[2019] 3 S.C.R.

535 535

SWISS RIBBONS PVT. LTD. & ANR. A

v.
UNION OF INDIA & ORS.
(Writ Petition (Civil) No. 99 of 2018)
B
JANUARY 25, 2019
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
Insolvency and Bankruptcy Code, 2016:
C
Constitutional validity of – Held: Provisions of the Code passes
constitutional muster.
ss. 5(7), 5(8), 5(20), 7(1), 7(4), 7(5), 8 and 9 – Classification
between financial creditor and operational creditor – Whether
discriminatory, arbitrary, and violative of Art. 14 – Held: Preserving D
the corporate debtor as a going concern, while ensuring maximum
recovery for all creditors being the objective of the Code, financial
creditors are clearly different from operational creditors – Thus,
there is an intelligible differentia between the two which has a direct
relation to the objects sought to be achieved by the Code – Thus,
there is no discrimination – Constitution of India – Art. 14. E

ss. 3, 3(9)(c), 214(e), 60, 65, 75, 7, 8 and 9 – Notice, hearing,

and set-off or counterclaim qua financial debts – Triggering of
insolvency resolution process by financial creditors and operational
creditors – Submission that the difference in the triggering process
at behest of financial creditors and operational creditors is F
discriminatory and arbitrary – Held: A financial creditor has to
prove “default” as opposed to an operational creditor who merely
“claims” a right to payment of a liability or obligation in respect of
a debt which may be due – In view thereof, the differentiation in the
triggering of insolvency resolution process by financial creditors G
u/s. 7 and by operational creditors u/ss. 8 and 9 becomes clear –
Insolvency and Bankruptcy Board of India (Information Utilities)
Regulations, 2017 – Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 – Form I.

H
535
536 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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
B
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
C 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
D
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
E
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
F 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 –
G
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
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 537

Utilities not governed by proper norms and evidence of loan default A

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
B
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 C
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 D
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 E
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 F
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 G
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.

H
538 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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 –
B
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
C 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
D 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
E 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
F 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
G 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
H control of the business of the corporate debtor during the
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 539

implementation of a resolution plan – Thus, any such person is not A

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 B
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.
C
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 D
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
E
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.
F
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 G
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. H
540 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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
B
period.
Constitution of India: Art. 77 – Submission that the tribunals-
NCLT 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
C 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.
D Disposing of the petitions, the Court
HELD:
CLASSIFICATION BETWEEN FINANCIAL CREDITOR
AND OPERATIONAL CREDITOR NEITHER
E 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
F 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
G
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
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 541

debt” would include a claim in respect of the provision of goods A

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 B
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, C
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 D
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 F
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 G
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
542 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B
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
C 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
D 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
E 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.
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 543

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
544 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
C 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
D 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.
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 545

Under the Code, the committee of creditors is entrusted A

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
B
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 C
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
D
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 F
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 G
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
546 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B 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
C
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
D 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
F 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
G 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
H muster. [Para 53][627-A-D]
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 547

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 C
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 D
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
548 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B
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
C 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
D 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
E 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
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 549

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 C
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 D
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, F
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 G
of more than 90 days in respect of a term loan). Post declaration
of such NPA, what is clear is that a substandard asset would then
be NPA which has remained as such for a period of twelve months.
In short, a person is a defaulter when an instalment and/or interest
on the principal remains overdue for more than three months,
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550 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 551

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
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552 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B
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
C 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,
E 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
F 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
G 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]
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 553

13.The Insolvency Code is a legislation which deals with A

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
B
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
554 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 555

[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
556 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 557

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 D
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 E
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, F
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 G
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
558 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B
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
C 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
D
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
F
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
G 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
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 559
[R. F. NARIMAN, J.]

decree issued without any hearing and without any process of A

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
B
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 C
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
D
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 E
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
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560 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
D 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
E 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,
F 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
G 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
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 561
[R. F. NARIMAN, J.]

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
B
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 C
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
D
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 E
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
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562 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
E 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
F
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
G 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.
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 563
[R. F. NARIMAN, J.]

Also, Section 29A subserves a very important object of the Code, which A
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
B
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 C
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
D
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 E
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:
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564 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
D
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
E 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
F 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
G 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
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 565
[R. F. NARIMAN, J.]

In such an environment of legislative and judicial uncertainty, the A

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
B
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 C
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 D
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 E
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 F
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 G
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
566 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B 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
C 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
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 567
[R. F. NARIMAN, J.]

Industrial Companies (Special Provisions) Act, 1985 as has been A

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
B
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 D
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 E
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 F
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 G
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
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568 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
H 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 A
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 C
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 D
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 E
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 F
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 G
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
570 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B 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
C 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
F 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
G 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).
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 571
[R. F. NARIMAN, J.]

To stay experimentation in things social and economic is a grave A

responsibility. Denial of the right to experiment may be fraught
with serious consequences to the Nation. It is one of the happy
incidents of the federal system that a single courageous State
may, if its citizens choose, serve as a laboratory; and try novel
social and economic experiments without risk to the rest of the
B
country. This Court has the power to prevent an experiment. We
may strike down the statute which embodies it on the ground that,
in our opinion, the measure is arbitrary, capricious or unreasonable.
We have power to do this, because the due process clause has
been held by the Court applicable to matters of substantive law as
well as to matters of procedure. But in the exercise of this high C
power, we must be ever on our guard, lest we erect our prejudices
into legal principles. If we would guide by the light of reason, we
must let our minds be bold.”2
The Lochner doctrine was finally buried in Ferguson v. Skrupa,
372 U.S. 726 (1962), where the Supreme Court held: D
“Both the District Court in the present case and the Pennsylvania
court in Stone adopted the philosophy of Adams v. Tanner, and
cases like it, that it is the province of courts to draw on their own
views as to the morality, legitimacy, and usefulness of a particular
business in order to decide whether a statute bears too heavily E
upon that business and, by so doing, violates due process. Under
the system of government created by our Constitution, it is up to
legislatures, not courts, to decide on the wisdom and utility of
legislation. There was a time when the Due Process Clause was
used by this Court to strike down laws which were thought
unreasonable, that is, unwise or incompatible with some particular F
economic or social philosophy. In this manner, the Due Process
Clause was used, for example, to nullify laws prescribing maximum
hours for work in bakeries, Lochner v. New York, 198 U. S.
45 (1905), outlawing “yellow dog” contracts, Coppage v.
Kansas, 236 U. S. 1 (1915), setting minimum wages for G
women, Adkins v. Children’s Hospital, 261 U. S. 525 (1923),
and fixing the weight of loaves of bread, Jay Burns Baking Co.
v. Bryan, 264 U. S. 504 (1924). This intrusion by the judiciary
into the realm of legislative value judgments was strongly objected
2
New State Ice Co. v. Liebman, 285 U.S. 262, 310-311 (1932).
H
572 SUPREME COURT REPORTS [2019] 3 S.C.R.

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)].
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 573
[R. F. NARIMAN, J.]

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
F
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 G
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
574 SUPREME COURT REPORTS [2019] 3 S.C.R.

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)
8. In this country, this Court in R.K. Garg v. Union of India,
(1981) 4 SCC 675 has held:
“8. Another rule of equal importance is that laws relating to
C economic activities should be viewed with greater latitude than
laws touching civil rights such as freedom of speech, religion etc.
It has been said by no less a person than Holmes, J., that the
legislature should be allowed some play in the joints, because it
has to deal with complex problems which do not admit of solution
D through any doctrinaire or strait-jacket formula and this is
particularly true in case of legislation dealing with economic
matters, where, having regard to the nature of the problems
required to be dealt with, greater play in the joints has to be allowed
to the legislature. The court should feel more inclined to give judicial
deference to legislative judgment in the field of economic regulation
E than in other areas where fundamental human rights are involved.
Nowhere has this admonition been more felicitously expressed
than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)]
where Frankfurter, J., said in his inimitable style:
“In the utilities, tax and economic regulation cases, there are
F good reasons for judicial self-restraint if not judicial deference
to legislative judgment. The legislature after all has the
affirmative responsibility. The courts have only the power to
destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability
G to error, the bewildering conflict of the experts, and the number
of times the judges have been overruled by events — self-
limitation can be seen to be the path to judicial wisdom and
institutional prestige and stability.”

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 C
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
D
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
576 SUPREME COURT REPORTS [2019] 3 S.C.R.

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
B
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
C 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
D
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
E 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
F
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.]

It is true that one or the other of the immunities or exemptions A

granted under the provisions of the Act may be taken advantage
of by resourceful persons by adopting ingenious methods and
devices with a view to avoiding or saving tax. But that cannot be
helped because human ingenuity is so great when it comes to tax
avoidance that it would be almost impossible to frame tax legislation
B
which cannot be abused. Moreover, as already pointed out above,
the trial and error method is inherent in every legislative effort to
deal with an obstinate social or economic issue and if it is found
that any immunity or exemption granted under the Act is being
utilized for tax evasion or avoidance not intended by the legislature,
the Act can always be amended and the abuse terminated. We C
are accordingly of the view that none of the provisions of the Act
is violative of Article 14 and its constitutional validity must be
upheld.”
(emphasis supplied)
Likewise, in Bhavesh D. Parish v. Union of India, (2000) 5 D
SCC 471, this Court held:
“26. The services rendered by certain informal sectors of the
Indian economy could not be belittled. However, in the path of
economic progress, if the informal system was sought to be
replaced by a more organized system, capable of better regulation E
and discipline, then this was an economic philosophy reflected by
the legislation in question. Such a philosophy might have its merits
and demerits. But these were matters of economic policy. They
are best left to the wisdom of the legislature and in policy matters
the accepted principle is that the courts should not interfere.
Moreover in the context of the changed economic scenario the F
expertise of people dealing with the subject should not be lightly
interfered with. The consequences of such interdiction can have
large-scale ramifications and can put the clock back for a number
of years. The process of rationalization of the infirmities in the
economy can be put in serious jeopardy and, therefore, it is G
necessary that while dealing with economic legislations, this Court,
while not jettisoning its jurisdiction to curb arbitrary action or
unconstitutional legislation, should interfere only in those few cases
where the view reflected in the legislation is not possible to be
taken at all.”
H
xxx xxx xxx
578 SUPREME COURT REPORTS [2019] 3 S.C.R.

A “30. Before we conclude there is another matter which we must

advert to. It has been brought to our notice that Section 45-S of
the Act has been challenged in various High Courts and a few of
them have granted the stay of provisions of Section 45-S. When
considering an application for staying the operation of a piece of
legislation, and that too pertaining to economic reform or change,
B
then the courts must bear in mind that unless the provision is
manifestly unjust or glaringly unconstitutional, the courts must show
judicial restraint in staying the applicability of the same. Merely
because a statute comes up for examination and some arguable
point is raised, which persuades the courts to consider the
C controversy, the legislative will should not normally be put under
suspension pending such consideration. It is now well settled that
there is always a presumption in favour of the constitutional validity
of any legislation, unless the same is set aside after final hearing
and, therefore, the tendency to grant stay of legislation relating to
economic reform, at the interim stage, cannot be understood. The
D
system of checks and balances has to be utilized in a balanced
manner with the primary objective of accelerating economic growth
rather than suspending its growth by doubting its constitutional
efficacy at the threshold itself.”
(emphasis supplied)
E
In DG of Foreign Trade v. Kanak Exports, (2016) 2 SCC 226,
this Court has held:
“109. Therefore, it cannot be denied that the Government has a
right to amend, modify or even rescind a particular scheme. It is
F well settled that in complex economic matters every decision is
necessarily empiric and it is based on experimentation or what
one may call trial and error method and therefore, its validity cannot
be tested on any rigid prior considerations or on the application of
any straitjacket formula. In Balco Employees’ Union v. Union
of India [Balco Employees’ Union v. Union of India, (2002) 2
G
SCC 333], the Supreme Court held that laws, including executive
action relating to economic activities should be viewed with greater
latitude than laws touching civil rights such as freedom of speech,
religion, etc. that the legislature should be allowed some play in
the joints because it has to deal with complex problems which do
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 579
[R. F. NARIMAN, J.]

not admit of solution through any doctrine or straitjacket formula A

and this is particularly true in case of legislation dealing with
economic matters, where having regard to the nature of the
problems greater latitude require to be allowed to the
legislature……”
It is with this background, factual and legal, that the constitutional B
validity of the Insolvency and Bankruptcy Code, 2016 has to be viewed.
THE RAISON D’ÊTRE FOR THE INSOLVENCY AND BANKRUPTCY CODE
9. The Statement of Objects and Reasons for the Code have
been referred to in Innoventive Industries (supra) which states:
C
“12. ……The Statement of Objects and Reasons of the Code
reads as under:
“Statement of Objects and Reasons.—There is no single law in
India that deals with insolvency and bankruptcy. Provisions relating
to insolvency and bankruptcy for companies can be found in the D
Sick Industrial Companies (Special Provisions) Act, 1985, the
Recovery of Debts Due to Banks and Financial Institutions Act,
1993, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 and the Companies
Act, 2013. These statutes provide for creation of multiple fora
such as Board of Industrial and Financial Reconstruction (BIFR), E
Debts Recovery Tribunal (DRT) and National Company Law
Tribunal (NCLT) and their respective Appellate Tribunals.
Liquidation of companies is handled by the High Courts. Individual
bankruptcy and insolvency is dealt with under the Presidency
Towns Insolvency Act, 1909, and the Provincial Insolvency Act, F
1920 and is dealt with by the Courts. The existing framework
for insolvency and bankruptcy is inadequate, ineffective and
results in undue delays in resolution, therefore, the proposed
legislation.
2. The objective of the Insolvency and Bankruptcy Code, 2015
G
is to consolidate and amend the laws relating to reorganization
and insolvency resolution of corporate persons, partnership
firms and individuals in a time-bound manner for maximization
of value of assets of such persons, to promote
entrepreneurship, availability of credit and balance the
interests of all the stakeholders including alteration in the H
580 SUPREME COURT REPORTS [2019] 3 S.C.R.

A priority of payment of government dues and to establish an

Insolvency and Bankruptcy Fund, and matters connected
therewith or incidental thereto. An effective legal framework
for timely resolution of insolvency and bankruptcy would
support development of credit markets and encourage
entrepreneurship. It would also improve Ease of Doing
B
Business, and facilitate more investments leading to higher
economic growth and development.
3. The Code seeks to provide for designating NCLT and DRT as
the Adjudicating Authorities for corporate persons and firms and
individuals, respectively, for resolution of insolvency, liquidation
C and bankruptcy. The Code separates commercial aspects of
insolvency and bankruptcy proceedings from judicial aspects. The
Code also seeks to provide for establishment of the Insolvency
and Bankruptcy Board of India (Board) for regulation of insolvency
professionals, insolvency professional agencies and information
D utilities. Till the Board is established, the Central Government shall
exercise all powers of the Board or designate any financial sector
regulator to exercise the powers and functions of the Board.
Insolvency professionals will assist in completion of insolvency
resolution, liquidation and bankruptcy proceedings envisaged in
the Code. Information Utilities would collect, collate, authenticate
E and disseminate financial information to facilitate such proceedings.
The Code also proposes to establish a fund to be called the
Insolvency and Bankruptcy Fund of India for the purposes specified
in the Code.
4. The Code seeks to provide for amendments in the Indian
F Partnership Act, 1932, the Central Excise Act, 1944, Customs
Act, 1962, the Income Tax Act, 1961, the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993, the Finance
Act, 1994, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, the Sick Industrial
G Companies (Special Provisions) Repeal Act, 2003, the Payment
and Settlement Systems Act, 2007, the Limited Liability Partnership
Act, 2008, and the Companies Act, 2013.
5. The Code seeks to achieve the above objectives.”
(emphasis in original)
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 581
[R. F. NARIMAN, J.]

10. The Preamble of the Code states as follows: A

“An Act to consolidate and amend the laws relating to
reorganization and insolvency resolution of corporate persons,
partnership firms and individuals in a time-bound manner for
maximization of value of assets of such persons, to promote
entrepreneurship, availability of credit and balance the interests B
of all the stakeholders including alteration in the order of priority
of payment of Government dues and to establish an Insolvency
and Bankruptcy Board of India, and for matters connected
therewith or incidental thereto.”
11. As is discernible, the Preamble gives an insight into what is C
sought to be achieved by the Code. The Code is first and foremost, a
Code for reorganization and insolvency resolution of corporate debtors.
Unless such reorganization is effected in a time-bound manner, the value
of the assets of such persons will deplete. Therefore, maximization of
value of the assets of such persons so that they are efficiently run as
going concerns is another very important objective of the Code. This, in D
turn, will promote entrepreneurship as the persons in management of
the corporate debtor are removed and replaced by entrepreneurs. When,
therefore, a resolution plan takes off and the corporate debtor is brought
back into the economic mainstream, it is able to repay its debts, which, in
turn, enhances the viability of credit in the hands of banks and financial E
institutions. Above all, ultimately, the interests of all stakeholders are
looked after as the corporate debtor itself becomes a beneficiary of the
resolution scheme – workers are paid, the creditors in the long run will
be repaid in full, and shareholders/investors are able to maximize their
investment. Timely resolution of a corporate debtor who is in the red, by
an effective legal framework, would go a long way to support the F
development of credit markets. Since more investment can be made
with funds that have come back into the economy, business then eases
up, which leads, overall, to higher economic growth and development of
the Indian economy. What is interesting to note is that the Preamble
does not, in any manner, refer to liquidation, which is only availed of as a G
last resort if there is either no resolution plan or the resolution plans
submitted are not up to the mark. Even in liquidation, the liquidator can
sell the business of the corporate debtor as a going concern. [See
ArcelorMittal (supra) at paragraph 83, footnote 3].

