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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 E 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 H

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A 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][600- F-G] F 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 G 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 – H referred to.

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NOTICE, HEARING, AND SET-OFF OR A 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 B (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, C 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 D 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 E 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] F

2.3 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 G 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 H

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A 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 non- B payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. Four policy reasons have been stated by the 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. E [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 F 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 G 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 H 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 E BLRC Report makes this abundantly clear. [Paras 43, 44][620- E-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 H

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A 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] E 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. A 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 B 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 E 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 F 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 G 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 H

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A 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][629- F; 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]

F 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. G 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 H

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and Anr. (1976) 1 SCC 906 : [1976] 3 SCR 44 - A 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. B 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] E 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, H

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A 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 B 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 C 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 D 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 E 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] F 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 G 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 H

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cannot possibly be disqualified under Section 29A(j). All the A 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 B 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. C

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 D 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, E 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 F 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, G 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 H

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A 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] D 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] H

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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 C 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 D 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] E 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, F 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 G (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 H

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A 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. B Skrupa 372 U.S. 726 (1962) - referred to. Case Law Reference [2014] 10 SCR 1 referred to Para 2 [2014] 10 SCR 1 referred to Para 2 C [2017] 7 SCR 797 referred to Para 2 2017 (13) SCALE 526 referred to Para 2 [2010] 6 SCR 857 referred to Para 4 [2017] 8 SCR 33 referred to Para 4 D [2016] 11 SCR 419 referred to Para 6 [1982] 1 SCR 947 referred to Para 8 [2000] 1 Suppl. SCR 291 referred to Para 8 [2015] 15 SCR 287 referred to Para 8 E [2015] 2 SCR 1040 referred to Para 18 [2018] 14 SCALE 286 referred to Para 21 2018 (13) SCALE 75 referred to Para 21 2018 (11) SCALE 556 referred to Para 21 F 2019 (1) SCC 1 referred to Para 21 (2018) 10 SCC 1 referred to Para 21 [2018] 6 SCR 1076 referred to Para 21 [2017] 12 SCR 358 referred to Para 21 G 2018 (9) SCALE 490 referred to Para 63 [2005] 3 Suppl. SCR 200 referred to Para 63 [2018 (13) SCALE 381 followed Para 64

H

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[2008] 8 SCR 553 distinguished Para 65 A [1994] 3 Suppl. SCR 405 distinguished Para 65 [1990] 3 Suppl. SCR 212 distinguished Para 65 [1989] 3 SCR 428 distinguished Para 65 [1987] 3 SCR 427 distinguished Para 65 B [1976] 3 SCR 44 distinguished Para 65 [1994] 1 Suppl. SCR 1 referred to Para 74 CIVIL ORIGINAL JURISDICTION: Writ Petition (Civil) No. 99 of 2018. C Under Article 32 of the Constitution of India. WITH Writ Petition (C) Nos. 115, 100, 459, 598, 775, 822, 849, 1221 of 2018, D Writ Petition (C) No. 37 of 2019 and S.L.P.(C) No. 28623 of 2018. K. K. Venugopal, Attorney General for India, Tushar Mehta, SG, Mrs. Madhvi Diwan, Vikramjit Banerjee, ASGs, Shyam Diwan, Rakesh Dwivedi, Sajan Poovayya, C.U. Singh, Mukul Rohatgi, K.V. Viswanathan, E Chetan Sharma, Sr. Advs., R. Balasubramanian, Ms. Hari Priya, Ms. Shraddha Deshmukh, Ms. Charanya Lakshmikumaran, Ms. Chinmayee Chandra, Mrs. Anil Katiyar, A.K. Sharma, Parag P. Tripathi, Bishwajit Dubey, Spandan Biswal, Ms. Srideepa Bhattacharyya, Manpreet Lamba, Aditya Marwah, Prafful Goyal, Kanu F Agarwal, Ms. Swarupama Chaturvedi, B.N. Dubey, Ms. Misha, Siddhant Kant, Ms. Srishti Khare, Ms. Jasveen Kaur, S.S. Shroff, M/s. Cyril Amarchand Mangaldas, Ananga Bhattacharyya, Rohit Rao N., Kiran Kumar Kondaparthi, M/s Veritas Legis, Milank Chaudhary, Sarojanand Jha, Ashly Cherian, S.K. Raza, Parveen Kumar, Rajesh Singh, O.P. Gaggar, Aditya Gaggar, Suresh K., Ms. Suruchi Aggarwal, G R.R. Gupta, Ms. Ankita Prakash, Ms. Sindhu T.P., M/s Indian Law, Raghav Bansal (for M/s. Parekh & Co.), Dr. Vinod Kumar Tewari, A.K. Shukla, Vivek Tiwari, Vinay Rai, Pramod Tiwari, Kanwal Chaudhary, Jasbir Singh Malik, Udit Gupta, Digant Kakkad, Vishwas Shah, Masoom Shah, Pulkit Deora (for M/s. Udit Kishan And Associates), H

