Introduction

Companies in financial distressgenerate externalities on the environment in whichtheyoperate, thereby resulting inadverse impacts on various stakeholders, such ascreditors, shareholders, employees, and the economy as a whole In order to minimisesuch repercussions, the Indian Parliament hasenacted a series of legislations that eitherprovide for a rescue of distressed companiesor measures for creditors to efficaciouslyrecover the debt due to them.

This process has culminated more recently in the Insolvency and Bankruptcy Code, 2016 (“IBC” or the “Code”.

Briefly, the IBC comes into play when a company (referred to as a “corporatedebtor” has committed a default in payment obligations.

Either a financial creditor (such as a bank or financial institution that has lent funds to the corporate debtor, an operational creditor (such as a providerof goods or services or an employee, orthe corporate debtor itself, may initiate a corporate insolvency resolution processbefore the National Company Law Tribunal (NCLT.

Once the NCLT admitssuch an application, it is required to declare a moratorium on suits, proceedings, andother forms of legal actionagainst the corporate debtor.

The NCLT may appoint a resolutionprofessional (interim and thereafter, final who would take over themanagement of the affairsof the corporate debtor.

Any person (referred to as a “resolution applicant” may propose a resolution plan to rescue the corporate debtor Constitutional Conundrums Involving Corporate Insolvency

Such resolution plans may be considered andapproved by a requisite majority of a committee of creditors (CoC, which consistsonly of financial creditors.

Ultimately., after the NCLT approves the resolutionplan, it becomes binding on creditors, shareholders, employees, and otherstakeholders.

Appeals against orders of the NCLT lie to the National Company Law Appellate Tribunal (NCLAT, and thereafter to the Supreme Court This is a timebound process and, if a resolution isnot successful, the corporate debtor isdestined to end up in liquidation.

Within a short span of five years, notonlyhas the IBC undergone a multitude ofamendments, but both the original and amended legislation have been subject torecurrent constitutional challenges on several facets, calling upon the judiciary todetermine theinter se equities among various stakeholders against the touchstone of values enshrined in the Constitution Our goal in this chapter isto explore the tremendous volume of constitutional jurisprudence that the Indian Supreme Court has generated in the context of firms confronting a financial endgame scenario-.. Through our analysis of the case law, we find that the judiciary has adopted a facilitative and rather noninterventionist approach while determining the constitutionality of the IBC It has rendered utmost deference to the Indian Parliament and resisted secondguessing the legislative decisionmaking from a constitutional perspective Barring a handful of instances, the Supreme Court has generally upheld the constitutionality of the IBC and its several amendments, that too regardless of the constituency from which a challenge may have emanated The Court has playedan active role inpaving the way for the unhind ered implementation of India”s monumental corporate insolvency legislation At a broad level, the judicial philosophysurrounding the constitutionality of the IBC is understandable, especially given the socioeconomic implications of the novel legislation However, at a doctrinal level, the approachof the Supreme Court on matterspertaining to the constitutionality of specific provisions of the IBC, and its amendments, begets some element of critique In its zeal to ensure the success of the policy relating to an important component of the corporate and financial markets, the Court appears to have forsaken stringent adherence to constitutional principles in favour of ensuring satisfactory economic outcomes, on a widespread basis In the end, one may sum up the judicial philosophy relating to the constitutionality of the IBC as one in which pragmatism trumps do ctrine With this brief background, we analyse the jurisprudence emanating from the Supreme Court on the IBC.

Judicial Motivators for Legislative Deference

One may rationalise the Indian judiciary”s light-touch approach towards the constitutionality of the IBC on several considerations First, the Supreme Court has relied extensively on its constant refrain not to intervene in matters of economic policy The Court”s evaluation usually begins with the presumption of constitutionality, which imposes the burden on the challenger to demonstrate that a legislative provision violates the Constitution.

As to the level of scrutiny, the Court has made a clear distinction between legislation that is within the economic realm and statutes that affect personal life and liberty Admittedly, the Court”s enquiry as to the constitutionality of economic legislation is far more liberal as compared to statutes that affect fundamental human rights.

This approach is evident in Justice Nariman”s dictum inwhere he observes, “the ƒ experiment contained in the Code, judged by the generality of its provisions and not by socalled crudities and inequities ƒ passes constitutional muster”.

These observations constitute the hallmark of judicial scrutiny of the constitutionality of the IBC.

They recognise the “wide latitude” given to the Parliament in this matter to not only respond bylegislating on matters relating to the economy but also to mend any problems in the working of the legislation through appropriate amendments..

Hence, the judiciary has turned towards an approach that involves an aerial view of the constitutionality of the IBC, and it has shunned a microscopic examination that considers “mathematical precision or wooden equality”.

At this juncture, it is important to note that the Court”s approach towards the IBC is consistent with its past precedents on the question of constitutionality of economic legislation.

Illustratively, such a stance is visible in the context of other economic legislations such as the Reserve Bank of India Act, 1934,the Finance Constitutional Conundrums In volving Corporate InsolvencySwiss Ribbons Private Limited vUnion of India,

Act, 2003,and the Competition Act, 2002.

The Indian approach is also broadlyconsistent with other leading jurisdictions, such as the United States,the European Union,and the United Kingdom.