H
582 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 12. It can thus be seen that the primary focus of the legislation is
to ensure revival and continuation of the corporate debtor by protecting
the corporate debtor from its own management and from a corporate
death by liquidation. The Code is thus a beneficial legislation which puts
the corporate debtor back on its feet, not being a mere recovery legislation
for creditors. The interests of the corporate debtor have, therefore, been
B
bifurcated and separated from that of its promoters / those who are in
management. Thus, the resolution process is not adversarial to the
corporate debtor but, in fact, protective of its interests. The moratorium
imposed by Section 14 is in the interest of the corporate debtor itself,
thereby preserving the assets of the corporate debtor during the resolution
C process. The timelines within which the resolution process is to take
place again protects the corporate debtor’s assets from further dilution,
and also protects all its creditors and workers by seeing that the resolution
process goes through as fast as possible so that another management
can, through its entrepreneurial skills, resuscitate the corporate debtor to
achieve all these ends.
D
APPOINTMENT OF MEMBERS OF THE NCLT AND THE NCLAT NOT
CONTRARY TO THISCOURT’S JUDGMENTS.
13. Shri Rohatgi has argued that contrary to the judgments in
Madras Bar Association (I) (supra) and Madras Bar Association
E (III) (supra), Section 412(2) of the Companies Act, 2013 continued on
the statute book, as a result of which, the two Judicial Members of the
Selection Committee get outweighed by three bureaucrats.
14. On 03.01.2018, the Companies Amendment Act, 2017 was
brought into force by which Section 412 of the Companies Act, 2013
F was amended as follows:
“412. Selection of Members of Tribunal and Appellate
Tribunal.—
xxx xxx xxx
(2) The Members of the Tribunal and the Technical Members of
G
the Appellate Tribunal shall be appointed on the recommendation
of a Selection Committee consisting of—
(a) Chief Justice of India or his nominee—Chairperson;
(b) a senior Judge of the Supreme Court or Chief Justice of
H High Court—Member;
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 583
[R. F. NARIMAN, J.]

(c) Secretary in the Ministry of Corporate Affairs—Member; A

and
(d) Secretary in the Ministry of Law and Justice—Member.
(2-A) Where in a meeting of the Selection Committee, there is
equality of votes on any matter, the Chairperson shall have a casting
vote.” B

This was brought into force by a notification dated 09.02.2018.

However, an additional affidavit has been filed during the course of these
proceedings by the Union of India. This affidavit is filed by one Dr. Raj
Singh, Regional Director (Northern Region) of the Ministry of Corporate
Affairs. This affidavit makes it clear that, acting in compliance with the C
directions of the Supreme Court in the aforesaid judgments, a Selection
Committee was constituted to make appointments of Members of the
NCLT in the year 2015 itself. Thus, by an Order dated 27.07.2015, (i)
Justice Gogoi (as he then was), (ii) Justice Ramana, (iii) Secretary,
Department of Legal Affairs, Ministry of Law and Justice, and (iv) D
Secretary, Corporate Affairs, were constituted as the Selection
Committee. This Selection Committee was reconstituted on 22.02.2017
to make further appointments. In compliance of the directions of this
Court, advertisements dated 10.08.2015 were issued inviting applications
for Judicial and Technical Members as a result of which, all the present
Members of the NCLT and NCLAT have been appointed. This being E
the case, we need not detain ourselves any further with regard to the
first submission of Shri Rohatgi.
NCLAT BENCH ONLY AT DELHI.
15. It has been argued by Shri Rohatgi that as per our judgment in F
Madras Bar Association (II) (supra), paragraph 123 states as follows:
“123. We shall first examine the validity of Section 5 of the NTT
Act. The basis of challenge to the above provision has already
been narrated by us while dealing with the submissions advanced
on behalf of the petitioners with reference to the fourth contention.
G
According to the learned counsel for the petitioners, Section 5(2)
of the NTT Act mandates that NTT would ordinarily have its
sittings in the National Capital Territory of Delhi. According to
the petitioners, the aforesaid mandate would deprive the litigating
assessee the convenience of approaching the jurisdictional High
H
584 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Court in the State to which he belongs. An assessee may belong

to a distant/remote State, in which eventuality, he would not merely
have to suffer the hardship of travelling a long distance, but such
travel would also entail uncalled for financial expense. Likewise,
a litigant assessee from a far-flung State may find it extremely
difficult and inconvenient to identify an Advocate who would
B
represent him before NTT, since the same is mandated to be
ordinarily located in the National Capital Territory of Delhi. Even
though we have expressed the view, that it is open to Parliament
to substitute the appellate jurisdiction vested in the jurisdictional
High Courts and constitute courts/tribunals to exercise the said
C jurisdiction, we are of the view, that while vesting jurisdiction in
an alternative court/tribunal, it is imperative for the legislature to
ensure that redress should be available with the same convenience
and expediency as it was prior to the introduction of the newly
created court/tribunal. Thus viewed, the mandate incorporated in
Section 5(2) of the NTT Act to the effect that the sittings of NTT
D
would ordinarily be conducted in the National Capital Territory of
Delhi, would render the remedy inefficacious, and thus
unacceptable in law. The instant aspect of the matter was
considered by this Court with reference to the Administrative
Tribunals Act, 1985 in S.P. Sampath Kumar case [S.P. Sampath
E Kumar v. Union of India, (1987) 1 SCC 124 : (1987) 2 ATC 82]
and L. Chandra Kumar case [L. Chandra Kumar v. Union of
India, (1997) 3 SCC 261 : 1997 SCC (L&S) 577], wherein it was
held that permanent Benches needed to be established at the seat
of every jurisdictional High Court. And if that was not possible, at
least a Circuit Bench required to be established at every place
F
where an aggrieved party could avail of his remedy. The position
on the above issue is no different in the present controversy. For
the above reason, Section 5(2) of the NTT Act is in clear breach
of the law declared by this Court.”
(emphasis supplied)
G
16. The learned Attorney General has assured us that this
judgment will be followed and Circuit Benches will be established as
soon as it is practicable. In this view of the matter, we record this
submission and direct the Union of India to set up Circuit Benches of the
NCLAT within a period of 6 months from today.
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 585
[R. F. NARIMAN, J.]

THE TRIBUNALS ARE FUNCTIONING UNDER THE WRONG MINISTRY A

17. Shri Mukul Rohatgi argued that in Madras Bar Association
(I) (supra), paragraph 120(xii) specifically reads as follows:
“120 We may tabulate the corrections required to set right the
defects in Parts I-B and I-C of the Act:
B
xxx xxx xxx
(xii) The administrative support for all Tribunals should be from
the Ministry of Law and Justice. Neither the Tribunals nor
their members shall seek or be provided with facilities from
the respective sponsoring or parent Ministries or Department C
concerned.
xxx xxx xxx”
Even though eight years have passed since the date of this judgment,
the administrative support for these tribunals continues to be from the
Ministry of Corporate Affairs. This needs to be rectified at the earliest. D
18. However, the learned Attorney General pointed out Article
77(3) of the Constitution of India and Delhi International Airport
Limited v. International Lease Finance Corporation and Ors.,
(2015) 8 SCC 446, which state that once rules of business are allocated
among various Ministries, such allocation is mandatory in nature. E
According to him, therefore, the rules of business, having allocated matters
which arise under the Insolvency Code to the Ministry of Corporate
Affairs, are mandatory in nature and have to be followed.
19. It is obvious that the rules of business, being mandatory in
nature, and having to be followed, are to be so followed by the executive F
branch of the Government. As far as we are concerned, we are bound
by the Constitution Bench judgment in Madras Bar Association (I)
(supra). This statement of the law has been made eight years ago. It is
high time that the Union of India follow, both in letter and spirit, the
judgment of this Court.
G
CLASSIFICATION BETWEEN FINANCIAL CREDITOR AND OPERATIONAL
CREDITOR NEITHER DISCRIMINATORY, NOR ARBITRARY, NOR VIOLATIVE OF
ARTICLE 14 OF THE CONSTITUTION OF INDIA.
20. The tests for violation of Article 14 of the Constitution of
India, when legislation is challenged as being violative of the principle of H
586 SUPREME COURT REPORTS [2019] 3 S.C.R.

A equality, have been settled by this Court time and again. Since equality is
only among equals, no discrimination results if the Court can be shown
that there is an intelligible differentia which separates two kinds of
creditors so long as there is some rational relation between the creditors
so differentiated, with the object sought to be achieved by the legislation.
This aspect of Article 14 has been laid down in judgments too numerous
B
to cite, from the very inception.
21. Another development of the law is that legislation can be struck
down as being manifestly arbitrary. This has been laid down by the recent
Constitution Bench decision in Shayara Bano (supra) as follows:
C “95. On a reading of this judgment in Natural Resources
Allocation case [Natural Resources Allocation, In re, Special
Reference No. 1 of 2012, (2012) 10 SCC 1], it is clear that this
Court did not read McDowell [State of A.P. v. McDowell and
Co., (1996) 3 SCC 709] as being an authority for the proposition
that legislation can never be struck down as being arbitrary. Indeed
D the Court, after referring to all the earlier judgments, and Ajay
Hasia [Ajay Hasia v. Khalid Mujib Sehravardi, (1981) 1 SCC
722 : 1981 SCC (L&S) 258] in particular, which stated that
legislation can be struck down on the ground that it is “arbitrary”
under Article 14, went on to conclude that “arbitrariness” when
E applied to legislation cannot be used loosely. Instead, it broad based
the test, stating that if a constitutional infirmity is found, Article 14
will interdict such infirmity. And a constitutional infirmity is found
in Article 14 itself whenever legislation is “manifestly arbitrary”
i.e. when it is not fair, not reasonable, discriminatory, not
transparent, capricious, biased, with favouritism or nepotism and
F not in pursuit of promotion of healthy competition and equitable
treatment. Positively speaking, it should conform to norms which
are rational, informed with reason and guided by public interest,
etc.
96. Another Constitution Bench decision in Subramanian Swamy
G v. CBI [Subramanian Swamy v. CBI, (2014) 8 SCC 682 : (2014)
6 SCC (Cri) 42 : (2014) 3 SCC (L&S) 36] dealt with a challenge
to Section 6-A of the Delhi Special Police Establishment Act, 1946.
This section was ultimately struck down as being discriminatory
and hence violative of Article 14. A specific reference had been
H made to the Constitution Bench by the reference order in
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 587
[R. F. NARIMAN, J.]

Subramanian Swamy v. CBI [Subramanian Swamy v. CBI, A

(2005) 2 SCC 317 : 2005 SCC (L&S) 241] and after referring to
several judgments including Ajay Hasia [Ajay Hasia v. Khalid
Mujib Sehravardi, (1981) 1 SCC 722 : 1981 SCC (L&S) 258],
Mardia Chemicals [Mardia Chemicals Ltd. v. Union of India,
(2004) 4 SCC 311], Malpe Vishwanath Acharya [Malpe
B
Vishwanath Acharya v. State of Maharashtra, (1998) 2 SCC
1] and McDowell [State of A.P. v. McDowell and Co., (1996) 3
SCC 709], the reference, inter alia, was as to whether arbitrariness
and unreasonableness, being facets of Article 14, are or are not
available as grounds to invalidate a legislation.
97. After referring to the submissions of the counsel, and several C
judgments on the discrimination aspect of Article 14, this Court
held: (Subramanian Swamy case [Subramanian Swamy v. CBI,
(2014) 8 SCC 682 : (2014) 6 SCC (Cri) 42 : (2014) 3 SCC (L&S)
36] , SCC pp. 721-22, paras 48-49)
“48. In E.P. Royappa [E.P. Royappa v. State of T.N., (1974) 4 D
SCC 3 : 1974 SCC (L&S) 165] , it has been held by this Court
that the basic principle which informs both Articles 14 and 16
are equality and inhibition against discrimination. This Court
observed in para 85 as under: (SCC p. 38)
‘85. … From a positivistic point of view, equality is antithetic E
to arbitrariness. In fact equality and arbitrariness are sworn
enemies; one belongs to the rule of law in a republic while the
other, to the whim and caprice of an absolute monarch. Where
an act is arbitrary, it is implicit in it that it is unequal both
according to political logic and constitutional law and is therefore F
violative of Article 14, and if it affects any matter relating to
public employment, it is also violative of Article 16. Articles 14
and 16 strike at arbitrariness in State action and ensure fairness
and equality of treatment.’
Court’s approach G
49. Where there is challenge to the constitutional validity of a law
enacted by the legislature, the Court must keep in view that there
is always a presumption of constitutionality of an enactment, and
a clear transgression of constitutional principles must be shown.
The fundamental nature and importance of the legislative process
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588 SUPREME COURT REPORTS [2019] 3 S.C.R.

A needs to be recognised by the Court and due regard and deference

must be accorded to the legislative process. Where the legislation
is sought to be challenged as being unconstitutional and violative
of Article 14 of the Constitution, the Court must remind itself to
the principles relating to the applicability of Article 14 in relation
to invalidation of legislation. The two dimensions of Article 14 in
B
its application to legislation and rendering legislation invalid are
now well recognised and these are: (i) discrimination, based on
an impermissible or invalid classification, and (ii) excessive
delegation of powers; conferment of uncanalised and unguided
powers on the executive, whether in the form of delegated
C legislation or by way of conferment of authority to pass
administrative orders—if such conferment is without any guidance,
control or checks, it is violative of Article 14 of the Constitution.
The Court also needs to be mindful that a legislation does not
become unconstitutional merely because there is another view or
because another method may be considered to be as good or
D
even more effective, like any issue of social, or even economic
policy. It is well settled that the courts do not substitute their views
on what the policy is.”
xxx xxx xxx
E 100. To complete the picture, it is important to note that subordinate
legislation can be struck down on the ground that it is arbitrary
and, therefore, violative of Article 14 of the Constitution. In Cellular
Operators Assn. of India v. TRAI [Cellular Operators Assn.
of India v. TRAI, (2016) 7 SCC 703], this Court referred to earlier
precedents, and held: (SCC pp. 736-37, paras 42-44)
F
“Violation of fundamental rights
42. We have already seen that one of the tests for challenging
the constitutionality of subordinate legislation is that subordinate
legislation should not be manifestly arbitrary. Also, it is settled
G law that subordinate legislation can be challenged on any of the
grounds available for challenge against plenary legislation. [See
Indian Express Newspapers (Bombay) (P) Ltd. v. Union of
India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union
of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] , SCC at p.
689, para 75.]
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 589
[R. F. NARIMAN, J.]

43. The test of “manifest arbitrariness” is well explained in two A

judgments of this Court. In Khoday Distilleries Ltd. v. State of
Karnataka [Khoday Distilleries Ltd. v. State of Karnataka,
(1996) 10 SCC 304], this Court held: (SCC p. 314, para 13)
‘13. It is next submitted before us that the amended Rules are
arbitrary, unreasonable and cause undue hardship and, therefore, B
violate Article 14 of the Constitution. Although the protection
of Article 19(1)(g) may not be available to the appellants, the
Rules must, undoubtedly, satisfy the test of Article 14, which is
a guarantee against arbitrary action. However, one must bear
in mind that what is being challenged here under Article 14 is
not executive action but delegated legislation. The tests of C
arbitrary action which apply to executive actions do not
necessarily apply to delegated legislation. In order that
delegated legislation can be struck down, such legislation
must be manifestly arbitrary; a law which could not be
reasonably expected to emanate from an authority D
delegated with the law-making power. In Indian Express
Newspapers (Bombay) (P) Ltd. v. Union of India [Indian
Express Newspapers (Bombay) (P) Ltd. v. Union of India,
(1985) 1 SCC 641 : 1985 SCC (Tax) 121], this Court said that
a piece of subordinate legislation does not carry the same degree
of immunity which is enjoyed by a statute passed by a competent E
legislature. A subordinate legislation may be questioned
under Article 14 on the ground that it is unreasonable;
“unreasonable not in the sense of not being reasonable,
but in the sense that it is manifestly arbitrary”. Drawing a
comparison between the law in England and in India, the Court F
further observed that in England the Judges would say,
“Parliament never intended the authority to make such rules;
they are unreasonable and ultra vires”. In India, arbitrariness
is not a separate ground since it will come within the
embargo of Article 14 of the Constitution. But subordinate
legislation must be so arbitrary that it could not be said to G
be in conformity with the statute or that it offends Article
14 of the Constitution.’
44. Also, in Sharma Transport v. State of A.P. [Sharma
Transport v. State of A.P., (2002) 2 SCC 188], this Court held:
(SCC pp. 203-04, para 25) H
590 SUPREME COURT REPORTS [2019] 3 S.C.R.

A ‘25. … The tests of arbitrary action applicable to executive action

do not necessarily apply to delegated legislation. In order to strike
down a delegated legislation as arbitrary it has to be established
that there is manifest arbitrariness. In order to be described as
arbitrary, it must be shown that it was not reasonable and
manifestly arbitrary. The expression “arbitrarily” means: in an
B
unreasonable manner, as fixed or done capriciously or at pleasure,
without adequate determining principle, not founded in the nature
of things, non-rational, not done or acting according to reason or
judgment, depending on the will alone.’”
(emphasis in original)
C
101. It will be noticed that a Constitution Bench of this Court in
Indian Express Newspapers (Bombay) (P) Ltd. v. Union of
India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union
of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it
was settled law that subordinate legislation can be challenged on
D any of the grounds available for challenge against plenary
legislation. This being the case, there is no rational distinction
between the two types of legislation when it comes to this ground
of challenge under Article 14. The test of manifest arbitrariness,
therefore, as laid down in the aforesaid judgments would apply to
E invalidate legislation as well as subordinate legislation under Article
14. Manifest arbitrariness, therefore, must be something done by
the legislature capriciously, irrationally and/or without adequate
determining principle. Also, when something is done which is
excessive and disproportionate, such legislation would be manifestly
arbitrary. We are, therefore, of the view that arbitrariness in the
F sense of manifest arbitrariness as pointed out by us above would
apply to negate legislation as well under Article 14.”
This judgment has since been followed in Gopal Jha v. The
Hon’ble Supreme Court of India, Writ Petition (Civil) No. 745/2018
[decided on 25.10.2018] (at paragraph 27); Indian Young Lawyers
G Associations and Ors. v. State of Kerala and Ors., Writ Petition
(Civil) No. 373/2006 [decided on 28.09.2018]; Joseph Shine v. Union
of India, Writ Petition (Criminal) No. 194/2017 [decided on 27.09.2018]
(at paragraphs 110, 195, 197); K.S. Puttaswamy v. Union of India,
Writ Petition (Civil) No. 494/2012 [decided on 26.09.2018] (at paragraphs
H 77, 78, 416, 724, 725, 1160); Navtej Singh Johar and Ors. v. Union of
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 591
[R. F. NARIMAN, J.]

