M/S. Innoventive Industries Ltd vs Icici Bank on 31 August, 2017

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOs. 8337-8338 OF 2017

M/S. INNOVENTIVE INDUSTRIES LTD. …APPELLANT

VERSUS

ICICI BANK ANR. …RESPONDENTS

JUDGMENT

R.F. Nariman, J.

1. The present case raises interesting questions which arise

under the Insolvency and Bankruptcy Code of 2016 (hereinafter

referred to as the Code), which received the Presidential assent on

28th May, 2016, but which provisions were brought into force only in

November-December, 2016.

2. The appellant before us is a multi-product company catering to

applications in diverse sectors. From August, 2012, owing to labour

problems, the appellant began to suffer losses. Since the appellant
Signature Not Verified

Digitally signed by
R.NATARAJAN
was not able to service the financial assistance given to it by 19
Date: 2017.08.31
16:32:01 IST
Reason:

banking entities, which had extended credit to the appellant, the

appellant itself proposed corporate debt restructuring. The 19
entities formed a consortium, led by the Central Bank of India, and

by a joint meeting dated 22nd February, 2014, it was decided that a

CDR resolution plan would be approved. The details of this plan are

not immediately relevant to the issues to be decided in the present

case. The lenders, upon perusing the terms of the CDR proposal

given by the appellant and a techno-economic viability study, (which

was done at the instance of the lenders), a CDR empowered group

admitted the restructuring proposal vide minutes of a meeting dated

23rd May, 2014. The Joint Lenders Forum at a meeting of 24 th June,

2014 finally approved the restructuring plan.

3. In terms of the restructuring plan, a master restructuring

agreement was entered into on 9 th September, 2014 (hereinafter

referred to as the MRA), by which funds were to be infused by the

creditors, and certain obligations were to be met by the debtors. The

aforesaid restructuring plan was implementable over a period of 2

years.

4. Suffice it to say that both sides have copiously referred to

various letters which passed between the parties and various

minutes of meetings. Ultimately, an application was made on 7 th

December, 2016 by ICICI Bank Ltd., in which it was stated that the

appellant being a defaulter within the meaning of the Code, the
insolvency resolution process ought to be set in motion. To this

application, a reply was filed by means of an interim application on

behalf of the appellant dated 17 th December, 2016, in which the

appellant claimed that there was no debt legally due inasmuch as

vide two notifications dated 22nd July, 2015 and 18th July, 2016, both

under the Maharashtra Relief Undertakings (Special Provisions Act),

1958 (hereinafter referred to as the Maharashtra Act), all liabilities of

the appellant, except certain liabilities with which we are not

concerned, and remedies for enforcement thereof were temporarily

suspended for a period of one year in the first instance under the

first notification of 22nd July, 2015 and another period of one year

under the second notification of 18 th July, 2016. It may be added

that this was the only point raised on behalf of the appellant in order

to stave off the admission of the ICICI Bank application made before

the NCLT. We are informed that hearings took place in the matter on

22nd and 23rd December, 2016, after which the NCLT adjourned the

case to 16th January, 2017.

5. On this date, a second application was filed by the appellant in

which a different plea was taken. This time, the appellant pleaded

that owing to non-release of funds under the MRA, the appellant was

unable to pay back its debts as envisaged. Further, it repaid only
some amounts to five lenders, who, according to the appellant,

complied with their obligations under the MRA. In the aforesaid

circumstances, it was pleaded that no default was committed by it.

6. By an order dated 17th January, 2017, the NCLT held that the

Code would prevail against the Maharashtra Act in view of the

non-obstante clause in Section 238 of the Code. It, therefore, held

that the Parliamentary statute would prevail over the State statute

and this being so, it is obvious that the corporate debtor had

defaulted in making payments, as per the evidence placed by the

financial creditors. Hence, the application was admitted and a

moratorium was declared.

7. By a separate order dated 23rd January, 2017 passed by the

NCLT, in which a clarification application was dismissed, it was held

that the second application of 16 th January, 2017 was raised

belatedly and would not be maintainable for two reasons – (1)

because no audience has been given to the corporate debtor in the

Tribunal by the Code; and (2) the corporate debtor has not taken the

plea contained in the second application in the earlier application.

This was because a limited timeframe of only 14 days was available

under the Code from the date of filing of the creditors’ petition, to

decide the application.

8. From the aforesaid order, an appeal was carried to the NCLAT,

which met with the same fate. The NCLAT, however, held that the

Code and the Maharashtra Act operate in different fields and,

therefore, are not repugnant to each other. Having recorded this,

however, the NCLAT went on to hold that the appellant cannot derive

any advantage from the Maharashtra Act to stall the insolvency

resolution process under Section 7 of the Code. It was further held

as under:

“80. Insofar as Master Restructuring Agreement dated
8th September 2014 is concerned; the appellant cannot
take advantage of the same. Even if it is presumed that
fresh agreement came into existence, it does not absolve
the Appellant from paying the previous debts which are
due to the financial creditor.

81. The Tribunal has noticed that there is a failure on the
part of appellant to pay debts. The Financial Creditor has
attached different records in support of default of
payment. Apart from that it is not supposed to go beyond
the question to see whether there is a failure on
fulfilment of obligation by the financial creditor under one
or other agreement, including the Master Restructuring
Agreement. In that view of the matter, the Appellant
cannot derive any advantage of the Master Restructuring
Agreement dated 8th September, 2014.”

9. Dr. A.M. Singhvi, learned Senior Advocate, who appeared on

behalf of the appellants, has argued before us that the Appellate

Tribunal, in fact, decided in his favour by holding the two Acts to be

not repugnant to each other, but then went on to say that the
Maharashtra Act will not apply. According to him, the Maharashtra

Act would apply for the reason that the moratorium imposed by the

two notifications under the Maharashtra Act continued in force at the

time when the insolvency application was made by ICICI and that,

therefore, the Code would not apply. According to him, the debt was

kept in temporary abeyance, after which the Code would apply. He

argued that he had a vested right under the Maharashtra Act and

that the debt was only suspended temporarily. According to him, no

repugnancy exists between the two statutes under Article 254 of the

Constitution and each operates in its own field. The Maharashtra

Act provides for relief against unemployment, whereas the Code is a

liquidation process. Further, the Code is made under Entry 9, List III

of the Seventh Schedule to the Constitution, whereas the

Maharashtra Act, which is a measure for unemployment relief, is

made under Entry 23, List III of the Seventh Schedule. This being

so, as correctly held by the Appellate Tribunal, the two Acts operated

in different spheres and, therefore, do not clash. Dr. Singhvi

mounted a severe attack on the Appellate Tribunal by stating that the

Tribunal ought to have gone into the MRA, in which case it would

have discovered that there was no debt due by the appellant,

inasmuch as the funds that were to be disbursed by the creditors to
the appellant were never disbursed, as a result of which the

corporate restructuring package never took off from the ground. He

further argued that amounts due under the MRA had not yet

fructified and for that reason also the application was premature.

10. Shri H.N. Salve, learned Senior Advocate, appearing on behalf

of the respondents, took us through the Code in some detail and

argued before us that the object of this Code is that the interests of

all stakeholders, namely shareholders, creditors and workmen, are

to be balanced and the old notion of a sick management which

cannot pay its financial debts continuing nevertheless in the

management seat has been debunked by the Code. The entire

object of the Code would be stultified if we were to heed Dr.

Singhvi’s submission, as according to Shri Salve, when an

application is made under Section 7 of the Code, the only limited

scope of argument before the NCLT by a corporate debtor is that the

debt is not due for any reason. According to Shri Salve, the first

application in reply to the corporate debtor was, in fact, the only

arguable point in the case which has been concurrently turned down.

According to Shri Salve, after an interim resolution professional has

been appointed and a moratorium declared, the directors of the

company are no longer in management and could not, therefore,
maintain the appeal before us. Also, according to Shri Salve, the

NCLT and NCLAT were both right in refusing to go into the plea that,

since the financial creditors had not pumped in funds, the corporate

debtor could not pay back its debts in accordance with the MRA, as

this plea was an after-thought which could easily have been taken in

the first reply. Further, in order to satisfy our conscience, he has

taken us through the MRA to some detail to show us that the

appellant would emerge as a defaulter under the MRA in any case.

He has also argued that it is obvious that the two Acts are repugnant

to each other, inasmuch as they cannot stand together. Under the

Maharashtra Act, a limited moratorium is imposed after which the

State Government may take over management of the company.

Under the Code, however, a full moratorium is to automatically

attach the moment an application is admitted by the NCLT, and

management of the company is then taken over by an interim

resolution professional. Obviously, the moratorium under the

Maharashtra Act and the management taken over by the State

Government cannot stand together with the moratorium imposed

under the Central Act and takeover of the management by the

interim resolution professional. According to him, therefore, no case

whatsoever is made out and the appeal should be dismissed, both
on grounds of maintainability and on merits.

11. Having heard learned counsel for both the parties, we find

substance in the plea taken by Shri Salve that the present appeal at

the behest of the erstwhile directors of the appellant is not

maintainable. Dr. Singhvi stated that this is a technical point and he

could move an application to amend the cause title stating that the

erstwhile directors do not represent the company, but are filing the

appeal as persons aggrieved by the impugned order as their

management right of the company has been taken away and as they

are otherwise affected as shareholders of the company. According

to us, once an insolvency professional is appointed to manage the

company, the erstwhile directors who are no longer in management,

obviously cannot maintain an appeal on behalf of the company. In

the present case, the company is the sole appellant. This being the

case, the present appeal is obviously not maintainable. However,

we are not inclined to dismiss the appeal on this score alone.

Having heard both the learned counsel at some length, and because

this is the very first application that has been moved under the Code,

we thought it necessary to deliver a detailed judgment so that all

Courts and Tribunals may take notice of a paradigm shift in the law.

Entrenched managements are no longer allowed to continue in
management if they cannot pay their debts.

12. The Insolvency and Bankruptcy Code, 2016 has been passed

after great deliberation and pursuant to various committee reports,

the most important of which is the report of the Bankruptcy Law

Reforms Committee of November, 2015. The Statement of Objects

and Reasons of the Code reads as under:

“STATEMENT OF OBJECTS AND REASONS
There is no single law in India that deals with insolvency
and bankruptcy. Provisions relating to insolvency and
bankruptcy for companies can be found in the Sick
Industrial Companies (Special Provisions) Act, 1985, the
Recovery of Debt 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), Debt
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, 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 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 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
Business, and facilitate more investments leading to
higher economic growth and development.

3. The Code seeks to provide for designating the NCLT
and DRT as the Adjudicating Authorities for corporate
persons and firms and individuals, respectively, for
resolution of insolvency, liquidation 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 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 and disseminate
financial information to facilitate such proceedings. The
Code also proposes to establish a fund to be called the
Insolvency and Bankruptcy Fund of India for the
purposes specified in the Code.

4. The Code seeks to provide for amendments in the
Indian Partnership Act, 1932, the Central Excise Act,
1944, Customs Act, 1962, Income-Tax Act, 1961, the
Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, the Finance Act, 1994, the
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, the Sick
Industrial Companies (Special Provisions) Repeal Act,
2003, the Payment and Settlement Systems Act, 2007,
the Limited Liability Partnership Act, 2008, and the
Companies Act, 2013.

5. The Code seeks to achieve the above objectives.”
(Emphasis Supplied)

13. One of the important objectives of the Code is to bring the

insolvency law in India under a single unified umbrella with the

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 190

countries on the ease of resolving insolvency based on various

indicia.

14. Other nations are have marched ahead much before us. For

example, the USA has adopted the Bankruptcy Reform Act of 1978,

which has since been codified in Title XI of the United States Code.

The US Code continues to favour the debtor. In a reorganization

case under Chapter 11, the debtor and its existing management

ordinarily continue to operate the business as a “debtor in

possession” – See USC 11, Sec. 1107-1108. The Court can appoint

a trustee to take over management of the debtor’s affairs only for

“cause” which includes fraud, dishonesty or gross mismanagement

of the affairs of the debtor – See USC 11, Sec. 1104. Having regard

to the aforesaid grounds, such appointments are rare. Creditors are
not permitted a direct role in operating the on-going business

operations of the debtor. However, the United States Trustee is to

appoint a committee of creditors to monitor the debtor’s ongoing

operations. A moratorium is provided, which gives the debtor a

breathing spell in which he is to seek to reorganize his business.

While a Chapter 11 case is pending, the debtor only needs to pay

post petition wages, expenses etc. In the meanwhile, the debtor can

work on permanent financial resolution of its pre-petition debts. It is

only when this does not work that the bankruptcy process is then put

into effect.

15. The UK Law, on the other hand, is governed by the Insolvency

Act of 1986 which has served as a model for the present Code.

