W.P.(C) 1273/2021 Page 1 of 33

$~22

* IN THE HIGH COURT OF DELHI AT NEW DELHI

Date of decision: 01

st

AUGUST, 2022

IN THE MATTER OF:

+ W.P.(C) 1273/2021 & CM APPLs. 3544/2021, 8050/2021,

16374/2021, 27429/2021 & 33701/2021

SASAKAWA INDIA LEPROSY FOUNDATION ..... Petitioner

Through: Mr. Rony John, Mr. Piyush Swami,

Mr. Arshdeep Singh, Advocates

versus

UNION OF INDIA & ORS ...... Respondents

Through: Mr. Anurag Ahluwalia, CGSC with

Mr. Danish Faraz Khan, Advocate for

R-1 & R-2

Mr. Parag P. Tripathi, Senior

Advocate with Mr. Ramesh Babu,

Ms. Manisha Singh, Ms.Sanya

Panjwani, Ms. Nisha Sharma,

Ms.Mishika Bajpai, Advocates for

R-3 & R-4/RBI

Mr. H. S. Parihar, Mr. Kuldeep Singh

Parihar and Ms Ikshita Parihar,

Advocates for NHB.

Mr. Raunak Dhillon, Ms. Madhavi

Khanna and Ms. Niharika Shukla,

Advocates for R-7 & R-8

CORAM:

HON'BLE THE CHIEF JUSTICE

W.P.(C) 1273/2021 Page 2 of 33

HON'BLE MR. JUSTICE SUBRAMONIUM PRASAD

J U D G M E N T

SUBRAMONIUM PRASAD, J

1. The instant Writ Petition has been filed under Articles 226, read with

227 of the Constitution of India, by the Petitioner herein i.e. Sasakawa-India

Leprosy Foundation challenging the constitutional validity of the Insolvency

and Bankruptcy (Insolvency and Liquidation Proceedings of Financial

Service Providers and Application to Adjudicating Authority) Rules, 2019

(hereinafter referred to as the “Impugned Rules”) and Notification No. S.O.

4139 (E) dated 18.11.2019, notified by the Central Government in exercise

of its powers under the Insolvency and Bankruptcy Code, 2016 (hereinafter

referred to as the “IBC”), on the ground that they are ultra vires Articles 14,

19 (1) (g) and 21 of the Constitution, Chapter III-B of the Reserve Bank of

India Act, 1934 (hereinafter referred to as the “RBI Act”) and Section 36A

of the NHB Act.

2. The Petitioner herein is a Public Charitable Trust engaged in

providing education, livelihood opportunities, and advocating for the rights

of individuals affected by leprosy. Between March 2017 to January 2018,

the Petitioner opened four fixed deposit accounts with various branches of

Dewan Housing Finance Corporation Limited (hereinafter referred to as

“DHFL”) in Delhi, to the tune of Rs. 7,56,07,000/. These FDs were non-

cumulative deposits, under yearly interest schemes, and were to mature only

after 03.12.2019.

3. However, in the interim, insolvency proceedings were initiated

against DHFL under the IBC. In exercise of powers conferred under Section

227 read with Section 239(zk) of the IBC, the Central Government brought

W.P.(C) 1273/2021 Page 3 of 33

out the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings

of Financial Service Providers and Application to Adjudicating Authority)

Rules, 2019. These rules were to apply to such financial providers as were to

be notified by the Government. In sum and substance, the financial

providers which were unable to pay their debts were brought under the

scope of the IBC, and in the facts and circumstances of the present case the

DHFL being such a financial service provider, was also resolved under the

IBC. Subsequently, after following the procedure laid down under the

Impugned Rules, several meeting of the Committee of Creditors (hereinafter

referred to as “COC”) were convened. As per the Impugned Rules,

depositors such as the Petitioner herein were being represented by an

authorised representative during the course of the COC meetings.

Thereafter, the COC approved the plan floated by one, Piramal Capital and

Housing Finance Limited, with an exceeding majority of 93.65% votes in its

favour. It is pertinent to note that under the successful Resolution Plan, the

Petitioner Trust is entitled for a refund of about 20-25% of the admitted

claim amount. Upon being entitled for a refund of only a miniscule sum, the

Petitioner Trust is aggrieved by the initiation of the insolvency process

under the Impugned Rules, as opposed to the process envisaged under the

RBI Act.

4. The contention of the Petitioners herein is that as the Impugned Rules

brought financial service providers within the ambit of the IBC, small

depositors and financial service providers were hit inasmuch as they were

unable to recover their investment. It is also the contention of the Petitioners

that in the present case, the State Bank of India has more than 90% stake in

the Committee of Creditors and Resolution Plan is only under the dictum of

W.P.(C) 1273/2021 Page 4 of 33

SBI and the approved plan does not take into account the grievances of the

small scale creditors in such NBFCs which are going through a corporate

insolvency process. It is, therefore, the contention of the Petitioners that

these rules have been framed in violation of the rules guaranteed to such

public depositors which though are in large number but have very small

amounts in the NBFCs under the various provisions of RBI Act and the

National Housing Bank Act, 1961 (hereinafter referred to as “NHB Act”).

5. It is the principal contention of the learned counsel for the Petitioner

that the effect of the rules which are impugned in this Writ Petition is that it

nullifies the rights of depositors guaranteed under Section 45-QA of the RBI

Act and Section 36-A of the NHB Act which assures that the depositors are

to be repaid the value of their deposits. It is contended that the process

envisaged under IBC takes away the “vested rights” of public depositors.

6. It has further been contended by the learned Counsel for the Petitioner

that as the insolvency process results in the imposition of a moratorium

under Section 14 of the IBC, depositors are debarred from initiating

proceedings against the Corporate Debtor. It is further contended that the

grievances of small financial creditors are never heard during the

proceedings.