India, (2018) 10 SCC 1 (at paragraphs 253, 353, 411, 637.9); Lok A
Prahari v. State of Uttar Pradesh and Ors., (2018) 6 SCC 1 (at
paragraph 35); and Nikesh Tarachand Shah v. Union of India and
Ors., (2018) 11 SCC 1 (at paragraph 23).
22. Sections 5(7) and 5(8) of the Code define “financial creditor”
and “financial debt” as follows: B
“5. Definitions.—In this Part, unless the context otherwise
requires,—
xxx xxx xxx
(7) “financial creditor” means any person to whom a financial C
debt is owed and includes a person to whom such debt has been
legally assigned or transferred to;
(8) “financial debt” means a debt along with interest, if any, which
is disbursed against the consideration for the time value of money
and includes— D
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance
credit facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility
E
or the issue of bonds, notes, debentures, loan stock or any
similar instrument;
(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital
lease under the Indian Accounting Standards or such other
accounting standards as may be prescribed; F

(e) receivables sold or discounted other than any receivables

sold on non-recourse basis;
(f) any amount raised under any other transaction, including
any forward sale or purchase agreement, having the commercial G
effect of a borrowing;
Explanation.—For the purposes of this sub-clause,—
(i) any amount raised from an allottee under a real estate
project shall be deemed to be an amount having the
commercial effect of a borrowing; and H
592 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (ii) the expressions, “allottee” and “real estate project” shall

have the meanings respectively assigned to them in clauses
(d) and (zn) of Section 2 of the Real Estate (Regulation and
Development) Act, 2016 (16 of 2016);
(g) any derivative transaction entered into in connection with
B protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other instrument
C issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to
(h) of this clause;
xxx xxx xxx”
D Section 5(20) defines “operational creditor” as follows:
“5. Definitions.—In this Part, unless the context otherwise
requires,—
xxx xxx xxx
(20) “operational creditor” means a person to whom an
E operational debt is owed and includes any person to whom
such debt has been legally assigned or transferred;
xxx xxx xxx”
Section 7 of the Code states:
F “7. Initiation of corporate insolvency resolution process by
financial creditor.—(1) A financial creditor either by itself or
jointly with other financial creditors, or any other person on behalf
of the financial creditor, as may be notified by the Central
Government, may file an application for initiating corporate
insolvency resolution process against a corporate debtor before
G the Adjudicating Authority when a default has occurred.
Explanation.—For the purposes of this sub-section, a default
includes a default in respect of a financial debt owed not only to
the applicant financial creditor but to any other financial creditor
of the corporate debtor.
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 593
[R. F. NARIMAN, J.]

(2) The financial creditor shall make an application under sub- A

section (1) in such form and manner and accompanied with such
fee as may be prescribed.
(3) The financial creditor shall, along with the application furnish—
(a) record of the default recorded with the information utility
or such other record or evidence of default as may be specified; B

(b) the name of the resolution professional proposed to act as

an interim resolution professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the C
receipt of the application under sub-section (2), ascertain the
existence of a default from the records of an information utility or
on the basis of other evidence furnished by the financial creditor
under sub-section (3).
(5) Where the Adjudicating Authority is satisfied that— D
(a) a default has occurred and the application under
sub-section (2) is complete, and there is no disciplinary
proceedings pending against the proposed resolution
professional, it may, by order, admit such application; or
(b) default has not occurred or the application under E
sub-section (2) is incomplete or any disciplinary proceeding is
pending against the proposed resolution professional, it may,
by order, reject such application:
Provided that the Adjudicating Authority shall, before rejecting
the application under clause (b) of sub-section (5), give a notice F
to the applicant to rectify the defect in his application within
seven days of receipt of such notice from the Adjudicating
Authority.
(6) The corporate insolvency resolution process shall commence
from the date of admission of the application under sub-section (5). G

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the financial
creditor and the corporate debtor;
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594 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (b) the order under clause (b) of sub-section (5) to the financial
creditor, within seven days of admission or rejection of such
application, as the case may be.”
23. A perusal of the definition of “financial creditor” and “financial
debt” makes it clear that a financial debt is a debt together with interest,
B if any, which is disbursed against the consideration for time value of
money. It may further be money that is borrowed or raised in any of the
manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an
inclusive definition. On the other hand, an “operational debt” would include
a claim in respect of the provision of goods or services, including
employment, or a debt in respect of payment of dues arising under any
C law and payable to the Government or any local authority.
24. 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
D 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
E
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
F 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.
G 25. The argument of learned counsel on behalf of the petitioners
is that in point of fact, there is no intelligible differentia having relation to
the objects sought to be achieved by the Code between financial and
operational creditors and indeed, nowhere in the world has this distinction
been made. The BLRC Report presents what according to it is the
rationale for the reason to differentiate between financial and operational
H creditors. The Report states as follows:
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 595
[R. F. NARIMAN, J.]

“While both types of creditors can trigger the IRP under the Code, A
the evidence presented to trigger varies. Since financial creditors
have electronic records of the liabilities filed in the Information
Utilities of Section 4.3, incontrovertible event of default on any
financial credit contract can be readily verifiable by accessing
this system. The evidence submitted of default by the debtor to
B
the operational creditor may be in either electronic or physical
form, since all operational creditors may or may not have electronic
filings of the debtors’ liability. Till such time that the Information
Utilities are ubiquitous, financial creditors may establish default in
a manner similar to operational creditors.”
Similarly, the Insolvency and Bankruptcy Bill in the Notes on Clause C
8 states:
“Clause 8 lays down the procedure for the initiation of the corporate
insolvency resolution process by an operational creditor. This
procedure differs from the procedure applicable to financial
creditors as operational debts (such as trade debts, salary or wage D
claims) tend to be small amounts (in comparison to financial debts)
or are recurring in nature and may not be accurately reflected on
the records of information utilities at all times. The possibility of
disputed debts in relation to operational creditors is also higher in
comparison to financial creditors such as banks and financial E
institutions. Accordingly, the process for initiation of the insolvency
resolution process differs for an operational creditor…… This
ensures that operational creditors, whose debt claims are usually
smaller, are not able to put the corporate debtor into the insolvency
resolution process prematurely or initiate the process for extraneous
considerations. It may also facilitate informal negotiations between F
such creditors and the corporate debtor, which may result in a
restructuring of the debt outside the formal proceedings.”
However, the Insolvency Law Committee [“ILC”], in its Report
of March 2018 dealt with debenture holders and fixed deposit holders,
who are also financial creditors, and are numerous. The Report then G
went on to state:
“10.6 For certain securities, a trustee or an agent may already be
appointed as per the terms of the security instrument. For example,
a debenture trustee would be appointed if debentures exceeding
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596 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 500 have been issued [Section 71(5), Companies Act, 2013] or if

secured debentures are issued [Rule 18(1)(c), Companies (Share
Capital and Debenture) Rules, 2014]. Such creditors may be
represented through such pre-appointed trustees or agents. For
other classes of creditors which exceed a certain threshold in
number, like home buyers or security holders for whom no trustee
B
or agent has already been appointed under a debt instrument or
otherwise, an insolvency professional (other than the IRP) shall
be appointed by the NCLT on the request of the IRP. It is to be
noted that as the agent or trustee or insolvency professional, i.e.
the authorised representative for the creditors discussed above
C and executors, guarantors, etc. as discussed in paragraph 9 of
this Report, shall be a part of the CoC, they cannot be related
parties to the corporate debtor in line with the spirit of proviso to
section 21(2).”
xxx xxx xxx
D “10.8 In light of the deliberation above, the Committee felt that a
mechanism requires to be provided in the Code to mandate
representation in meetings of security holders, deposit holders,
and all other classes of financial creditors which exceed a certain
number, through an authorised representative. This can be done
E by adding a new provision to section 21 of the Code. Such a
representative may either be a trustee or an agent appointed under
the terms of the debt agreement of such creditors, otherwise an
insolvency professional may be appointed by the NCLT for each
such class of financial creditors. Additionally, the representative
shall act and attend the meetings on behalf of the respective class
F of financial creditors and shall vote on behalf of each of the
financial creditor to the extent of the voting share of each such
creditor, and as per their instructions. To ensure adequate
representation by the authorised representative of the financial
creditors, a specific provision laying down the rights and duties of
G such authorised representatives may be inserted. Further, the
requisite threshold for the number of creditors and manner of
voting may be specified by IBBI through regulations to enable
efficient voting by the representative. Also, regulation 25 may
also be amended to enable voting through electronic means such
as e-mail, to address any technical issues which may arise due to
H a large number of creditors voting at the same time.”
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 597
[R. F. NARIMAN, J.]

Given this Report, the Code was amended and Section 21(6A) A
and 21(6B) were added, which are set out hereinbelow:
“21. Committee of creditors.—
xxx xxx xxx
(6-A) Where a financial debt— B
(a) is in the form of securities or deposits and the terms of the
financial debt provide for appointment of a trustee or agent to
act as authorised representative for all the financial creditors,
such trustee or agent shall act on behalf of such financial
creditors; C
(b) is owed to a class of creditors exceeding the number as
may be specified, other than the creditors covered under clause
(a) or sub-section (6), the interim resolution professional shall
make an application to the Adjudicating Authority along with
the list of all financial creditors, containing the name of an D
insolvency professional, other than the interim resolution
professional, to act as their authorised representative who shall
be appointed by the Adjudicating Authority prior to the first
meeting of the committee of creditors;
(c) is represented by a guardian, executor or administrator,
E
such person shall act as authorised representative on behalf of
such financial creditors,
and such authorised representative under clause (a) or clause (b)
or clause (c) shall attend the meetings of the committee of
creditors, and vote on behalf of each financial creditor to the extent
F
of his voting share.
(6-B) The remuneration payable to the authorised representative—
(i) under clauses (a) and (c) of sub-section (6-A), if any, shall
be as per the terms of the financial debt or the relevant
documentation; and G
(ii) under clause (b) of sub-section (6-A) shall be as specified
which shall form part of the insolvency resolution process
costs.”
Also, Regulations 16A and 16B of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons) H
598 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Regulations, 2016 [“CIRP Regulations”] were added, with effect from

04.07.2018, as follows:
“16A. Authorised representative.—(1) The interim resolution
professional shall select the insolvency professional, who is the
choice of the highest number of financial creditors in the class in
B Form CA received under sub-regulation (1) of regulation 12, to
act as the authorised representative of the creditors of the
respective class:
Provided that the choice for an insolvency professional to act as
authorised representative in Form CA received under sub-
C regulation (2) of regulation 12 shall not be considered.
(2) The interim resolution professional shall apply to the
Adjudicating Authority for appointment of the authorised
representatives selected under sub-regulation (1) within two days
of the verification of claims received under sub-regulation (1) of
D regulation 12.
(3) Any delay in appointment of the authorised representative for
any class of creditors shall not affect the validity of any decision
taken by the committee.
(4) The interim resolution professional shall provide the list of
E creditors in each class to the respective authorised representative
appointed by the Adjudicating Authority.
(5) The interim resolution professional or the resolution
professional, as the case may be, shall provide an updated list of
creditors in each class to the respective authorised representative
F as and when the list is updated.
Clarification: The authorised representative shall have no role in
receipt or verification of claims of creditors of the class he
represents.
(6) The interim resolution professional or the resolution
G professional, as the case may be, shall provide electronic means
of communication between the authorised representative and the
creditors in the class.
(7) The voting share of a creditor in a class shall be in proportion
to the financial debt which includes an interest at the rate of eight
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 599
[R. F. NARIMAN, J.]

per cent per annum unless a different rate has been agreed to A
between the parties.
(8) The authorised representative of creditors in a class shall be
entitled to receive fee for every meeting of the committee attended
by him in the following manner, namely:
B
Number of creditors in Fee per meeting of the
the class committee (Rs.)

10-100 15,000

101-1000 20,000 C

More than 1000 25,000

(9) The authorised representative shall circulate the agenda to

creditors in a class and announce the voting window at least D
twenty-four hours before the window opens for voting instructions
and keep the voting window open for at least twelve hours.
16B. Committee with only creditors in a class.—Where the
corporate debtor has only creditors in a class and no other financial
creditor eligible to join the committee, the committee shall consist E
of only the authorised representative(s).”
26. It is obvious that debenture holders and persons with home
loans may be numerous and, therefore, have been statutorily dealt with
by the aforesaid change made in the Code as well as the Regulations.
However, as a general rule, it is correct to say that financial creditors, F
which involve banks and financial institutions, would certainly be smaller
in number than operational creditors of a corporate debtor.
27. According to us, 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 G
services as well as payments to workers not being secured by mortgaged
documents and the like. The distinction between secured and unsecured
creditors is a distinction which has obtained since the earliest of the
Companies Acts both in the United Kingdom and in this country. Apart
from the above, the nature of loan agreements with financial creditors is
H
600 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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.
B
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.
C 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
D
debts. A simple example will suffice. Goods that are supplied may be
substandard. Services that are provided may be substandard. Goods
may not have been supplied at all. All these qua operational debts are
matters to be proved in arbitration or in the courts of law. On the other
hand, financial debts made to banks and financial institutions are well-
E documented and defaults made are easily verifiable.
28. Most importantly, financial creditors are, from the very
beginning, involved with assessing the viability of the corporate debtor.
They can, and therefore do, engage in restructuring of the loan as well
as reorganization of the corporate debtor’s business when there is
F 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
G the Code.
NOTICE, HEARING, AND SET-OFF OR COUNTERCLAIM QUA FINANCIAL
DEBTS.

29. This Court, in Innoventive Industries (supra) stated as

H follows:
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 601
[R. F. NARIMAN, J.]

“27. The scheme of the Code is to ensure that when a default A

takes place, in the sense that a debt becomes due and is not paid,
the insolvency resolution process begins. Default is defined in
Section 3(12) in very wide terms as meaning non-payment of a
debt once it becomes due and payable, which includes non-
payment of even part thereof or an instalment amount. For the
B
meaning of “debt”, we have to go to Section 3(11), which in turn
tells us that a debt means a liability of obligation in respect of a
“claim” and for the meaning of “claim”, we have to go back to
Section 3(6) which defines “claim” to mean a right to payment
even if it is disputed. The Code gets triggered the moment default
is of rupees one lakh or more (Section 4). The corporate insolvency C
resolution process may be triggered by the corporate debtor itself
or a financial creditor or operational creditor. A distinction is made
by the Code between debts owed to financial creditors and
operational creditors. A financial creditor has been defined under
Section 5(7) as a person to whom a financial debt is owed and a
D
financial debt is defined in Section 5(8) to mean a debt which is
disbursed against consideration for the time value of money. As
opposed to this, an operational creditor means a person to whom
an operational debt is owed and an operational debt under Section
5(21) means a claim in respect of provision of goods or services.
28. When it comes to a financial creditor triggering the process, E
Section 7 becomes relevant. Under the Explanation to Section
7(1), a default is in respect of a financial debt owed to any financial
creditor of the corporate debtor — it need not be a debt owed to
the applicant financial creditor. Under Section 7(2), an application
is to be made under sub-section (1) in such form and manner as is F
prescribed, which takes us to the Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016. Under Rule
4, the application is made by a financial creditor in Form 1
accompanied by documents and records required therein. Form 1
is a detailed form in 5 parts, which requires particulars of the
applicant in Part I, particulars of the corporate debtor in Part II, G
particulars of the proposed interim resolution professional in Part
III, particulars of the financial debt in Part IV and documents,
records and evidence of default in Part V. Under Rule 4(3), the
applicant is to dispatch a copy of the application filed with the
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602 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Adjudicating Authority by registered post or speed post to the

registered office of the corporate debtor. The speed, within which
the Adjudicating Authority is to ascertain the existence of a default
from the records of the information utility or on the basis of evidence
furnished by the financial creditor, is important. This it must do
within 14 days of the receipt of the application. It is at the stage of
B
Section 7(5), where the Adjudicating Authority is to be satisfied
that a default has occurred, that the corporate debtor is entitled to
point out that a default has not occurred in the sense that the
“debt”, which may also include a disputed claim, is not due. A
debt may not be due if it is not payable in law or in fact. The
C moment the Adjudicating Authority is satisfied that a default has
occurred, the application must be admitted unless it is incomplete,
in which case it may give notice to the applicant to rectify the
defect within 7 days of receipt of a notice from the Adjudicating
Authority. Under sub-section (7), the Adjudicating Authority shall
then communicate the order passed to the financial creditor and
D
corporate debtor within 7 days of admission or rejection of such
application, as the case may be.
29. The scheme of Section 7 stands in contrast with the scheme
under Section 8 where an operational creditor is, on the occurrence
of a default, to first deliver a demand notice of the unpaid debt to
E the operational debtor in the manner provided in Section 8(1) of
the Code. Under Section 8(2), the corporate debtor can, within a
period of 10 days of receipt of the demand notice or copy of the
invoice mentioned in sub-section (1), bring to the notice of the
operational creditor the existence of a dispute or the record of the
F pendency of a suit or arbitration proceedings, which is pre-
existing—i.e. before such notice or invoice was received by the
corporate debtor. The moment there is existence of such a dispute,
the operational creditor gets out of the clutches of the Code.
30. On the other hand, as we have seen, in the case of a corporate
G debtor who commits a default of a financial debt, the Adjudicating
Authority has merely to see the records of the information utility
or other evidence produced by the financial creditor to satisfy
itself that a default has occurred. It is of no matter that the debt is
disputed so long as the debt is “due” i.e. payable unless interdicted
by some law or has not yet become due in the sense that it is
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 603
[R. F. NARIMAN, J.]

payable at some future date. It is only when this is proved to the A

satisfaction of the Adjudicating Authority that the Adjudicating
Authority may reject an application and not otherwise.”
30. Section 3(9)(c) read with Section 214(e) of the Code are
important and are set out as under:
“3. Definitions.—In this Code, unless the context otherwise B
requires,—
xxx xxx xxx
(9) “core services” means services rendered by an information
utility for— C
xxx xxx xxx
(c) authenticating and verifying the financial information
submitted by a person; and
xxx xxx xxx”
D
“214. Obligations of information utility.—For the purposes of
providing core services to any person, every information utility
shall—
xxx xxx xxx
(e) get the information received from various persons E
authenticated by all concerned parties before storing such
information;
xxx xxx xxx”
31. It is clear from these Sections that information in respect of F
debts incurred by financial debtors is easily available through information
utilities which, under the Insolvency and Bankruptcy Board of India
(Information Utilities) Regulations, 2017 [“Information Utilities
Regulations”], are to satisfy themselves that information provided as
to the debt is accurate. This is done by giving notice to the corporate
debtor who then has an opportunity to correct such information. G
32. Apart from the record maintained by such utility, Form I
appended to the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016, makes it clear that the following are other sources
which evidence a financial debt:
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604 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (a) Particulars of security held, if any, the date of its creation, its
estimated value as per the creditor;
(b) Certificate of registration of charge issued by the registrar of
companies (if the corporate debtor is a company);
(c) Order of a court, tribunal or arbitral panel adjudicating on the
B default;
(d) Record of default with the information utility;
(e) Details of succession certificate, or probate of a will, or letter
of administration, or court decree (as may be applicable), under
C the Indian Succession Act, 1925;
(f) The latest and complete copy of the financial contract reflecting
all amendments and waivers to date;
(g) A record of default as available with any credit information
company;
D
(h) Copies of entries in a bankers book in accordance with the
Bankers Books Evidence Act, 1891.
33. Rule 4 (3) of the aforesaid Rules states as follows:
“4. Application by financial creditor.—
E xxx xxx xxx
(3) The applicant shall dispatch forthwith, a copy of the
application filed with the Adjudicating Authority, by registered
post or speed post to the registered office of the corporate
debtor.
F
xxx xxx xxx”
Section 420 of the Companies Act, 2013 states as follows:
“420. Orders of Tribunal.—(1) The Tribunal may, after giving
the parties to any proceeding before it, a reasonable opportunity
G of being heard, pass such orders thereon as it thinks fit.
(2) The Tribunal may, at any time within two years from the date
of the order, with a view to rectifying any mistake apparent from
the record, amend any order passed by it, and shall make such
amendment, if the mistake is brought to its notice by the parties:
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 605
[R. F. NARIMAN, J.]