While piloting the Code in Parliament, Shri Arun Jaitley, learned

Finance Minister, stated on the floor of the House:

“SHRI ARUN JAITLEY: One of the differences between
your Chapter 11 and this is that in Chapter 11, the debtor
continues to be in possession. Here the creditors will be
in possession. Now, the SICA is being phased out, and I
will tell you one of the reasons why SICA didn’t function.
Under SICA, the predominant experience has been this,
and that is why a decision was taken way back in 2002
to repeal SICA when the original Company Law
amendments were passed. Now since they were
challenged before the Supreme Court, it didn’t come into
operation. Now, the object behind SICA was revival of
sick companies. But not too many revivals took place.

But what happened in the process was that a protective
wall was created under SICA that once you enter the
BIFR, nobody can recover money from you. So, that
non-performing investment became more
non-performing because the companies were not being
revived and the banks were also unable to pursue any
demand as far as those sick companies were concerned,
and therefore, SICA runs contrary to this whole concept
of exit that if a particular management is not in a position
to run a company, then instead of the company closing
down under this management, a more liquid and a
professional management must come and then save this
company. That is the whole object. And if nobody can
save it, rather than allowing it to be squandered, the
assets must be distributed — as the Joint Committee has
decided — in accordance with the waterfall mechanism
which they have created.”
(Emphasis Supplied)

16. At this stage, it is important to set out the important paragraphs

contained in the report of the Bankruptcy Law Reforms Committee of

November, 2015, as these excerpts give us a good insight into why

the Code was enacted and the purpose for which it was enacted:

“As Chairman of the Committee on bankruptcy law
reforms, I have had the privilege of overseeing the
design and drafting of a new legal framework for
resolving matters of insolvency and bankruptcy. This is a
matter of critical importance: India is one of the youngest
republics in the world, with a high concentration of the
most dynamic entrepreneurs. Yet these game changers
and growth drivers are crippled by an environment that
takes some of the longest times and highest costs by
world standards to resolve any problems that arise while
repaying dues on debt. This problem leads to grave
consequences: India has some of the lowest credit
compared to the size of the economy. This is a
troublesome state to be in, particularly for a young
emerging economy with the entrepreneurial dynamism of
India. Such dynamism not only needs reforms, but
reforms done urgently.”

xxx xxx xxx xxx

“The limited liability company is a contract between
equity and debt. As long as debt obligations are met,
equity owners have complete control, and creditors have
no say in how the business is run. When default takes
place, control is supposed to transfer to the creditors;

equity owners have no say.

This is not how companies in India work today. For many
decades, creditors have had low power when faced with
default. Promoters stay in control of the company even
after default. Only one element of a bankruptcy
framework has been put into place: to a limited extent,
banks are able to repossess fixed assets which were
pledged with them.

While the existing framework for secured credit has
given rights to banks, some of the most important
lenders in society are not banks. They are the dispersed
mass of households and financial firms who buy
corporate bonds. The lack of power in the hands of a
bondholder has been one (though not the only) reason
why the corporate bond market has not worked. This, in
turn, has far reaching ramifications such as the
difficulties of infrastructure financing.

Under these conditions, the recovery rates obtained in
India are among the lowest in the world. When default
takes place, broadly speaking, lenders seem to recover
20% of the value of debt, on an NPV basis.

When creditors know that they have weak rights resulting
in a low recovery rate, they are averse to lend. Hence,
lending in India is concentrated in a few large companies
that have a low probability of failure. Further, secured
credit dominates, as creditors rights are partially present
only in this case. Lenders have an emphasis on secured
credit. In this case, credit analysis is relatively easy: It
only requires taking a view on the market value of the
collateral. As a consequence, credit analysis as a
sophisticated analysis of the business prospects of a firm
has shriveled.

Both these phenomena are unsatisfactory. In many
settings, debt is an efficient tool for corporate finance;
there needs to be much more debt in the financing of
Indian firms. E.g. long-dated corporate bonds are
essential for most infrastructure projects. The lack of
lending without collateral, and the lack of lending based
on the prospects of the firm, has emphasised debt
financing of asset-heavy industries. However, some of
the most important industries for India‟s rapid growth are
those which are more labour intensive. These industries
have been starved of credit.”

xxx xxx xxx xxx

“The key economic question in the bankruptcy
process

When a firm (referred to as the corporate debtor in the
draft law) defaults, the question arises about what is to
be done. Many possibilities can be envisioned. One
possibility is to take the firm into liquidation. Another
possibility is to negotiate a debt restructuring, where the
creditors accept a reduction of debt on an NPV basis,
and hope that the negotiated value exceeds the
liquidation value. Another possibility is to sell the firm as
a going concern and use the proceeds to pay creditors.
Many hybrid structures of these broad categories can be
envisioned.

The Committee believes that there is only one correct
forum for evaluating such possibilities, and making a
decision: a creditors committee, where all financial
creditors have votes in proportion to the magnitude of
debt that they hold. In the past, laws in India have
brought arms of the government (legislature, executive
or judiciary) into this question. This has been strictly
avoided by the Committee. The appropriate disposition of
a defaulting firm is a business decision, and only the
creditors should make it.”

xxx xxx xxx xxx

“Speed is of essence

Speed is of essence for the working of the bankruptcy
code, for two reasons. First, while the ‘calm period’ can
help keep an organisation afloat, without the full clarity of
ownership and control, significant decisions cannot be
made. Without effective leadership, the firm will tend to
atrophy and fail. The longer the delay, the more likely it is
that liquidation will be the only answer. Second, the
liquidation value tends to go down with time as many
assets suffer from a high economic rate of depreciation.

From the viewpoint of creditors, a good realisation 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
realisation is lower when there are delays. Hence, delays
cause value destruction. Thus, achieving a high recovery
rate is primarily about identifying and combating the
sources of delay.”

xxx xxx xxx xxx

“The role that insolvency and bankruptcy plays in
debt financing

Creditors put money into debt investments today in
return for the promise of fixed future cash flows. But the
returns expected on these investments are still uncertain
because at the time of repayment, the seller (debtor)
may make repayments as promised, or he may default
and does not make the payment. When this happens,
the debtor is considered insolvent. Other than cases of
outright fraud, the debtor may be insolvent because of
• Financial failure – a persistent mismatch between
payments by the enterprise and receivables into
the enterprise, even though the business model is
generating revenues, or
• Business failure – which is a breakdown in the
business model of the enterprise, and it is unable
to generate sufficient revenues to meet payments.

Often, an enterprise may be a successful business
model while still failing to repay its creditors. A sound
bankruptcy process is one that helps creditors and
debtors realise and agree on whether the entity is facing
financial failure and business failure. This is important to
allow both parties to realise the maximum value of the
business in the insolvency.”

xxx xxx xxx xxx

“Control of a company is not divine right. When a firm
defaults on its debt, control of the company should shift
to the creditors. In the absence of swift and decisive
mechanisms for achieving this, management teams and
shareholders retain control after default. Bankruptcy law
must address this.”

xxx xxx xxx xxx

“Objectives

The Committee set the following as objectives desired
from implementing a new Code to resolve insolvency
and bankruptcy:

1. Low time to resolution.

2. Low loss in recovery.

3. Higher levels of debt financing across a wide variety of
debt instruments.

The performance of the new Code in implementation will
be based on measures of the above outcomes.

Principles driving the design

The Committee chose the following principles to design
the new insolvency and bankruptcy resolution
framework:

I. The Code will facilitate the assessment of viability of
the enterprise at a very early stage.

1. The law must explicitly state that the viability of the
enterprise is a matter of business, and that matters of
business can only be negotiated between creditors and
debtor. While viability is assessed as a negotiation
between creditors and debtor, the final decision has to be
an agreement among creditors who are the financiers
willing to bear the loss in the insolvency.

2. The legislature and the courts must control the
process of resolution, but not be burdened to make
business decisions.

3. The law must set up a calm period for insolvency
resolution where the debtor can negotiate in the
assessment of viability without fear of debt recovery
enforcement by creditors.

4. The law must appoint a resolution professional as the
manager of the resolution period, so that the creditors
can negotiate the assessment of viability with the
confidence that the debtors will not take any action to
erode the value of the enterprise. The professional will
have the power and responsibility to monitor and
manage the operations and assets of the enterprise. The
professional will manage the resolution process of
negotiation to ensure balance of power between the
creditors and debtor, and protect the rights of all
creditors. The professional will ensure the reduction of
asymmetry of information between creditors and debtor
in the resolution process.

II. The Code will enable symmetry of information
between creditors and debtors.

5. The law must ensure that information that is essential
for the insolvency and the bankruptcy resolution process
is created and available when it is required.

6. The law must ensure that access to this information is
made available to all creditors to the enterprise, either
directly or through the regulated professional.

7. The law must enable access to this information to third
parties who can participate in the resolution process,
through the regulated professional.

III. The Code will ensure a time-bound process to better
preserve economic value.

8. The law must ensure that time value of money is
preserved, and that delaying tactics in these negotiations
will not extend the time set for negotiations at the start.

IV. The Code will ensure a collective process.

9. The law must ensure that all key stakeholders will
participate to collectively assess viability. The law must
ensure that all creditors who have the capability and the
willingness to restructure their liabilities must be part of
the negotiation process. The liabilities of all creditors who
are not part of the negotiation process must also be met
in any negotiated solution.

V. The Code will respect the rights of all creditors
equally.

10. The law must be impartial to the type of creditor in
counting their weight in the vote on the final solution in
resolving insolvency.

VI. The Code must ensure that, when the negotiations
fail to establish viability, the outcome of bankruptcy must
be binding.

11. The law must order the liquidation of an enterprise
which has been found unviable. This outcome of the
negotiations should be protected against all appeals
other than for very exceptional cases.

VII. The Code must ensure clarity of priority, and that the
rights of all stakeholders are upheld in resolving
bankruptcy.

12. The law must clearly lay out the priority of
distributions in bankruptcy to all stakeholders. The
priority must be designed so as to incentivise all
stakeholders to participate in the cycle of building
enterprises with confidence.

13. While the law must incentivise collective action in
resolving bankruptcy, there must be a greater flexibility to
allow individual action in resolution and recovery during
bankruptcy compared with the phase of insolvency
resolution.”

xxx xxx xxx xxx

“An application from a creditor must have a record of the
liability and evidence of the entity having defaulted on
payments. The Committee recommends different
documentation requirements depending upon the type of
creditor, either financial or operational. A financial
creditor must submit a record of default by the entity as
recorded in a registered Information Utility (referred to as
the IU) as described in Section 4.3 (or on the basis of
other evidence). The default can be to any financial
creditor to the entity, and not restricted to the creditor
who triggers the IRP. The Code requires that the
financial creditor propose a registered Insolvency
Professional to manage the IRP. Operational creditors
must present an “undisputed bill” which may be filed at a
registered information utility as requirement to trigger the
IRP. The Code does not require the operational creditor
to propose a registered Insolvency Professional to
manage the IRP. If a professional is not proposed by the
operational creditor, and the IRP is successfully
triggered, the Code requires the Adjudicator to approach
the Regulator for a registered Insolvency Professional for
the case.

In case the financial creditor triggers the IRP, the
Adjudicator verifies the default from the information utility
(if the default has been filed with an information utility, tit
such be incontrovertible evidence of the existence of a
default) or otherwise confirms the existence of default
through the additional evidence adduced by the financial
creditor, and puts forward the proposal for the RP to the
Regulator for validation. In case the operational creditor
triggers the IRP, the Adjudicator verifies the
documentation. Simultaneously, the Adjudicator requests
the Regulator for an RP. If either step cannot be verified,
or the process verification exceeds the specified amount
of time, then the Adjudicator rejects the application, with
a reasoned order for the rejection. The order rejecting
the application cannot be appealed against. Instead,
application has to be made afresh. Once the documents
are verified within a specified amount of time, the
Adjudicator will trigger the IRP and register the IRP by
issuing an order. The order will contain a unique ID that
will be issued for the case by which all reports and
records that are generated during the IRP will be stored,
and accessed.”

xxx xxx xxx xxx

“Steps at the start of the IRP In order to ensure that the
resolution can proceed in an orderly manner, it is
important for the Adjudicator to put in place an
environment of a “calm period” with a definite time of
closure, that will assure both the debtor and creditors of
a time-bound and level field in their negotiations to
assess viability. The first steps that the Adjudicator takes
is put in place an order for a moratorium on debt
recovery actions and any existing or new law suits being
filed in other courts, a public announcement to collect
claims of liabilities, the appointment of an interim RP and
the creation of a creditor committee.”
(Emphasis Supplied)

17. The stage is now set for an in-depth examination of Part II of

the Code, with which we are immediately concerned in this case.