7. It is also the contention of the learned Counsel for the Petitioner that

Section 45MBA of the RBI Act would prevail over provisions of the IBC in

light of the non-obstante clause in Section 45MBA of the RBI Act. The

Petitioner has contended that since Section 45MBA of the RBI Act was

enacted “later in time”, it would prevail over the provisions of the IBC. In

this regard, the learned Counsel for the Petitioner has placed reliance upon

W.P.(C) 1273/2021 Page 5 of 33

the Integrated Finance Company Limited v. Reserve Bank of India, (2015)

13 SCC 772.

8. Reliance has been placed upon by the judgments titled Lord Krishna

Sugar Mills Ltd. v. Union of India, (1960) 1 SCR 39, and Cellular Operators

Assn. of India v. TRAI, (2016) 7 SCC 703 to argue that while adjudging

the constitutionality of a subordinate legislation, the Court ought to take into

account the relative restrictions and advantages of laws which form part of a

single scheme.

9. Per contra, learned Counsel for the Reserve Bank of India i.e

Respondent Nos. 3 and 4, has stated that the RBI is the primary statutory

authority which is entrusted with the responsibility of regulating the banking

sector. The counsel for Respondent Nos. 3 and 4 has stated that although

RBI has issued various guidelines to ensure that NBFCs have adequate

capital base to repay deposits, the deposits made with NBFCs still do not fall

within the purview of the Deposit Insurance And Credit Guarantee

Corporation Act, 1961. This implies that deposits with NBFCs are riskier

than those in banks. Hence, it is the contention of Respondent Nos. 3 and 4

that Section 45-QA of the RBI Act and Section 36-A of the NHB Act simply

underscores the contractual liability of the NBFC to its depositors.

10. The Respondent Nos. 3 and 4 have further argued that a perusal of

Section 45MBA of the RBI Act indicates that it is simply an enabling

section and is not mandatory in nature. It is submitted that since RBI is the

primary regulator for banking, it had the discretion to invoke the insolvency

under the provisions of the IBC, which envisage a more detailed and

comprehensive resolution process.

W.P.(C) 1273/2021 Page 6 of 33

11. It has further been contended by the counsel for the Respondent Nos.

3 and 4 that the laws related to economic activities are to be given greater

latitude as there exists no straight jacket formula to deal with economic

issues. Further, due deference is supposed to be given to the judgment of

experts, and that Courts should refrain from substituting their judgment in

place of experts. In this regard, reliance has been placed upon the following

judgments:-

i. R.K. Garg v. Union of India, (1981) 4 SCC 675;

ii. Peerless General Finance and Investment Co. Limited v.

Reserve Bank of India, (1992) 2 SCC 343;

iii. Shri Sitaram Sugar Co. Ltd. and Another v. Union of India

andOrs., (1990) 3 SCC 223;

iv. Prag Ice & Oil Mills v. Union of India, AIR 1978 SC 1296;

v. P.T.R. Exports (Madras) (P.) Ltd. v. Union of India, AIR1996

SC 346; Balco Employees' Union (Regd) v. Union of India,

(2002) 2 SCC 333; Bhavesh D. Parish v. Union and India,

(2000) 5 SCC 471.

12. DHFL i.e. Respondent No. 6 and Mr. R. Subramaniakumar i.e. the

administrator of DHFL (hereinafter referred to as “Respondent No. 7”)

raised the preliminary objection that although the Petitioner has challenged

constitutionality of the Impugned Rules and Notification, the real intent of

the Petitioner was otherwise. It is the submission of the Respondent Nos. 6

and 7 that the instant Writ Petition is an oblique method of challenging the

approved resolution plan, for which the NCLAT is the appropriate forum.

13. The learned Counsel for the Respondent Nos. 6 and 7 have brought to

the attention of this Court that 97 deposit holders had also approached the

W.P.(C) 1273/2021 Page 7 of 33

Hon’ble Supreme Court in Vinay Kumar Mittal & Ors. v. Dewan Housing

Finance Corporation Ltd. Mumbai & Ors., (2020) 11 SCC 288 where the

Hon’ble Supreme Court on 30.01.2020 upheld the CIRP process of DHFL/

Respondent No. 6.

14. Learned Counsel for the Respondent Nos. 6 and 7 also pointed out

that the Petitioner can approach the NCLT, under Section 60(5) of the

NCLT, if it is aggrieved by the manner in which its claims have been dealt

with under the approved Resolution Plan. It is stated that Section 60(5) of

the IBC ensures that only the NCLT has jurisdiction over proceedings by or

against a corporate debtor. In this regard, the reliance has been placed upon

Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.

15. Learned Counsel for Respondent No. 8 i.e. the COC has sought to

argue that the Impugned Rules and Notification are neither bad in law, nor

in conflict with the provisions of the RBI Act or the NBH Act. In this

regard, the learned Counsel has placed reliance upon the report dated

October 4, 2019, of the Sub-Committee of the Insolvency Law Committee

for Notification of Financial Service Providers under Section 227 of the

Code (hereinafter referred to as the “ILC Report”). A perusal of the ILC

report indicates that the Impugned Notification and Rules were enacted after

careful consideration, and after duly considering the pre-existing regulations

of the RBI Act.

16. Learned Counsel for Respondent Nos. 3 and 4 added that the assertion

that the no-objection granted by the RBI will result in the depletion in the

value of public deposits is baseless and ought to be outrightly rejected. It is

argued that the RBI gave its approval to a resolution plan which had been

approved by 93.65% of the COC, and is binding upon all stakeholders,

W.P.(C) 1273/2021 Page 8 of 33

including dissenting creditors. In this regard, reliance is placed upon

Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta

&Ors., (2020) 8 SCC 531.