Provided that no such amendment shall be made in respect of any A

order against which an appeal has been preferred under this Act.
(3) The Tribunal shall send a copy of every order passed under
this section to all the parties concerned.”
Rules 11, 34, and 37 of the National Company Law Tribunal Rules,
2016 [“NCLT Rules”] state as follows: B

“11. Inherent Powers.—Nothing in these rules shall be deemed

to limit or otherwise affect the inherent powers of the Tribunal to
make such orders as may be necessary for meeting the ends of
justice or to prevent abuse of the process of the Tribunal.”
C
xxx xxx xxx
34. General Procedure.—(1) In a situation not provided for in
these rules, the Tribunal may, for reasons to be recorded in writing,
determine the procedure in a particular case in accordance with
the principles of natural justice. D
(2) The general heading in all proceedings before the Tribunal, in
all advertisements and notices shall be in Form No. NCLT 4.
(3) Every petition or application or reference shall be filed in form
as provided in Form No. NCLT 1 with attachments thereto
accompanied by Form No. NCLT 2 and in case of an interlocutory E
application, the same shall be filed in Form No. NCLT 1
accompanied by such attachments thereto along with Form No.
NCLT 3.
(4) Every petition or application including interlocutory application
shall be verified by an affidavit in Form No. NCLT 6. Notice to F
be issued by the Tribunal to the opposite party shall be in Form
NCLT 5.”
xxx xxx xxx
“37. Notice to Opposite Party.- (1) The Tribunal shall issue notice
to the respondent to show cause against the application or petition G
on a date of hearing to be specified in the Notice. Such notice in
Form No. NCLT 5 shall be accompanied by a copy of the
application with supporting documents.
(2) If the respondent does not appear on the date specified in the
notice in Form No. NCLT 5, the Tribunal, after according H
606 SUPREME COURT REPORTS [2019] 3 S.C.R.

A reasonable opportunity to the respondent, shall forthwith proceed

ex-parte to dispose of the application.
(3) If the respondent contests to the notice received under sub-
rule (1), it may, either in person or through an authorised
representative, file a reply accompanied with an affidavit and along
B with copies of such documents on which it relies, with an advance
service to the petitioner or applicant, to the Registry before the
date of hearing and such reply and copies of documents shall
form part of the record.”
A conjoint reading of all these Rules makes it clear that at the
C stage of the Adjudicating Authority’s satisfaction under Section 7(5) of
the Code, the corporate debtor is served with a copy of the application
filed with the Adjudicating Authority and has the opportunity to file a
reply before the said authority and be heard by the said authority before
an order is made admitting the said application. What is also of relevance
is that in order to protect the corporate debtor from being dragged into
D the corporate insolvency resolution process malafide, the Code prescribes
penalties. Thus, Section 65 of the Code reads as follows:
“65. Fraudulent or malicious initiation of proceedings.—(1)
If, any person initiates the insolvency resolution process or
liquidation proceedings fraudulently or with malicious intent for
E any purpose other than for the resolution of insolvency, or
liquidation, as the case may be, the Adjudicating Authority may
impose upon such person a penalty which shall not be less than
one lakh rupees, but may extend to one crore rupees.
(2) If, any person initiates voluntary liquidation proceedings with
F the intent to defraud any person, the Adjudicating Authority may
impose upon such person a penalty which shall not be less than
one lakh rupees but may extend to one crore rupees.”
34. Also, punishment is prescribed under Section 75 for furnishing
false information in an application made by a financial creditor which
G further deters a financial creditor from wrongly invoking the provisions
of Section 7. Section 75 reads as under:
“75. Punishment for false information furnished in
application.—Where any person furnishes information in the
application made under Section 7, which is false in material
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 607
[R. F. NARIMAN, J.]

particulars, knowing it to be false or omits any material fact, A

knowing it to be material, such person shall be punishable with
fine which shall not be less than one lakh rupees, but may extend
to one crore rupees.”
35. Insofar as set-off and counterclaim is concerned, a set-off of
amounts due from financial creditors is a rarity. Usually, financial debts B
point only in one way – amounts lent have to be repaid. However, it is
not as if a legitimate set-off is not to be considered at all. Such set-off
may be considered at the stage of filing of proof of claims during the
resolution process by the resolution professional, his decision being subject
to challenge before the Adjudicating Authority under Section 60. Section
60(5)(c) reads as follows: C

“60. Adjudicating Authority for corporate persons.—

xxx xxx xxx
(5) Notwithstanding anything to the contrary contained in any other
law for the time being in force, the National Company Law D
Tribunal shall have jurisdiction to entertain or dispose of—
xxx xxx xxx
(c) any question of priorities or any question of law or facts,
arising out of or in relation to the insolvency resolution or
E
liquidation proceedings of the corporate debtor or corporate
person under this Code.”
36. 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
F
nothing in the Code which interdicts the corporate debtor from pursuing
such counterclaims in other judicial fora. Form C dealing with submission
of claims by financial creditors in the CIRP Regulations states thus:
“FORM C
SUBMISSION OF CLAIM BY FINANCIAL CREDITORS G
[Under Regulation 8 of the Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016]
[Date]
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608 SUPREME COURT REPORTS [2019] 3 S.C.R.

A From
[Name and address of the financial creditor, including address of
its registered office and principal office]
To
B The Interim Resolution Professional/Resolution Professional,
[Name of the Insolvency Resolution Professional / Resolution
Professional]
[Address as set out in public announcement]
Subject: Submission of claim and proof of claim.
C
Madam/Sir,
[Name of the financial creditor], hereby submits this claim in
respect of the corporate insolvency resolution process of [name
of corporate debtor]. The details for the same are set out below:
D

H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 609
[R. F. NARIMAN, J.]

* PAN number, passport, AADHAAR Card or the identity card

E
issued by the Election Commission of India.
DECLARATION
I, [Name of claimant], currently residing at [insert address], do
hereby declare and state as follows:
1. [Name of corporate debtor], the corporate debtor was, at F
the insolvency commencement date, being the …………
day of ………… 20……, actually indebted to me for a
sum of Rs. [insert amount of claim].
2. In respect of my claim of the said sum or any part thereof,
I have relied on the documents specified below: G
[Please list the documents relied on as evidence of claim].
3. The said documents are true, valid and genuine to the best
of my knowledge, information and belief and no material
facts have been concealed therefrom.
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610 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 4. In respect of the said sum or any part thereof, neither I, nor

any person, by my order, to my knowledge or belief, for my
use, had or received any manner of satisfaction or security
whatsoever, save and except the following:
[Please state details of any mutual credit, mutual debts, or
B other mutual dealings between the corporate debtor and
the creditor which may be set-off against the claim].
5. I am/I am not a related party of the corporate debtor, as
defined under Section 5(24) of the Code.
6. I am eligible to join committee of creditors by virtue of
C proviso to Section 21(2) of the Code even though I am a
related party of the corporate debtor.
Date:
Place:
(Signature of the claimant)
D
VERIFICATION
I, [Name] the claimant hereinabove, do hereby verify that the
contents of this proof of claim are true and correct to my knowledge
and belief and no material fact has been concealed therefrom.
E Verified at … on this …… day of ………, 20…
(Signature of claimant)
[Note: In the case of company or limited liability partnership, the
declaration and verification shall be made by the director/manager/
secretary/designated partner and in the case of other entities, an
F officer authorised for the purpose by the entity.]”
37. The trigger for a financial creditor’s application is non-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
G 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 learned Solicitor General
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 611
[R. F. NARIMAN, J.]

for this shift in legislative policy. First is predictability and certainty. A

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,
B
the trigger that would lead to liquidation can only be upon failure of the
resolution process.
38. In this context, it is important to differentiate between “claim”,
“debt” and “default”. Each of these terms is separately defined as follows:
“3. Definitions.—In this Code, unless the context otherwise C
requires,—
xxx xxx xxx
(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to D
judgment, fixed, disputed, undisputed, legal, equitable, secured
or unsecured;
(b) right to remedy for breach of contract under any law for
the time being in force, if such breach gives rise to a right to
payment, whether or not such right is reduced to judgment,
E
fixed, matured, unmatured, disputed, undisputed, secured or
unsecured;
xxx xxx xxx
(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and F
operational debt;
(12) “default” means non-payment of debt when whole or any
part or instalment of the amount of debt has become due and
payable and is not paid by the debtor or the corporate debtor, as
the case may be; G
xxx xxx xxx”
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
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612 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 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.
B
SECTIONS 21 AND 24 AND ARTICLE 14: OPERATIONAL CREDITORS
HAVE NO VOTE IN THE COMMITTEE OF CREDITORS.

39. Section 21 of the Code reads as follows:

“21. Committee of creditors.—(1) The interim resolution
C professional shall after collation of all claims received against the
corporate debtor and determination of the financial position of the
corporate debtor, constitute a committee of creditors.
(2) The committee of creditors shall comprise all financial creditors
of the corporate debtor:
D
Provided that a financial creditor or the authorised representative
of the financial creditor referred to in sub-section (6) or sub-section
(6-A) or sub-section (5) of Section 24, if it is a related party of the
corporate debtor, shall not have any right of representation,
participation or voting in a meeting of the committee of creditors:
E
Provided further that the first proviso shall not apply to a financial
creditor, regulated by a financial sector regulator, if it is a related
party of the corporate debtor solely on account of conversion or
substitution of debt into equity shares or instruments convertible
into equity shares, prior to the insolvency commencement date.
F
(3) Subject to sub-sections (6) and (6-A), where the corporate
debtor owes financial debts to two or more financial creditors as
part of a consortium or agreement, each such financial creditor
shall be part of the committee of creditors and their voting share
shall be determined on the basis of the financial debts owed to
G them.
(4) Where any person is a financial creditor as well as an
operational creditor,—
(a) such person shall be a financial creditor to the extent of the
financial debt owed by the corporate debtor, and shall be
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 613
[R. F. NARIMAN, J.]

included in the committee of creditors, with voting share A

proportionate to the extent of financial debts owed to such
creditor;
(b) such person shall be considered to be an operational creditor
to the extent of the operational debt owed by the corporate
debtor to such creditor. B
(5) Where an operational creditor has assigned or legally
transferred any operational debt to a financial creditor, the
assignee or transferee shall be considered as an operational creditor
to the extent of such assignment or legal transfer.
(6) Where the terms of the financial debt extended as part of a C
consortium arrangement or syndicated facility provide for a single
trustee or agent to act for all financial creditors, each financial
creditor may—
(a) authorize the trustee or agent to act on his behalf in the
committee of creditors to the extent of his voting share; D
(b) represent himself in the committee of creditors to the extent
of his voting share;
(c) appoint an insolvency professional (other than the resolution
professional) at his own cost to represent himself in the
E
committee of creditors to the extent of his voting share; or
(d) exercise his right to vote to the extent of his voting share
with one or more financial creditors jointly or severally.
(6-A) Where a financial debt—
(a) is in the form of securities or deposits and the terms of the F
financial debt provide for appointment of a trustee or agent to
act as authorised representative for all the financial creditors,
such trustee or agent shall act on behalf of such financial
creditors;
(b) is owed to a class of creditors exceeding the number as G
may be specified, other than the creditors covered under clause
(a) or sub-section (6), the interim resolution professional shall
make an application to the Adjudicating Authority along with
the list of all financial creditors, containing the name of an
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614 SUPREME COURT REPORTS [2019] 3 S.C.R.

A insolvency professional, other than the interim resolution

professional, to act as their authorised representative who shall
be appointed by the Adjudicating Authority prior to the first
meeting of the committee of creditors;
(c) is represented by a guardian, executor or administrator,
B such person shall act as authorised representative on behalf of
such financial creditors,
and such authorised representative under clause (a) or clause (b)
or clause (c) shall attend the meetings of the committee of
creditors, and vote on behalf of each financial creditor to the extent
C of his voting share.
(6-B) The remuneration payable to the authorised representative—
(i) under clauses (a) and (c) of sub-section (6-A), if any, shall
be as per the terms of the financial debt or the relevant
documentation; and
D
(ii) under clause (b) of sub-section (6-A) shall be as specified
which shall form part of the insolvency resolution process costs.
(7) The Board may specify the manner of voting and the
determining of the voting share in respect of financial debts covered
under sub-sections (6) and (6-A).
E
(8) Save as otherwise provided in this Code, all decisions of the
committee of creditors shall be taken by a vote of not less than
fifty-one per cent. of voting share of the financial creditors:
Provided that where a corporate debtor does not have any financial
F creditors, the committee of creditors shall be constituted and shall
comprise of such persons to exercise such functions in such
manner as may be specified.
(9) The committee of creditors shall have the right to require the
resolution professional to furnish any financial information in relation
G to the corporate debtor at any time during the corporate insolvency
resolution process.
(10) The resolution professional shall make available any financial
information so required by the committee of creditors under sub-
section (9) within a period of seven days of such requisition.”
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 615
[R. F. NARIMAN, J.]

40. Section 24(3), 24(4), and Section 28, which are also material, A
read as follows:
“24. Meeting of committee of creditors.—
xxx xxx xxx
(3) The resolution professional shall give notice of each meeting B
of the committee of creditors to—
(a) members of [committee of creditors, including the authorised
representatives referred to in sub-sections (6) and (6-A) of
Section 21 and sub-section (5)];
(b) members of the suspended Board of Directors or the C
partners of the corporate persons, as the case may be;
(c) operational creditors or their representatives if the amount
of their aggregate dues is not less than ten per cent of the
debt.
D
(4) The directors, partners and one representative of operational
creditors, as referred to in sub-section (3), may attend the meetings
of committee of creditors, but shall not have any right to vote in
such meetings:
Provided that the absence of any such director, partner or
representative of operational creditors, as the case may be, shall E
not invalidate proceedings of such meeting.
xxx xxx xxx”
xxx xxx xxx
“28. Approval of committee of creditors for certain F
actions.—(1) Notwithstanding anything contained in any other
law for the time being in force, the resolution professional, during
the corporate insolvency resolution process, shall not take any of
the following actions without the prior approval of the committee
of creditors namely— G
(a) raise any interim finance in excess of the amount as may
be decided by the committee of creditors in their meeting;
(b) create any security interest over the assets of the corporate
debtor;
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616 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (c) change the capital structure of the corporate debtor,

including by way of issuance of additional securities, creating
a new class of securities or buying back or redemption of issued
securities in case the corporate debtor is a company;
(d) record any change in the ownership interest of the corporate
B debtor;
(e) give instructions to financial institutions maintaining
accounts of the corporate debtor for a debit transaction from
any such accounts in excess of the amount as may be decided
by the committee of creditors in their meeting;
C (f) undertake any related party transaction;
(g) amend any constitutional documents of the corporate debtor;
(h) delegate its authority to any other person;
(i) dispose of or permit the disposal of shares of any shareholder
D of the corporate debtor or their nominees to third parties;
(j) make any change in the management of the corporate debtor
or its subsidiary;
(k) transfer rights or financial debts or operational debts under
material contracts otherwise than in the ordinary course of
E
business;
(l) make changes in the appointment or terms of contract of
such personnel as specified by the committee of creditors; or
(m) make changes in the appointment or terms of contract of
F statutory auditors or internal auditors of the corporate debtor.
(2) The resolution professional shall convene a meeting of the
committee of creditors and seek the vote of the creditors prior to
taking any of the actions under sub-section (1).
(3) No action under sub-section (1) shall be approved by the
G committee of creditors unless approved by a vote of sixty-six per
cent of the voting shares.
(4) Where any action under sub-section (1) is taken by the resolution
professional without seeking the approval of the committee of
creditors in the manner as required in this section, such action
H shall be void.
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 617
[R. F. NARIMAN, J.]