18. There are two sets of definition sections. They are rather

involved, the dovetailing of one definition going into another. Section

3 defines various terms as follows:

“Sec. 3(6) “claim” means—

(a) a right to payment, whether or not such right is
reduced to judgment, fixed, disputed, undisputed, legal,
equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law
for the time being in force, if such breach gives rise to a
right to payment, whether or not such right is reduced to
judgment, fixed, matured, unmatured, disputed,
undisputed, secured or unsecured;

Sec. 3(10) “creditor” means any person to whom a debt
is owed and includes a financial creditor, an operational
creditor, a secured creditor, an unsecured creditor and a
decree-holder;

Sec. 3(11) “debt” means a liability or obligation in respect
of a claim which is due from any person and includes a
financial debt and operational debt;

Sec. 3(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 repaid by the debtor
or the corporate debtor, as the case may be;

Sec. 3(13) “financial information”, in relation to a person,
means one or more of the following categories of
information, namely:—

(a) records of the debt of the person;

(b) records of liabilities when the person is solvent;

(c) records of assets of person over which security
interest has been created;

(d) records, if any, of instances of default by the person
against any debt;

(e) records of the balance sheet and cash-flow
statements of the person; and

(f) such other information as may be specified.

Sec. 3(19) “insolvency professional” means a person
enrolled under section 206 with an insolvency
professional agency as its member and registered with
the Board as an insolvency professional under section
207;”
(Emphasis Supplied)

19. Certain definitions contained in Section 5 are also important

from our point of view. Section 5(7), (8), (12), (14), (20) and (27)

read as under:

“Sec. 5(7) “financial creditor” means any person to whom
a financial debt is owed and includes a person to whom
such debt has been legally assigned or transferred to;

Sec. 5(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—

(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 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;

(e) receivables sold or discounted other than any
receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction,
including any forward sale or purchase agreement,
having the commercial effect of a borrowing;

(g) any derivative transaction entered into in connection
with protection against or benefit from fluctuation in any
rate or price and for calculating the value of any
derivative transaction, only the market value of such
transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a
guarantee, indemnity, bond, documentary letter of
credit or any other instrument issued by a bank or
financial institution;

(i) the amount of any liability in respect of any of the
guarantee or indemnity for any of the items referred to
in sub-clauses (a) to (h) of this clause;

Sec. 5(12) “insolvency commencement date” means the
date of admission of an application for initiating corporate
insolvency resolution process by the Adjudicating
Authority under sections 7, 9 or section 10, as the case
may be;

Sec. 5(14) “insolvency resolution process period” means
the period of one hundred and eighty days beginning
from the insolvency commencement date and ending on
one hundred and eightieth day;

Sec. 5(20) “operational creditor” means a person to
whom an operational debt is owed and includes any
person to whom such debt has been legally assigned or
transferred;

Sec. 5(27) “resolution professional”, for the purposes of
this Part, means an insolvency professional appointed to
conduct the corporate insolvency resolution process and
includes an interim resolution professional;”

20. Under Section 4 of the Code, Part II applies to matters relating

to the insolvency and liquidation of corporate debtors, where the

minimum amount of default is rupees one lakh. Sections 6, 7 and 8

form part of one scheme and are very important for the decision in
the present case. They read as follows:

“Sec. 6. Persons who may initiate corporate
insolvency resolution process. – Where any corporate
debtor commits a default, a financial creditor, an
operational creditor or the corporate debtor itself may
initiate corporate insolvency resolution process in
respect of such corporate debtor in the manner as
provided under this Chapter.

Sec. 7. Initiation of corporate insolvency resolution
process by financial creditor. – (1) A financial creditor
either by itself or jointly with other financial creditors may
file an application for initiating corporate insolvency
resolution process against a corporate debtor before 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.

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

(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
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 to the applicant to rectify the defect in
his application within seven days of receipt of such
notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall
commence from the date of admission of the application
under sub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the
financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the
financial creditor,
within seven days of admission or rejection of such
application, as the case may be.

Sec. 8. Insolvency resolution by operational
creditor.- (1) An operational creditor may, on the
occurrence of a default, deliver a demand notice of
unpaid operational debtor copy of an invoice demanding
payment of the amount involved in the default to the
corporate debtor in such form and manner as may be
prescribed.

(2) The corporate debtor shall, within a period of ten days
of the receipt of the demand notice or copy of the invoice
mentioned in sub-section (1) bring to the notice of the
operational creditor—

(a) existence of a dispute, if any, and record of the
pendency of the suit or arbitration proceedings filed
before the receipt of such notice or invoice in relation to
such dispute;

(b) the repayment of unpaid operational debt—

(i) by sending an attested copy of the record of
electronic transfer of the unpaid amount from the bank
account of the corporate debtor; or

(ii) by sending an attested copy of record that the
operational creditor has encashed a cheque issued by
the corporate debtor.

Explanation.—For the purposes of this section, a
“demand notice” means a notice served by an
operational creditor to the corporate debtor demanding
repayment of the operational debt in respect of which the
default has occurred.”

21. Section 12 provides for a time limit for completion of the

insolvency resolution process and reads as follows:

“Sec. 12. Time-limit for completion of insolvency
resolution process.- (1) Subject to sub-section (2), the
corporate insolvency resolution process shall be
completed within a period of one hundred and eighty
days from the date of admission of the application to
initiate such process.

(2) The resolution professional shall file an application to
the Adjudicating Authority to extend the period of the
corporate insolvency resolution process beyond one
hundred and eighty days, if instructed to do so by a
resolution passed at a meeting of the committee of
creditors by a vote of seventy-five per cent. of the voting
shares.

(3) On receipt of an application under sub-section (2), if
the Adjudicating Authority is satisfied that the subject
matter of the case is such that corporate insolvency
resolution process cannot be completed within one
hundred and eighty days, it may by order extend the
duration of such process beyond one hundred and eighty
days by such further period as it thinks fit, but not
exceeding ninety days:

Provided that any extension of the period of corporate
insolvency resolution process under this section shall not
be granted more than once.”

22. Sections 13 and 14 deal with the declaration of moratorium

and public announcements and read as under:

“Sec. 13. Declaration of moratorium and public
announcement.- (1) The Adjudicating Authority, after
admission of the application under section 7 or section 9
or section 10, shall, by an order—

(a) declare a moratorium for the purposes referred to in
section 14;

(b) cause a public announcement of the initiation of
corporate insolvency resolution process and call for the
submission of claims under section 15; and

(c) appoint an interim resolution professional in the
manner as laid down in section 16.

(2) The public announcement referred to in clause (b) of
sub-section (1) shall be made immediately after the
appointment of the interim resolution professional.

Sec. 14 Moratorium.- (1) Subject to provisions of
sub-sections (2) and (3), on the insolvency
commencement date, the Adjudicating Authority shall by
order declare moratorium for prohibiting all of the
following, namely:—

(a) the institution of suits or continuation of pending
suits or proceedings against the corporate debtor
including execution of any judgment, decree or order in
any court of law, tribunal, arbitration panel or other
authority;

(b) transferring, encumbering, alienating or disposing of
by the corporate debtor any of its assets or any legal
right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any
security interest created by the corporate debtor in
respect of its property including any action under the
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor
where such property is occupied by or in the
possession of the corporate debtor.

(2) The supply of essential goods or services to the
corporate debtor as may be specified shall not be
terminated or suspended or interrupted during
moratorium period.

(3) The provisions of sub-section (1) shall not apply to
such transactions as may be notified by the Central
Government in consultation with any financial sector
regulator.

(4) The order of moratorium shall have effect from the
date of such order till the completion of the corporate
insolvency resolution process:

Provided that where at any time during the corporate
insolvency resolution process period, if the Adjudicating
Authority approves the resolution plan under sub-section
(1) of section 31 or passes an order for liquidation of
corporate debtor under section 33, the moratorium shall
cease to have effect from the date of such approval or
liquidation order, as the case may be.”

23. Under Section 17, from the date of appointment of the interim

resolution professional, the management of the affairs of the

corporate debtor vests with interim resolution professional. Section

17(1)(a) reads as under:

“Sec. 17. Management of affairs of corporate debtor
by interim resolution professional. – (1) From the date
of appointment of the interim resolution professional,—

(a) the management of the affairs of the corporate debtor
shall vest in the interim resolution professional;”

24. Under Section 20 of the Act, the interim resolution professional

shall manage the operations of the corporate debtor as a going

concern. Section 21 is extremely important and provides for

appointment of a committee of creditors. Section 21 reads as

follows:

“21. Committee of creditors. – (1) The interim resolution
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:

Provided that a related party to whom a corporate debtor
owes a financial debt shall not have any right of
representation, participation or voting in a meeting of the
committee of creditors.

(3) 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
them.

(4) Where any person is a financial creditor as well as an
operational creditor,—

(a) such person shall be a financial creditor to the
extent of the financial debt owed by the corporate
debtor, and shall be included in the committee of
creditors, with voting share proportionate to the extent
of financial debts owed to such creditor;

(b) such person shall be considered to be an
operational creditor to the extent of the operational debt
owed by the corporate debtor to such creditor.

(5) Where an operational creditor has assigned or legally
transferred any operational debt to a financial creditor,
the assignee or transferee shall be considered as an
operational creditor to the extent of such assignment or
legal transfer.

(6) Where the terms of the financial debt extended as
part of a consortium arrangement or syndicated facility or
issued as securities provide for a single trustee or agent
to act for all financial creditors, each financial creditor
may—

(a) authorise the trustee or agent to act on his behalf in
the committee of creditors to the extent of his voting
share;

(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 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.

(7) The Board may specify the manner of determining the
voting share in respect of financial debts issued as
securities under sub-section (6) .

(8) All decisions of the committee of creditors shall be
taken by a vote of not less than seventy-five per cent. of
voting share of the financial creditors:

Provided that where a corporate debtor does not have
any financial creditors, the committee of creditors shall
be constituted and comprise of such persons to exercise
such functions in such manner as may be specified by
the Board.

(9) The committee of creditors shall have the right to
require the resolution professional to furnish any financial
information in relation to the corporate debtor at any time
during the corporate insolvency resolution process.

(10) The resolution professional shall make available any
financial information so required by the committee of
creditors under sub-section (9) within a period of seven
days of such requisition.”

25. Under Section 24, members of the committee of creditors may

conduct meetings in order to protect their interests. Under Section

28, a resolution professional appointed under Section 25 cannot take

certain actions without the prior approval of the committee of

creditors. Section 28 reads as under:

“28. Approval of committee of creditors for certain
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:—

(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;

(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 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;

(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 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 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 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 committee of creditors unless approved by a vote of
seventy five per cent. of the voting shares.

(4) Where any action under sub-section (1) is taken by
the resolution professional without seeking the approval
of the committee of creditors in the manner as required
in this section, such action shall be void.

(5) The committee of creditors may report the actions of
the resolution professional under sub-section (4) to the
Board for taking necessary actions against him under
this Code.”

26. The most important sections dealing with the restructuring of

the corporate debtor are Sections 30 and 31, which read as under:

“Sec 30. Submission of resolution plan.- (1) A
resolution applicant may submit a resolution plan to the
resolution professional prepared on the basis of the
information memorandum.

(2) The resolution professional shall examine each
resolution plan received by him to confirm that each
resolution plan—

(a) provides for the payment of insolvency resolution
process costs in a manner specified by the Board in
priority to the repayment of other debts of the corporate
debtor;

(b) provides for the repayment of the debts of
operational creditors in such manner as may be
specified by the Board which shall not be less than the
amount to be paid to the operational creditors in the
event of a liquidation of the corporate debtor under
section 53;

(c) provides for the management of the affairs of the
Corporate debtor after approval of the resolution plan;

(d) the implementation and supervision of the resolution
plan;

(e) does not contravene any of the provisions of the law
for the time being in force;

(f) conforms to such other requirements as may be
specified by the Board.

(3) The resolution professional shall present to the
committee of creditors for its approval such resolution
plans which confirm the conditions referred to in
sub-section (2).

(4) The committee of creditors may approve a resolution
plan by a vote of not less than seventy five per cent. of
voting share of the financial creditors.

(5) The resolution applicant may attend the meeting of
the committee of creditors in which the resolution plan of
the applicant is considered: Provided that the resolution
applicant shall not have a right to vote at the meeting of
the committee of creditors unless such resolution
applicant is also a financial creditor.

(6) The resolution professional shall submit the resolution
plan as approved by the committee of creditors to the
Adjudicating Authority.

Sec 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 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.

(2) Where the Adjudicating Authority is satisfied that the
resolution plan does not confirm to the requirements
referred to in sub-section (1), it may, by an order, reject
the resolution plan.

(3) After the order of approval under sub-section (1),—

(a) the moratorium order passed by the Adjudicating
Authority under section 14 shall cease to have effect;
and

(b) the resolution professional shall forward all records
relating to the conduct of the corporate insolvency
resolution process and the resolution plan to the Board
to be recorded on its database.”