17. The learned Counsel has also pointed out that the Petitioner has failed

to challenge Section 227 of the IBC but has only challenged the Impugned

Rules and the Impugned Notification, which is untenable in law. The

counsel for Respondent No. 8 has also argued that the deposit holders do not

have a right to claim to full repayment. In this regard, attention is drawn to

Section 12 of the Banning of Unregulated Deposit Schemes Act, 2019 which

categorically makes the repayment of deposits subject to the rigours of inter

alia the IBC.

18. The learned Counsel for the Union i.e. Respondent No. 1, after going

through the scheme of the IBC, submitted that the objective of the Impugned

Rules and Notification was to provide a framework for the insolvency of

Financial Service Providers, and that due process was followed in the

formulation of the same.

19. In his rejoinder, the ld. Counsel for the Petitioner has reiterated that

the depositors will only get a refund of about 20-25% of their claim amount,

and that this indicates an abdication of administrative discretion by the RBI.

It has been argued that this abdication of power is more evident from the

RBI’s submissions that deposits in NBFCs are riskier. It has also been

highlighted that while the RBI’s role under the IBC is relegated to being a

mere spectator, it plays the primary role of ensuring regulatory oversight

under the RBI Act, and NHB Act.

W.P.(C) 1273/2021 Page 9 of 33

20. The Petitioner further submitted that the ILC Committee had

categorically discussed the non-viability of resorting to the IBC for

systematically important entities such as DHFL.

21. Heard the arguments advanced by the counsel for the Petitioner, and

Respondents, and perused the material on record.

22. The legal matrix, as relevant to the instant Writ Petition, spans three

principal legislations namely, the RBI Act, the NHB Act and the IBC. The

law governing NBFCs at various points in time has been delineated below:-

a. On 01.12.1964, Chapter III-B titled ‘Provisions Relating to Non-

Banking Institutions Receiving Deposits and Financial

Institutions’ was inserted in the RBI Act. Vide this amendment,

the RBI gained supervisory authority over, inter alia, non-banking

financial institution (hereinafter referred to as “NBFIs/NBFCs”),

as defined under Section 45-I (a) of the RBI Act.

b. On 09.01.1997, as the previous amendments were considered to

be inadequate to regulate NBFIs, Sections 45-IA (Requirement of

registration and net owned fund), 45-IB (Maintenance of

percentage of assets), 45-IC (Reserve Fund), 45-JA (Power of

Bank to determine policy and issue directions), 45-MB (Power of

Bank to prohibit acceptance of deposit and alienation of assets),

45- NC (Power of Bank to exempt) and 45-QA (Power of

Company Law Board to order repayment of deposit) were also

inserted in Chapter III-B of the RBI Act.

c. On 18.06.1997, vide Notification DFC (COC) No. 112/ED(SG)-

97, the RBI exempted NBFIs, as defined in Section 2(d) of the

NHB Act from the application of Chapter III-B of the RBI Act.

W.P.(C) 1273/2021 Page 10 of 33

d. On 12.06.2000, certain Sections namely, Sections 29-A

(Requirement of registration and net owned fund), 29-B

(Maintenance of percentage of assets), 29-C (Reserve Fund) and

36-A (power to order repayment of deposit) were inserted in the

NHB Act. It is pertinent to note that these Sections were

analogous to Sections 45-IA, 45-IB and 45-IC, Section 45-QA of

RBI Act. Hence, the regulatory power as had previously existed

with the RBI was now to be exercised under the NHB Act.

e. Thereafter, on 28.05.2016, the Central Government notified the

Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) to

consolidate and amend the laws relating to reorganisation and

insolvency resolution of corporate persons, partnership firms and

individuals in a time-bound manner. The provisions of the IBC, as

relevant to the instant Writ Petition are as follows:-

“Section 227 - Power of Central Government to notify

financial service providers, etc

[Notwithstanding anything to the contrary 2[contained

in this Code] or any other law for the time being in

force, the Central Government may, if it considers

necessary, in consultation with the appropriate

financial sector regulators, notify financial service

providers or categories of financial service providers

for the purpose of their insolvency and liquidation

proceedings, which may be conducted under this

Code, in such manner as may be prescribed.]

[Explanation. -- For the removal of doubts, it is hereby

clarified that the insolvency and liquidation

proceedings for financial service providers or

categories of financial service providers may be

W.P.(C) 1273/2021 Page 11 of 33

conducted with such modifications and in such manner

as may be prescribed.]”

“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.”

“239. Power to make rules.

(1) The Central Government may, by notification, make

rules for carrying out the provisions of this Code.

(2) Without prejudice to the generality of the

provisions of sub-section (1), the Central Government

may make rules for any of the following matters,

namely,

xxx

(zk) the manner of conducting insolvency and

liquidation proceedings under Section 227.”

(emphasis supplied)

f. The IBC did not regulate the insolvency of NBFIs when it was

enacted. However, Section 227, read with Section 239 of the IBC

gave the Central Government the power to notify ‘financial

service providers’ to carry out their insolvency under the IBC, and

enact Rules to regulate the procedure as well.

g. On 01.08.2019, the Finance (No. 2) Act, 2019 came into force.

Thereafter, on 09.08.2019, vide Chapter VI of the Finance Act,

2019, Section 45MBA was notified under Chapter III-B of the

RBI Act. Pertinently, Section 45MBA(2) gave the RBI the power

W.P.(C) 1273/2021 Page 12 of 33

to frame schemes for the reconstruction of NBFCs. The relevant

Section reads as under:-

“45MBA. Resolution of non-banking financial

company.--

(1) Without prejudice to any other provision of this Act

or any other law for the time being in force, the Bank

may, if it is satisfied, upon an inspection of the Books

of a non-banking financial company that it is in the

public interest or in the interest of financial stability so

to do for enabling the continuance of the activities

critical to the functioning of the financial system, frame

schemes which may provide for any one or more of the

following, namely:--

***

(b) reconstruction of the non-banking financial

company;.'

h. Thereafter, on 15.11.2019, the Central Government in exercise of

its powers under Section 227 read with Section 239(zk) of the

IBC, notified the Impugned Rules to govern the insolvency

resolution and liquidation of Financial Service providers/NBFCs.