(5) The committee of creditors may report the actions of the A

resolution professional under sub-section (4) to the Board for taking
necessary actions against him under this Code. Approval of
committee of creditors for certain actions.”
41. In this regard, the BLRC Report states:
“The creditors committee will have the power to decide the final B
solution by majority vote in the negotiations. The majority vote
requires more than or equal to 75 percent of the creditors committee
by weight of the total financial liabilities…… The Committee
deliberated on who should be on the creditors committee, given
the power of the creditors committee to ultimately keep the entity C
as a going concern or liquidate it. The Committee reasoned that
members of the creditors committee have to be creditors both
with the capability to assess viability, as well as to be willing to
modify terms of existing liabilities in negotiations. Typically,
operational creditors are neither able to decide on matters regarding
the insolvency of the entity, nor willing to take the risk of postponing D
payments for better future prospects for the entity. The Committee
concluded that, for the process to be rapid and efficient, the Code
will provide that the creditors committee should be restricted to
only the financial creditors.”
“The second is that any proposed solution must explicitly account E
for the IRP costs and the liabilities of the operational creditors
within a reasonable period from the approval of the solution if it is
approved. The Committee argues that there must be a
counterbalance to operational creditors not having a vote on the
creditors committee. Thus, they concluded that the dues of the F
operational creditors must have priority in being paid as an explicit
part of the proposed solution. This must be ensured by the RP in
evaluating a proposal before bringing it to the creditors committee.
If there is ambiguity about the coverage of the liability in the
information memorandum that the RP presents to garner solutions,
then the RP must ensure that this is clearly stated and accounted G
for in the proposed solution.”
The Joint Parliamentary Committee Report of April, 2016 [“Joint
Parliamentary Committee Report”] on the Insolvency and Bankruptcy
Code also agreed with these observations but modified Section 24 so as
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618 SUPREME COURT REPORTS [2019] 3 S.C.R.

A to permit operational creditors to be present at the meetings of the

committee of creditors, albeit without voting rights, if operational creditors
aggregate to 10% or more of the total debts owed by the corporate
debtor.
The Joint Parliamentary Committee Report also opined as follows:
B “21. Role of Operational Creditors - Clause 24
Some of the stakeholders in the memorandum/views furnished
before the Committee were of the opinion that whereas operation
creditor has right to make application for initiation of corporate
insolvency resolution process, operational creditors like workmen,
C employees, suppliers have not been given any representation in
the committee of creditors which is pivotal in whole resolution
process. In this regard, one of the stakeholders has suggested
that committee of creditors may contain operational creditors as
well, with some thresholds.
D In this context, while appreciating that the operational creditors
are important stakeholders in a company, the Committee took note
of the rationale of not including operational creditors in the
committee of creditors as indicated in notes on Clause 21 appended
with the Bill which states as under:¯
E “The committee has to be composed of members who have
the capability to assess the commercial viability of the corporate
debtor and who are willing to modify the terms of the debt
contracts in negotiations between the creditors and the
corporate debtor. Operational creditors are typically not able
F to decide on matters relating to commercial viability of the
corporate debtor, nor are they typically willing to take the risk
of restructuring their debts in order to make the corporate
debtor a going concern. Similarly, financial creditors who are
also operational creditors will be given representation on the
committee of creditors only to the extent of their financial debts.
G Nevertheless, in order to ensure that the financial creditors do
not treat the operational creditors unfairly, any resolution plan
must ensure that the operational creditors receive an amount
not less than the liquidation value of their debt (assuming the
corporate debtor were to be liquidated).
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 619
[R. F. NARIMAN, J.]

All decisions of the Committee shall be taken by a vote of not less A

than seventy-five per cent of the voting share. In the event there
are no financial creditors for a corporate debtor, the composition
and decision-making processes of the corporate debtor shall be
specified by the Insolvency and Bankruptcy Board. The
Committee shall also have the power to call for information from
B
the resolution professional.”
The Committee after due deliberations are of the view that, if not
voting rights, operational creditors at least should have presence
in the committee of creditors to present their views/concerns on
important issues considered at the meetings so that their views/
concerns are taken into account by the committee of creditors C
while finalizing the resolution plan.”
(emphasis supplied)
The original Insolvency and Bankruptcy Bill did not allow
operational creditors to attend the committee of creditors at all. This Bill D
was amended whilst in the form of a Bill, the Joint Parliamentary
Committee deciding as follows:
“The Committee, therefore, decided to modify clause 24(3) and
(4) as given under:
Modified Clause 24(3)¯ E
“The resolution professional shall give notice of each meeting of
the committee of creditors to-
(a) members of committee of creditors;
(b) members of the suspended Board of Directors or the F
partners of the corporate persons, as the case may be;
(c) operational creditors or their representatives if the amount
of their aggregate dues is not less than ten per cent of the
debt.”
Modified Clause 24(4)¯ G

“The directors, partners and one representative of operational

creditors as referred to in sub-section (3), may attend the meetings
of committee of creditors, but shall not have any right to vote in
such meetings:
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620 SUPREME COURT REPORTS [2019] 3 S.C.R.

A Provided that the absence of any such director, partner or

representative of operational creditors, as the case may be, shall
not invalidate proceedings of such meeting.”
42. What is also of importance is the fact that Expert Committees
have been set up by the Government to oversee the working of the
B Code. Thus, the report of the Insolvency Law Committee of March,
2018, after examining the working of the Code, thought it fit not to amend
the Code so as to give operational creditors the right to vote. This was
stated as follows:
“This rationale still holds true, and thus it was deemed fit not to
amend the constitution of the CoC. Further, operational creditors
C
whose aggregate dues are not less than ten percent of the debt
have a right to attend the meetings of the CoC. Also, under the
resolution plan, they are guaranteed at least the liquidation value.”
“…The Committee agreed that presently, most of the resolution
plans are in the process of submission and there is no empirical
D evidence to further the argument that operational creditors do not
receive a fair share in the resolution process under the current
scheme of the Code. Hence, the Committee decided to continue
with the present arrangement without making any amendments
to the Code.”
E 43. Under the Code, the committee of creditors is entrusted with
the primary responsibility of financial restructuring. They are required to
assess the viability of a corporate debtor by taking into account all
available information as well as to evaluate all alternative investment
opportunities that are available. The committee of creditors is required
to evaluate the resolution plan on the basis of feasibility and viability.
F
Thus, Section 30(4) states:
“30. Submission of resolution plan.—
xxx xxx xxx
(4) The committee of creditors may approve a resolution plan by
G a vote of not less than sixty-six per cent of voting share of the
financial creditors, after considering its feasibility and viability, and
such other requirements as may be specified by the Board:
Provided that the committee of creditors shall not approve a
resolution plan, submitted before the commencement of the
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017,
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 621
[R. F. NARIMAN, J.]

where the resolution applicant is ineligible under Section 29A and A

may require the resolution professional to invite a fresh resolution
plan where no other resolution plan is available with it:
Provided further that where the resolution applicant referred to in
the first proviso is ineligible under clause (c) of Section 29A, the
resolution applicant shall be allowed by the committee of creditors B
such period, not exceeding thirty days, to make payment of overdue
amounts in accordance with the proviso to clause (c) of Section
29A:
Provided also that nothing in the second proviso shall be construed
as extension of period for the purposes of the proviso to sub-
C
section (3) of Section 12, and the corporate insolvency resolution
process shall be completed within the period specified in that sub-
section.
Provided also that the eligibility criteria in Section 29A as amended
by the Insolvency and Bankruptcy Code (Amendment) Ordinance,
2018 (Ord. 6 of 2018) shall apply to the resolution applicant who D
has not submitted resolution plan as on the date of commencement
of the Insolvency and Bankruptcy Code (Amendment) Ordinance,
2018.
xxx xxx xxx”
It is important to bear in mind that once the resolution plan is E
approved by the committee of creditors and thereafter by the Adjudicating
Authority, the aforesaid plan is binding on all stakeholders as follows:
“31. Approval of resolution plan.—(1) If the Adjudicating
Authority is satisfied that the resolution plan as approved by the
committee of creditors under sub-section (4) of Section 30 meets F
the requirements as referred to in sub-section (2) of Section 30, it
shall by order approve the resolution plan which shall be binding
on the corporate debtor and its employees, members, creditors,
guarantors and other stakeholders involved in the resolution plan:
Provided that the Adjudicating Authority shall, before passing an G
order for approval of resolution plan under this sub-section, satisfy
that the resolution plan has provisions for its effective
implementation.
xxx xxx xxx”
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622 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 44. Since the financial creditors are in the business of money

lending, banks and financial institutions are best equipped to assess viability
and feasibility of the business of the corporate debtor. Even at the time
of granting loans, these banks and financial institutions undertake a
detailed market study which includes a techno-economic valuation report,
evaluation of business, financial projection, etc. Since this detailed study
B
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
C services, and are typically unable to assess viability and feasibility of
business. The BLRC Report, already quoted above, makes this abundantly
clear.
45. Quite apart from this, the United Nations Commission on
International Trade Law, in its Legislative Guide on Insolvency Law
D [“UNCITRAL Guidelines”] recognizes the importance of ensuring
equitable treatment to similarly placed creditors and states as follows:
“Ensuring equitable treatment of similarly situated
creditors
7. The objective of equitable treatment is based on the notion that,
E in collective proceedings, creditors with similar legal rights should
be treated fairly, receiving a distribution on their claim in accordance
with their relative ranking and interests. This key objective
recognizes that all creditors do not need to be treated identically,
but in a manner that reflects the different bargains they have
F struck with the debtor. This is less relevant as a defining factor
where there is no specific debt contract with the debtor, such as
in the case of damage claimants (e.g. for environmental damage)
and tax authorities. Even though the principle of equitable treatment
may be modified by social policy on priorities and give way to the
prerogatives pertaining to holders of claims or interests that arise,
G for example, by operation of law, it retains its significance by 12
UNCITRAL Legislative Guide on Insolvency Law ensuring that
the priority accorded to the claims of a similar class affects all
members of the class in the same manner. The policy of equitable
treatment permeates many aspects of an insolvency law, including
H the application of the stay or suspension, provisions to set aside
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 623
[R. F. NARIMAN, J.]

acts and transactions and recapture value for the insolvency estate, A
classification of claims, voting procedures in reorganization and
distribution mechanisms. An insolvency law should address
problems of fraud and favouritism that may arise in cases of
financial distress by providing, for example, that acts and
transactions detrimental to equitable treatment of creditors can
B
be avoided.”
46. 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 C
safeguarded. It may be seen that a resolution plan cannot pass muster
under Section 30(2)(b) read with Section 31 unless a minimum payment
is made to operational creditors, being not less than liquidation value.
Further, on 05.10.2018, Regulation 38 has been amended. Prior to the
amendment, Regulation 38 read as follows: D
“38. Mandatory contents of the resolution plan.— (1) A
resolution plan shall identify specific sources of funds that will be
used to pay the—
(a) insolvency resolution process costs and provide that the
[insolvency resolution process costs, to the extent unpaid, will E
be paid] in priority to any other creditor;
(b) liquidation value due to operational creditors and provide
for such payment in priority to any financial creditor which
shall in any event be made before the expiry of thirty days
after the approval of a resolution plan by the Adjudicating F
Authority; and
(c) liquidation value due to dissenting financial creditors and
provide that such payment is made before any recoveries are
made by the financial creditors who voted in favour of the
resolution plan.” G
Post amendment, Regulation 38 reads as follows:
“38. Mandatory contents of the resolution plan.—(1) The
amount due to the operational creditors under a resolution plan
shall be given priority in payment over financial creditors.
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624 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (1-A) A resolution plan shall include a statement as to how it has

dealt with the interests of all stakeholders, including financial
creditors and operational creditors, of the corporate debtor.
xxx xxx xxx”
47. The aforesaid Regulation further strengthens the rights of
B operational creditors by statutorily incorporating the principle of fair and
equitable dealing of operational creditors’ rights, together with priority in
payment over financial creditors.
48. For all the aforesaid reasons, we do not find that operational
creditors are discriminated against or that Article 14 has been infracted
C either on the ground of equals being treated unequally or on the ground
of manifest arbitrariness.
SECTION 12A IS NOT VIOLATIVE OF ARTICLE 14
49. Section 12A was inserted by the Insolvency and Bankruptcy
(Second Amendment) Act, 2018 with retrospective effect from
D 06.06.2018. It reads as follows:
“12-A. Withdrawal of application admitted under Section 7,
9 or 10.—The Adjudicating Authority may allow the withdrawal
of application admitted under Section 7 or Section 9 or Section 10,
on an application made by the applicant with the approval of ninety
E per cent voting share of the committee of creditors, in such manner
as may be specified.”
50. The ILC Report of March 2018, which led to the insertion of
Section 12A, stated as follows:
“29.1 Under rule 8 of the CIRP Rules, the NCLT may permit
F withdrawal of the application on a request by the applicant before
its admission. However, there is no provision in the Code or the
CIRP Rules in relation to permissibility of withdrawal post
admission of a CIRP application. It was observed by the
Committee that there have been instances where on account of
settlement between the applicant creditor and the corporate debtor,
G judicial permission for withdrawal of CIRP was granted
[Lokhandwala Kataria Construction Pvt. Ltd. v. Ninus
Finance & Investment Manager LLP, Civil Appeal No. 9279 of
2017; Mothers Pride Dairy India Private Limited v. Portrait
Advertising and Marketing Private Limited, Civil Appeal No.
H 9286/2017; Uttara Foods and Feeds Private Limited v. Mona
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 625
[R. F. NARIMAN, J.]

Pharmacem, Civil Appeal No. 18520/2017]. This practice was A

deliberated in light of the objective of the Code as encapsulated in
the BLRC Report, that the design of the Code is based on ensuring
that “all key stakeholders will participate to collectively assess
viability. The law must ensure that all creditors who have the
capability and the willingness to restructure their liabilities
B
must be part of the negotiation process. The liabilities of all
creditors who are not part of the negotiation process must
also be met in any negotiated solution.” Thus, it was agreed
that once the CIRP is initiated, it is no longer a proceeding only
between the applicant creditor and the corporate debtor but is
envisaged to be a proceeding involving all creditors of the debtor. C
The intent of the Code is to discourage individual actions for
enforcement and settlement to the exclusion of the general benefit
of all creditors.
(emphasis in original)
29.2 On a review of the multiple NCLT and NCLAT judgments D
in this regard, the consistent pattern that emerged was that a
settlement may be reached amongst all creditors and the debtor,
for the purpose of a withdrawal to be granted, and not only the
applicant creditor and the debtor. On this basis read with the intent
of the Code, the Committee unanimously agreed that the relevant E
rules may be amended to provide for withdrawal post admission
if the CoC approves of such action by a voting share of ninety per
cent. It was specifically discussed that rule 11 of the National
Company Law Tribunal Rules, 2016 may not be adopted for this
aspect of CIRP at this stage (as observed by the Hon’ble Supreme
Court in the case of Uttara Foods and Feeds Private Limited v. F
Mona Pharmacem, Civil Appeal No. 18520/2017) and even
otherwise, as the issue can be specifically addressed by amending
rule 8 of the CIRP Rules.”
51. Before this Section was inserted, this Court, under Article
142, was passing orders allowing withdrawal of applications after G
creditors’ applications had been admitted by the NCLT or the NCLAT.
Regulation 30A of the CIRP Regulations states as under:
“30A. Withdrawal of application.—(1) An application for
withdrawal under Section 12-A shall be submitted to the interim
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626 SUPREME COURT REPORTS [2019] 3 S.C.R.

A resolution professional or the resolution professional, as the case

may be, in Form FA of the Schedule before issue of invitation for
expression of interest under Regulation 36A.
(2) The application in sub-regulation (1) shall be accompanied by
a bank guarantee towards estimated cost incurred for purposes
B of clauses (c) and (d) of Regulation 31 till the date of application.
(3) The committee shall consider the application made under sub-
regulation (1) within seven days of its constitution or seven days
of receipt of the application, whichever is later.
(4) Where the application is approved by the committee with ninety
C percent voting share, the resolution professional shall submit the
application under sub-regulation (1) to the Adjudicating Authority
on behalf of the applicant, within three days of such approval.
(5) The Adjudicating Authority may, by order, approve the
application submitted under sub-regulation (4).”
D
This Court, by its order dated 14.12.2018 in Brilliant Alloys Pvt.
Ltd. v. Mr. S. Rajagopal & Ors., SLP (Civil) No. 31557/2018, has
stated that Regulation 30A(1) is not mandatory but is directory for the
simple reason that on the facts of a given case, an application for
withdrawal may be allowed in exceptional cases even after issue of
E invitation for expression of interest under Regulation 36A.
52. 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
F to oversee the resolution process must be consulted before any individual
corporate debtor is allowed to settle its claim. A question arises as to
what is to happen before a committee of creditors is constituted (as per
the timelines that are specified, a committee of creditors can be appointed
at any time within 30 days from the date of appointment of the interim
resolution professional). We make it clear that at any stage where the
G
committee of creditors is not yet constituted, a party can approach the
NCLT directly, which Tribunal may, in exercise of its inherent powers
under Rule 11 of the NCLT Rules, 2016, allow or disallow an application
for withdrawal or settlement. This will be decided after hearing all the
concerned parties and considering all relevant factors on the facts of
H each case.
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 627
[R. F. NARIMAN, J.]

53. The main thrust against the provision of Section 12A is the A
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,
B
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 (supra). Also, it is clear, that under Section 60 of
the Code, the committee of creditors do not have the last word on the C
subject. If the committee of creditors arbitrarily rejects a just settlement
and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can
always set aside such decision under Section 60 of the Code. For all
these reasons, we are of the view that Section 12A also passes
constitutional muster.
D
EVIDENCE PROVIDED BY PRIVATE INFORMATION UTILITIES: ONLY PRIMA
FACIE EVIDENCE OF DEFAULT

54. A frontal attack was made by Shri Mukul Rohatgi on the ground
that private information utilities that have been set up are not governed
by proper norms. Also, the evidence by way of loan default contained in E
the records of such utility cannot be conclusive evidence of what is
stated therein. The BLRC Report had stated:
“Under the present arrangements, considerable time can be lost
before all parties obtain this information. Disputes about these
facts can take up years to resolve in court…… Hence, the F
Committee envisions a competitive industry of “information utilities”
who hold an array of information about all firms at all times. When
the IRP commences, within less than a day, undisputed and
complete information would become available to all persons
involved in the IRP and thus address this source of delay.”
G
55. The setting up of information utilities was preceded by a regime
of information companies which were referred to as credit information
companies [“CICs”], as recommended by the Siddiqui Working Group
in 1999. The Attorney General pointed out, in his written submission,
that:
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628 SUPREME COURT REPORTS [2019] 3 S.C.R.