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

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

prescribed, which takes us to the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016. Under Rule 4,

the application is made by a financial creditor in Form 1

accompanied by documents and records required therein. Form 1 is

a detailed form in 5 parts, which requires particulars of the applicant

in Part I, particulars of the corporate debtor in Part II, particulars of

the proposed interim resolution professional in part III, particulars of

the financial debt in part IV and documents, records and evidence of

default in part V. Under Rule 4(3), the applicant is to dispatch a copy

of the application filed with the adjudicating authority by registered

post or speed post to the registered office of the corporate debtor.

The speed, within which the adjudicating authority is to ascertain the

existence of a default from the records of the information utility or on

the basis of evidence furnished by the financial creditor, is important.

This it must do within 14 days of the receipt of the application. It is

at the stage of 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

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

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 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 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

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 payable at some

future date. It is only when this is proved to the satisfaction of the

adjudicating authority that the adjudicating authority may reject an

application and not otherwise.

31. The rest of the insolvency resolution process is also very

important. The entire process is to be completed within a period of

180 days from the date of admission of the application under Section

12 and can only be extended beyond 180 days for a further period of

not exceeding 90 days if the committee of creditors by a voting of

75% of voting shares so decides. It can be seen that time is of

essence in seeing whether the corporate body can be put back on its

feet, so as to stave off liquidation.

32. As soon as the application is admitted, a moratorium in terms

of Section 14 of the Code is to be declared by the adjudicating
authority and a public announcement is made stating, inter alia, the

last date for submission of claims and the details of the interim

resolution professional who shall be vested with the management of

the corporate debtor and be responsible for receiving claims. Under

Section 17, the erstwhile management of the corporate debtor is

vested in an interim resolution professional who is a trained person

registered under Chapter IV of the Code. This interim resolution

professional is now to manage the operations of the corporate

debtor as a going concern under the directions of a committee of

creditors appointed under Section 21 of the Act. Decisions by this

committee are to be taken by a vote of not less than 75% of the

voting share of the financial creditors. Under Section 28, a

resolution professional, who is none other than an interim resolution

professional who is appointed to carry out the resolution process, is

then given wide powers to raise finances, create security interests,

etc. subject to prior approval of the committee of creditors.

33. Under Section 30, any person who is interested in putting the

corporate body back on its feet may submit a resolution plan to the

resolution professional, which is prepared on the basis of an

information memorandum. This plan must provide for payment of

insolvency resolution process costs, management of the affairs of
the corporate debtor after approval of the plan, and implementation

and supervision of the plan. It is only when such plan is approved by

a vote of not less than 75% of the voting share of the financial

creditors and the adjudicating authority is satisfied that the plan, as

approved, meets the statutory requirements mentioned in Section

30, that it ultimately approves such plan, which is then binding on the

corporate debtor as well as its employees, members, creditors,

guarantors and other stakeholders. Importantly, and this is a major

departure from previous legislation on the subject, the moment the

adjudicating authority approves the resolution plan, the moratorium

order passed by the authority under Section 14 shall cease to have

effect. The scheme of the Code, therefore, is to make an attempt,

by divesting the erstwhile management of its powers and vesting it in

a professional agency, to continue the business of the corporate

body as a going concern until a resolution plan is drawn up, in which

event the management is handed over under the plan so that the

corporate body is able to pay back its debts and get back on its feet.

All this is to be done within a period of 6 months with a maximum

extension of another 90 days or else the chopper comes down and

the liquidation process begins.

34. On the facts of the present case, we find that in answer to the
application made under Section 7 of the Code, the appellant only

raised the plea of suspension of its debt under the Maharashtra Act,

which, therefore, was that no debt was due in law. The adjudicating

authority correctly referred to the non-obstante clause in Section 238

and arrived at a conclusion that a notification under the Maharashtra

Act would not stand in the way of the corporate insolvency resolution

process under the Code. However, the Appellate Tribunal by the

impugned judgment held thus:

“78. Following the law laid down by Hon’ble Supreme
Court in “Yogendra Krishnan Jaiswal” and “Madras
Petrochem Limited” we hold that there is no repugnancy
between IB Code, 2016 and the MRU Act as they both
operate in different fields. The Parliament has expressly
stated that the provisions of the IB Code, 2016 (which
is a later enactment to the MRU Act) shall have effect
notwithstanding the provisions of any other law for the
time being in force. This stipulation does not mean that
the provisions of MRU Act or for that matter any other
law are repugnant to the provisions of the Code.

79. In view of the finding as recorded above, we hold that
the Appellant is not entitled to derive any advantage from
MRU Act, 1956 to stall the insolvency resolution process
under Section 7 of the Insolvency Bankruptcy Code,
2016.”

This statement by the Appellate Tribunal has to be tested with

reference to the constitutional position on repugnancy.

35. Article 254 of the Constitution of India is substantially modeled

on Section 107 of the Government of India Act, 1935. Article 254

reads as under:

“Article 254 – Inconsistency between laws made by
Parliament and laws made by the Legislatures of
States
(1) If any provision of a law made by the Legislature of a
State is repugnant to any provision of a law made by
Parliament which Parliament is competent to enact, or to
any provision of an existing law with respect to one of the
matters enumerated in the Concurrent List, then, subject
to the provisions of clause (2), the law made by
Parliament, whether passed before or after the law made
by the Legislature of such State, or, as the case may be,
the existing law, shall prevail and the law made by the
Legislature of the State shall, to the extent of the
repugnancy, be void.

(2) Where a law made by the Legislature of a State [***]
with respect to one of the matters enumerated in the
Concurrent List contains any provision repugnant to the
provisions of an earlier law made by Parliament or an
existing law with respect to that matter, then, the law so
made by the Legislature of such State shall, if it has
been reserved for the consideration of the President and
has received his assent, prevail in that State:
Provided that nothing in this clause shall prevent
Parliament from enacting at any time any law with
respect to the same matter including a law adding to,
amending, varying or repealing the law so made by the
Legislature of the State.”
Section 107 reads as follows:

“Inconsistency between Federal Laws and Provincial
or State Laws
(1) If any provision of a Provincial law is repugnant to
any provision of a Federal law which the Federal
Legislature is competent to enact or to any provision of
an existing Indian law with respect to one of the matters
enumerated in the Concurrent Legislative List, then,
subject to the provisions of this section, the Federal law,
whether passed before or after the Provincial law, or as
the case may be, the existing Indian law, shall prevail
and the Provincial law shall, to the extent of the
repugnancy, be void.

(2) Where a Provincial law with respect to one of the
matters enumerated in the Concurrent Legislative List
contains any provision repugnant to the provisions of an
earlier Federal law or an existing Indian law with respect
to that matter, then, if the Provincial law, having been
reserved for the consideration of the Governor-General
has received the assent of the Governor-General or for
the signification of His Majesty’s pleasure has received
the assent of the Governor-General or of His Majesty, the
Provincial law shall in that Province prevail, but
nevertheless the Federal Legislature may at any time
enact further legislation with respect to the same matter.
Provided that no Bill or amendment for making any
provision repugnant to any Provincial law, which, having
been so reserved has received the assent of the
Governor-General or of His Majesty, shall be introduced
or moved in either Chamber of the Federal Legislature
without the previous sanction of the Governor-General in
his discretion.

(3) If any provision of a law of a Federated State is
repugnant to a Federal law which extends to that State,
the Federal law, whether passed before or after the law
of the State, shall prevail and the law of the State shall,
to the extent of the repugnancy be void.”

36. The British North America Act, which is the oldest among the

Constitutions framed by the British Parliament for its colonies, had

under Sections 91 and 92 exclusive law making power for the

different subjects set out therein which is distributed between

Parliament and the Provincial Legislatures. The only concurrent

subject was stated in Section 95 of the said Act, which reads as

follows:

“In each Province the Legislature may make laws in
relation to agriculture in the Province, and to immigration
into the Province; and it is hereby declared that the
Parliament of Canada may from time to time make laws
in relation to agriculture in all or any of the Provinces,
and to immigration into all or any of the Provinces; and
any law of the Legislature of a Province relative to
agriculture or to immigration shall have effect in and for
the Province as long and as far only as it is not
repugnant to any Act of the Parliament of Canada.”

It is for this reason that the Canadian cases on repugnancy were

said to be somewhat restricted and have rarely been applied in

construing Article 254.

37. In so far as the US Constitution is concerned, there again legislative
powers are reserved completely to the States and Congress is given the power
to legislate only on enumerated subjects that are set out in Article 1 Section 8 of
the US Constitution. In this context, no questions of repugnancy can arise as the
States can legislate even with respect to matters laid down in Article 1 Section 8
so long as they do not exceed the territorial boundary of the State. It is only
when Congress actually enacts legislation under Article 1 Section 8 that State
legislation, if any, on the same subject matter can be said to be ousted.
However, when Congress passed the Eighteenth Amendment to the US
Constitution, by which it imposed prohibition, Section 2 thereof stated that
Congress and the several States shall have concurrent powers to enforce this
Article by appropriate legislation. The question that arose in State of Rhode
Island v. Palmer, 253 U.S. 350, was as to the meaning of the expression
“concurrent power”. It was argued that, unless both Congress and the State
legislatures concurrently enact laws, laws under Section 2 of the Eighteenth
Amendment could not be made. This argument was turned down by the
majority judgment of Van Devanter, J. which, strangely enough, merely
announced conclusions on the questions involved without any reasoning 1. Van
Devanter, J.’s majority judgment held (at 387):

“8. The words “concurrent power” in that section do not
mean joint power, or require that legislation thereunder
by Congress, to be effective, shall be approved or
sanctioned by the several states or any of them; nor do
they mean that the power to enforce is divided between
Congress and the several states along the lines which
separate or distinguish foreign and interstate commerce

1
from intrastate affairs.

9. The power confided to Congress by that section,
while not exclusive, is territorially coextensive with the
prohibition of the first section, embraces manufacture
and other intrastate transactions as well as importation,
exportation and interstate traffic, and is in no wise
dependent on or affected by action or inaction on the
part of the several states or any of them.”

Two dissents, on the other hand, held that unless the Congress and

the States concurrently legislate, Section 2 does not give them the

power to enforce prohibition. The US cases also do not, therefore,

assist in this context.

38. On the other hand, the Commonwealth of Australia

Constitution Act of 1900, also enacted by the British Parliament, has

a scheme by which Parliament, in Section 51, has power to make

laws with respect to 39 stated matters. Under Section 52,

Parliament, subject to the Constitution, has exclusive power to make

laws only qua three subjects set out therein. Section 109 of the

Australian Constitution reads as under:

“When a law of a State is inconsistent with a law of the
Commonwealth, the latter shall prevail, and the former
shall, to the extent of the inconsistency, be invalid.”

39. Since the Australian cases deal with repugnancy in great

detail, they have been referred to by the early judgments of this

Court.

40. In Zaverbhai Amaidas v. State Of Bombay, (1955) 1 SCR

799, a question arose as to the efficacy of a Bombay Act of 1947

vis-à-vis the Essential Supplies (Temporary Powers) Act of 1946, as

amended in 1950. This Court, after referring to Section 107 of the

Government of India Act and Article 254 of the Constitution, stated

that Article 254, is in substance, a reproduction of Section 107 with

one difference– that the power of Parliament under Article 254(2)

goes even to the extent of repealing a State law. This Court then

examined the subject matters of the two Acts and found that the

Parliamentary enactment as amended in 1950 prevailed over the

Bombay Act in as much as the higher punishment given for the same

offence under the Bombay Act was repugnant to the lesser

punishment given by Section 7 of the Parliamentary enactment.

41. In Tika Ramji v. State of U.P., (1956) SCR 393, this Court,

after setting out Article 254 of the Constitution, referred in detail to a

treatise on the Australian Constitution and to various Australian

judgments as follows:

“Nicholas in his Australian Constitution, 2nd ed., p. 303,
refers to three tests of inconsistency or repugnancy:—
(1) There may be inconsistency in the actual terms
of the competing statutes (R. v. Brisbane Licensing
Court, [1920] 28 CLR 23).

(2) Though there may be no direct conflict, a State
law may be inoperative because the Commonwealth law,
or the award of the Commonwealth Court, is intended to
be a complete exhaustive code (Clyde Engineering Co.
Ltd. v. Cowburn, [1926] 37 CLR 466).

(3) Even in the absence of intention, a conflict may
arise when both State and Commonwealth seek to
exercise their powers over the same subject-matter
(Victoria v. Commonwealth, [1937] 58 CLR
618; Wenn v. Attorney-General (Vict.), [1948] 77 CLR 84)
Isaacs, J. in Clyde Engineering Company,
Limited v. Cowburn [(1926) 37 CLR 466, 489] laid down
one test of inconsistency as conclusive: “If, however, a
competent legislature expressly or implicitly evinces its
intention to cover the whole field, that is a conclusive test
of inconsistency where another Legislature assumes to
enter to any extent upon the same field”.