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A Arvind Kumar Gupta, Ms. Henna George, Ms. Purti Marwaha, Ms. V.S. Lakshmi, A.V. Balan, Chandrashekhar A. Chakalabbi, S.K. Pandey, Anshul Raj, Awanish Kumar, M/s. Dharmaprabhas Law Associates, Pragya Ohri, Abhirup Dasgupta, Ishaan Duggal, Mohit D.Ram, Sanjay Kapur, Ms. Megha Karnwal, Bharath Gangadharan, Ms. Shubhra Kapur, Ms. Madhumita Bhattacharjee, Ms. Srija Choudhury, B Rajendra Barot, Vivek Shetty, Ms. Liz Mathew, Jahan A. Chokshi, Ms. Sansriti, Eklavya Dwivedi, Navneet R., Raghav Mehrotra, Vipin Kumar Jai, Vipul Jai, Shailly Dinkar, Hitesh Kr. Sharma, Rajesh Singh, Rajendra Beniwal, Rajesh P., Vishal Thakur, Arvind Kumar Shukla, Alok Shukla, N.P. Gaur, Hardik Luthra, Kunal Yadav, Nihal Ahmad, Ms. Reetu C Sharma, Ms. Neena Shukla, Atul Sharma, Arveena Sharma, Ashu Kansal, Ms. Varsha Banerjee, Karan Batura, Ms. Stuti Vats, Manmayi Sharma, T. V. S. Raghavendra Sreyas, M/s Gayatri Gulati, M/s Sneh Dhillon, Rajesh Kumar-I, Anant Gautam, Ms. Shruti Vats, Ms. Khushboo Aggarwal, Anmol Mehta, Ms. Diksha Rai, Ms. Palak Mahajan, Ishan Bisht, Vishrov Mukherjee, Pukhrambam Ramesh Kumar, Ameya Vikram D Mishra, Ms. Catherine Ayallore, Priyadarshi Banerjee, Pratibhanu Singh Kharola, Ms. Priyanka M.P., K. Amrit Kumar Sharma, Vigro Mukherjee, Nitin P., Meka Venkata Rama Krishna, P.S. Sudheer, Rishi Maheshwari, Ms. Anne Mathew, Bharat Sood, Ms. Shruti Jose, Mahesh Agarwal, Himanshu Satija, Jay Zaveri, Anshuman Srivastava, Sikhil Suri, Rishi E Agrawala, Karan Luthra, Ms. Devika Mohan, Raghav Shankar, Simranjeet Singh, Ms. Aastha Mehta, Divyang Chandiramani, Vrinda Bhandari, Ravi Raghunath, Dhananjay B. Ray, Mukunda Rao, Venkataraman Rao, Soumik Ghosal, Rajesh Kumaram, Ms. Neeha Nagpal, Ms. Devanshi Singh, Arshit Anand, Gunjan Adhwani, Ms. Shally Bhasin, Nishant Rao, Rajesh Kumar, E. C. Agrawala, Puneet Singh F Bindra, Ms. Simran Jeet, Saad M. Shervani, Abhishek Singh, Jamal Anand, Ytharth Kumar, Vanshdeep Dalmia, Pranaya Goyal, Abhishek Sharma, Yash Badkur, Harshvardhan Jha, Yugandhara Pawar Jha, Ms. Mayuri Shukla, Abhishek Chaoudhary, Ms. Divya Roy, Lakshyajit Singh Bagdwal, Sarvesh Bisaria, Ashish Azad, Parkash Chandra Sharma, G Mrs. S. Usha Reddy, Balaji Srinivasan, Alok Kumar, Ms. Somya Yadava, Ms. Jagriti Mahajan, Siddhant Tripathi, Ms. Prarthna Dogra, Ms. Snigdha Singh, Ramesh Thakur, Mahesh K. Chaudhary, Ms. Kusum Lata, Naresh Kaushik, Vardhman Kaushik, Manoj Joshi, Omung Raj Gupta, D. Singh, Ms. Rebbeca Dats, Rahul Sharma, Siddhant Manral, Mrs. Lalita Kaushik, Keshav Gupta, Ms. Ana Bansal, Anil Kumar, Devanshu H

