputed, such application would be rejected.
[Para 24][594-D-F]
1.4 It is clear that most financial creditors, particularly banks
and financial institutions, are secured creditors whereas most
operational creditors are unsecured, payments for goods and
services as well as payments to workers not being secured by
mortgaged documents and the like. The 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
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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. [Para 27][599-G-H; 600-A-D]
1.5 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. [Para 28][600F-G]
Shayara Bano v. Union of India (2017) 9 SCC 1 :
[2017] 7 SCR 797; Gopal Jha v. The Hon'ble Supreme
Court of India [2018] 14 SCALE 286; Indian Young
Lawyers Associations and Ors. v. State of Kerala and
Ors. 2018 (13) SCALE 75; Joseph Shine v. Union of
India 2018 (11) SCALE 556; K.S. Puttaswamy v. Union
of India (2019) 1 SCC 1; Navtej Singh Johar and Ors.
v. Union of India (2018) 10 SCC 1; Lok Prahari v.
State of Uttar Pradesh and Ors. (2018) 6 SCC 1 : [2018]
6 SCR 1076; Nikesh Tarachand Shah v. Union of India
and Ors. (2018) 11 SCC 1 : [2017] 12 SCR 358 -
referred to.
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NOTICE,
HEARING,
AND
SET-OFF
OR
COUNTERCLAIM QUA FINANCIAL DEBTS.
2.1 It is clear from Section 3 (a) (c) read with Section 214
(e) of the Code that information in respect of debts incurred by
financial debtors is easily available through information utilities
which, under the Insolvency and Bankruptcy Board of India
(Information Utilities) Regulations, 2017 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, makes clear the other sources which evidence a financial
debt. [Paras 31, 32][603-F-H]
2.2 A conjoint reading of Rule 4(3), 11, 34 and 37 of the
National Company Law Tribunal Rules, 2016 makes it clear that
at the stage of the Adjudicating Authority's satisfaction under
Section 7(5) of the Code, the corporate debtor is served with a
copy of the application filed with the Adjudicating Authority and
has the opportunity to file a reply before the said authority and
be heard by the said authority before an order is made admitting
the said application. In order to protect the corporate debtor from
being dragged into the corporate insolvency resolution process
malafide, the Code prescribes penalties. 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. [Paras 33, 34][606-C, D, G]
2.3 Insofar as set-off and counterclaim is concerned, a setoff 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 u/s.60. Equally, counterclaims,
by their very definition, are independent rights which are not
taken away by the Code but are preserved for the stage of
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admission of claims during the resolution plan. Also, there is
nothing in the Code which interdicts the corporate debtor from
pursuing such counterclaims in other judicial fora. [Paras 35, 36]
[607-B, C, F]
2.4 The trigger for a financial creditor's application is nonpayment of dues when they arise under loan agreements. It is for
this reason that Section 433(e) of the Companies Act, 1956 has
been repealed by the Code and a change in approach has been
brought about. Legislative policy now is to move away from the
concept of "inability to pay debts" to "determination of default".
The said shift enables the financial creditor to prove, based upon
solid documentary evidence, that there was an obligation to pay
the debt and that the debtor has failed in such obligation. Four
policy reasons have been stated by the Solicitor General for this
shift in legislative policy. First is predictability and certainty.
Secondly, the paramount interest to be safeguarded is that of the
corporate debtor and admission into the insolvency resolution
process does not prejudice such interest but, in fact, protects it.
Thirdly, in a situation of financial stress, the cause of default is
not relevant; protecting the economic interest of the corporate
debtor is more relevant. Fourthly, the trigger that would lead to
liquidation can only be upon failure of the resolution process.
[Para 37][610-F-H; 611-A-B]
2.5 Whereas a "claim" gives rise to a "debt" only when it
becomes "due", a "default" occurs only when a "debt" becomes
"due and payable" and is not paid by the debtor. It is for this
reason that a financial creditor has to prove "default" as opposed
to an operational creditor who merely "claims" a right to payment
of a liability or obligation in respect of a debt which may be due.
When this aspect is borne in mind, the differentiation in the
triggering of insolvency resolution process by financial creditors
under Section 7 and by operational creditors under Sections 8
and 9 of the Code becomes clear. [Para 38][611-H; 612-A-B]
Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC
407 : [2017] 8 SCR 33 - referred to.