Dixon, J. elaborated this theme in Ex
parte McLean [(1930) 43 CLR 472, 483]:

“When the Parliament of the Commonwealth
and the Parliament of a State each legislate
upon the same subject and prescribe what
the rule of conduct shall be, they make laws
which are inconsistent, notwithstanding that
the rule of conduct is identical which each
prescribes, and section 109 applies. That this
is so is settled, at least when the sanctions
they impose are diverse. But the reason is
that, by prescribing the rule to be observed,
the Federal statute shows an intention to
cover the subject matter and provide what
the law upon it shall be. If it appeared that the
Federal law was intended to be
supplementary to or cumulative upon State
law, then no inconsistency would be exhibited
in imposing the same duties or in inflicting
different penalties. The inconsistency does
not lie in the mere co-existence of two laws
which are susceptible of simultaneous
obedience. It depends upon the intention of
the paramount Legislature to express by its
enactment, completely, exhaustively, or
exclusively, what shall be the law governing
the particular conduct or matter to which its
attention is directed. When a Federal statute
discloses such an intention, it is inconsistent
with it for the law of a State to govern the
same conduct or matter”.

To the same effect are the observations of Evatt, J.
in Stock Motor Plough Ltd. v. Forsyth [(1932) 48 CLR
128, 147]:

“It is now established, therefore, that State
and Federal laws may be inconsistent,
although obedience to both laws is possible.
There may even be inconsistency although
each law imposes the very same duty of
obedience. These conclusions have, in the
main, been reached, by ascribing
“inconsistency” to a State law, not because
the Federal law directly invalidates or
conflicts with it, but because the Federal law
is said to “cover the field”. This is a very
ambiguous phrase, because subject matters
of legislation bear little resemblance to
geographical areas. It is no more than a
cliche for expressing the fact that, by reason
of the subject matter dealt with, and the
method of dealing with it, and the nature and
multiplicity of the regulations prescribed, the
Federal authority has adopted a plan or
scheme which will be hindered and
obstructed if any additional regulations
whatever are prescribed upon the subject by
any other authority; if, in other words, the
subject is either touched or trenched upon by
State authority”.

The Calcutta High Court in G.P. Stewart v. B.K. Roy
Chaudhury [AIR 1939 Cal 628] had occasion to consider
the meaning of repugnancy and B.N. Rau, J. who
delivered the judgment of the Court observed at p. 632:

“It is sometimes said that two laws cannot be
said to be properly repugnant unless there is
a direct conflict between them, as when one
says “do” and the other “don’t”, there is no
true repugnancy, according to this view, if it is
possible to obey both the laws. For reasons
which we shall set forth presently, we think
that this is too narrow a test: there may well
be cases of repugnancy where both laws say
“don’t” but in different ways. For example,
one law may say, “No person shall sell liquor
by retail, that is, in quantities of less than five
gallons at a time” and another law may say,
“No person shall sell liquor by retail, that is, in
quantities of less than ten gallons at a time”.
Here, it is obviously possible to obey both
laws, by obeying the more stringent of the
two, namely the second one; yet it is equally
obvious that the two laws are repugnant, for
to the extent to which a citizen is compelled
to obey one of them, the other, though not
actually disobeyed, is nullified”.

The learned Judge then discussed the various
authorities which laid down the test of repugnancy in
Australia, Canada, and England and concluded at p.
634:

“The principle deducible from the English
cases, as from the Canadian cases, seems
therefore to be the same as that enunciated
by Isaacs, J. in the Australian 44 hour case
(37 C.L.R. 466) if the dominant law has
expressly or impliedly evinced its intention to
cover the whole field, then a subordinate law
in the same field is repugnant and therefore
inoperative. Whether and to what extent in a
given case, the dominant law evinces such
an intention must necessarily depend on the
language of the particular law”.

Sulaiman, J. in Shyamakant Lal v. Rambhajan
Singh [(1939) FCR 188, 212] thus laid down the principle
of construction in regard to repugnancy:

“When the question is whether a Provincial
legislation is repugnant to an existing Indian
law, the onus of showing its repugnancy and
the extent to which it is repugnant should be
on the party attacking its validity. There ought
to be a presumption in favour of its validity,
and every effort should be made to reconcile
them and construe both so as to avoid their
being repugnant to each other; and care
should be taken to see whether the two do
not really operate in different fields without
encroachment. Further, repugnancy must
exist in fact, and not depend merely on a
possibility. Their Lordships can discover no
adequate grounds for holding that there
exists repugnancy between the two laws in
districts of the Province of Ontario where the
prohibitions of the Canadian Act are not and
may never be in force: (Attorney-General for
Ontario v. Attorney-General for the
Dominion) [(1896) AC 348, 369-70].”
(at pages 424-427)
(Emphasis Supplied)

This Court expressly held that the pith and substance doctrine has

no application to repugnancy principles for the reason that:

“The pith and substance argument also cannot be
imported here for the simple reason that, when both the
Centre as well as the State Legislatures were operating
in the concurrent field, there was no question of any
trespass upon the exclusive jurisdiction vested in the
Centre under Entry 52 of List I, the only question which
survived being whether, putting both the pieces of
legislation enacted by the Centre and the State
Legislature together, there was any repugnancy, a
contention which will be dealt with hereafter.”
(at pages 420-421)

42. In Deep Chand v. State of U.P., 1959 Supp. (2) SCR 8, this

Court referred to its earlier judgments in Zaverbhai (supra) and Tika

Ramji (supra) and held:

“Repugnancy between two statutes may thus be
ascertained on the basis of the following three principles:

(1) Whether there is direct conflict between the two
provisions;

(2) Whether Parliament intended to lay down an
exhaustive code in respect of the subject matter
replacing the Act of the State Legislature; and
(3) Whether the law made by Parliament and the law
made by the State Legislature occupy the same field.”
(at page 43)

43. In Pandit Ukha Kolhe v. State of Maharashtra, (1964) 1 SCR

926, this Court found that Sections 129A and 129B did not repeal in

its entirety an existing law contained in Section 510 of the Code of

Criminal Procedure in its application to offences under Section 66 of

the Bombay Prohibition Act. It was held that Sections 129A and

129B must be regarded as enacted in exercise of power conferred

by Entries 2 and 12 in the Concurrent List. It was then held:

“It is, difficult to regard Section 129B of the Act as so
repugnant to Section 510 of the Code as to make the
latter provision wholly inapplicable to trials for offences
under the Bombay Prohibition Act. Section 510 is a
general provision dealing with proof of reports of the
Chemical Examiner in respect of matters or things duly
submitted to him for examination or analysis and report.

Section 129B deals with a special class of reports and
certificates. In the investigation of an offence under the
Bombay Prohibition Act, examination of a person
suspected by a Police Officer or Prohibition Officer of
having consumed an intoxicant, or of his blood may be
carried out only in the manner prescribed by Section
129A: and the evidence to prove the facts disclosed
thereby will be the certificate or the examination viva
voce of the registered Medical Practitioner, or the
Chemical Examiner, for examination in the course of an
investigation of an offence under the Act of the person so
suspected or of his blood has by the clearest implication
of the law to be carried out in the manner laid down or
not at all. Report of the Chemical Examiner in respect of
blood collected in the course of investigation of an
offence under the Bombay Prohibition Act, otherwise
than in the manner set out in Section 129A cannot
therefore be used as evidence in the case. To that extent
Section 510 of the code is superseded by Section 129B.
But the report of the Chemical Examiner relating to the
examination of blood of an accused person collected at a
time when no investigation was pending, or at the
instance not of a Police Officer or a Prohibition Officer
remains admissible under Section 510 of the Code.”
(at pages 953-954)

44. In M. Karunanidhi v. Union of India, (1979) 3 SCR 254, this

Court referred to a number of Australian judgments and judgments of

this Court and held:

“It is well settled that the presumption is always in favour
of the constitutionality of a statute and the onus lies on
the person assailing the Act to prove that it is
unconstitutional. Prima facie, there does not appear to us
to be any inconsistency between the State Act and the
Central Acts. Before any repugnancy can arise, the
following conditions must be satisfied:-

1. That there is a clear and direct inconsistency
between the Central Act and the State Act.

2. That such an inconsistency is absolutely
irreconcilable.

3. That the inconsistency between the provisions of
the two Acts is of such a nature as to bring the two Acts
into direct collision with each other and a situation is
reached where it is impossible to obey the one without
disobeying the other.

In Colin Howard’s Australian Federal Constitutional Law,
2nd Edition the author while describing the nature of
inconsistency between the two enactments observed as
follows:-

“An obvious inconsistency arises when the
two enactments produce different legal
results when applied to the same facts”.

In the case of Hume v. Palmer (38 CLR 441) Knox, C.J.
observed as follows:-

“The rules prescribed by the Commonwealth
Law and the State law respectively are for
present purposes substantially identical, but
the penalties imposed for the contravention
differ…
In these circumstances, it is I think, clear that
the reasons given by my brothers Issacs and
Starke for the decisions of this Court in Union
Steamship Co. of New Zealand v.

Commonwealth (36 CLR 130) and Clyde
Engineering Co. v. Cowburn (37 CLR 466)
establish that the provisions of the law of the
State for the breach of which the appellant
was convicted are inconsistent with the law of
the Commonwealth within the meaning of
sec. 109 of the Constitution and are therefore
invalid”.

Issacs, J. observed as follows:-

“There can be no question that the
Commonwealth Navigation Act, by its own
direct provisions and the Regulations made
under its authority, applies upon construction
to the circumstances of the case. It is
inconsistent with the State Act in various
ways, including (1) general supersession of
the regulations of conduct, and so displacing
the State regulations, whatever those may
be; (2) the jurisdiction to convict, the State
law empowering the Court to convict
summarily, the Commonwealth Law making
the contravention an indictable offence, and
therefore bringing into operation sec. 80 of
the Constitution, requiring a jury; (3) the
penalty, the State providing a maximum of
£50 the Commonwealth Act prescribing a
maximum of £100, or imprisonment, or both;
(4) the tribunal itself”.

Starke, J. observed as follows:-

“It is not difficult to see that the Federal Code
would be ‘disturbed or deranged’ if the State
Code applied a different sanction in respect
of the same act. Consequently the State
regulations are, in my opinion, inconsistent
with the law of the Commonwealth and
rendered invalid by force of sec. 109 of the
Constitution”.

In a later case of the Australian High Court in Ex. Parte
Mclean (43 CLR 472) Issacs and Starke, JJ. while
dwelling on the question of repugnancy made the
following observation:-

“In Cowburn’s case (supra) is stated the
reasoning for that conclusion and we will now
refer to those statements without repeating
them. In short, the very same conduct by the
same persons is dealt with in conflicting
terms by the Commonwealth and State Acts.
A Court, seeing that, has no authority to
inquire further, or to seek to ascertain the
scope or bearing of the State Act. It must
simply apply sec. 109 of the Constitution,
which declares the invalidity pro tanto of
the State Act”.

Similarly Dixon, J. observed thus:-

“When the Parliament of the Commonwealth
and the Parliament of a State each legislate
upon the same subject and prescribe what
the rule of conduct shall be, they make laws
which are inconsistent, notwithstanding that
the rule of conduct is identical which each
prescribes, and sec. 109 applies. That this is
so is settled, at least when the sanctions they
impose are diverse Hume v. Palmer (supra)”.

In the case of Zaverbhai Amaidas v. The State of
Bombay [(1955) 1 SCR 799] this Court laid down the
various tests to determine the inconsistency between two
enactments and observed as follows-

“The important thing to consider with
reference to this provision is whether the
legislation is ‘in respect of the same matter’.
If the later legislation deals not with the
matters which formed the subject of the
earlier legislation but with other and distinct
matters though of a cognate and allied
character, then Article 254 (2) will have no
application. The principle embodied
in section 107 (2) and Article 254 (2) is that
when there is legislation covering the same
ground both by the Centre and by the
Province, both of them being competent to
enact the same, the law of the Centre should
prevail over that of the State”.

“It is true, as already pointed out, that on a
question under Article 254 (1) whether an Act
of Parliament prevails against a law of the
State, no question of repeal arises; but the
principle on which the rule of implied repeal
rests, namely, that if subject-matter of the
later legislation is identical with that of the
earlier, so that they cannot both stand
together, then the earlier is repealed by the
later enactment, will be equally applicable to
a question under Article 254(2) whether the
further legislation by Parliament is in respect
of the same matter as that of the State law”.