The Impugned Rules were to apply to such categories of financial

service providers, as may be notified by the Central Government

under section 227.

i. On 18.11.2019, the MCA/Respondent No. 1 under exercise of its

power under section 227 of the IBC, notified one such financial

service provider i.e NBFCs, having assets of Rs. 500 crore or

more. The relevant excerpt of the notification is set out below:-

W.P.(C) 1273/2021 Page 13 of 33

“S.O. 4139(E).—In exercise of the powers conferred by

section 227 of the Insolvency and Bankruptcy Code,

2016 (31 of 2016), the Central Government in

consultation with the Reserve Bank of India hereby

notifies as under:

The insolvency resolution and liquidation proceedings

of the following categories of financial service

providers shall be undertaken in accordance with the

provisions of the Insolvency and Bankruptcy Code,

2016 read with the Insolvency and Bankruptcy

(Insolvency and Liquidation Proceedings of Financial

Service Providers and Application to Adjudicating

Authority) Rules, 2019 (in this notification referred to

as the ‘Rules’) and the applicable Regulations....”

j. By virtue of the above, insolvency and liquidation proceedings of

NBFIs, with asset size of Rs.500 crore or more, could be

undertaken under the Impugned Rules.

k. On 19.11.2019, vide Notification No. DOR.047/CGM(MM)-2019,

the earlier notification dated 18.06.1997 (which exempted housing

finance institutions from Chapter III-B of the RBI Act) was

withdrawn. This implies that inter alia Section 45MBA of the RBI

Act could be exercised to govern NBFCs, such as DHFL.

23. NBFC has been defined under both, the NHB Act, and the RBI Act.

Further, as they are banking institutions, the RBI is the primary regulator for

NBFCs. The Impugned Rules have been formulated under the IBC and seek

to subject financial service providers including NBFCs, to the resolution

process as envisaged under the IBC. The Petitioner has challenged the

Impugned Rules on the ground that they are in the teeth of certain sections

of the RBI Act and NHB Act, and consequently that they take away certain

vested rights of depositors, such as the Petitioners herein.

W.P.(C) 1273/2021 Page 14 of 33

24. It is trite law that the Impugned Rules being subordinate legislation,

can be challenged on certain well established principles. The Supreme Court

in State of T.N. v. P. Krishnamurthy, (2006) 4 SCC 517, has laid down the

parameters of judicial review of subordinate legislation as under:-

“15. There is a presumption in favour of

constitutionality or validity of a subordinate legislation

and the burden is upon him who attacks it to show that

it is invalid. It is also well recognised that a

subordinate legislation can be challenged under any of

the following grounds:

(a) Lack of legislative competence to make the

subordinate legislation.

(b) Violation of fundamental rights guaranteed under

the Constitution of India.

(c) Violation of any provision of the Constitution of

India.

(d) Failure to conform to the statute under which it is

made or exceeding the limits of authority conferred by

the enabling Act.

(e) Repugnancy to the laws of the land, that is, any

enactment.

(f) Manifest arbitrariness/unreasonableness (to an

extent where the court might well say that the

legislature never intended to give authority to make

such rules).

25. The judicial pronouncements made it clear that while there exists a

presumption of constitutionality in favour of the Impugned Rules, a

successful challenge to them can be levelled on grounds such as, the lack of

legislative competence, violation of fundamental rights, repugnancy to the

other laws and manifest arbitrariness/unreasonableness.

26. The primary challenge of the Petitioner is that the Impugned Rules are

W.P.(C) 1273/2021 Page 15 of 33

repugnant to the RBI Act, and the NHB Act. The ld. Counsel for the

Petitioner draws attention to Section 45Q of the RBI Act which contains a

non-obstante clause to the effect that Chapter III of the RBI Act would have

effect notwithstanding anything inconsistent contained in any other law.

Further reliance has been placed upon Section 45MBA of the RBI Act

which categorically states that without prejudice to any other provision, the

RBI is empowered to make regulations for the reconstruction of inter alia

NBFCs. It is the contention of learned Counsel for the Petitioner that RBI

Act which contains a non-obstante clause, and is the special statute

governing NBFCs must prevail over the IBC, which is a general statute.

Therefore, it is argued that the Impugned Rules are inconsistent with Section

45Q of the RBI Act, and are ultra vires.

27. The Impugned Rules have been framed under the powers granted

under Section 227 read with Section 239 (2) (zk) of the IBC. Section 239 (2)

of the IBC gives the Central Government the power to make rules to govern

the insolvency process. Under Section 227, the Central Government has

categorically been empowered to notify appropriate financial service

providers to enable their insolvency process to be carried out under the

Code.

28. It is pertinent to reproduce the observations in the ‘Report Of The

Sub-Committee Of The Insolvency Law Committee For Notification Of

Financial Service Providers Under Section 227 of The Insolvency And

Bankruptcy Code, 2016, which reads as under:-

“FRAMEWORK FOR FACILITATING THE

RESOLUTION OF FSPs

W.P.(C) 1273/2021 Page 16 of 33

In light of the critical services provided by many FSPs

and the impact that their failure can have on the

economy, resolution frameworks, particularly for

certain kinds of FSPs, such as NBFCs and HFCs,

assume great significance. As per the latest financial

stability report of the RBI released on June 27, 2019

(FSR)20, NBFCs are the largest net borrowers of

funds from the financial system with gross payables of

around INR 8,446 billion and gross receivables of

around INR 723 billion as at March-end 2019. The

highest funds have been received from scheduled

commercial banks, followed by AMC-MFs and

insurance companies. The FSR further notes that

NBFCs depend largely on public funds which account

for seventy percent of the total liabilities of the sector.