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Sajlan, Deepak Joshi, Aakash Lamba, T. Mahipal, Sahil Monga, Utkarsh A Maria, Nakul Gandhi, M/s. Karanjawala & Co., Ashish Rana, Harshit Garg, Senthil Jagadeesan, M. P. Vinod, Sandeep Sudhakar Deshmukh, Vinod Sharma, Nikhil Jain, Rajiv Shankar Dvivedi, Anupam Lal Das, Mohit D. Ram, Aakarsh Kamra, Ms. Usha Nandini. V, Ms. Pallavi Pratap, Mayank Pandey, Shantanu Sagar, Anurag Kishore, Som Raj Choudhury, B Abhishek Agarwal, Sudarsh Menon, Ms. Meera Mathur, Arun Aggarwal, Advs. for the appearing parties. The Judgment of the Court was delivered by R. F. NARIMAN, J. 1. The present petitions assail the constitutional validity of various provisions of the Insolvency and C Bankruptcy Code, 2016 [“Insolvency Code” or “Code”]. Since we are deciding only questions relating to the constitutional validity of the Code, we are not going into the individual facts of any case.

2. Shri Mukul Rohatgi, learned Senior Advocate, appearing in Writ Petition (Civil) No. 99 of 2018, has first and foremost argued that the members of the National Company Law Tribunal [“NCLT”] and certain members of the National Company Law Appellate Tribunal [“NCLAT”], apart from the President, have been appointed contrary to this Court’s judgment in Madras Bar Association v. Union of India, (2015) 8 SCC 583 [“Madras Bar Association (III)”], and that therefore, this being so, all orders that are passed by such members, being passed contrary to the judgment of this Court in the aforesaid case, ought to be set aside. In any case, even assuming that the de facto doctrine would apply to save such orders, it is clear that such members ought to be restrained from passing any orders in future. In any case, until a properly constituted committee, in accordance with the aforesaid judgment, reappoints them, they ought not to be allowed to function. He also argued that the administrative support for all tribunals should be from the Ministry of Law and Justice. However, even today, NCLT and NCLAT are functioning under the Ministry of Corporate Affairs. This again needs to be corrected immediately. A further technical violation also exists in that if the powers of the High Court are taken away, the NCLAT, as an appellate forum, should have the same convenience and expediency as existed prior to appeals going to the NCLAT. Since the NCLAT, as an appellate court, has a seat only at New Delhi, this would render the remedy inefficacious inasmuch as persons would have to travel from Tamil Nadu, Calcutta, and Bombay to New Delhi, whereas earlier, they H

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A could have approached the respective High Courts in their States. This again is directly contrary to Madras Bar Association v. Union of India, (2014) 10 SCC 1 [“Madras Bar Association (II)”], and to paragraph 123 in particular. Apart from the aforesaid technical objection, Shri Rohatgi assailed the legislative scheme that is contained in Section 7 of the Code, stating that there is no real difference between financial creditors and operational creditors. According to him, both types of creditors would give either money in terms of loans or money’s worth in terms of goods and services. Thus, there is no intelligible differentia between the two types of creditors, regard being had to the object sought to be achieved by the Code, namely, insolvency resolution, and if that is not possible, then ultimately, liquidation. Relying upon Shayara Bano v. Union of India, (2017) 9 SCC 1 [“Shayara Bano”], he argued that such classification will not only be discriminatory, but also manifestly arbitrary, as under Sections 8 and 9 of the Code, an operational debtor is not only given notice of default, but is entitled to dispute the genuineness of the claim. In the case of a financial debtor, on the other hand, no notice is given and the financial debtor is not entitled to dispute the claim of the financial creditor. It is enough that a default as defined occurs, after which, even if the claim is disputed and even if there be a set-off and counterclaim, yet, the Code gets triggered at the behest of a financial creditor, without the corporate debtor being able to justify the fact that a E 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 arbitrary in that operational creditors do not have even a single vote in the committee of creditors which has very important functions to perform in the resolution process of corporate debtors. Shri Rohatgi then went on to assail the establishment of information utilities that are set up under the Code. According to him, under Section 210 of the Code, there can be private information utilities whose sole object would be to make a profit. Further, the said information utility is not only to collect financial data, but also to check whether a default has or has not occurred. Certification of such agency cannot substitute for adjudication. Thus, the certificate of an information utility is in the nature of a preliminary H