In the case of Ch. Tika Ramji Ors. etc. v. The State of
Uttar Pradesh Ors. [(1956) SCR 393] while dealing
with the question of repugnancy between a Central and a
State enactment, this Court relied on the observations of
Nicholas in his Australian Constitution, 2nd Ed. p.303,
where three tests of inconsistency or repugnancy have
been laid down and which are as follows:-

“(1) There may be inconsistency in the actual
terms of the competing statutes
(R. v. Brisbane Licensing Court, [1920] 28
CLR 23).

(2) Though there may be no direct conflict, a
State law may be inoperative because the
Commonwealth law, or the award of the
Commonwealth Court, is intended to be a
complete exhaustive code (Clyde
Engineering Co. Ltd. v. Cowburn, [1926] 37
CLR 466).

(3) Even in the absence of intention, a
conflict may arise when both State and
Commonwealth seek to exercise their powers
over the same subject-matter
(Victoria v. Commonwealth, [1937] 58 CLR
618; Wenn v. Attorney-General (Vict.), [1948]
77 CLR 84)

This Court also relied on the decisions in the case of
Hume v. Palmer as also the case of Ex Parte Mclean
(supra) referred to above. This Court also endorsed the
observations of Sulaiman, J. in the case of Shyamakant
Lal v. Rambhajan Singh [(1939) FCR 188] where
Sulaiman, J. observed as follows:

“When the question is whether a Provincial
legislation is repugnant to an existing Indian
law, the onus of showing its repugnancy and
the extent to which it is repugnant should be
on the party attacking its validity. There ought
to be a presumption in favour of its validity,
and every effort should be made to reconcile
them and construe both so as to avoid their
being repugnant to each other, and care
should be taken to see whether the two do
not really operate in different fields without
encroachment. Further, repugnancy must
exist in fact, and not depend merely on a
possibility”.

In the case of Om Prakash Gupta v. State of U.P. [(1957)
SCR 423] where this Court was considering the question
of the inconsistency between the two Central
enactments, namely, the Indian Penal Code and
the Prevention of Corruption Act held that there was no
inconsistency and observed as follows:-

“It seems to us, therefore, that the two
offences are distinct and separate. This is the
view taken in Amarendra Nath Roy v. The
State (AIR 1955 Cal 236) and we endorse
the opinion of the learned Judges, expressed
therein. Our conclusion, therefore, is that the
offence created under section 5 (1) (c) of
the Corruption Act is distinct and separate
from the one under section 405 of the Indian
Penal Code and, therefore, there can be no
question of section 5 (1) (c) repealing section
405 of the Indian Penal Code. If that is so,
then, Article 14 of the Constitution can be no
bar”.

Similarly in the case of Deep Chand v. The State of Uttar
Pradesh Ors. (1959 Supp (2) SCR 8) this Court
indicated the various tests to ascertain the question of
repugnancy between the two statutes and observed as
follows:-

“Repugnancy between two statutes may thus
be ascertained on the basis of the following
three principles:-

(1) Whether there is direct conflict between
the two provisions;

(2) Whether Parliament intended to lay down
an exhaustive code in respect of the subject
matter replacing the Act of the State
Legislature; and
(3) Whether the law made by Parliament and
the law made by the State Legislature occupy
the same field”.

In the case of Megh Raj and Ors. v. Allah Rakhia Ors.
(AIR 1942 FC 27) where Varadachariar, J. speaking for
the Court pointed out that where as in Australia a
provision similar to section 107 of the Government of
India Act, 1935 existed in the shape of section 109 of the
Australian Constitution, there was no corresponding
provision in the American Constitution. Similarly, the
Canadian cases have laid down a principle too narrow
for application to Indian cases. According to the learned
Judge, the safe rule to follow was that where the
paramount legislation does not purport to be exhaustive
or unqualified there is no inconsistency and in this
connection observed as follows:-

“The principle of that decision is that where
the paramount legislation does not purport to
be exhaustive or unqualified, but itself
permits or recognises other laws restricting or
qualifying the general provision made in it, it
cannot be said that any qualification or
restriction introduced by another law is
repugnant to the provision in the main or
paramount law”.

“The position will be even more obvious, if
another test of repugnancy which has been
suggested in some cases is applied, namely,
whether there is such an inconsistency
between the two provisions that one must be
taken to repeal the other by necessary
implication.”

In the case of State of Orissa v. M. A. Tulloch Co.
[(1964) 4 SCR 461] Ayyangar J. speaking for the Court
observed as follows:-

“Repugnancy arises when two enactments
both within the competence of the two
Legislatures collide and when the
Constitution expressly or by necessary
implication provides that the enactment of
one Legislature has superiority over the other
then to the extent of the repugnancy the one
supersedes the other. But two enactments
may be repugnant to each other even though
obedience to each of them is possible without
disobeying the other. The test of two
legislations containing contradictory
provisions is not, however, the only criterion
of repugnancy, for if a competent legislature
with a superior efficacy expressly or impliedly
evinces by its legislation an intention to cover
the whole field, the enactments of the other
legislature whether passed before or after
would be overborne on the ground of
repugnance. Where such is the position, the
inconsistency is demonstrated not by a
detailed comparison of provisions of the two
statutes but by the mere existence of the two
pieces of legislation”.

In the case of T. S. Balliah v. T. S. Rangachari [(1969) 3
SCR 65] it was pointed out by this Court that before
coming to the conclusion that there is a repeal by
implication, the Court must be satisfied that the two
enactments are so inconsistent that it becomes
impossible for them to stand together. In other words,
this Court held that when there is a direct collision
between the two enactments which is irreconcilable then
only repugnancy results. In this connection, the Court
made the following observations:-

“Before coming to the conclusion that there is
a repeal by implication, the Court must be
satisfied that the two enactments are so
inconsistent or repugnant that they
cannot stand together and the repeal of the
express prior enactment must flow from
necessary implication of the language of the
later enactment. It is therefore necessary in
this connection to scrutinise the terms and
consider the true meaning and effect of the
two enactments”.

“The provisions enacted in s. 52 of the 1922
Act do not alter the nature or quality of the
offence enacted in s. 177, Indian Penal
Code but it merely provides a new course of
procedure for what was already an offence.
In a case of this description the new statute is
regarded not as superseding, nor repealing
by implication the previous law, but as
cumulative”.

“A plain reading of the section shows that
there is no bar to the trial or conviction of the
offender under both enactments but there is
only a bar to the punishment of the offender
twice for the same offence. In other words,
the section provides that where an act or
omission constitutes an offence under two
enactments, the offender may be prosecuted
and punished under either or both the
enactments but shall not be liable to be
punished twice for the same offence”.

On a careful consideration, therefore, of the authorities
referred to above, the following propositions emerge:-

1. That in order to decide the question of repugnancy it
must be shown that the two enactments contain
inconsistent and irreconcilable provisions, so that they
cannot stand together or operate in the same field.

2. That there can be no repeal by implication unless the
inconsistency appears on the face of the two statutes.

3. That where the two statutes occupy a particular field,
there is room or possibility of both the statutes operating
in the same field without coming into collision with each
other, no repugnancy results.

4. That where there is no inconsistency but a statute
occupying the same field seeks to create distinct and
separate offences, no question of repugnancy arises and
both the statutes continue to operate in the same field.”
(at pages 272-278)
(Emphasis Supplied)

45. In Hoechst Pharmaceuticals Ltd. v. State of Bihar,

(1983) 3 SCR 130, this Court after referring to the earlier judgments

held:

“Article 254 of the Constitution makes provision first, as
to what would happen in the case of conflict between a
Central and State law with regard to the subjects
enumerated in the Concurrent List, and secondly, for
resolving such conflict. Art. 254(1) enunciates the normal
rule that in the event of a conflict between a Union and a
State law in the concurrent field, the former prevails over
the latter. Cl. (1) lays down that if a State law relating to a
concurrent subject is ‘repugnant’ to a Union law relating
to that subject, then, whether the Union law is prior or
later in time, the Union law will prevail and the State law
shall, to the extent of such repugnancy, be void. To the
general rule laid down in cl. (1), cl. (2) engrafts an
exception, viz., that if the President assents to a State
law which has been reserved for his consideration, it will
prevail notwithstanding its repugnancy to an earlier law
of the Union, both laws dealing with a concurrent subject.
In such a case, the Central Act will give way to the State
Act only to the extent of inconsistency between the two,
and no more. In short, the result of obtaining the assent
of the President to a State Act which is inconsistent with
a previous Union law relating to a concurrent subject
would be that the State Act will prevail in that State and
override the provisions of the Central Act in their
applicability to that State only. The predominance of the
State law may however be taken away if Parliament
legislates under the proviso to cl. (2). The proviso to Art.

254(2) empowers the Union Parliament to repeal or
amend a repugnant State law, either directly, or by itself
enacting a law repugnant to the State law with respect to
the ‘same matter’. Even though the subsequent law
made by Parliament does not expressly repeal a State
law, even then, the State law will become void as soon
as the subsequent law of Parliament creating
repugnancy is made. A State law would be repugnant to
the Union law when there is direct conflict between the
two laws. Such repugnancy may also arise where both
laws operate in the same field and the two cannot
possibly stand together. See: Zaverbhai Amaidas v.
State of Bombay (1955 1 SCR 799), M. Karunanidhi v.
Union of India (1979 3 SCR 254) and T. Barai v. Henry
Ah Hoe Anr. (1983 1 SCC 177).

We may briefly refer to the three Australian decisions
relied upon. As stated above, the decision in Clyde
Engineering Company’s case (supra), lays down that
inconsistency is also created when one statute takes
away rights conferred by the other. In Ex Parte McLean’s
case, supra, Dixon J. laid down another test viz.,
two statutes could be said to be inconsistent if they, in
respect of an identical subject-matter, imposed identical
duty upon the subject, but provided for different
sanctions for enforcing those duties. In Stock Motor
Ploughs Limited’s case, supra, Evatt, J. held that even in
respect of cases where two laws impose one and the
same duty of obedience there may be inconsistency. As
already stated the controversy in these appeals falls to
be determined by the true nature and character of the
impugned enactment, its pith and substance, as to
whether it falls within the legislative competence of the
State Legislature under Art. 246(3) and does not involve
any question of repugnancy under Art. 254(1).

We fail to comprehend the basis for the submission put
forward on behalf of the appellants that there is
repugnancy between sub-s. (3) of s. 5 of the Act which is
relatable to Entry 54 of List II of the Seventh Schedule
and paragraph 21 of the Control order issued by the
Central Government under sub-s. (1) of s. 3 of the
Essential Commodities Act relatable to Entry 33 of List III
and therefore sub-s. (3) of s. 5 of the Act which is a law
made by the State Legislature is void under Art.
254(1). The question of repugnancy under Art.
254(1) between a law made by Parliament and a law
made by the State Legislature arises only in case both
the legislations occupy the same field with respect to one
of the matters enumerated in the Concurrent List, and
there is direct conflict between the two laws. It is only
when both these requirements are fulfilled that the State
law will, to the extent of repugnancy become void. Art.
254(1) has no application to cases of repugnancy due to
overlapping found between List II on the one hand and
List I and List III on the other. If such overlapping exists
in any particular case, the State law will be ultra vires
because of the non-obstante clause in Art. 246(1) read
with the opening words “Subject to” in Art. 246(3). In
such a case, the State law will fail not because of
repugnance to the Union law but due to want of
legislative competence. It is no doubt true that the
expression “a law made by Parliament which Parliament
is competent to enact” in Art. 254(1) is susceptible of a
construction that repugnance between a State law and a
law made by Parliament may take place outside the
concurrent sphere because Parliament is competent to
enact law with respect to subjects included in List III as
well as “List I”. But if Art. 254(1) is read as a whole, it will
be seen that it is expressly made subject to cl. (2) which
makes reference to repugnancy in the field of Concurrent
List–in other words, if cl. (2) is to be the guide in the
determination of scope of cl. (1), the repugnancy
between Union and State law must be taken to refer only
to the Concurrent field. Art. 254(1) speaks of a State law
being repugnant to (a) a law made by Parliament or (b)
an existing law.

There was a controversy at one time as to whether the
succeeding words “with respect to one of the matters
enumerated in the Concurrent List” govern both (a) and

(b) or (b) alone. It is now settled that the words “with
respect to” qualify both the clauses in Art. 254(1) viz. a
law made by Parliament which Parliament is competent
to enact as well as any provision of an existing law. The
under lying principle is that the question of repugnancy
arises only when both the Legislatures are competent to
legislate in the same field i.e. with respect to one of the
matters enumerated in the Concurrent List. Hence, Art.
254(1) can not apply unless both the Union and the State
laws relate to a subject specified in the Concurrent List,
and they occupy the same field.