Bank borrowings, debentures and commercial papers

are the major sources of funding for NBFCs

Recently, the Finance (No. 2) Act, 2019 has conferred

certain additional resolution powers on the RBI in

relation to NBFCs by amending the Reserve Bank of

India Act, 1934. Such powers include: (i) removal of

directors of NBFCs on grounds of public interest, to

prevent the affairs from being conducted in a manner

detrimental to the interests of depositors or creditors,

in the interest of financial stability or for securing

proper management; (ii) supersession of the board of

directors on the grounds specified in (i) and

appointment of an administrator for a specified

period; and (iii) framing schemes which may provide

for amalgamation, enabling creation of a bridge

institution for transferring the viable part of the

business to it, reconstruction of the NBFC, etc. These

W.P.(C) 1273/2021 Page 17 of 33

schemes may be prepared in public interest, in the

interest of financial stability or enabling the

continuance of the activities if it is critical to the

functioning of the financial system.

In light of the factors mentioned above and the

possibility of a contagion effect in case of failure of

NBFCs and HFCs, the resolution framework for such

entities needs to be re-evaluated. As highlighted

earlier, currently, India does not have a specialized

and consolidated resolution framework for FSPs.

The Finance (No. 2) Act, 2019 has also amended the

National Housing Bank Act, 1987 and conferred

certain powers for regulation of HFCs with the RBI.

After reviewing the regulatory framework applicable to

HFCs, the RBI will issue revised regulations in due

course. Till the RBI issues a revised framework, HFCs

must comply with the directions and instructions issued

by the National Housing Bank.

While the recent amendments might help the RBI in

resolving at least some FSPs under distress, the

resolution framework for FSPs in general remains

uncomprehensive, with disparate powers conferred

on various financial sector regulators across several

statutes. Even the recent amendments to the Reserve

Bank of India Act, 1934 remain untested. Further,

post enactment of the IBC, an event of default is no

longer a ground for filing an application for winding

up under the Companies Act, 2013. Consequently, the

stakeholders of FSPs are left with no effective remedy

against a defaulting FSP.

W.P.(C) 1273/2021 Page 18 of 33

Comparatively, the resolution framework for non-FSPs

under the IBC is working reasonably well. Since the

Parliament in its wisdom has provided the flexibility

for the IBC to be used for insolvency resolution of

FSPs and even the FRDI Bill had envisaged the

application of the IBC to certain categories of FSPs

while formulating a dedicated framework for

resolution of FSPs, there is a clear case for allowing

some FSPs to be resolved under the IBC to the extent

possible, as under:

1. Where the business and regulation of an FSP is not

different from that of a corporate debtor currently

being resolved under the IBC, the FSP should be

resolved under the normal process of the IBC;

2. Where the business and regulation of an FSP is

fairly different from that of a corporate debtor

currently being resolved under the IBC, the FSP

should be resolved under the IBC with appropriate

modifications; and

3. Where the business and regulations of an FSP is

substantially different from that of a corporate debtor

currently being resolved under the IBC, the FSP may

be not resolved under the IBC.” (emphasis supplied)

29. In light of the foregoing, it is abundantly evident that the Central

Government had the occasion to go through, and extensively evaluate the

powers granted to the RBI under Section 45MBA of the RBI Act. It is only

after carefully considering the pre-existing framework under the RBI Act,

and noting its various shortcomings, did the legislature in its wisdom enact

the Impugned Rules and Notification, and decide to subject a NBFC to the

W.P.(C) 1273/2021 Page 19 of 33

rigours of the IBC. Hence, this Court finds no force in the argument of the

Petitioner that the provisions of the RBI would prevail over the IBC.

30. As it appears, this Court needs to examine the scheme of the statutes

in the context of the controversy presented before it. The IBC is a special

statute to streamline and consolidate the insolvency process of various

companies and institutions and also to ensure that the assets of the Corporate

Debtor are maximized. While there is no doubt that the RBI Act principally

governs financial institutions, including NBFCs, it is by no stretch of

imagination a special statue in respect of insolvency.

31. The legislative intent in introducing the IBC can be gathered from the

Statements of Objects and Reasons of the IBC, as reproduced below:-

"Statement of Objects and Reasons.—There is no

single law in India that deals with insolvency and

bankruptcy. Provisions relating to insolvency and

bankruptcy for companies can be found in the Sick

Industrial Companies (Special Provisions) Act, 1985,

the Recovery of Debt Due to Banks and Financial

Institutions Act, 1993, the Securitisation and

Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 and the Companies Act,

2013. These statutes provide for creation of multiple

fora such as Board of Industrial and Financial

Reconstruction (BIFR), Debts Recovery Tribunal

(DRT) and National Company Law Tribunal (NCLT)

and their respective Appellate Tribunals. Liquidation

of companies is handled by the High Courts. Individual

bankruptcy and insolvency is dealt with under the

Presidency Towns Insolvency Act, 1909, and the

Provincial Insolvency Act, 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.

W.P.(C) 1273/2021 Page 20 of 33

2. The objective of the Insolvency and Bankruptcy

Code, 2015 is to consolidate and amend the laws

relating to reorganization and insolvency resolution of

corporate persons, partnership firms and individuals in

a time bound manner for maximization of value of

assets of such persons, to promote entrepreneurship,

availability of credit and balance the interests of all the

stakeholders including alteration in the priority of

payment of government dues and to establish an

Insolvency and Bankruptcy Fund, and matters

connected therewith or incidental thereto. An effective

legal framework for timely resolution of insolvency and

bankruptcy would support development of credit

markets and encourage entrepreneurship. It would also

improve Ease of Doing Business, and facilitate more

investments leading to higher economic growth and

development.