A “In 2013, the RBI constituted another Committee under the

chairmanship of Aditya Puri, MD, HDFC Bank to examine
reporting formats used by CICs and other related issues. The
Committee’s report led to the standardization of data formats for
reporting corporate, consumer and MFI data by all credit
institutions and streamlining the process of data submission by
B
credit institutions to CICs. In 2015, all credit institutions were
directed by RBI to become members of all the CICs and submit
current and historical data about specified borrower to them and
to update it regularly.
The purpose of setting up the above regime of information utilities
C was to reduce information asymmetry for improved credit risk
assessment and to improve recovery processes.
The setting up of IUs marks a shift in the above position as not
only is the information with IUs used to reduce information
asymmetry, but it is also to be treated as prima facie evidence of
D the transaction for the purpose of IBC proceedings. This assists
in improving the timelines for the resolution process.”
56. The Information Utilities Regulations, in particular Regulations
20 and 21, make it clear that on receipt of information of default, an
information utility shall expeditiously undertake the process of
E authentication and verification of information. Regulations 20 and 21
read as follows:
“20. Acceptance and receipt of information.—(1) An
information utility shall accept information submitted by a user in
Form C of the Schedule.
F
(2) On receipt of the information submitted under sub-regulation
(1), the information utility shall—
(a) assign a unique identifier to the information, including records
of debt;
G (b) acknowledge its receipt, and notify the user of—
(i) the unique identifier of the information;
(ii) the terms and conditions of authentication and verification
of information; and

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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 629
[R. F. NARIMAN, J.]

(iii) the manner in which the information may be accessed A

by other parties.
21. Information of default.—(1) On receipt of information of
default, an information utility shall expeditiously undertake the
processes of authentication and verification of the information.
(2) On completion of the processes of authentication and B
verification under sub-regulation (1), the information utility shall
communicate the information of default, and the status of
authentication to registered users who are—
(a) creditors of the debtor who has defaulted;
C
(b) parties and sureties, if any, to the debt in respect of which
the information of default has been received.”
57. The aforesaid Regulations also make it clear that apart from
the stringent requirements as to registration of such utility, the moment
information of default is received, such information has to be D
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
learned Attorney General, is only prima facie evidence of default, which E
is rebuttable by the corporate debtor, makes it clear that the challenge
based on this ground must also fail.
RESOLUTION PROFESSIONAL HAS NO ADJUDICATORY POWERS.
58. It is clear from a reading of the Code as well as the Regulations
F
that the resolution professional has no adjudicatory powers. Section 18
of the Code lays down the duties of an interim resolution professional as
follows:
“18. Duties of interim resolution professional.—(1) The
interim resolution professional shall perform the following duties,
namely— G

(a) collect all information relating to the assets, finances and

operations of the corporate debtor for determining the financial
position of the corporate debtor, including information relating
to—
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630 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (i) business operations for the previous two years;

(ii) financial and operational payments for the previous two
years;
(iii) list of assets and liabilities as on the initiation date; and
B (iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors to
him, pursuant to the public announcement made under Sections
13 and 15;
(c) constitute a committee of creditors;
C
(d) monitor the assets of the corporate debtor and manage its
operations until a resolution professional is appointed by the
committee of creditors;
(e) file information collected with the information utility, if
necessary; and
D
(f) take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the
balance sheet of the corporate debtor, or with information utility
or the depository of securities or any other registry that records
the ownership of assets including—
E
(i) assets over which the corporate debtor has ownership
rights which may be located in a foreign country;
(ii) assets that may or may not be in possession of the
corporate debtor;
F (iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the
corporate debtor, financial instruments, insurance policies;
G (vi) assets subject to the determination of ownership by a
court or authority;
(g) to perform such other duties as may be specified by the
Board.
Explanation.—For the purposes of this section, the term
H “assets” shall not include the following, namely—
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 631
[R. F. NARIMAN, J.]

(a) assets owned by a third party in possession of the A

corporate debtor held under trust or under contractual
arrangements including bailment;
(b) assets of any Indian or foreign subsidiary of the corporate
debtor; and
(c) such other assets as may be notified by the Central B
Government in consultation with any financial sector
regulator.”
59. Under the CIRP Regulations, the resolution professional has
to vet and verify claims made, and ultimately, determine the amount of
each claim as follows: C

“10. Substantiation of claims.—The interim resolution

professional or the resolution professional, as the case may be,
may call for such other evidence or clarification as he deems fit
from a creditor for substantiating the whole or part of its claim.”
D
xxx xxx xxx
“12. Submission of proof of claims.—(1) Subject to sub-
regulation (2), a creditor shall submit claim with proof on or before
the last date mentioned in the public announcement.
(2) A creditor, who fails to submit claim with proof within the time E
stipulated in the public announcement, may submit the claim with
proof to the interim resolution professional or the resolution
professional, as the case may be, on or before the ninetieth day of
the insolvency commencement date.
(3) Where the creditor in sub-regulation (2) is a financial creditor F
under regulation 8, it shall be included in the committee from the
date of admission of such claim:
Provided that such inclusion shall not affect the validity of any
decision taken by the committee prior to such inclusion.
13. Verification of claims.—(1) The interim resolution G
professional or the resolution professional, as the case may be,
shall verify every claim, as on the insolvency commencement date,
within seven days from the last date of the receipt of the claims,
and thereupon maintain a list of creditors containing names of
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632 SUPREME COURT REPORTS [2019] 3 S.C.R.

A creditors along with the amount claimed by them, the amount of

their claims admitted and the security interest, if any, in respect of
such claims, and update it.
(2) The list of creditors shall be –
(a) available for inspection by the persons who submitted proofs
B of claim;
(b) available for inspection by members, partners, directors
and guarantors of the corporate debtor;
(c) displayed on the website, if any, of the corporate debtor;
C (d) filed with the Adjudicating Authority; and
(e) presented at the first meeting of the committee.
14. Determination of amount of claim.—(1) Where the amount
claimed by a creditor is not precise due to any contingency or
other reason, the interim resolution professional or the resolution
D
professional, as the case may be, shall make the best estimate of
the amount of the claim based on the information available with
him.
(2) The interim resolution professional or the resolution
professional, as the case may be, shall revise the amounts of claims
E admitted, including the estimates of claims made under sub-
regulation (1), as soon as may be practicable, when he comes
across additional information warranting such revision.”
It is clear from a reading of these Regulations that the resolution
professional is given administrative as opposed to quasi-judicial powers.
F 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 follows:
“35A. Preferential and other transactions.—(1) On or before
the seventy-fifth day of the insolvency commencement date, the
G resolution professional shall form an opinion whether the corporate
debtor has been subjected to any transaction covered under
sections 43, 45, 50 or 66.
(2) Where the resolution professional is of the opinion that the
corporate debtor has been subjected to any transactions covered
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 633
[R. F. NARIMAN, J.]

under sections 43, 45, 50 or 66, he shall make a determination on A

or before the one hundred and fifteenth day of the insolvency
commencement date, under intimation to the Board.
(3) Where the resolution professional makes a determination under
sub-regulation (2), he shall apply to the Adjudicating Authority for
appropriate relief on or before the one hundred and thirty-fifth B
day of the insolvency commencement date.
60. 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. Sections
41 and 42, by way of contrast between the powers of the liquidator and C
that of the resolution professional, are set out hereinbelow:
“41. Determination of valuation of claims.—The liquidator
shall determine the value of claims admitted under Section 40 in
such manner as may be specified by the Board.
42. Appeal against the decision of liquidator.—A creditor may D
appeal to the Adjudicating Authority against the decision of the
liquidator accepting or rejecting the claims within fourteen days
of the receipt of such decision.”
It is clear from these Sections that when the liquidator
“determines” the value of claims admitted under Section 40, such E
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.
61. Unlike the liquidator, the resolution professional cannot act in
a number of matters without the approval of the committee of creditors F
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.
G
CONSTITUTIONAL VALIDITY OF SECTION 29A.
62. Section 29A reads as follows:
“29A. Persons not eligible to be resolution applicant.—A
person shall not be eligible to submit a resolution plan, if such
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634 SUPREME COURT REPORTS [2019] 3 S.C.R.

A person, or any other person acting jointly or in concert with such

person—
(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the guidelines of
the Reserve Bank of India issued under the Banking Regulation
B Act, 1949 (10 of 1949);
(c) at the time of submission of the resolution plan has an
account,] or an account of a corporate debtor under the
management or control of such person or of whom such person
is a promoter, classified as non-performing asset in accordance
C with the guidelines of the Reserve Bank of India issued under
the Banking Regulation Act, 1949 (10 of 1949) or the guidelines
of a financial sector regulator issued under any other law for
the time being in force, and at least a period of one year has
lapsed from the date of such classification till the date of
D commencement of the corporate insolvency resolution process
of the corporate debtor:
Provided that the person shall be eligible to submit a resolution
plan if such person makes payment of all overdue amounts
with interest thereon and charges relating to non-performing
E asset accounts before submission of resolution plan:
Provided further that nothing in this clause shall apply to a
resolution applicant where such applicant is a financial entity
and is not a related party to the corporate debtor.
Explanation I.—For the purposes of this proviso, the
F expression “related party” shall not include a financial entity,
regulated by a financial sector regulator, if it is a financial
creditor of the corporate debtor and is a related party of the
corporate debtor solely on account of conversion or substitution
of debt into equity shares or instruments convertible into equity
shares, prior to the insolvency commencement date.
G
Explanation II.—For the purposes of this clause, where a
resolution applicant has an account, or an account of a corporate
debtor under the management or control of such person or of
whom such person is a promoter, classified as non-performing
asset and such account was acquired pursuant to a prior
H
SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 635
[R. F. NARIMAN, J.]

resolution plan approved under this Code, then, the provisions A

of this clause shall not apply to such resolution applicant for a
period of three years from the date of approval of such
resolution plan by the Adjudicating Authority under this Code;
(d) has been convicted for any offence punishable with
imprisonment— B
(i) for two years or more under any Act specified under the
Twelfth Schedule; or
(ii) for seven years or more under any other law for the time
being in force:
C
Provided that this clause shall not apply to a person after the
expiry of a period of two years from the date of his release
from imprisonment:
Provided further that this clause shall not apply in relation to a
connected person referred to in clause (iii) of Explanation I; D
(e) is disqualified to act as a director under the Companies
Act, 2013 (18 of 2013):
Provided that this clause shall not apply in relation to a connected
person referred to in clause (iii) of Explanation I;
(f) is prohibited by the Securities and Exchange Board of India E
from trading in securities or accessing the securities markets;
(g) has been a promoter or in the management or control of a
corporate debtor in which a preferential transaction,
undervalued transaction, extortionate credit transaction or
fraudulent transaction has taken place and in respect of which F
an order has been made by the Adjudicating Authority under
this Code:
Provided that this clause shall not apply if a preferential
transaction, undervalued transaction, extortionate credit
transaction or fraudulent transaction has taken place prior to G
the acquisition of the corporate debtor by the resolution
applicant pursuant to a resolution plan approved under this Code
or pursuant to a scheme or plan approved by a financial sector
regulator or a court, and such resolution applicant has not
H
636 SUPREME COURT REPORTS [2019] 3 S.C.R.

A otherwise contributed to the preferential transaction,

undervalued transaction, extortionate credit transaction or
fraudulent transaction;
(h) has executed a guarantee in favour of a creditor in respect
of a corporate debtor against which an application for insolvency
B resolution made by such creditor has been admitted under this
Code and such guarantee has been invoked by the creditor
and remains unpaid in full or part;
(i) is subject to any disability, corresponding to clauses (a) to
(h), under any law in a jurisdiction outside India; or
C (j) has a connected person not eligible under clauses (a) to (i).
Explanation I.—For the purposes of this clause, the expression
“connected person” means—
(i) any person who is the promoter or in the management or
D control of the resolution applicant; or
(ii) any person who shall be the promoter or in management
or control of the business of the corporate debtor during the
implementation of the resolution plan; or
(iii) the holding company, subsidiary company, associate
E company or related party of a person referred to in clauses
(i) and (ii):
Provided that nothing in clause (iii) of Explanation I shall
apply to a resolution applicant where such applicant is a
financial entity and is not a related party of the corporate
F debtor:
Provided further that the expression “related party” shall
not include a financial entity, regulated by a financial sector
regulator, if it is a financial creditor of the corporate debtor
and is a related party of the corporate debtor solely on account
G of conversion or substitution of debt into equity shares or
instruments convertible into equity shares, prior to the
insolvency commencement date;
Explanation II.—For the purposes of this section, “financial
entity” shall mean the following entities which meet such
H criteria or conditions as the Central Government may, in
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 637
[R. F. NARIMAN, J.]

consultation with the financial sector regulator, notify in this A

behalf, namely—
(a) a scheduled bank;
(b) any entity regulated by a foreign central bank or a
securities market regulator or other financial sector regulator
of a jurisdiction outside India which jurisdiction is compliant B
with the Financial Action Task Force Standards and is a
signatory to the International Organisation of Securities
Commissions Multilateral Memorandum of Understanding;
(c) any investment vehicle, registered foreign institutional
investor, registered foreign portfolio investor or a foreign C
venture capital investor, where the terms shall have the
meaning assigned to them in regulation 2 of the Foreign
Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2017 made under
the Foreign Exchange Management Act, 1999 (42 of 1999); D
(d) an asset reconstruction company registered with the
Reserve Bank of India under Section 3 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002);
(e) an Alternate Investment Fund registered with the E
Securities and Exchange Board of India;
(f) such categories of persons as may be notified by the
Central Government.”
63. This Section was first introduced by the Insolvency and
F
Bankruptcy Code (Amendment) Ordinance, 2017, which amended the
Insolvency and Bankruptcy Code on 23.11.2017. The Finance Minister
while moving the Amendment Bill stated as follows:
“The core and the soul of this new Ordinance is really Clause 5,
which is Section 29A of the original Bill. I may just explain that
once a company goes into the resolution process, then applications G
would be invited with regard to the potential resolution proposals
as far as the company is concerned or the enterprise is concerned.
Now a number of ineligibility clauses were not there in the original
Act, and, therefore, Clause 29A introduces those who are not
eligible to apply. For instance, there is a clause with regard to an H
638 SUPREME COURT REPORTS [2019] 3 S.C.R.

A undischarged insolvent who is not eligible to apply; a person who

has been disqualified under the Companies Act to act as a Director
cannot apply; and a person who is prohibited under the SEBI Act
cannot apply. So these are statutory disqualifications. And, there
is also a disqualification in clause (c) with regard to those who are
corporate debtors and who, as on the date of the application making
B
a bid, do not operationalize the account by paying the interest
itself, i.e., you cannot say that I have an NPA. I am not making
the account operational. The accounts will continue to be NPAs
and yet I am going to apply for this. Effectively, this clause will
mean that those, who are in management and on account of whom
C this insolvent or the non-performing asset has arisen, will now try
and say, I do not discharge any of the outstanding debts in terms
of making the accounts operational, and yet I would like to apply
and get the same enterprise back at a discounted value, for this is
not the object of this particular Act itself. So clause 5 has been
brought in with that purpose in mind.”
D
(emphasis supplied)
The Statement of Objects and Reasons for the aforesaid
amendment states:
“2. The provisions for insolvency resolution and liquidation of a
E corporate person in the Code did not restrict or bar any person
from submitting a resolution plan or participating in the acquisition
process of the assets of a company at the time of liquidation.
Concerns have been raised that persons who, with their misconduct
contributed to defaults of companies or are otherwise undesirable,
F may misuse this situation due to lack of prohibition or restrictions
to participate in the resolution or liquidation process, and gain or
regain control of the corporate debtor. This may undermine the
processes laid down in the Code as the unscrupulous person would
be seen to be rewarded at the expense of creditors. In addition, in
order to check that the undesirable persons who may have
G submitted their resolution plans in the absence of such a provision,
responsibility is also being entrusted on the committee of creditors
to give a reasonable period to repay overdue amounts and become
eligible.”
(emphasis supplied)
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 639
[R. F. NARIMAN, J.]

This Court has held in ArcelorMittal (supra): A

“27. A purposive interpretation of Section 29A, depending both
on the text and the context in which the provision was enacted,
must, therefore, inform our interpretation of the same. We are
concerned in the present matter with sub-clauses (c), (f), (i) and
(j) thereof. B
28. It will be noticed that the opening lines of Section 29A contained
in the Ordinance of 2017 are different from the opening lines of
Section 29A as contained in the Amendment Act of 2017. What is
important to note is that the phrase “persons acting in concert”
is conspicuous by its absence in the Ordinance of 2017. The C
concepts of “promoter”, “management” and “control” which
were contained in the opening lines of Section 29A under the
Ordinance have now been transferred to sub-clause (c) in the
Amendment Act of 2017. It is, therefore, important to note that
the Amendment Act of 2017 opens with language which is of
wider import than that contained in the Ordinance of 2017, evincing D
an intention to rope in all persons who may be acting in concert
with the person submitting a resolution plan.
29. The opening lines of Section 29A of the Amendment Act refer
to a de facto as opposed to a de jure position of the persons
mentioned therein. This is a typical instance of a “see through E
provision”, so that one is able to arrive at persons who are actually
in “control”, whether jointly, or in concert, with other persons. A
wooden, literal, interpretation would obviously not permit a tearing
of the corporate veil when it comes to the “person” whose
eligibility is to be gone into. However, a purposeful and contextual F
interpretation, such as is the felt necessity of interpretation of
such a provision as Section 29A, alone governs. For example, it is
well settled that a shareholder is a separate legal entity from the
company in which he holds shares. This may be true generally
speaking, but when it comes to a corporate vehicle that is set up
for the purpose of submission of a resolution plan, it is not only G
permissible but imperative for the competent authority to find out
as to who are the constituent elements that make up such a
company. In such cases, the principle laid down in Salomon v. A
Salomon and Co. Ltd. [1897] AC 22 will not apply. For it is
important to discover in such cases as to who are the real individuals H
640 SUPREME COURT REPORTS [2019] 3 S.C.R.