3.1 SECTIONS 21 AND 24 AND ARTICLE 14:
OPERATIONAL CREDITORS HAVE NO VOTE IN THE
COMMITTEE OF CREDITORS.
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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
committee of creditors is required to evaluate the resolution plan
on the basis of feasibility and viability. Once the resolution plan
is approved by the committee of creditors and thereafter by the
Adjudicating Authority, the said plan is binding on all
stakeholders. 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
BLRC Report makes this abundantly clear. [Paras 43, 44][620E-F; 621-E; 622-A-C]
3.2 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 u/s.30(2)(b) rw Section
31 unless a minimum payment is made to operational creditors,
being not less than liquidation value. Regulation 38 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.
Thus, it cannot be said that the operational creditors are
discriminated against or that Article 14 has been infracted either
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on the ground of equals being treated unequally or on the ground
of manifest arbitrariness. [Paras 46-48][623-C-D; 624-B-C]
SECTION 12A IS NOT VIOLATIVE OF ARTICLE 14
4.1 It is clear that once the Code gets triggered by
admission of a creditor's petition under Sections 7 to 9, the
proceeding that is before the Adjudicating Authority, being a
collective proceeding, is a proceeding in rem. Being a proceeding
in rem, it is necessary that the body which is to oversee the
resolution process must be consulted before any individual
corporate debtor is allowed to settle its claim. A question arises
as to what is to happen before a committee of creditors is
constituted (as per the timelines that are specified, a committee
of creditors can be appointed at any time within 30 days from the
date of appointment of the interim resolution professional). It is
made 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 would be decided after hearing all
the concerned parties and considering all relevant factors on the
facts of each case. [Para 52][626-E-H]
4.2 The main thrust against the provision of Section 12A is
the fact that ninety per cent of the committee of creditors has to
allow withdrawal. This high threshold has been explained in the
ILC Report as all financial creditors have to put their heads
together to allow such withdrawal as, ordinarily, an omnibus
settlement involving all creditors ought, ideally, to be entered
into. This explains why ninety per cent, which is substantially all
the financial creditors, have to grant their approval to an individual
withdrawal or settlement. In any case, the figure of ninety per
cent, in the absence of anything further to show that it is arbitrary,
must pertain to the domain of legislative policy, which has been
explained by the Report. Also, it is clear, that under Section 60 of
the Code, the committee of creditors do not have the last word
on the subject. If the committee of creditors arbitrarily 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. Thus, the Section 12A also passes constitutional
muster. [Para 53][627-A-D]
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Brilliant Alloys Pvt. Ltd. v. Mr. S. Rajagopal & Ors.
SLP (Civil) No. 31557/2018 dated 14.12.2018 -
referred to.
EVIDENCE PROVIDED BY PRIVATE INFORMATION
UTILITIES: ONLY PRIMA FACIE EVIDENCE OF DEFAULT
5. 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. The said
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, as
has been conceded by the Attorney General, is only prima facie
evidence of default, which is rebuttable by the corporate debtor,
makes it clear that the challenge based on this ground must also
fail. [Paras 56, 57][628-E; 629-D-E]
RESOLUTION
PROFESSIONAL
HAS
NO
ADJUDICATORY POWERS.
6. It is clear from a reading of the Code as well as the
Regulations that the resolution professional has no adjudicatory
powers. Section 18 of the Code lays down the duties of an interim
resolution professional. Under the CIRP Regulations, the
resolution professional has to vet and verify claims made, and
ultimately, determine the amount of each claim. It is clear from a
reading of Regulations 10, 12, 13, 14 and 15 that 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. It is clear from Sections 41 and 42
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that when the liquidator "determines" the value of claims
admitted under Section 40, such determination is a "decision",
which is quasi-judicial in nature, and which can be appealed against
to the Adjudicating Authority under Section 42 of the Code. 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. [Paras 58-61][629F; 631-C; 632-F; 633-C, E-G]
CONSTITUTIONAL VALIDITY OF SECTION 29A:
RETROSPECTIVE APPLICATION
7. A statute is not retrospective merely because it affects
existing rights; nor is it retrospective merely because a part of
the requisites for its action is drawn from a time antecedent to its
passing. In ArcelorMittal's case, this Court has observed that a
resolution applicant has no vested right for consideration or
approval of its resolution plan. This being the case, it is clear
that no vested right is taken away by application of Section 29A.