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decree issued without any hearing and without any process of adjudication. Shri Rohatgi next argued that Section 12A of the Code is contrary to the directions of this Court in its order in Uttara Foods and Feeds Pvt. Ltd. v. Mona Pharmachem, Civil Appeal No. 18520/2017 [decided on 13.11.2017], and that instead of following the said order, Section 12A now derails the settlement process by requiring the approval of at least ninety per cent of the voting share of the committee of creditors. Unbridled and uncanalized power is given to the committee of creditors to reject legitimate settlements entered into between creditors and the corporate debtors. Shri Rohatgi then argued that the resolution professional, having been given powers of adjudication under the Code and Regulations, grant of adjudicatory power to a non-judicial authority is violative of basic aspects of dispensation of justice and access to justice. Lastly, a four-fold attack was raised against Section 29A, in particular, clause (c) thereof. First and foremost, Shri Rohatgi stated that the vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor have been impaired by retrospective application of Section 29A. Section 29A, in any case, is contrary to the object sought to be achieved by the Code, in particular, speedy disposal of the resolution process as it will inevitably lead to challenges before the Adjudicating Authority and Appellate Authority, which will slow down and delay the insolvency resolution process. In particular, so far as Section 29A(c) is concerned, a blanket ban on participation of all promoters of corporate debtors, without any mechanism to weed out those who are unscrupulous and have brought the company to the ground, as against persons who are efficient managers, but who have not been able to 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 F 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 G 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 H

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A persons who may be related parties in the sense that they may be relatives of the erstwhile promoters are also debarred, despite the fact that they may have no business connection with the erstwhile promoters who have been rendered ineligible by Section 29A.

3. Shri K.V. Viswanathan, learned Senior Advocate, appearing in B Writ Petition No.822 of 2018, strongly supported Shri Rohatgi and argued the same points with great clarity and with various nuances of his own, which will be reflected in our judgment. Followed by Shri Viswanathan, Shri A.K. Gupta, Shri Pulkit Deora, Shri Devanshu Sajlan and Shri Deepak Joshi also made submissions with particular regard to discrimination against operational creditors. C

4. As against these submissions, Shri K.K. Venugopal, the learned Attorney General for India, and Shri Tushar Mehta, learned Solicitor General for India, appearing for the Union of India, and Shri Rakesh Dwivedi, learned Senior Advocate, appearing for the Reserve Bank of India, countered all the aforesaid submissions. They argued with reference to our judgments and Committee Reports that till the Insolvency Code was enacted, the regime of previous legislation had failed to maximize the value of stressed assets and had focused on reviving the corporate debtor with the same erstwhile management. All these legislations had failed, as a result of which, the Code was enacted to reorganize insolvency resolution of corporate debtors in a time bound manner to maximize the value of assets of such person. They further argued that there is a paradigm shift from the erstwhile management of a corporate debtor being in possession of stressed assets to creditors who now assume control from the erstwhile management and are able to approve resolution plans of other better and more efficient managers, which would not only be in the interest of the corporate debtor itself but in the interest of all stakeholders, namely, all creditors, workers, and shareholders other than shareholdings of the erstwhile management. They referred to the Statement of Objects and Reasons, the Preamble, and various provisions of the Code, and to the Rules and Regulations made thereunder, to buttress their submissions. In particular, they referred to judgments which mandated a judicial hands-off when it came to laws relating to economic regulation. They argued that the legislature must get the maximum free play in the joints to experiment and come up with solutions to problems that have seemed intractable earlier. In particular, in combating the individual points made by the learned counsel appearing H

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on behalf of the petitioners, they argued that none of the members of the A 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 being made, which the operational creditors do not have. Further, financial creditors are, from the start, involved with the assessment of viability of corporate debtors and are, therefore, better equipped to engage in restructuring of loans as well as reorganization of the corporate debtor’s business in the event of financial stress. All these differentiae are not only intelligible, but directly relate to the objects sought to be achieved by the Code. Insofar as Section 7, relatable to financial creditors, and Sections 8 and 9, which relate to operational creditors are concerned, it is a fallacy to say that no notice is issued to the financial debtor on defaults made, as financial debtors are fully aware of the loan structure and the defaults that have been made. Further, this Court’s judgment in Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC 407 [“Innoventive Industries”] has made it clear that under Section F 7(5) of the Code, the Adjudicating Authority, in being “satisfied” that there is a default, has to issue notice to the corporate debtor, hear the corporate debtor, and then adjudicate upon the same. The reason why disputes raised by financial debtors are not gone into at the stage of triggering the Code is because the evidence of financial debts are contained in the documents of information utilities, banks, and financial G institutions. Disputes which may be raised can be raised at the stage of filing of claims once the resolution process is underway. Also, by the very nature of financial debts, set-off and counterclaims by financial debtors are very rare and, in any case, wholly independent of the loan that has been granted to them. Insofar as operational creditors having H

