Swiss Ribbons Pvt. Ltd. & Anr. vs Union of India & Ors.

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 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. 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 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.

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 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 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.

NOTICE,

HEARING,

AND

SET-OFF

COUNTERCLAIM QUA FINANCIAL DEBTS.

OR

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 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.

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 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]

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

ADJUDICATORY POWERS.

HAS

NO

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 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 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

MALFEASANCE

29A(C)

NOT

RESTRICTED

TO

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, 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 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 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. This and other amendments that are repeatedly being made to the Code, and to subordinate legislation made thereunder, based upon Committee Reports which are looking into the working of the Code, would also show that the legislature is alive to serious anomalies that arise in the working of the Code and steps in to rectify them. [Paras 78, 80 and 81][655-F; 657-B-C; 658-C-E] SECTION 53 OF THE CODE DOES NOT VIOLATE

ARTICLE 14.

12. 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. Repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts, which are unsecured, which is directly related to the object sought to be achieved by the Code. In any case, workmen’s dues, which are also unsecured debts, have traditionally been placed above most other debts. Thus, it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted. Thus, the challenge to s. 53 that it is discriminatory and manifestly arbitrary cannot be accepted. [Para 84][661-B-D]

13.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, in terms of legislations having failed, ‘trial’ having led to repeated ‘errors’, ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so–called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. The working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners. In the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid. The figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained. [Paras 85, 86][661-E-H; 662-A, E-F]

Madras Bar Association v. Union of India (2015) 8 SCC

583 : [2014] 10 SCR 1; Madras Bar Association v. Union of India (2014) 10 SCC 1 : [2014] 10 SCR 1; Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem 2017 (13) SCALE 526; Union of India v. R. Gandhi, President, Madras Bar Association (2010) 11 SCC 1: [2010] 6 SCR 857; Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018) 1 SCC 407: [2017] 8 SCR 33; Madras Petrochem Ltd. and Anr. v. Board for Industrial and Financial Reconstruction and Ors. (2016) 4 SCC

1 : [2016] 11 SCR 419; R.K. Garg v. Union of India (1981) 4 SCC 675 : [1982] 1 SCR 947; Bhavesh D. Parish v. Union of India (2000) 5 SCC 471 : [2000] 1 Suppl. SCR 291; DG of Foreign Trade v. Kanak Exports (2016) 2 SCC 226 : [2015] 15 SCR 287; Delhi

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

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