This construction of ours is supported by the
observations of Venkatarama Ayyar, J. speaking for the
Court in A. S. Krishna’s case, supra, while dealing with s.
107(1) of the Government of India Act, 1935 to the effect:

“For this section to apply, two conditions must
be fulfilled: (1) The provisions of the
Provincial law and those of the Central
legislation must both be in respect of a matter
which is enumerated in the Concurrent List,
and (2) they must be repugnant to each
other. It is only when both these requirements
are satisfied that the Provincial law will, to the
extent of the repugnancy, become void.”

In Ch. Tika Ramji’s case, supra, the Court observed that
no question of repugnancy under Art. 254 of the
Constitution could arise where parliamentary legislation
and State legislation occupy different fields and deal with
separate and distinct matters even though of a cognate
and allied character and that where, as in that case,
there was no inconsistency in the actual terms of the
Acts enacted by Parliament and the State Legislature
relatable to Entry 33 of List III, the test of repugnancy
would be whether Parliament and State Legislature, in
legislating on an entry in the Concurrent List, exercised
their powers over the same subject-matter or whether
the laws enacted by Parliament were intended to be
exhausted as to cover the entire field, and added:

“The pith and substance argument cannot be
imported here for the simple reason that,
when both the Centre as well as the State
Legislatures were operating in the concurrent
field, there was no question of any trespass
upon the exclusive jurisdiction of the Centre
under Entry 52 of List I, the only question
which survived being whether put in both the
pieces of legislation enacted by the Centre
and the State Legislature, there was any
such repugnancy.”

This observation lends support to the view that in cases
of overlapping between List II on the one hand and Lists
I and III on the other, there is no question of repugnancy
under Art. 254(1). Subba Rao. J. speaking for the Court
in Deep Chand’s case, supra, interpreted Art. 254(1) in
these terms:

“Art. 254(1) lays down a general rule. Clause
(2) is an exception to that Article and the
proviso qualified the said exception. If there
is repugnancy between the law made by the
State and that made by the Parliament with
respect to one of the matters enumerated in
the Concurrent List, the law made by
Parliament shall prevail to the extent of the
repugnancy and law made by the State shall,
to the extent of such repugnancy, be void.”
(at pages 179-183)
(Emphasis Supplied)

46. In Vijay Kumar Sharma Ors. Etc v. State Of Karnataka,

(1990) 2 SCC 562, this Court held that the Karnataka Contract

Carriages (Acquisition) Act, 1976 enacted under Entry 42 of List III

was not repugnant to the Motor Vehicles Act, 1988 enacted under

Entry 35 of the same List. In so holding, Sawant, J. laid down:

“32.Thus the Karnataka Act and the MV Act, 1988 deal
with two different subject matters. As stated earlier the
Karnataka Act is enacted by the State Legislature for
acquisition of contract carriages under Entry 42 of the
Concurrent List read with Article 31 of the Constitution to
give effect to the provisions of Articles 39(b) and (c)
thereof. The MV Act 1988 on the other hand is enacted
by the Parliament under Entry 35 of the Concurrent List
to regulate the operation of the motor vehicles. The
objects and the subject matters of the two enactments
are materially different. Hence the provisions of Article
254 do not come into play in the present case and hence
there is no question of repugnancy between the two
legislations.”
(at page 581)

47. Ranganath Misra, J., in a concurring judgment, posed the

question as to whether when the State law is under one head of

legislation in the Concurrent List and the Parliamentary legislation is

under another head in the same list, can there be repugnancy at all?

The question was answered thus:

“13. In cl. (1) of Art. 254 it has been clearly indicated that
the competing legislations must be in respect of one of
the matters enumerated in the Concurrent List. The
seven Judge Bench examining the vires of the Karnataka
Act did hold that the State Act was an Act for acquisition
and came within Entry 42 of the Concurrent List. That
position is not disputed before us. There is unanimity at
the bar that the Motor Vehicles Act is a legislation coming
within Entry 35 of the Concurrent List. Therefore,
the Acquisition Act and the 1988 Act as such do not
relate to one common head of legislation enumerated in
the Concurrent List and the State Act and the
parliamentary statute deal with different matters of
legislation.”
“19. A number of precedents have been cited at the
hearing and those have been examined and even some
which were not referred to at the bar. There is no clear
authority in support of the stand of the petitioners —
where the State law is under one head of legislation in
the Concurrent List, the subsequent Parliamentary
legislation is under another head of legislation in the
same list and in the working of the two it is said to give
rise to a question of repugnancy.”
(at pages 575 and 577)

48. In Rajiv Sarin v. State of Uttarakhand, (2011) 8 SCC 708, this

Court examined the Kumaun and Uttarakhand Zamindari Abolition

and Land Reforms Act, 1960 vis-à-vis the Forest Act, 1927 and

found that there was no repugnancy between the two. This Court

held:

“52. The aforesaid position makes it quite clear that even
if both the legislations are relatable to List III of the
Seventh Schedule of the Constitution, the test for
repugnancy is whether the two legislations “exercise
their power over the same subject-matter…” and
secondly, whether the law of Parliament was intended “to
be exhaustive to cover the entire field”. The answer
to both these questions in the instant case is in the
negative, as the Indian Forest Act, 1927 deals with the
law relating to forest transit, forest levy and forest
produce, whereas the KUZALR Act deals with the land
and agrarian reforms.

53. In respect of the Concurrent List under Seventh
Schedule to the Constitution, by definition both the
legislatures viz. the Parliament and the State legislatures
are competent to enact a law. Thus, the only way in
which the doctrine of pith and substance can and is
utilised in determining the question of repugnancy is to
find out whether in pith and substance the two laws
operate and relate to the same matter or not. This can be
either in the context of the same Entry in List III or
different Entries in List III of the Seventh Schedule of the
Constitution. In other words, what has to be examined is
whether the two Acts deal with the same field in the
sense of the same subject matter or deal with different
matters.”
(at page 727)
(Emphasis Supplied)

49. It will be noticed that the Constitution Bench judgment in Rajiv

Sarin (supra) does not at all refer to Tika Ramji (supra). Tika Ramji

(supra) had clearly held that the doctrine of pith and substance

cannot be referred to in determining questions of repugnancy, once it

is found that both the Parliamentary law and State law are referable

to the Concurrent List. Therefore, the statement in paragraph 53 in

Rajiv Sarin (supra), that the doctrine of pith and substance has

utility in finding out whether, in substance, the two laws operate and

relate to the same matter, may not be a correct statement of the law

in view of the unequivocal statement made in Tika Ramji (supra) by

an earlier Constitution Bench decision. 2 However, the following

sentence is of great importance, which is, that the two laws, namely,

the Parliamentary and the State legislation, do not need to find their

origin in the same entry in List III so long as they deal, either as a

whole or in part, with the same subject matter. This clarification of

the law is important in that Ranganath Misra, J.’s separate

concurring opinion in Vijay Kumar Sharma (supra) seems to point

to a different direction. However, Hoechst Pharmaceuticals

2
(supra), also does not agree with this view and indicates that so long

as the two laws are traceable to a matter in the Concurrent List and

there is repugnancy, the State law will have to be yield to the Central

law except if the State law is covered by Article 254(2).

50. The case law referred to above, therefore, yields the following

propositions:

i) Repugnancy under Article 254 arises only if both the

Parliamentary (or existing law) and the State law are referable to List

III in the 7th Schedule to the Constitution of India.

ii) In order to determine whether the Parliamentary (or existing

law) is referable to the Concurrent List and whether the State law is

also referable to the Concurrent List, the doctrine of pith and

substance must be applied in order to find out as to where in pith

and substance the competing statutes as a whole fall. It is only if

both fall, as a whole, within the Concurrent List, that repugnancy can

be applied to determine as to whether one particular statute or part

thereof has to give way to the other.

iii) The question is what is the subject matter of the statutes in

question and not as to which entry in List III the competing statutes

are traceable, as the entries in List III are only fields of legislation;

also, the language of Article 254 speaks of repugnancy not merely of
a statute as a whole but also “any provision” thereof.

iv) Since there is a presumption in favour of the validity of statutes

generally, the onus of showing that a statute is repugnant to another

has to be on the party attacking its validity. It must not be forgotten

that that every effort should be made to reconcile the competing

statutes and construe them both so as to avoid repugnancy – care

should be taken to see whether the two do not really operate in

different fields qua different subject matters.

v) Repugnancy must exist in fact and not depend upon a mere

possibility.

vi) Repugnancy may be direct in the sense that there is

inconsistency in the actual terms of the competing statutes and there

is, therefore, a direct conflict between two or more provisions of the

competing statutes. In this sense, the inconsistency must be clear

and direct and be of such a nature as to bring the two Acts or parts

thereof into direct collision with each other, reaching a situation

where it is impossible to obey the one without disobeying the other.

This happens when two enactments produce different legal results

when applied to the same facts.

vii) Though there may be no direct conflict, a State law may be

inoperative because the Parliamentary law is intended to be a
complete, exhaustive or exclusive code. In such a case, the State

law is inconsistent and repugnant, even though obedience to both

laws is possible, because so long as the State law is referable to the

same subject matter as the Parliamentary law to any extent, it must

give way. One test of seeing whether the subject matter of the

Parliamentary law is encroached upon is to find out whether the

Parliamentary statute has adopted a plan or scheme which will be

hindered and/or obstructed by giving effect to the State law. It can

then be said that the State law trenches upon the Parliamentary

statute. Negatively put, where Parliamentary legislation does not

purport to be exhaustive or unqualified, but itself permits or

recognises other laws restricting or qualifying the general provisions

made in it, there can be said to be no repugnancy.

viii) A conflict may arise when Parliamentary law and State law

seek to exercise their powers over the same subject matter. This

need not be in the form of a direct conflict, where one says “do” and

the other says “don’t”. Laws under this head are repugnant even if

the rule of conduct prescribed by both laws is identical. The test

that has been applied in such cases is based on the principle on

which the rule of implied repeal rests, namely, that if the subject

matter of the State legislation or part thereof is identical with that of
the Parliamentary legislation, so that they cannot both stand

together, then the State legislation will be said to be repugnant to the

Parliamentary legislation. However, if the State legislation or part

thereof deals not with the matters which formed the subject matter of

Parliamentary legislation but with other and distinct matters though

of a cognate and allied nature, there is no repugnancy.

ix) Repugnant legislation by the State is void only to the extent of

the repugnancy. In other words, only that portion of the State’s

statute which is found to be repugnant is to be declared void.

x) The only exception to the above is when it is found that a State

legislation is repugnant to Parliamentary legislation or an existing

law if the case falls within Article 254(2), and Presidential assent is

received for State legislation, in which case State legislation prevails

over Parliamentary legislation or an existing law within that State.

Here again, the State law must give way to any subsequent

Parliamentary law which adds to, amends, varies or repeals the law

made by the legislature of the State, by virtue of the operation of

Article 254(2) proviso.

51. Applying the aforesaid rules to the facts of the present case,

we find that the State statute in question is the Maharashtra Act.

The Statement of Objects and Reasons for the aforesaid Act reads
thus:

“In order to mitigate the hardship that may be caused to
the workers who may be thrown out of employment by
the closure of an undertaking, Government may take
over such undertaking either on lease or on such
conditions as may be deemed suitable and run it as a
measure of unemployment relief. In such cases
Government may have to fix revised terms of
employment of the workers or to make other changes
which may not be in consonance with the existing labour
laws or any agreements or awards applicable to the
undertaking. It may become necessary even to exempt
the undertaking from certain legal provisions. For these
reasons it is proposed to obtain power to exclude an
undertaking, run by or under the authority of Government
as a measure of unemployment relief, from the operation
of certain labour laws or any specified provisions thereof
subject to such conditions and for such periods as may
be specified. It is also proposed to make a provision to
secure that while the rights and liabilities of the original
employer and workmen may remain suspended during
the period the undertaking is run by Government, they
would revive and become enforceable as soon as the
undertaking ceases to be under the control of
Government.”

There is no doubt that this Maharashtra Act is referable to Entry 23,

List III in the 7th Schedule to the Constitution, which reads as under:

“23. Social security and social insurance; employment
and unemployment.”

Sections 3 and 4 of the Maharashtra Act are material and are set out

herein:

“3. Declaration of relief undertaking .

(1) If at any time it appears to the State Government
necessary to do so, the State Government may, by
notification in the Official Gazette, declare that an
industrial undertaking specified in the notification,
whether started, acquired or otherwise taken over by the
State Government, and carried on or proposed to be
carried on by itself or under its authority, or to which any
loan, guarantee or financial assistance has been
provided by the State Government shall, with effect from
the date specified for the purpose in the notification, be
conducted to serve as a measure of preventing
unemployment or of unemployment relief and the
undertaking shall accordingly be deemed to be a relief
undertaking for the purposes of this Act.