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A no vote in the committee of creditors is concerned, this is because operational creditors are typically interested only in getting payment for supply of goods or services made by them, whereas financial creditors are typically involved in seeing that the entirety of their loan gets repaid, for which they are better equipped to go into the viability of corporate enterprises, both at the stage of grant of the loan and at the stage of B default. Also, the interests of operational creditors, when a resolution plan is to be approved, are well looked-after as the minimum that the operational creditors are to be paid is the liquidation value of assets. Apart from this, their interests are to be placed at par with the interests of financial creditors, and if this is not done, then the Adjudicating C 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 D 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 the benefit of all creditors generally, can only be if all or most of them agree to the same. They argued that the resolution professional has no adjudicatory powers under the Code or the Regulations, but is only to collate information. Even when he exercises his discretion to exercise his best judgment in certain situations, he does so administratively, and is subject to an adjudicatory body overseeing the same. When it comes to Section 29A of the Code, they argued that Section 29A does not disturb any vested or existing rights, as a resolution applicant does not have any vested or existing rights that can be disturbed, as has been held in ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors., Civil Appeal Nos. 9402-9405/2018 [decided on 04.10.2018] [“ArcelorMittal”]. Further, merely because this Section relies on antecedent facts for its application, does not mean that it is retrospective. H

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Also, Section 29A subserves a very important object of the Code, which is to see that undesirable persons who are mentioned in all its clauses are rendered ineligible to submit resolution plans so that such persons may not come into the management of stressed corporate debtors. They also argued that Section 29A is not aimed at only persons who have committed acts of malfeasance, but also persons who are otherwise unfit to be put in the saddle of the management of the corporate debtor, such as undischarged insolvents and persons who have been removed as directors under Section 164 of the Companies Act, 2013 (for not filing financial statements or annual returns for any continuous period of 3 financial years, for example). They further argued that a period of one year is sufficient period within which a person, whose account has been declared NPA, should clear its dues. They referred to the RBI Regulations dealing with NPAs and stated that even before a person’s account is declared NPA, a long rope is given for such person to clear off its debts. It is only when it does not do so, that its account is declared NPA in the first instance. Also, once the said guidelines are perused, it is clear that an account, which has been NPA for one year, is declared as substandard asset and it is for this reason that the one year period is given in Section 29A(c), which is based on reason, and is not arbitrary.

5. Shri C.U. Singh, appearing on behalf of the Asset Reconstruction Company of India Limited, referred to the pre-existing state of legislation before the Code was enacted, and referred in detail to how all such legislations had failed to produce the necessary results. He also relied upon extracts from the Insolvency Act, 1986 of the United 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 F 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 G 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: H

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A “The current state of the bankruptcy process for firms is a highly fragmented framework. Powers of the creditor and the debtor under insolvency are provided for under different Acts. Given the conflicts between creditors and debtors in the resolution of insolvency as described in Section 3.2.2, the chances for consistency and efficiency in resolution are low when rights are B separately defined. It is problematic that these different laws are implemented in different judicial fora. Cases that are decided at the tribunal/BIFR often come for review to the High Courts. This gives rise to two types of problems in implementation of the resolution framework. The first is the lack of clarity of jurisdiction. C In a situation where one forum decides on matters relating to the rights of the creditor, while another decides on those relating to the rights of the debtor, the decisions are readily appealed against and either stayed or overturned in a higher court. Ideally, if economic value is indeed to be preserved, there must be a single forum that hears both sides of the case and makes a judgment based on both. A second problem exacerbates the problems of multiple judicial fora. The fora entrusted with adjudicating on matters relating to insolvency and bankruptcy may not have the business or financial expertise, information or bandwidth to decide on such matters. This leads to delays and extensions in arriving at an outcome, and increases the vulnerability to appeals of the outcome. The uncertainty that these problems give rise to shows up in case law on matters of insolvency and bankruptcy in India. Judicial precedent is set by “case law” which helps flesh out the statutory laws. These may also, in some cases, pronounce new substantive law where the statute and precedent are silent. (Ravi, 2015) reviews judgments of the High Courts on BIFR cases, the DRTs and DRATs, as well as a review of important judgments of the Supreme Court that have had a significant impact on the interpretation of existing insolvency legislation. The judgments reviewed are those after June 2002 when the SARFAESI Act came into effect. It is illustrative of both debtor and creditor led process of corporate insolvency, and reveals a matrix of fragmented and contrary outcomes, rather than coherent and consistent, being set as precedents. H