3. The Code seeks to provide for designating the

NCLT and DRT as the Adjudicating Authorities for

corporate persons and firms and individuals,

respectively, for resolution of insolvency, liquidation

and bankruptcy. The Code separates commercial

aspects of insolvency and bankruptcy proceedings from

judicial aspects. The Code also seeks to provide for

establishment of the Insolvency and Bankruptcy Board

of India (Board) for regulation of insolvency

professionals, insolvency professional agencies and

information utilities. Till the Board is established, the

Central Government shall exercise all powers of the

Board or designate any financial sector regulator to

exercise the powers and functions of the Board.

Insolvency professionals will assist in completion of

insolvency resolution, liquidation and bankruptcy

proceedings envisaged in the Code. Information

Utilities would collect, collate, authenticate and

disseminate financial information to facilitate such

W.P.(C) 1273/2021 Page 21 of 33

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."

32. The objective of the legislature in enacting the Code was to streamline

and consolidate the various laws that existed in relation to insolvency and

bankruptcy for companies and other financial institutions. The Apex Court

in Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India and Ors., (2019) 4

SCC 17, has held as under:-

“11. As is discernible, the Preamble gives an insight

into what is sought to be achieved by the Code. The

Code is first and foremost, a Code for reorganization

and insolvency resolution of corporate debtors.

Unless such reorganization is effected in a time-

bound manner, the value of the assets of such

persons will deplete. Therefore, maximization of

value of the assets of such persons so that they are

efficiently run as going concerns is another very

important objective of the Code. This, in turn, will

promote entrepreneurship as the persons in

management of the corporate debtor are removed and

replaced by entrepreneurs. When, therefore, a

W.P.(C) 1273/2021 Page 22 of 33

resolution plan takes off and the corporate debtor is

brought back into the economic mainstream, it is able

to repay its debts, which, in turn, enhances the viability

of credit in the hands of banks and financial

institutions. Above all, ultimately, the interests of all

stakeholders are looked after as the corporate debtor

itself becomes a beneficiary of the resolution scheme -

workers are paid, the creditors in the long run will be

repaid in full, and shareholders/investors are able to

maximize their investment. Timely resolution of a

corporate debtor who is in the red, by an effective legal

framework, would go a long way to support the

development of credit markets. Since more investment

can be made with funds that have come back into the

economy, business then eases up, which leads, overall,

to higher economic growth and development of the

Indian economy. What is interesting to note is that the

Preamble does not, in any manner, refer to liquidation,

which is only availed of as a last resort if there is

either no resolution plan or the resolution plans

submitted are not up to the mark. Even in liquidation,

the liquidator can sell the business of the corporate

debtor as a going concern. [See ArcelorMittal (supra)

at paragraph 83, footnote 3].”

33. Furthermore, in Innoventive Industries Ltd. v. ICICI Bank and Ors.,

AIR 2017 SC 4084 the Apex Court held as under:-

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

bring the insolvency law in India under a single unified

umbrella with the object of speeding up of the

insolvency process. As per the data available with the

World Bank in 2016, insolvency resolution in India

took 4.3 years on an average, which was much higher

when compared with the United Kingdom (1 year),

USA (1.5 years) and South Africa (2 years). The World

W.P.(C) 1273/2021 Page 23 of 33

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.

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:

…

253. 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…”

34. As has been noted by the Apex Court in Swiss Ribbons (supra), the

IBC sought to effect the resolution in a time bound manner to ensure that the

value of the assets of the Corporate Debtors does not deplete. The Code was

enacted as a beneficial legislation and was intended to put the Corporate

Debtor back on its feet, and is not a mere recovery legislation for aggrieved

creditors. Furthermore, as was categorically noted in Swiss Ribbons (Supra),

the moratorium imposed under Section 14 of the IBC is in the utmost

interest of the Corporate Debtor, and is imperative to protect the distressed

entity till such time a resolution is arrived at. Considering the objective of

the IBC, this Court finds no force in the argument of the Petitioner that the

Impugned Rules and Notification have extinguished the jurisdiction of the

NCLT thereby causing prejudice to the Petitioners.

W.P.(C) 1273/2021 Page 24 of 33

35. Further, the RBI has been the primary regulator of NBFCs under

Chapter III-B of the RBI Act since 1964. Being the primary regulator for

NBFCs, the RBI in its ‘Summary of Recommendations of The Task Force

On NBFCs’ noted that the existing legislative and regulatory framework

governing the insolvency of NBFCs required further refinement and

improvement because of the rising number of defaulting NBFCs, and also as

there was an urgent need for an efficient redressal mechanism for individual

depositors. It was also noted that the insolvency process for NBFCs

remained deficit as it was unable to prevent the Corporate Debtor’s assets

from depleting and also did not adequately benefit creditors. This discretion

accorded to the RBI has been underscored in the wording of Section

45MBA itself. The word “may” as opposed to ‘shall’ appears in Section 45

MBA of the RBI Act. This indicates that the Section is merely

enabling/directory and not mandatory in nature.

36. As has been noted above, the RBI is the primary regulator of NBFCs

and hence was well within its powers to apply its discretion to initiate the

insolvency process under the Impugned Rules or invoke the newly added

provisions under the RBI Act.

37. The Petitioner has argued that Section 45QA of the RBI Act read with

Section 36A of the NHB Act bestow upon depositors, such as the Petitioner,

the “vested right” to claim the entirety of their deposits. It is argued that the

Impugned Rules have extinguished these “vested rights” of depositors, such

as the Petitioner. In this regard, the relevant Sections reads as follows:-

“Section 45-QA of the Reserve Bank of India Act,

1934

W.P.(C) 1273/2021 Page 25 of 33

45QA. (1) Every deposit accepted by a non-banking

financial company, unless renewed, shall be repaid in

accordance with the terms and conditions of such

deposit.