(2) A notification under sub-section (1) shall have effect
for such period not exceeding twelve months as may be
specified in the notification; but it shall be renewable by
like notifications from time to time for further periods not
exceeding twelve months at a time, so however that all
the periods in the aggregate do not exceed fifteen years.

4. Power to prescribe industrial relations and other
facilities temporarily for relief undertakings.

(1) Notwithstanding any law, usage, custom, contract,
instrument, decree, order, award, submission,
settlement, standing order or other provision whatsoever,
the State Government may, by notification in the Official
Gazette, direct that–

(a) in relation to any relief undertaking and in respect of
the period for which the relief undertaking continues as
such under sub-section (2) of section 3–

(i) all or any of the laws in the Schedule to
this Act or any provisions thereof shall not
apply (and such relief undertaking shall be
exempt therefrom), or shall, if so directed by
the State Government, be applied with such
modifications (which do not however affect
the policy of the said laws) as may be
specified in the notification;

(ii) all or any of the agreements, settlements,
awards or standing orders made under any of
the laws in the Schedule to this Act, which
may be applicable to the undertaking
immediately before it was acquired or taken
over by the State Government or before any
loan, guarantee or other financial assistance
was provided to it by, or with the approval of
the State Government, for being run as a
relief undertaking, shall be suspended in
operation or shall, if so directed by the State
Government, be applied with such
modifications as may be specified in the
notification;

(iii) rights, privileges, obligations and liabilities
shall be determined and be enforceable in
accordance with clauses (i) and (ii) and the
notification;

(iv) any right, privilege, obligation on liability
accrued or incurred before the undertaking
was declared a relief undertaking and any
remedy for the enforcement thereof shall be
suspended and all proceedings relative
thereto pending before any court, tribunal,
officer or authority shall be stayed;

(b) the right, privilege, obligation and liability referred to
in clause (a) (iv) shall, on the notification ceasing to have
force, revive and be enforceable and the proceedings
referred to therein shall be continued:

Provided that in computing the period of limitation for the
enforcement of such right, privilege, obligation or liability,
the period during which it was suspended under clause

(a) (iv) shall be excluded notwithstanding anything
contained in any law for the time being in force.

(2) A notification under sub-section (1) shall have effect
from such date, not being earlier than the date referred
to in sub-section (1) of section 3, as may be specified
therein, and the provisions of section 21 of the Bombay
General Clauses Act, 1904, shall apply to the power to
issue such notification.”

52. On the other hand, the Insolvency and Bankruptcy Code, 2016

is an Act to consolidate and amend the laws relating to

reorganization and insolvency resolution, inter alia, of corporate

persons. Insofar as corporate persons are concerned, amendments

are made to the following enactments by Sections 249 to 252 and

255:

“249. Amendments of Act 51 of 1993.

The Recovery of Debts due to Banks and Financial
Institutions Act, 1993 shall be amended in the manner
specified in the Fifth Schedule.

250. Amendments of Act 32 of 1994.

The Finance Act, 1994 shall be amended in the manner
specified in the Sixth Schedule.

251. Amendments of Act 54 of 2002.

The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002
shall be amended in the manner specified in the Seventh
Schedule.

252. Amendments of Act 1 of 2004.

The Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 shall be amended in the manner
specified in the Eighth Schedule.

(253) and (254) xxx xxx xxx

255. Amendments of Act 18 of 2013.

The Companies Act, 2013 shall be amended in the
manner specified in the Eleventh Schedule.”

53. It is settled law that a consolidating and amending act like the
present Central enactment forms a code complete in itself and is

exhaustive of the matters dealt with therein. In Ravula Subba Rao

and another v. The Commissioner of Income Tax, Madras, (1956)

S.C.R. 577, this Court held:

“The Act is, as stated in the preamble, one to consolidate
and amend the law relating to income-tax. The rule of
construction to be applied to such a statute is thus stated
by Lord Herschell in Bank of England v. Vagliano [(1891)
AC 107, 141]:

“I think the proper course is in the first
instance to examine the language of the
statute, and to ask what is its natural
meaning, uninfluenced by any considerations
derived from the previous state of the law,
and not to start with inquiring how the law
previously stood, and then, assuming that it
was probably “intended to leave it
unaltered…”
We must therefore construe the provisions of the Indian
Income-tax Act as forming a code complete in itself and
exhaustive of the matters dealt with therein, and
ascertain what their true scope is.”
(at page 585)
Similarly in Union of India v. Mohindra Supply Company, [1962] 3

S.C.R. 497, this Court held:

“The Arbitration Act of 1940 is a consolidating and
amending statute and is for all purposes a code relating
to arbitration. In dealing with the interpretation of the
Indian Succession Act, 1865, the Privy Council
in Narendra Nath Sircar v. Kamlabasini Desai [(1896) LR
23, IA 18] observed that a code must be construed
according to the natural meaning of the language used
and not on the presumption that it was intended to leave
the existing law unaltered. The Judicial Committee
approved of the observations of Lord Herschell in Bank
of England v. Vagliano Brothers [(1891) AC 107,
144-145] to the following effect:

“I think the proper course is in the first
instance to examine the language of the
statute and to ask what is its natural meaning
uninfluenced by any considerations derived
from the previous state of the law, and not to
start with enquiring how the law previously
stood, and then, assuming that it was
probably intended to leave it unaltered, to
see if the words of the enactment will bear an
interpretation in conformity with this view. If a
statute, intended to embody in a code a
particular branch of the law, is to be treated in
this fashion, it appears to me that its utility
will be almost entirely destroyed, and the
very object with which it was enacted will be
frustrated. The purpose of such a statute
surely was that on any point specifically dealt
with by it the law should be ascertained by
interpreting the language used instead of, as
before, by roaming over a vast number of
authorities in order to discover what the law
was, extracting it by a minute critical
examination of the prior decisions….”

The court in interpreting a statute must therefore proceed
without seeking to add words which are not to be found
in the statute, nor is it permissible in interpreting a statute
which codifies a branch of the law to start with the
assumption that it was not intended to alter the
pre-existing law; nor to add words which are not to be
found in the statute, or “for which authority is not found in
the statute”.”
(at pages 506-508)

In Joseph Peter v. State of Goa, Daman and Diu, (1977) 3 SCC

280, this Court dealt with a Goa regulation vis-à-vis the Code of

Criminal Procedure. In that context, this Court observed:

“A Code is complete and that marks the distinction
between a Code and an ordinary enactment. The
Criminal Procedure Code, by that canon, is
self-contained and complete.”
(at page 282)
There can be no doubt, therefore, that the Code is a Parliamentary

law that is an exhaustive code on the subject matter of insolvency in

relation to corporate entities, and is made under Entry 9, List III in

the 7th Schedule which reads as under:

“9. Bankruptcy and insolvency”

54. On reading its provisions, the moment initiation of the

corporate insolvency resolution process takes place, a moratorium is

announced by the adjudicating authority vide Sections 13 and 14 of

the Code, by which institution of suits and pending proceedings etc.

cannot be proceeded with. This continues until the approval of a

resolution plan under Section 31 of the said Code. In the interim, an

interim resolution professional is appointed under Section 16 to

manage the affairs of corporate debtors under Section 17.

55. It is clear, therefore, that the earlier State law is repugnant to

the later Parliamentary enactment as under the said State law, the

State Government may take over the management of the relief

undertaking, after which a temporary moratorium in much the same

manner as that contained in Sections 13 and 14 of the Code takes

place under Section 4 of the Maharashtra Act. There is no doubt
that by giving effect to the State law, the aforesaid plan or scheme

which may be adopted under the Parliamentary statute will directly

be hindered and/or obstructed to that extent in that the management

of the relief undertaking, which, if taken over by the State

Government, would directly impede or come in the way of the taking

over of the management of the corporate body by the interim

resolution professional. Also, the moratorium imposed under

Section 4 of the Maharashtra Act would directly clash with the

moratorium to be issued under Sections 13 and 14 of the Code. It

will be noticed that whereas the moratorium imposed under the

Maharashtra Act is discretionary and may relate to one or more of

the matters contained in Section 4(1), the moratorium imposed

under the Code relates to all matters listed in Section 14 and follows

as a matter of course. In the present case it is clear, therefore, that

unless the Maharashtra Act is out of the way, the Parliamentary

enactment will be hindered and obstructed in such a manner that it

will not be possible to go ahead with the insolvency resolution

process outlined in the Code. Further, the non-obstante clause

contained in Section 4 of the Maharashtra Act cannot possibly be

held to apply to the Central enactment, inasmuch as a matter of

constitutional law, the later Central enactment being repugnant to the
earlier State enactment by virtue of Article 254 (1), would operate to

render the Maharashtra Act void vis-à-vis action taken under the

later Central enactment. Also, Section 238 of the Code reads as

under:

“Sec. 238. Provisions of this Code to override other
laws.-

The provisions of this Code shall have effect,
notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or
any instrument having effect by virtue of any such law.”

It is clear that the later non-obstante clause of the Parliamentary

enactment will also prevail over the limited non-obstante clause

contained in Section 4 of the Maharashtra Act. For these reasons,

we are of the view that the Maharashtra Act cannot stand in the way

of the corporate insolvency resolution process under the Code.

56. Dr. Singhvi, however, argued that the notification under the

Maharashtra Act only kept in temporary abeyance the debt which

would become due the moment the notification under the said Act

ceases to have effect. We are afraid that we cannot accede to this

contention. The notification under the Maharashtra Act continues for

one year at a time and can go upto 15 years. Given the fact that the

timeframe within which the company is either to be put back on its

feet or is to go into liquidation is only 6 months, it is obvious that the

period of one year or more of suspension of liability would
completely unsettle the scheme of the Code and the object with

which it was enacted, namely, to bring defaulter companies back to

the commercial fold or otherwise face liquidation. If the moratorium

imposed by the Maharashtra Act were to continue from one year

upto 15 years, the whole scheme and object of the Code would be

set at naught. Undeterred by this, Dr. Singhvi, however, argued that

since the suspension of the debt took place from July, 2015

onwards, the appellant had a vested right which could not be

interfered with by the Code. It is precisely for this reason that the

non-obstante clause, in the widest terms possible, is contained in

Section 238 of the Code, so that any right of the corporate debtor

under any other law cannot come in the way of the Code. For all

these reasons, we are of the view that the Tribunal was correct in

appreciating that there would be repugnancy between the provisions

of the two enactments. The judgment of the Appellate Tribunal is not

correct on this score because repugnancy does exist in fact.

57. Both the Tribunal and the Appellate Tribunal refused to go into

the other contentions of Dr. Singhvi, viz. that under the MRA, it was

because the creditors did not disburse the amounts thereunder that

the appellant was not able to pay its dues. We are of the view that

the Tribunal and the Appellate Tribunal were right in not going into
this contention for the very good reason that the period of 14 days

within which the application is to be decided was long over by the

time the second application was made before the Tribunal. Also, the

second application clearly appears to be an after-thought for the

reason that the corporate debtor was fully aware of the fact that the

MRA had failed and could easily have pointed out these facts in the

first application itself. However, for reasons best known to it, the

appellant chose to take up only a law point before the Tribunal. The

law point before the Tribunal was argued on 22 nd and 23rd December,

2016, presumably with little success. It is only as an after-thought

that the second application was then filed to add an additional string

to a bow which appeared to the appellants to have already been

broken.

58. Even otherwise, Shri Salve took us through the MRA in great

detail. Dr. Singhvi did likewise to buttress his point of view that

having promised to infuse funds into the appellant, not a single naya

paisa was ever disbursed. According to us, one particular clause in

the MRA is determinative on the merits of this case, even if we were

to go into the same. Under Article V entitled “Representations and

Warranties”, clause 20(t) states as follows:
“(t) NATURE OF OBLIGATIONS.

The obligations under this Agreement and the other
Restructuring Documents constitute direct, unconditional
and general obligations of the Borrower and the
Reconstituted Facilities, rank at least pari passu as to
priority of payment to all other unsubordinated
indebtedness of the Borrower other than any priority
established under applicable law.”

59. The obligation of the corporate debtor was, therefore,

unconditional and did not depend upon infusing of funds by the

creditors into the appellant company. Also, the argument taken for

the first time before us that no debt was in fact due under the MRA

as it has not fallen due (owing to the default of the secured creditor)

is not something that can be countenanced at this stage of the

proceedings. In this view of the matter, we are of the considered

view that the Tribunal and the Appellate Tribunal were right in

admitting the application filed by the financial creditor ICICI Bank

Ltd.

60. The appeals, accordingly, stand dismissed. There shall,

however, be no order as to costs.

………………………………J.

(R.F. Nariman)

………………………………J.

(Sanjay Kishan Kaul)
New Delhi;

August 31, 2017.

Leave a Comment

Your email address will not be published. Required fields are marked *