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In such an environment of legislative and judicial uncertainty, the outcomes on insolvency and bankruptcy are poor. World Bank (2014) reports that the average time to resolve insolvency is four years in India, compared to 0.8 years in Singapore and 1 year in London. Sengupta and Sharma, 2015 compare the number of new cases that file for corporate insolvency in the U.K., which has a robust insolvency law, to the status of cases registered at the BIFR under SICA, 1985, as well as those filed for liquidation under Companies Act, 1956. They compare this with the number of cases files in the UK, and find a significantly higher turnover in the cases that are filed and cleared through the insolvency process in the UK. If we are to bring financing patterns back on track with the global norm, we must create a legal framework to make debt contracts credible channels of financing. This calls for a deeper redesign of the entire resolution process, rather than working on strengthening any single piece of it. India is not unusual in requiring this. In all countries, bankruptcy laws undergo significant changes over the period of two decades or more. For example, the insolvency resolution framework in the UK is the Insolvency Act of 1986, which was substantially modified with the Insolvency Act of 2000, and the Enterprise Act of 2002. The first Act for bankruptcy resolution in the US that lasted for a significant time was the Bankruptcy Act of 1889. This was followed by the Act of 1938, the Reform Act of 1978, the Act of 1984, the Act of 1994, a related consumer protection Act of 2005. Singapore proposed a bankruptcy reform in 2013, while there are significant changes that are being proposed in the US and the Italian bankruptcy framework this year in 2015. Several of these are structural reforms with fundamental implications on resolving insolvency….” The BLRC went on to state: “[…..] India is one of the youngest republics in the world, with a high concentration of the most dynamic entrepreneurs. Yet these game changers and growth drivers are crippled by an environment that takes some of the longest times and highest costs by world standards to resolve any problems that arise while repaying dues on debt. This problem leads to grave consequences: India has some of the lowest credit compared to the size of the economy. H

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A This is a troublesome state to be in, particularly for a young emerging economy with the entrepreneurial dynamism of India.” xxx xxx xxx “Speed is of essence for the working of the bankruptcy code, for two reasons. First, while the ‘calm period’ can help keep an organization afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer. Second, the liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realization is lower when there are delays. Hence, D delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay. This same idea is found in FSLRC’s (Financial Sector Legislative Reforms Commission) treatment of the failure of financial firms. E The most important objective in designing a legal framework for dealing with firm failure is the need for speed.” The pre-existing scenario has been noticed in some of our judgments. In Madras Petrochem Ltd. and Anr. v. Board for Industrial and Financial Reconstruction and Ors., (2016) 4 SCC 1, F this Court found: “40.……The Eradi Committee Report relating to insolvency and winding up of companies dated 31-7-2000, observed that out of 3068 cases referred to BIFR from 1987 to 2000 all but 1062 cases have been disposed of. Out of the cases disposed of, 264 cases were revived, 375 cases were under negotiation for revival process, G 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 H

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Industrial Companies (Special Provisions) Act, 1985 as has been pointed out earlier, has been severely undermined by reason of the enormous delays involved in the disposal of cases by BIFR. (See Paras 5.8, 5.9 and 5.15 of the Report.) Consequently, the Committee recommended that the Sick Industrial Companies (Special Provisions) Act, 1985 be repealed and the provisions thereunder for revival and rehabilitation should be telescoped into the structure of the Companies Act, 1956 itself.” (emphasis supplied) xxx xxx xxx “43.……In fact, another interesting document is the Report on C Trend and Progress of Banking in India 2011-2012 for the year ended 30-6-2012 submitted by Reserve Bank of India to the Central Government in terms of Section 36(2) of the Banking Regulation Act, 1949. In Table IV.14 the Report provides statistics regarding trends in non-performing assets bank-wise, group-wise. As per the said Table, the opening balance of non-performing assets in public sector banks for the year 2011-2012 was Rs 746 billion but the closing balance for 2011-2012 was Rs 1172 billion only. The total amount recovered through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 during 2011-2012 registered a decline compared to the previous year, but, even then, the amounts recovered under the said Act constituted 70% of the total amount recovered. The amounts recovered under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 constituted only 28%. All this would go to show that the amounts that public sector banks and financial institutions have to recover are in staggering figures and at long last at least one statutory measure has proved to be of some efficacy. This Court would be loathe to give such an interpretation as would thwart the recovery process under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which Act alone seems to have worked to some extent at least.” Similarly, in Innoventive Industries (supra), this Court found: “13. One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the H

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A object of speeding up of the insolvency process. As per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). The World Bank’s Ease of Doing Business Index, 2015, ranked India as country number 135 out of B 190 countries on the ease of resolving insolvency based on various indicia.” Further, this Court in ArcelorMittal (supra) observed: “62. Previous legislation, namely, the Sick Industrial Companies C (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 D 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 E 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 F 7. In the United States, at one point of time, Justice Stephen Field’s dissents of the 19th Century were translated into majority opinions in the early 20th Century. This was referred to as the Lochner era, in which the U.S. Supreme Court, over a period of 40 years, consistently struck down legislation which was economic in nature as such legislation did not, according to the Court, square with property rights. As a result, a G large number of minimum wage laws, maximum hours of work in factories laws, child labour laws, etc. were struck down. The result, as is well known, is that President Roosevelt initiated a court-packing plan in which he sought to get authorization from Congress to appoint additional judges to the Supreme Court, who would have then overruled the Lochner line of precedents. As it turned out, that became unnecessary as Justice

SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 569 [R. F. NARIMAN, J.]

