1

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. ...RESP ONDENTS

J U D G M E N T

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 28

th

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,

2

owing to labour problems, the appellant began to suffer losses.

Since the appellant was not able to service the financial

assistance given to it by 19 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 22

nd

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 23

rd

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

3

by the debtors. The aforesaid restructuring plan w as

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

22

nd

July, 2015 and 18

th

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 wer e

temporarily suspended for a period of one year in the first

instance under the first notification of 22

nd

July, 2015 and

another period of one year under the second notification of 18

th

4

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 22

nd

and 23

rd

December, 2016, after which the NCLT adjourned the case to

16

th

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 17

th

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

5

evidence placed by the financial creditors. Hence, the

application was admitted and a moratorium was declared.

7. By a separate order dated 23

rd

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:

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“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

7

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

8

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,

9

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

10

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

11

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

12

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

13

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

14

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-

15

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

16

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

17

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

18

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

19

“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

20

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

21

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.

22

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

23

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.

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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

25

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

26

“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

27

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)

28

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

29

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

30

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

31

(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,

32

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:

33

“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;

34

(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.

35

(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

36

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.

37

(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.

38

(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

39

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

40

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;

41

(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

42

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

43

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

44

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

45

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

46

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

47

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

48

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,

49

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 th e

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:

50

“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 I&B Code, 2016 and the

MRU Act as they both operate in different fields.

The Parliament has expressly stated that the

provisions of the I&B 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

51

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.

52

(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.

53

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

54

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 Eighteent h

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):

1

White, C.J. concurring stated (at 388):

“I profoundly regret that in a case of this magnitude, affecting, as it does,

an amendment to the Constitution dealing with the powers and duties of

the national and state governments, and intimately concerning the welfare

of the whole people, the court has deemed it proper to state only ultimate

conclusions, without an exposition of the reasoning by which they have

been reached.”

55

“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 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 Australi a

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

56

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

57

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

58

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”.

59

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

60

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

61

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:

62

“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

63

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

64

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:-

65

“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)

66

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

67

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”.

68

“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

69

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

70

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

71

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

72

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

73

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

74

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

75

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

76

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

77

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.

78

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

79

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

80

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

81

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

82

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,

83

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 (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).

2

Similar observations were made with respect to the doctrine of pith and substance in the context of Article 254 in

the following judgments, without referring to the aforementioned paragraph in Tika Ramji (supra, at pages 420-

421): Vijay Kumar Sharma (supra) at 595, para 53, Girnar Traders v. State of Maharashtra, (2011) 3 SCC 1 at 79,

para 174, Offshore Holdings (P) Limited v. Bangalore Development Authority, (2011) 3 SCC 139 at 179, para 92.

84

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 7

th

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.

85

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.

86

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 thoug h

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

87

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

88

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

89

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 7

th

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.

90

(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

91

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

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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.

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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

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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

95

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)

96

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 7

th

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

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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

98

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.

99

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

100

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

101

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 23

rd

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.”

102

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.