(2) Where a non-banking financial company has failed

to repay any deposit or part thereof in accordance with

the terms and conditions of such deposit, the Company

Law Board constituted under section 10E of the

Companies Act, 1956 may, if it is satisfied, either on its

own motion or on an application of the depositor, that

it is necessary so to do to safeguard the interests of the

company, the depositors or in the public interest,

direct, by order, the non-banking financial company to

make repayment of such deposit or part thereof

forthwith or within such time and subject to such

conditions as may be specified in the order:

Provided that the Company Law Board may, before

making any order under this sub-section, give a

reasonable opportunity of being heard to the non-

banking financial company and the other persons

interested in the matter.

Section 36-A of the NHB Act

36-A. Power to order repayment of deposit. —(1)

Every deposit accepted by a housing finance

institution which is a company unless renewed, shall

be repaid in accordance with the terms and

conditions of such deposit.

(2) Where a housing finance institution which is a

company has failed to repay any deposit or part

thereof in accordance with the terms and conditions of

such deposit, such officer of the National Housing

W.P.(C) 1273/2021 Page 26 of 33

Bank, as may be authorised by the Central Government

for the purpose of this section (hereinafter referred to

as the “authorised officer”) may, if he is satisfied,

either on his own motion or on any application of the

depositor, that it is necessary so to do to safeguard the

interests of the housing finance institution, the

depositors or in the public interest, direct, by order,

such housing finance institution to make repayment of

such deposit or part thereof forthwith or within such

time and subject to such conditions as may be specified

in the order:

Provided that the authorised officer may, before

making any order under this sub-section, give a

reasonable opportunity of being heard to the housing

finance institution and the other persons interested in

the matter. (emphasis supplied)

38. Upon a perusal of the abovementioned Sections, it is evident that

these Sections lay down the procedure for repayment of deposit by a NBFC.

Section 45QA(1) directs that every deposit accepted by a NBFC, unless

renewed, shall be repaid in accordance with the terms and conditions of such

deposit. Section 45QA(2) states that in case a NBFC has failed to repay the

deposit, the Company Law Board shall, on its own motion or on an

application of the depositor, direct, the NBFC to repay such deposit or part

thereof forthwith. Section 36A of the NHB Act is analogous to Section

45QA of the RBI and is similarly worded.

39. In the considered opinion of this Court, the true import of the Sections

is not to create a “vested right” in favour of the depositors to necessarily

receive a full repayment of their deposits. A plain reading of Section 45-QA

W.P.(C) 1273/2021 Page 27 of 33

of the RBI Act and Section 36-A of the NHB Act indicates that they simply

underscore the contractual liability of the NBFC and provide for a redressal

mechanism for depositors to claim their money. Further, although the RBI

has issued various guidelines to ensure that NBFCs have adequate capital

base to repay deposits, the deposits made with NBFCs still do not fall within

the purview of the ‘Deposit Insurance And Credit Guarantee Corporation

Act, 1961’, thereby making them riskier.

40. In this regard, the Supreme Court in Kanaya Ram and Ors. v.

Rajender Kumar and Ors., AIR 1985 SC 371 has noted the following with

regard to a vested/accrued right:-

“... It has been held ever since the leading case of

Abbot v. Minister for Lands LR (1895) AC 425 that a

mere right to take advantage of the provisions of an

Act is not an accrued right. Abbot's case has been

followed by this Court in a number of decisions. In

such a situation, the Court is bound to take into

consideration the subsequent events and mould the

relief accordingly.”

(emphasis supplied)

41. Further, the Supreme Court in Howrah Municipal Corpn. and Ors. vs.

Ganges Rope Co. Ltd. and Ors., [2003]Supp 6 SCR 1212 has observed as

under:-

37. The argument advanced on the basis of so-called

creation of vested right for obtaining sanction on the

basis of the Building Rules (unamended) as they were

on the date of submission of the application and the

order of the High Court fixing a period for decision of

the same, is misconceived. The word 'vest' is normally

W.P.(C) 1273/2021 Page 28 of 33

used where an immediate fixed right in present or

future enjoyment in respect of a property is created.

With the long usage the said word 'vest' has also

acquired a meaning as "an absolute or indefeasible

right" [See K.J. Aiyer's 'Judicial Dictionary' (A

complete Law Lexicon), Thirteenth Edition].

The context in which respondent - company claims a

vested right for sanction and which has been accepted

by the Division Bench of the High Court, is not a right

in relation to 'ownership or possession of any property'

for which the expression 'vest' is generally used. What

we can understand from the claim of a 'vested right' set

up by the respondent-company is that on the baas of

Building Rules, as applicable to their case on the date

of making an application for sanction and the fixed

period allotted by the court for its consideration, it had

a 'legitimate' or 'settled expectation' to obtain the

sanction. In our considered opinion, such 'settled

expectation', if any, did not create any vested right to

obtain sanction. True it is that the respondent-

company which can have no control over the manner

of processing of application for sanction by the

Corporation cannot be blamed for delay but during

pendency of its application for sanction, if the State

Government, in exercise of its rule making power,

amended the Building Rules and imposed restrictions

on the heights of buildings on G.T. Road and other

wards, such 'settled expectation' has been rendered

impossible of fulfillment due to change in law. The

claim based on the alleged 'vested right' or 'settled

expectation' cannot be set up against statutory

provisions which were brought into force by the State

W.P.(C) 1273/2021 Page 29 of 33

Government by amending the Building Rulesand not

by the Corporation against whom such 'vested right'

or 'settled expectation' is being sought to be enforced.

The 'vested right' or 'settled expectation' has been

nullified not only by the Corporation but also by the

State by amending the Building Rules. Besides this

such a 'settled, expectation' or so-called 'vested right'

cannot be countenanced against public interest and

convenience which are sought to be served by

amendment of the Building Rules and the resolution

of the Corporation issued thereupon.