Roberts switched his vote so that a 5:4 majority from 1937 onwards upheld economic legislation. It is important to note that the dissents of Justice Holmes and Justice Brandeis now became the law. Justice Holmes had, in his dissent in Lochner v. New York, 198 U.S. 45 (1905), stated: “This case is decided upon an economic theory which a large part of the country does not entertain. If it were a question whether I B agreed with that theory, I should desire to study it further and long before making up my mind. But I do not conceive that to be my duty, because I strongly believe that my agreement or disagreement has nothing to do with the right of a majority to embody their opinions in law. It is settled by various decisions of this court that state constitutions and state laws may regulate life in many ways which we, as legislators, might think as injudicious, or, if you like, as tyrannical, as this, and which, equally with this, interfere with the liberty to contract. Sunday laws and usury laws are ancient examples. A more modern one is the prohibition of lotteries. The liberty of the citizen to do as he likes so long as he does not interfere with the liberty of others to do the same, which has been a shibboleth for some well-known writers, is interfered with by school laws, by the Post Office, by every state or municipal institution which takes his money for purposes thought desirable, whether he likes it or not. The Fourteenth Amendment does not enact Mr. Herbert Spencer’s Social Statics. The other day, we sustained the Massachusetts vaccination law. Jacobson v. Massachusetts, 197 U. S. 11. United States and state statutes and decisions cutting down the liberty to contract by way of combination are familiar to this court. Northern Securities Co. v. United States, 193 U. S.

197. Two years ago, we upheld the prohibition of sales of stock on margins or for future delivery in the constitution of California. Otis v. Parker, 187 U. S. 606. The decision sustaining an eight hour law for miners is still recent. Holden v. Hardy, 169 U. S. 366. Some of these laws embody convictions or prejudices which judges are likely to share. Some may not. But a constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of the citizen to the State or of laissez faire. It is made for people of fundamentally differing views, and the accident of our finding certain opinions natural and familiar or novel and even shocking ought not to conclude our judgment upon H

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A the question whether statutes embodying them conflict with the Constitution of the United States. General propositions do not decide concrete cases. The decision will depend on a judgment or intuition more subtle than any articulate major premise. But I think that the proposition just stated, if it is accepted, will carry us far toward the end. Every opinion tends to become a law. I think that the word liberty in the Fourteenth Amendment is perverted when it is held to prevent the natural outcome of a dominant opinion, unless it can be said that a rational and fair man necessarily would admit that the statute proposed would infringe fundamental principles as they have been understood by the traditions of our people and our law. It does not need research to show that no such sweeping condemnation can be passed upon the statute before us. A reasonable man might think it a proper measure on the score of health. Men whom I certainly could not pronounce unreasonable would uphold it as a D first instalment of a general regulation of the hours of work. Whether in the latter aspect it would be open to the charge of inequality I think it unnecessary to discuss.”1 Similarly, in New State Ice Co. v. Liebman, 285 U.S. 262 (1932), Justice Brandeis echoed Justice Holmes as follows: E “The discoveries in physical science, the triumphs in invention, attest the value of the process of trial and error. In large measure, these advances have been due to experimentation. In those fields experimentation has, for two centuries, been not only free but encouraged. Some people assert that our present plight is due, in part, to the limitations set by courts upon experimentation in the fields of social and economic science; and to the discouragement to which proposals for betterment there have been subjected otherwise. There must be power in the States and the Nation to remould, through experimentation, our economic practices and institutions to meet changing social and economic needs. I cannot believe that the framers of the Fourteenth Amendment, or the States which ratified it, intended to deprive us of the power to correct the evils of technological unemployment and excess productive capacity which have attended progress in the useful arts. 1 H Lochner v. New York, 198 U.S. 45, 75-76 (1905).