Since a resolution applicant who applies under Section 29A(c)
has no vested right to apply for being considered as a resolution
applicant, this point is of no avail. [Paras 64, 65][640-E-F;
641-B, G]
ArcelorMittal India Private Limited v. Satish Kumar
Gupta and Ors. [2018] 13 SCALE 381 - followed.
Ritesh Agarwal and Anr. v. SEBI and Ors. (2008) 8 SCC
205 : [2008] 8 SCR 553; K.S. Paripoornan v. State of
Kerala and Ors. (1994) 5 SCC 593 : [1994] 3 Suppl.
SCR 405; Darshan Singh v. Ram Pal Singh and Anr.
(1992) Supp 1 SCC 191 : [1990] 3 Suppl. SCR 212;
Pyare Lal Sharma v. Managing Director and Ors. (1989)
3 SCC 448 : [1989] 3 SCR 428; P.D. Aggarwal and
Ors. v. State of U.P. and Ors. (1987) 3 SCC 622 : [1987]
3 SCR 427; Govind Das and Ors. v. Income Tax Officer
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and Anr. (1976) 1 SCC 906 : [1976] 3 SCR 44 -
distinguished.
Chitra Sharma v. Union of India 2018 (9) SCALE 490;
State Bank's Staff Union (Madras Circle) v. Union of
India and Ors. (2005) 7 SCC 584 : [2005] 3 Suppl.
SCR 200 - referred to.
SECTION
29A(C)
NOT
RESTRICTED
TO
MALFEASANCE
8. 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. Thus, this plea is
also rejected. [Para 69][643-D-F]
THE ONE-YEAR PERIOD IN SECTION 29A(C) AND
NPAS
9. 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 clear from clause 4 of the RBI Master
Circular 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 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,
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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. Prior to this one-year-three-month period, banks and
financial institutions do not declare the accounts of corporate
debtors to be NPAs. As a matter of practice, they first try and
resolve disputes with the corporate debtor, after which, the
corporate debtor's account is declared NPA. As a matter of
legislative policy therefore, quite apart from malfeasance, if a
person is unable to repay a loan taken, in whole or in part, within
this period of one year and three months (which, in any case, is
after an earlier period where the corporate debtor and its financial
creditors sit together to resolve defaults that continue), it is stated
to be ineligible to become a resolution applicant. The reason is
not far to see. A person who cannot service a debt for the said
period is obviously a person who is ailing itself. The legislative
policy, therefore, is that a person who is unable to service its
own debt beyond the grace period 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. [Paras 70, 71][643-G; 646-A-G]
RELATED PARTY
10.1 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
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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.
[Para 75][654-F-H; 655-A]
Attorney General for India and Ors. v. Amratlal
Prajivandas and Ors. (1994) 5 SCC 54 : [1994] 1 Suppl.
SCR 1 - referred to.
10.2 It was submitted that the expression "connected
person" in Explanation I, clause (ii) to Section 29A(j) cannot
possibly refer to a person who may be in management or control
of the business of the corporate debtor in future. This would be
arbitrary as the explanation would then apply to an indeterminate
person. This submission cannot be accepted as Explanation I
seeks to make it clear that if a person is otherwise covered as a
"connected person", this provision would also cover a person
who is in management or 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. [Para 76][655-B-D]
EXEMPTION OF MICRO, SMALL, AND MEDIUM
ENTERPRISES FROM SECTION 29A
11. 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. The rationale of ILC
Report of 2018 for excluding such industries from the eligibility
criteria laid down in Section 29A(c) and 29A(h) is because qua
such industries, other resolution applicants may not be
forthcoming, which then will inevitably lead not to resolution, but
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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. It can thus, be seen that
when the Code has worked hardship to a class of enterprises,
the Committee constituted by the Government, in overseeing
the working of the Code, has been alive to such problems, and
the Government in turn has followed the recommendations of
the Committee in enacting Section 240A. This is an important
instance of how the executive continues to monitor the application
of the Code, and exempts a class of enterprises from the
application of some of its provisions in deserving cases.