A or entities who are acting jointly or in concert, and who have set
up such a corporate vehicle for the purpose of submission of a
resolution plan.”
Similarly in Chitra Sharma v. Union of India, Writ Petition (Civil)
No. 744 of 2017 [decided on 09.08.2018], this Court observed as follows:
B “31. Parliament has introduced Section 29A into the IBC with a
specific purpose. The provisions of Section 29A are intended to
ensure that among others, persons responsible for insolvency of
the corporate debtor do not participate in the resolution
process......”
C “32. …… The Court must bear in mind that Section 29A has
been enacted in the larger public interest and to facilitate effective
corporate governance. Parliament rectified a loophole in the Act
which allowed a back-door entry to erstwhile managements in
the CIRP. Section 30 of the IBC, as amended, also clarifies that a
D resolution plan of a person who is ineligible under Section 29A
will not be considered by the CoC……”
RETROSPECTIVE APPLICATION
64. It is settled law that a statute is not retrospective merely
because it affects existing rights; nor is it retrospective merely because
E a part of the requisites for its action is drawn from a time antecedent to
its passing [See State Bank’s Staff Union (Madras Circle) v. Union of
India and Ors., (2005) 7 SCC 584 (at paragraph 21)]. In ArcelorMittal
(supra), this Court has observed that a resolution applicant has no vested
right for consideration or approval of its resolution plan as follows:
F “79. Take the next stage under Section 30. A Resolution
Professional has presented a resolution plan to the committee of
creditors for its approval, but the committee of creditors does not
approve such plan after considering its feasibility and viability, as
the requisite vote of not less than 66% of the voting share of the
financial creditors is not obtained. As has been mentioned
G
hereinabove, the first proviso to Section 30(4) furnishes the answer,
which is that all that can happen at this stage is to require the
Resolution Professional to invite a fresh resolution plan within the
time limits specified where no other resolution plan is available
with him. It is clear that at this stage again no application before
H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 641
[R. F. NARIMAN, J.]

the Adjudicating Authority could be entertained as there is no A

vested right or fundamental right in the resolution applicant to
have its resolution plan approved, and as no adjudication has yet
taken place.”
65. This being the case, it is clear that no vested right is taken
away by application of Section 29A. However, Shri Viswanathan pointed B
out the judgments in Ritesh Agarwal and Anr. v. SEBI and Ors.,
(2008) 8 SCC 205 (at paragraph 25), K.S. Paripoornan v. State of
Kerala and Ors., (1994) 5 SCC 593 (at paragraphs 60-66), Darshan
Singh v. Ram Pal Singh and Anr., 1992 Supp (1) SCC 191 (at paragraph
35), Pyare Lal Sharma v. Managing Director and Ors., (1989) 3
SCC 448 (at paragraph 21), P.D. Aggarwal and Ors. v. State of U.P. C
and Ors., (1987) 3 SCC 622 (at paragraph 18), and Govind Das and
Ors. v. Income Tax Officer and Anr., (1976) 1 SCC 906 (at paragraphs
6 and 11), to argue that if a Section operates on an antecedent set of
facts, but affects a vested right, it can be held to be retrospective, and
unless the legislature clearly intends such retrospectivity, the Section D
should not be construed as such. Each of these judgments deals with
different situations in which penal and other enactments interfere with
vested rights, as a result of which, they were held to be prospective in
nature. However, in our judgment in ArcelorMittal (supra), we have
already held that resolution applicants have no vested right to be
considered as such in the resolution process. Shri Mukul Rohatgi, however, E
argued that this judgment is distinguishable as no question of constitutional
validity arose in this case, and no issue as to the vested right of a promoter
fell for consideration. We are of the view that the observations made in
ArcelorMittal (supra) directly arose on the facts of the case in order
to oust the Ruias as promoters from the pale of consideration of their F
resolution plan, in which context, this Court held that they had no vested
right to be considered as resolution applicants. Accordingly, we follow
the aforesaid judgment. 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.
G
SECTION 29A(C) NOT RESTRICTED TO MALFEASANCE
66. According to learned counsel for the petitioners, Section 29A(c)
treats unequals as equals. A good erstwhile manager cannot be lumped
with a bad erstwhile manager. Where an erstwhile manager is not guilty
of malfeasance or of acting contrary to the interests of the corporate H
642 SUPREME COURT REPORTS [2019] 3 S.C.R.

A debtor, there is no reason why he should not be permitted to take part in

the resolution process. After all, say the counsel for the petitioners,
maximization of value of the assets of the corporate debtor is an important
objective to be achieved by the Code. Keeping out good erstwhile
managers from the resolution process would go contrary to this objective.
B 67. This objection by the petitioners was countered by the learned
Attorney General and Solicitor General, stating that the various clauses
of Section 29A would show that a person need not be a criminal in order
to be kept out of the resolution process. For example, under Section
29A(a), it is clear that a person may be an undischarged insolvent for no
fault of his. Equally, under Section 29A(e), a person may be disqualified
C to act as a director under the Companies Act, 2013, say, where he has
not furnished the necessary financial statements on time [see Section
164(2)(a)4 of the Companies Act, 2013].
68. The learned counsel for some of the petitioners have also
argued that the proviso to Section 35(1)(f) that was added by the
D Insolvency and Bankruptcy Code (Amendment) Act, 2017 [dated
19.01.2018] with retrospective effect from 23.11.2017 is manifestly
arbitrary and violative of Article 14 of the Constitution of India. The
proviso to Section 35(1)(f) reads as follows:
“35. Powers and duties of liquidator.—(1) Subject to the
E directions of the Adjudicating Authority, the liquidator shall have
the following powers and duties, namely:—
xxx xxx xxx
4
“164. Disqualifications for appointment of director.—
F xxx xxx xxx
(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous
period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or
to redeem any debentures on the due date or pay interest due thereon or
pay any dividend declared and such failure to pay or redeem continues for
G one year or more,
shall be eligible to be re-appointed as a director of that company or appointed
in other company for a period of five years from the date on which the said
company fails to do so:
Provided that where a person is appointed as a director of a company which is
in default of clause (a) or clause (b), he shall not incur the disqualification for a
period of six months from the date of his appointment.
H xxx xxx xxx”
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 643
[R. F. NARIMAN, J.]

(f) subject to Section 52, to sell the immovable and movable A

property and actionable claims of the corporate debtor in
liquidation by public auction or private contract, with power to
transfer such property to any person or body corporate, or to
sell the same in parcels in such manner as may be specified:
Provided that the liquidator shall not sell the immovable and B
movable property or actionable claims of the corporate debtor
in liquidation to any person who is not eligible to be a resolution
applicant.
xxx xxx xxx”
69. According to the learned counsel for the petitioners, when C
immovable and movable property is sold in liquidation, it ought to be sold
to any person, including persons who are not eligible to be resolution
applicants as, often, it is the erstwhile promoter who alone may purchase
such properties piecemeal by public auction or by private contract. The
same rationale that has been provided earlier in this judgment will apply D
to this proviso as well – 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, E
are further, by this proviso, interdicted from purchasing assets of the
corporate debtor whose debts they have either wilfully not paid or have
been unable to pay. The legislative purpose which permeates Section
29A continues to permeate the Section when it applies not merely to
resolution applicants, but to liquidation also. Consequently, this plea is F
also rejected.
THE ONE-YEAR PERIOD IN SECTION 29A(C) AND NPAS
70. It is clear that Section 29A goes to eligibility to submit a
resolution plan. A wilful defaulter, in accordance with the guidelines of
the RBI, would be a person who though able to pay, does not pay. An G
NPA, on the other hand, refers to the account belonging to a person that
is declared as such under guidelines issued by the RBI. It is important at
this juncture to advert to the aforesaid guidelines. The RBI’s Master
Circular on Prudential Norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances dated
H
644 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 01.07.2015 [“RBI Master Circular”] consolidates instructions issued

upto 30.06.2015 on NPAs. Clause 2.1 defines NPAs as under:
“2. DEFINITIONS
2.1 Non-performing Assets
B 2.1.1 An asset, including a leased asset, becomes non--performing
when it ceases to generate income for the bank.
2.1.2 A non-performing asset (NPA) is a loan or an advance
where;
i. interest and/ or instalment of principal remain overdue for a
C period of more than 90 days in respect of a term loan,
ii. the account remains ‘out of order’ as indicated at paragraph
2.2 below, in respect of an Overdraft/Cash Credit (OD/
CC),
iii. the bill remains overdue for a period of more than 90 days
D
in the case of bills purchased and discounted,
iv. the instalment of principal or interest thereon remains overdue
for two crop seasons for short duration crops,
v. the instalment of principal or interest thereon remains overdue
E for one crop season for long duration crops,
vi. the amount of liquidity facility remains outstanding for more
than 90 days, in respect of a securitization transaction
undertaken in terms of guidelines on securitization dated
February 1, 2006.
F vii. in respect of derivative transactions, the overdue receivables
representing positive mark-to-market value of a derivative
contract, if these remain unpaid for a period of 90 days
from the specified due date for payment.
2.1.3 In case of interest payments, banks should, classify an account
G as NPA only if the interest due and charged during any quarter is
not serviced fully within 90 days from the end of the quarter.
2.1.4 In addition, an account may also be classified as NPA in
terms of paragraph 4.2.4 of this Master Circular.”

H
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 645
[R. F. NARIMAN, J.]

Clause 4 of the RBI Master Circular deals with asset classification A

as follows:
“4. ASSET CLASSIFICATION
4.1 Categories of NPAs
Banks are required to classify non--performing assets further
into the following three categories based on the period for which B
the asset has remained non--performing and the realisability of
the dues:
• Sub-standard Assets
• Doubtful Assets
C
• Loss Assets
4.1.1 Sub-standard Assets
With effect from March 31, 2005, a sub-standard asset would
be one, which has remained NPA for a period less than or equal
to 12 months. Such an asset will have well defined credit D
weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
4.1.2 Doubtful Assets
With effect from March 31, 2005, an asset would be classified E
as doubtful if it has remained in the sub-standard category for a
period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as
sub-standard, with the added characteristic that the weaknesses
make collection or liquidation in full – on the basis of currently
known facts, conditions and values – highly questionable and F
improbable.
4.1.3 Loss Assets
A loss asset is one where loss has been identified by the bank or
internal or external auditors or the RBI inspection but the amount
has not been written off wholly. In other words, such an asset is G
considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted although there may be some
salvage or recovery value.
xxx xxx xxx”
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646 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 71. What is clear from the aforesaid circular is that accounts are
declared NPA only if defaults made by a corporate debtor are not resolved
(for example, interest on and/or instalment of the principal remaining
overdue for a period of more than 90 days in respect of a term loan).
Post declaration of such NPA, what is clear is that a substandard asset
would then be NPA which has remained as such for a period of twelve
B
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
C period, it is clear that such person can bid along with other resolution
applicants to manage the corporate debtor. What is important to bear in
mind is also the fact that, prior to this one-year-three-month period, banks
and financial institutions do not declare the accounts of corporate debtors
to be NPAs. As a matter of practice, they first try and resolve disputes
with the corporate debtor, after which, the corporate debtor’s account is
D
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
E ineligible to become a resolution applicant. The reason is not far to see.
A person who cannot service a debt for the aforesaid period is obviously
a person who is ailing itself. The saying of Jesus comes to mind – “if the
blind lead the blind, both shall fall into the ditch.” The legislative policy,
therefore, is that a person who is unable to service its own debt beyond
the grace period referred to above, is unfit to be eligible to become a
F
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
G now gets classified as a doubtful asset.
72. The Committee set up by the Government to oversee the
working of the Code has, in its Report of March 2018, also considered
this aspect of the matter and has opined as follows:
“14.8 In regards to the disqualification under clause (c) for having
H an NPA account, it was also stated to the Committee that the
 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 647
[R. F. NARIMAN, J.]

time period for existence of the NPA account must be increased A

from one year to three years. The reason provided was that a
downturn in a typical business cycle was most likely to extend
over a year. However, in the absence of any concrete data, the
Committee felt that there is no conclusive way to determine what
the ideal time period for existence of an NPA should be for the
B
disqualification to apply. The Committee felt that the Code was
a relatively new legislation and therefore, it would be prudent
to wait and allow industry experience to emerge for a few
years before any amendment is made to the NPA holding
period under section 29A(c). In relation to applicability of
section 29A(c), the Committee also discussed that it must be C
clarified that the disqualification pursuant to section 29A(c)
shall be applicable if such NPA accounts are held by the
resolution applicant or its connected persons at the time of
submission of the resolution plan to the RP.”
(emphasis in original) D
RELATED PARTY
73. A constitutional challenge has been raised against Section
29A(j) read with the definition of “related party”. “Related party” is
defined in the Code as follows:
E
“5. Definitions.—In this Part, unless the context otherwise
requires,—
xxx xxx xxx
(24) “related party”, in relation to a corporate debtor, means—
F
(a) a director or partner of the corporate debtor or a relative
of a director or partner of the corporate debtor;
(b) a key managerial personnel of the corporate debtor or a
relative of a key managerial personnel of the corporate debtor;
(c) a limited liability partnership or a partnership firm in which G
a director, partner, or manager of the corporate debtor or his
relative is a partner;
(d) a private company in which a director, partner or manager
of the corporate debtor is a director and holds along with his
relatives, more than two per cent of its share capital; H
648 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (e) a public company in which a director, partner or manager

of the corporate debtor is a director and holds along with
relatives, more than two per cent of its paid-up share capital;
(f) anybody corporate whose board of directors, managing
director or manager, in the ordinary course of business, acts
B on the advice, directions or instructions of a director, partner
or manager of the corporate debtor;
(g) any limited liability partnership or a partnership firm whose
partners or employees in the ordinary course of business, acts
on the advice, directions or instructions of a director, partner
C or manager of the corporate debtor;
(h) any person on whose advice, directions or instructions, a
director, partner or manager of the corporate debtor is
accustomed to act;
(i) a body corporate which is a holding, subsidiary or an associate
D company of the corporate debtor, or a subsidiary of a holding
company to which the corporate debtor is a subsidiary;
(j) any person who controls more than twenty per cent of voting
rights in the corporate debtor on account of ownership or a
voting agreement;
E
(k) any person in whom the corporate debtor controls more
than twenty per cent of voting rights on account of ownership
or a voting agreement;
(l) any person who can control the composition of the board of
directors or corresponding governing body of the corporate
F
debtor;
(m) any person who is associated with the corporate debtor on
account of—
(i) participation in policy-making processes of the corporate
G debtor; or
(ii) having more than two directors in common between the
corporate debtor and such person; or
(iii) interchange of managerial personnel between the
corporate debtor and such person; or
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[R. F. NARIMAN, J.]

(iv) provision of essential technical information to, or from, A

the corporate debtor;
(24A) “related party”, in relation to an individual, means—
(a) a person who is a relative of the individual or a relative of
the spouse of the individual;
B
(b) a partner of a limited liability partnership, or a limited liability
partnership or a partnership firm, in which the individual is a
partner;
(c) a person who is a trustee of a trust in which the beneficiary
of the trust includes the individual, or the terms of the trust C
confers a power on the trustee which may be exercised for
the benefit of the individual;
(d) a private company in which the individual is a director and
holds along with his relatives, more than two per cent. of its
share capital; D
(e) a public company in which the individual is a director and
holds along with relatives, more than two per cent. of its paid-
up share capital;
(f) a body corporate whose board of directors, managing director
or manager, in the ordinary course of business, acts on the E
advice, directions or instructions of the individual;
(g) a limited liability partnership or a partnership firm whose
partners or employees in the ordinary course of business, act
on the advice, directions or instructions of the individual;
(h) a person on whose advice, directions or instructions, the F
individual is accustomed to act;
(i) a company, where the individual or the individual along with
its related party, own more than fifty per cent. of the share
capital of the company or controls the appointment of the board
of directors of the company. G

Explanation.—For the purposes of this clause,—

(a) “relative”, with reference to any person, means anyone
who is related to another, in the following manner, namely—
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650 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (i) members of a Hindu Undivided Family,

(ii) husband,
(iii) wife,
(iv) father,
B (v) mother,
(vi) son,
(vii) daughter,
(viii) son’s daughter and son,
C
(ix) daughter’s daughter and son,
(x) grandson’s daughter and son,
(xi) granddaughter’s daughter and son,
(xii) brother,
D
(xiii) sister,
(xiv) brother’s son and daughter,
(xv) sister’s son and daughter,
(xvi) father’s father and mother,
E
(xvii) mother’s father and mother,
(xviii) father’s brother and sister,
(xix) mother’s brother and sister, and

F (b) wherever the relation is that of a son, daughter, sister or

brother, their spouses shall also be included;”
74. What is argued by the petitioners is that the mere fact that
somebody happens to be a relative of an ineligible person cannot be
good enough to oust such person from becoming a resolution applicant,
if he is otherwise qualified. We were urged, by Shri Viswanathan in
G
particular, to apply the doctrine of nexus that is well known and that has
been applied by this Court in several judgments in other legal contexts,
more particularly, in Attorney General for India and Ors. v. Amratlal
Prajivandas and Ors., (1994) 5 SCC 54. Paragraph 44 reads as under:

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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 651
[R. F. NARIMAN, J.]