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A to at the time, particularly by Mr. Justice Holmes and Mr. Justice Brandeis. Dissenting from the Court’s invalidating a state statute which regulated the resale price of theatre and other tickets, Mr. Justice Holmes said, “I think the proper course is to recognize that a state Legislature B can do whatever it sees fit to do unless it is restrained by some express prohibition in the Constitution of the United States or of the State, and that Courts should be careful not to extend such prohibitions beyond their obvious meaning by reading into them conceptions of public policy that the particular Court may happen to entertain. C And, in an earlier case, he had emphasized that, ‘The criterion of constitutionality is not whether we believe the law to be for the public good’ [Adkins v. Children’s Hospital, 261 U. S. 525, 567, 570 (1923) (dissenting opinion)]. D The doctrine that prevailed in Lochner, Coppage, Adkins, Burns, and like cases - that due process authorizes courts to hold laws unconstitutional when they believe the legislature has acted unwisely - has long since been discarded. We have returned to the original constitutional proposition that courts do not substitute their social and economic beliefs for the judgment of legislative E bodies, who are elected to pass laws. As this Court stated in a unanimous opinion in 1941, “We are not concerned… with the wisdom, need, or appropriateness of the legislation. [Olsen v. Nebraska ex rel. Western Reference & Bond Assn., 313 U. S. 236, 246 (1941)]” F Legislative bodies have broad scope to experiment with economic problems, and this Court does not sit to, “subject the state to an intolerable supervision hostile to the basic principles of our government and wholly beyond the protection which the general clause of the Fourteenth Amendment was intended to secure” G [Sproles v. Binford, 286 U.S. 374, 388 (1932)]. It is now settled that States “have power to legislate against what are found to be injurious practices in their internal commercial and business affairs, so long as their laws do not run afoul of some specific federal constitutional prohibition, or of some valid federal law” [Lincoln Federal Labor Union, etc. v. Northwestern Iron & Metal Co., H 335 U.S. 525, 536 (1949)].

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In the face of our abandonment of the use of the “vague contours” A [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. B 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 C that legislation was needed to deal with the business of debt adjusting. Unquestionably, there are arguments showing that the business of debt adjusting has social utility, but such arguments are properly addressed to the legislature, not to us. We refuse to sit as a “superlegislature to weigh the wisdom of legislation,” [Day- D Brite Lighting, Inc., v. Missouri, 342 U.S. 421, 423 (1923)] and we emphatically refuse to go back to the time when courts used the Due Process Clause “to strike down state laws, regulatory of business and industrial conditions, because they may be unwise, improvident, or out of harmony with a particular school of thought” [Williamson v. Lee Optical Co., 348 U.S. 483, 488 (1955)]. Nor E are we able or willing to draw lines by calling a law “prohibitory” or “regulatory.” Whether the legislature takes for its textbook Adam Smith, Herbert Spencer, Lord Keynes, or some other is no concern of ours. The Kansas debt adjusting statute may be wise or unwise. But relief, if any be needed, lies not with us, but with the body constituted to pass laws for the State of Kansas. Nor is the statute’s exception of lawyers a denial of equal protection of the laws to nonlawyers. Statutes create many classifications which do not deny equal protection; it is only “invidious discrimination” which offends the Constitution. The business of debt adjusting gives rise to a relationship of trust in which the debt adjuster will, in a situation of insolvency, be marshalling assets in the manner of a proceeding in bankruptcy. The debt adjuster’s client may need advice as to the legality of the various claims against him remedies existing under state laws governing debtor- creditor relationships, or provisions of the Bankruptcy Act - advice H

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A which a nonlawyer cannot lawfully give him. If the State of Kansas wants to limit debt adjusting to lawyers, the Equal Protection Clause does not forbid it. We also find no merit in the contention that the Fourteenth Amendment is violated by the failure of the Kansas statute’s title to be as specific as appellee thinks it ought to be under the Kansas Constitution.”3 B (emphasis supplied)

3 Ferguson v. Skrupa, 372 U.S. 726, 728-733 (1962). H

SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 575 [R. F. NARIMAN, J.]

The Court must always remember that “legislation is directed to A practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry”; “that exact wisdom and nice adaption of remedy are not always possible” B and that “judgment is largely a prophecy based on meagre and uninterpreted experience”. Every legislation, particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company [94 L Ed 381 : 338 US 604 (1950)] be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, E howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the F possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.” (emphasis supplied) G

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 H

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A offered for unearthing black money. Those who have successfully evaded taxation and concealed their income or wealth despite the stringent tax laws and the efforts of the tax department are not likely to disclose their unaccounted money without some inducement by way of immunities and exemptions and it must necessarily be left to the legislature to decide what immunities and exemptions would be sufficient for the purpose. It would be outside the province of the Court to consider if any particular immunity or exemption is necessary or not for the purpose of inducing disclosure of black money. That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The Court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The Court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the Court not to hazard an opinion where even economists may differ. The Court must while examining the constitutional validity of a legislation of this kind, “be resilient, not rigid, forward looking, not static, liberal, not verbal” and the Court must always bear in mind the constitutional proposition enunciated by the Supreme Court of the United States in Munn v. Illinois [94 US 13] , namely, “that courts do not substitute their social and economic beliefs for the judgment of legislative bodies”. The Court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The Court should constantly remind itself of what the Supreme Court of the United States said in Metropolis Theater Company v. City of Chicago [57 L Ed 730 : 228 US 61 (1912)] : G “The problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical it may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not always discernible, the wisdom of any choice may be disputed or condemned. Mere H error of government are not subject to our judicial review.”

SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 577 [R. F. NARIMAN, J.]