(emphasis supplied)

42. In Manish Kumar vs. Union of India (UOI) and Ors., (2021) 5 SCC

1, the Supreme Court has observed as under:-

“361. However, we cannot also lose sight of the fact that

the Legislature has power to impair and take away vested

rights. The limitation that flows, however, is from both

Article 14 and 19 read with Article 21. It flows from the

Doctrine that the action of the State must be fair and

reasonable. The question, as to validity of the

retrospective law, is a matter to be judged on a

consideration of the facts, the period of time, over which

the retrospective law operates, the impact of the law on the

vested rights, the public interest, the nature of the right,

which is the subject matter of the law and the terms of the

law.

362. The nature of the right involved in this case, is the

right of the financial creditors to move an application

Under Section 7. Though, Section 7 confers a right upon

the financial creditor to file the application, the

proceedings are one in rem. We have already dealt with

W.P.(C) 1273/2021 Page 30 of 33

the scope of the Code and the consequences it can produce

on the stakeholders and also the real estate project. The

Legislature was faced with the situation, where it felt that

the requirement, as to maintainability of the application

Under Section 7, must, in regard to pending applications,

be modified in the manner done. There is a determining

principle, namely, the perception from experience about

how the entire object of the Code would stand jeopardised

if applications already filed could go on even when a fair

and reasonable number of kindred souls are not available

to support it. Once there is a principle, it cannot be

capricious, excessive or disproportionate unless we find

the time given under the proviso is manifestly arbitrary. A

vested right under a statute can be taken away by a

retrospective law. A right given under a statute can be

taken away by another statute. We cannot ignore the fact

that there was considerable public interest behind such a

law. The sheer numbers, in which applications

proliferated, combined with the results it could produce,

cannot be brushed aside as an irrational or capricious

aspect to have been guided by in making the law. Being

an economic measure, the wider latitude available to the

Law Giver, cannot be lost sight of.”

(emphasis supplied)

43. It emerges that the mere right to take advantage of certain provisions

of an Act does not by itself create a vested right. Further, the legislature is

well within its right to create subsequent laws which may take away vested

rights. It also appears from a reading of Manish Kumar (Supra) that greater

latitude is to be awarded to the legislature in dealing with economic policies.

Considering this, this Court finds no force in the argument of the Petitioner

W.P.(C) 1273/2021 Page 31 of 33

that the impugned rules violate the Petitioner’s ‘vested rights’ supposedly

created under Section 45-QA(1) of the RBI Act or Section 36-A of the NHB

Act.

44. It also cannot be accepted that the Impugned Rules are

unconstitutional as they unjustly curtail the jurisdiction of the NCLT, and

the Board under NHB Act after the moratorium under Section 14 of the IBC

is imposed.

45. Further, it is trite law that the scope of judicial review in matters

relating to the financial and economic policies governed by special bodies,

such as the RBI, is narrow. In Peerless General Finance and Investment Co.

Limited and Ors. v. Reserve Bank of India and Ors., (1992) 2 SCC 343, the

Supreme Court has observed as under:-

“35. Before examining the scope and effect of the

impugned paragraphs 6 and 12 of the directions of

1987, it is also important to note that Reserve Bank of

India which is bankers' bank is a creature of Statute.

It had large contingent of expert advice relating to

matters affecting the economy of the entire country

arid nobody can doubt the bonafides of the Reserve

Bank in issuing the impugned directions of 1987. The

Reserve Bank plays an important role in the economy

and financial affairs of India and one of its important

functions is to regulate the banking system in the

country...

36. The function of the Court is to see that lawful

authority is not abused but not to appropriate to itself

the task entrusted to that authority. It is well settled

that a public body invested with statutory powers must

take care not to exceed or abuse Its power. It must keep

within the limits of the authority committed to it. It

must act in good faith and it must act reasonably.

W.P.(C) 1273/2021 Page 32 of 33

Courts are not to interfere with economic policy which

is the function of experts. It is not the function of the

Courts to sit in Judgment over matters of economic

policy and it must necessarily be left to the expert

bodies. In such matters even experts can seriously and

doubtlessly differ. Courts cannot be expected to decide

them without even the aid of experts. "

(emphasis supplied)

46. It is a well-established principle that this Court ought not to interfere

in matters of economic policy, for which competent and specialised bodies

such as RBI have been created. This Court can only strike down the

directions issued by the RBI upon being satisfied that the directions were

wholly unreasonable or violative of the Constitution or provisions of a given

statute. In the considered opinion of this Court, the MCA in consultation

with the RBI has taken a considered decision to resolve the financial

defaults of DHFL under the Impugned Rules. Hence, this Court finds no

reason to interfere with discretion exercised by the RBI.

47. In light of the foregoing, it is evident that the Impugned Rules operate

in their own sphere, and are not repugnant to or in the teeth of the provisions

of the RBI Act or NHB Act. Further, Section 45MBA is only directory in

nature, and does not mandate that the insolvency of an NBFC is carried out

under the RBI Act. In light of this, it cannot be said that both the Impugned

Rules and the Acts cannot be reconciled. Further, for matters concerning

insolvency, the IBC may prevail unless anything to the contrary is expressly

laid down by the RBI.

48. The Impugned Notification is simply procedural in nature, and lays

down the threshold of Rs. 500 Crore or more, as the asset value of a NBFC

W.P.(C) 1273/2021 Page 33 of 33

for the Impugned Rules to apply. The Central Government has issued this

Notification in pursuance of its powers under Section 227 of the Code, and

there is no infirmity in the same. Hence, this Court does not find occasion to

interfere with the Impugned Rules or Notification as the Petitioner has failed

to dislodge the presumption of constitutionality existing in their favour.

49. With these observations, the petition is dismissed, along with pending

application(s), if any.

SATISH CHANDRA SHARMA, CJ

SUBRAMONIUM PRASAD, J

AUGUST 1, 2022

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