“44. It is contended by the counsel for the petitioners that extending A

the provisions of SAFEMA to the relatives, associates and other
‘holders’ is again a case of overreaching or of over-breadth, as it
may be called — a case of excessive regulation. It is submitted
that the relatives or associates of a person falling under clause
(a) or clause (b) of Section 2(2) of SAFEMA may have acquired
B
properties of their own, may be by illegal means but there is no
reason why those properties be forfeited under SAFEMA just
because they are related to or are associates of the detenu or
convict, as the case may be. It is pointed out that the definition of
‘relative’ in Explanation (2) and of ‘associates’ in Explanation (3)
are so wide as to bring in a person even distantly related or C
associated with the convict/detenu, within the net of SAFEMA,
and once he comes within the net, all his illegally acquired properties
can be forfeited under the Act. In our opinion, the said contention
is based upon a misconception. SAFEMA is directed towards
forfeiture of “illegally acquired properties” of a person falling under
D
clause (a) or clause (b) of Section 2(2). The relatives and
associates are brought in only for the purpose of ensuring that the
illegally acquired properties of the convict or detenu, acquired or
kept in their names, do not escape the net of the Act. It is a well-
known fact that persons indulging in illegal activities screen the
properties acquired from such illegal activity in the names of their E
relatives and associates. Sometimes they transfer such properties
to them, may be, with an intent to transfer the ownership and title.
In fact, it is immaterial how such relative or associate holds the
properties of convict/detenu — whether as a benami or as a mere
name-lender or as a bona fide transferee for value or in any other
F
manner. He cannot claim those properties and must surrender
them to the State under the Act. Since he is a relative or associate,
as defined by the Act, he cannot put forward any defence once it
is proved that that property was acquired by the detenu — whether
in his own name or in the name of his relatives and associates. It
is to counteract the several devices that are or may be adopted by G
persons mentioned in clauses (a) and (b) of Section 2(2) that their
relatives and associates mentioned in clauses (c) and (d) of the
said sub-section are also brought within the purview of the Act.
The fact of their holding or possessing the properties of convict/
detenu furnishes the link between the convict/detenu and his
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652 SUPREME COURT REPORTS [2019] 3 S.C.R.

A relatives and associates. Only the properties of the convict/detenu

are sought to be forfeited, wherever they are. The idea is to reach
his properties in whosoever’s name they are kept or by whosoever
they are held. The independent properties of relatives and friends,
which are not traceable to the convict/detenu, are not sought to
be forfeited nor are they within the purview of SAFEMA [ That
B
this was the object of the Act is evident from para 4 of the preamble
which states: “And whereas such persons have in many cases
been holding the properties acquired by them through such gains
in the names of their relatives, associates and confidants.” We
are not saying that the preamble can be utilized for restricting the
C scope of the Act, we are only referring to it to ascertain the object
of the enactment and to reassure ourselves that the construction
placed by us accords with the said object.] . We may proceed to
explain what we say. Clause (c) speaks of a relative of a person
referred to in clause (a) or clause (b) (which speak of a convict
or a detenu). Similarly, clause (d) speaks of associates of such
D
convict or detenu. If we look to Explanation (3) which specifies
who the associates referred to in clause (d) are, the matter
becomes clearer. ‘Associates’ means — (i) any individual who
had been or is residing in the residential premises (including
outhouses) of such person [‘such person’ refers to the convict or
E detenu, as the case may be, referred to in clause (a) or clause
(b)]; (ii) any individual who had been or is managing the affairs
or keeping the accounts of such convict/detenu; (iii) any
association of persons, body of individuals, partnership firm or
private company of which such convict/detenu had been or is a
member, partner or director; (iv) any individual who had been or
F
is a member, partner or director of an association of persons,
body of individuals, partnership firm or private company referred
to in clause (iii) at any time when such person had been or is a
member, partner or director of such association of persons, body
of individuals, partnership firm or private company; (v) any person
G who had been or is managing the affairs or keeping the accounts
of any association of persons, body of individuals, partnership firm
or private company referred to in clause (iii); (vi) the trustee of
any trust where (a) the trust has been created by such convict/
detenu; or (b) the value of the assets contributed by such convict/
detenu to the trust amounts, on the date of contribution not less
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[R. F. NARIMAN, J.]

than 20% of the value of the assets of the trust on that date; and A
(vii) where the competent authority, for reasons to be recorded in
writing, considers that any properties of such convict/detenu are
held on his behalf by any other person, such other person. It would
thus be clear that the connecting link or the nexus, as it may be
called, is the holding of property or assets of the convict/detenu or
B
traceable to such detenu/convict. Section 4 is equally relevant in
this context. It declares that “as from the commencement of this
Act, it shall not be lawful for any person to whom this Act applies
to hold any illegally acquired property either by himself or through
any other person on his behalf”. All such property is liable to be
forfeited. The language of this section is indicative of the ambit of C
the Act. Clauses (c) and (d) in Section 2(2) and the Explanations
(2) and (3) occurring therein shall have to be construed and
understood in the light of the overall scheme and purpose of the
enactment. The idea is to forfeit the illegally acquired properties
of the convict/detenu irrespective of the fact that such properties
D
are held by or kept in the name of or screened in the name of any
relative or associate as defined in the said two Explanations. The
idea is not to forfeit the independent properties of such relatives
or associates which they may have acquired illegally but only to
reach the properties of the convict/detenu or properties traceable
to him, wherever they are, ignoring all the transactions with respect E
to those properties. By way of illustration, take a case where a
convict/detenu purchases a property in the name of his relative or
associate — it does not matter whether he intends such a person
to be a mere name-lender or whether he really intends that such
person shall be the real owner and/or possessor thereof — or
F
gifts away or otherwise transfers his properties in favour of any
of his relatives or associates, or purports to sell them to any of his
relatives or associates — in all such cases, all the said transactions
will be ignored and the properties forfeited unless the convict/
detenu or his relative/associate, as the case may be, establishes
that such property or properties are not “illegally acquired G
properties” within the meaning of Section 3(c). In this view of the
matter, there is no basis for the apprehension that the independently
acquired properties of such relatives and associates will also be
forfeited even if they are in no way connected with the convict/
detenu. So far as the holders (not being relatives and associates)
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654 SUPREME COURT REPORTS [2019] 3 S.C.R.

A mentioned in Section 2(2)(e) are concerned, they are dealt with

on a separate footing. If such person proves that he is a transferee
in good faith for consideration, his property — even though
purchased from a convict/detenu — is not liable to be forfeited. It
is equally necessary to reiterate that the burden of establishing
that the properties mentioned in the show-cause notice issued
B
under Section 6, and which are held on that date by a relative or
an associate of the convict/detenu, are not the illegally acquired
properties of the convict/detenu, lies upon such relative/associate.
He must establish that the said property has not been acquired
with the monies or assets provided by the detenu/convict or that
C they in fact did not or do not belong to such detenu/convict. We
do not think that Parliament ever intended to say that the properties
of all the relatives and associates, may be illegally acquired, will
be forfeited just because they happen to be the relatives or
associates of the convict/detenu. There ought to be the connecting
link between those properties and the convict/detenu, the burden
D
of disproving which, as mentioned above, is upon the relative/
associate. In this view of the matter, the apprehension and
contention of the petitioners in this behalf must be held to be based
upon a mistaken premise. The bringing in of the relatives and
associates or of the persons mentioned in clause (e) of Section
E 2(2) is thus neither discriminatory nor incompetent apart from the
protection of Article 31-B.”
(emphasis supplied)
75. We are of the view that persons who act jointly or in concert
with others are connected with the business activity of the resolution
F 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
G 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
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 655
[R. F. NARIMAN, J.]

“relative” contained in the definition Sections must be read noscitur a 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.
76. An argument was also made that the expression “connected
person” in Explanation I, clause (ii) to Section 29A(j) cannot possibly B
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 contention also needs
to be repelled 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 C
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. This disposes
of all the contentions raising questions as to the constitutional validity of D
Section 29A(j).
EXEMPTION OF MICRO, SMALL, AND MEDIUM ENTERPRISES FROM SECTION
29A
77. The ILC Report of March 2018 found that micro, small, and
medium enterprises form the foundation of the economy and are key E
drivers of employment, production, economic growth, entrepreneurship,
and financial inclusion.
78. Section 7 of the Micro, Small and Medium Enterprises
Development Act, 2006 classifies enterprises depending upon whether
they manufacture or produce goods, or are engaged in providing and F
rendering services as micro, small, or medium, depending upon certain
investments made, as follows:
“7. Classification of enterprises.—(1) Notwithstanding
anything contained in Section 11-B of the Industries (Development
and Regulation) Act, 1951 (65 of 1951), the Central Government G
may, for the purposes of this Act, by notification and having regard
to the provisions of sub-sections (4) and (5), classify any class or
classes of enterprises, whether proprietorship, Hindu undivided
family, associations of persons, co-operative society, partnership
firm, company or undertaking, by whatever name called,—
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656 SUPREME COURT REPORTS [2019] 3 S.C.R.

A (a) in the case of the enterprises engaged in the manufacture

or production of goods pertaining to any industry specified in
the First Schedule to the Industries (Development and
Regulation) Act, 1951 (65 of 1951), as—
(i) a micro enterprise, where the investment in plant and
B machinery does not exceed twenty-five lakh rupees;
(ii) a small enterprise, where the investment in plant and
machinery is more than twenty-five lakh rupees but does
not exceed five crore rupees; or
(iii) a medium enterprise, where the investment in plant and
C machinery is more than five crore rupees but does not exceed
ten crore rupees;
(b) in the case of the enterprises engaged in providing or
rendering of services, as—

D (i) a micro enterprise, where the investment in equipment

does not exceed ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is
more than ten lakh rupees but does not exceed two crore
rupees; or
E (iii) a medium enterprise, where the investment in equipment
is more than two crore rupees but does not exceed five crore
rupees.
xxx xxx xxx”
79. The ILC Report of 2018 exempted these industries from
F Section 29A(c) and 29A(h) of the Code, their rationale for doing so
being contained in paragraph 27.4 of the Report, which reads as follows:
“27.4 Regarding the first issue, the Code is clear that default of
INR one lakh or above triggers the right of a financial creditor or
an operational creditor to file for insolvency. Thus, the financial
G creditor or operational creditors of MSMEs may take it to
insolvency under the Code. However, given that MSMEs are the
bedrock of the Indian economy, and the intent is not to push them
into liquidation and affect the livelihood of employees and workers
of MSMEs, the Committee sought it fit to explicitly grant
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 657
[R. F. NARIMAN, J.]

exemptions to corporate debtors which are MSMEs by permitting A

a promoter who is not a wilful defaulter, to bid for the MSME in
insolvency. The rationale for this relaxation is that a business of
an MSME attracts interest primarily from a promoter of an MSME
and may not be of interest to other resolution applicants.”
(emphasis supplied) B
80. Thus, the rationale 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 C
inserted in the Code with retrospective effect from 06.06.2018 as follows:
“240-A. Application of this Code to micro, small and medium
enterprises.—(1) Notwithstanding anything to the contrary
contained in this Code, the provisions of clauses (c) and (h) of
Section 29A shall not apply to the resolution applicant in respect D
of corporate insolvency resolution process of any micro, small
and medium enterprises.
(2) Subject to sub-section (1), the Central Government may, in
the public interest, by notification, direct that any of the provisions
of this Code shall— E
(a) not apply to micro, small and medium enterprises; or
(b) apply to micro, small and medium enterprises, with such
modifications as may be specified in the notification.
(3) A draft of every notification proposed to be issued under sub-
F
section (2), shall be laid before each House of Parliament, while it
is in session, for a total period of thirty days which may be comprised
in one session or in two or more successive sessions.
(4) If both Houses agree in disapproving the issue of notification
or both Houses agree in making any modification in the notification,
the notification shall not be issued or shall be issued only in such G
modified form as may be agreed upon by both the Houses, as the
case may be.
(5) The period of thirty days referred to in sub-section (3) shall
not include any period during which the House referred to in sub-
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658 SUPREME COURT REPORTS [2019] 3 S.C.R.

A section (4) is prorogued or adjourned for more than four

consecutive days.
(6) Every notification issued under this section shall be laid, as
soon as may be after it is issued, before each House of Parliament.
Explanation.—For the purposes of this section, the expression
B “micro, small and medium enterprises” means any class or classes
of enterprises classified as such under sub-section (1) of Section
7 of the Micro, Small and Medium Enterprises Development Act,
2006 (27 of 2006).”
81. It can thus be seen that when the Code has worked hardship
C 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
D 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
E rectify them.
SECTION 53 OF THE CODE DOES NOT VIOLATE ARTICLE 14.
82. An argument has been made by counsel appearing on behalf
of the petitioners that in the event of liquidation, operational creditors
F will never get anything as they rank below all other creditors, including
other unsecured creditors who happen to be financial creditors. This,
according to them, would render Section 53 and in particular, Section
53(1)(f) discriminatory and manifestly arbitrary and thus, violative of
Article 14 of the Constitution of India.
Section 53(1) reads as follows:
G
“53. Distribution of assets.—(1) Notwithstanding anything to
the contrary contained in any law enacted by the Parliament or
any State Legislature for the time being in force, the proceeds
from the sale of the liquidation assets shall be distributed in the
following order of priority and within such period and in such
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 659
[R. F. NARIMAN, J.]

manner as may be specified, namely— A

(a) the insolvency resolution process costs and the liquidation
costs paid in full;
(b) the following debts which shall rank equally between and
among the following—
B
(i) workmen’s dues for the period of twenty-four months
preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured
creditor has relinquished security in the manner set out in
Section 52; C
(c) wages and any unpaid dues owed to employees other than
workmen for the period of twelve months preceding the
liquidation commencement date;
(d) financial debts owed to unsecured creditors;
D
(e) the following dues shall rank equally between and among the
following:—
(i) any amount due to the Central Government and the State
Government including the amount to be received on account
of the Consolidated Fund of India and the Consolidated Fund
of a State, if any, in respect of the whole or any part of the E
period of two years preceding the liquidation commencement
date;
(ii) debts owed to a secured creditor for any amount unpaid
following the enforcement of security interest;
F
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
xxx xxx xxx”
G
83. The BLRC Report, which led to the enactment of the
Insolvency Code, in dealing with this aspect of the matter, has stated:
“The Committee has recommended to keep the right of the Central
and State Government in the distribution waterfall in liquidation at
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660 SUPREME COURT REPORTS [2019] 3 S.C.R.

A a priority below the unsecured financial creditors in addition to all

kinds of secured creditors for promoting the availability of credit
and developing a market for unsecured financing (including the
development of bond markets). In the long run, this would increase
the availability of finance, reduce the cost of capital, promote
entrepreneurship and lead to faster economic growth. The
B
government also will be the beneficiary of this process as economic
growth will increase revenues. Further, efficiency enhancement
and consequent greater value capture through the proposed
insolvency regime will bring in additional gains to both the economy
and the exchequer.”
C xxx xxx xxx
“For the remaining creditors who participate in the collective action
of Liquidation, the Committee debated on the waterfall of liabilities
that should hold in Liquidation in the new Code. Across different
jurisdictions, the observation is that secured creditors have first
D priority on the realizations, and that these are typically paid out
net of the costs of insolvency resolution and Liquidation. In order
to bring the practices in India in-line with the global practice, and
to ensure that the objectives of this proposed Code is met, the
Committee recommends that the waterfall in Liquidation should
E be as follows:
1. Costs of IRP and liquidation.
2. Secured creditors and Workmen dues capped up to three
months from the start of IRP.

F 3. Employees capped up to three months.

4. Dues to unsecured financial creditors, debts payable to
workmen in respect of the period beginning twelve months
before the liquidation commencement date and ending three
months before the liquidation commencement date;
G 5. Any amount due to the State Government and the Central
Government in respect of the whole or any part of the period
of two years before the liquidation commencement date; any
debts of the secured creditor for any amount unpaid following
the enforcement of security interest
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 SWISS RIBBONS PVT. LTD. v. UNION OF INDIA 661
[R. F. NARIMAN, J.]

6. Remaining debt A
7. Surplus to shareholders.”
84. It will be seen that the reason for differentiating between
financial debts, which are secured, and operational debts, which are
unsecured, is in the relative importance of the two types of debts when
it comes to the object sought to be achieved by the Insolvency Code. B
We have already seen that repayment of financial debts infuses capital
into the economy inasmuch as banks and financial institutions are able,
with the money that has been paid back, to further lend such money to
other entrepreneurs for their businesses. This rationale creates an
intelligible differentia between financial debts and operational debts, C
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, D
Article 14 does not get infracted. For these reasons, the challenge to
Section 53 of the Code must also fail.
EPILOGUE
85. The Insolvency Code is a legislation which deals with economic E
matters and, in the larger sense, deals with the economy of the country
as a whole. Earlier experiments, as we have seen, in terms of legislations
having failed, ‘trial’ having led to repeated ‘errors’, ultimately led to the
enactment of the Code. The experiment contained in the Code, judged
by the generality of its provisions and not by so-called crudities and
inequities that have been pointed out by the petitioners, passes F
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. We have also seen that 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 G
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.

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662 SUPREME COURT REPORTS [2019] 3 S.C.R.

A 86. We are happy to note that 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. Approximately
3300 cases have been disposed of by the Adjudicating Authority based
on out-of-court settlements between corporate debtors and creditors
which themselves involved claims amounting to over INR 1,20,390 crores.
B
Eighty cases have since been resolved by resolution plans being accepted.
Of these eighty cases, the liquidation value of sixty-three such cases is
INR 29,788.07 crores. However, the amount realized from the resolution
process is in the region of INR 60,000 crores, which is over 202% of the
liquidation value. As a result of this, the Reserve Bank of India has
C come out with figures which reflect these results. Thus, credit that has
been given by banks and financial institutions to the commercial sector
(other than food) has jumped up from INR 4952.24 crores in 2016-2017,
to INR 9161.09 crores in 2017-2018, and to INR 13195.20 crores for
the first six months of 2018-2019. Equally, credit flow from non-banks
has gone up from INR 6819.93 crores in 2016-2017, to INR 4718 crores
D
for the first six months of 2018-2019. Ultimately, the total flow of resources
to the commercial sector in India, both bank and non-bank, and domestic
and foreign (relatable to the non-food sector) has gone up from a total of
INR 14530.47 crores in 2016-2017, to INR 18469.25 crores in 2017-
2018, and to INR 18798.20 crores in the first six months of 2018-2019.
E These 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. The result is
that all the petitions will now be disposed of in terms of this judgment.
There will be no order as to costs.
F
Nidhi Jain Petitions disposed of.