Although this approach was considered settled law, recent events have cast a doubt on this position In the matter of constitutionality of the “demonetisation” oflegal tender by the Government of India, the Supreme Court referredthe questionof “the scope of judicial review in matters relating to [the] fiscal and economic policyof the Government.” to a Constitution Bench.

Similarly, with respect to thepending matters relating to the constitutionality of the “farm laws”,the Supreme Court ordered a stay on the implementation of these legislationswithout anyobservations on the factors that are evaluate d while ordering an interim stay, such aswhether the statute,In fact, some commentators have argued that the Supreme Court has exhibited a more liberal stance towards the imposition of a staytowards economic legislation such as thefarm laws asopposed to noneconomicstatutes.

Given these developments, there appears to be a contrast between the Court”s approach to the IBC compared toother economic legislations in the recentpastprima facie, appears to be unconstitutional, the balance of convenience, and public interest.

Second, the rulings of the Supreme Court are awash withits consciousness ofthefact that the IBC emerged in the wake of arguablyfailedlegislationssuchasthe SICA.

The nobility of the purpose and object of the IBC, and the fear of the possiblefailure of another corporate rescue legislation, appear to have played a key role in a somewhat benevolent assessment of its constitutionality Hence, ingrained in theconstitutional analysis of the IBC, is itshistorical evolution and concern regarding theexigencies it soughtto mitigate The Court has alsoplaced significant reliance onthepreparatory work that went into the enactment of the IBC and its key amendments.

At the same time, itis important to draw a distinction in the realm of theinterplay of judicial adjudication and committee reports The initial set of cases suchasHere, the committees” role tended typically to affirm oneinterpretation from a range of possible interpretations that arose in the working of the IBC Put simply, these exercises were interpretational and doctrinal and did notconcern the exposition of policy For instance, after the enactment of the IBC, a questionarose as to whether insolvencyapplicationscould be initiated in relation totimebarred debts Prior to the Supreme Court”s adjudicationof the question., the Ministry of Corporate Affairs releasedthe ILC Report 2018, which stated tworeasons to conclude that timebarred debts were outside the purview of the IBC.

First, it stated that the Limitation Act has been historically applicable to debts evenin case of legislationspredating the IBC, such as the Companies Act, 1956, whereincourts excluded timebarred debts from winding up proceedings Second, allowingtimebarred debts to be the basis of insolvencyproceedings is in conflict with otherprovisions of the IBC.

Constitutional Conundrums In volving Corporate InsolvencyEssar Steel and Innoventive Industries, relied on committee reports and other legislative documents, such as the BLRC Report thathad formed the basis of the enactment of the IBC These documents largely focused on the policyobjectives of the (then proposed IBC Bill However, after the enactment of the IBC, questions arose as to the operation and doctrinal interpretation of several provisions of the IBC To resolve these ambiguities, several committees were formed after the enactment of the IBC.

Based on the above reasoning, the ILC Report 2018 observed, Given that the intent was not to package the Code as a fresh opportunity for creditorsand claimants who did not exercise their remedy under existing laws within theprescribed limitation period, the Committee thought it fit toinsert a specific sectionapplying the Limitation Act to the Code the relevant entry under the Limitation Actmay be on a caseto case basisƒ-..

It is interesting that the ILC Report 2018 made observations with respect to theintentof the unamended IBC without any reference to prelegislative eventsormaterial The discussion was largely consequentialist and doctrinal Subsequently., the Parliamentpassed the Insolvency and Bankruptcy Code (Second Amendment Act, 2018 (the “Second Amendment” andintroduced Section 238A which ignoredtimebarred debts However, Section 238A was not given retrospective effect from the date of the commencement of the IBC Therefore, with respect to the timeperiod betweenthe enactment of the IBC and the Second Amendment, it was stillunclear whether timebarred debts were excluded The Supreme Court put an endto thiscontroversy inby holding that the timebarred debts were excluded from the veryinception of the IBC It observed, “the Insolvency Law Committee Report of March 2018 makes it clear that the object of the Code from the very beginning was not toallow dead or stale claims to be resuscitated”.

Evidently, the Court relies on the IL C Report 2018, among other grounds, toarrive at the conclusion thattimebarred debts were outside the purview of the IBC from its very inception Thisis a notabl e development Reliance on the ILC Report 2018, to the extent of determining the purport of the provisions introduced by the Second Amendment is justified and is common practice since it is the veryrecommendations of the ILC Report 2018 that culminated in the Second Amendment However, on the issue of interpretation of the unamended IBC, thereliance on reports that were prepared after the enactment of the IBC is a strikingdevelopment given that such reports are no t prelegislative material and were notreferred toduring the process of the enactment of the IBC in its original form Thisraises the question as to whether a report preparedbya group of experts after theenactment of a legislation can ever be understoodto be reflective of the intentionthat the Members of Parliamenthad at the time of the passing of the enactment.

The rationale behind the elevation of a mereadministrative or ministerial opinion to the status of parliamentar y intent is unclear.

BK. Educational Services Private Limited vParag Gupta and Associates,

Although the constitutionality of the IBC was not inquestioninwas rather limited Illustratively, one of the consultations offered a mere 14 daysto the publicto sendin theirsuggestions.

Constitutional scrutiny requires greater recognition ofprocessorientedmatters, as much as substantive issues.

Fourth, apart from its (arguably excessive reliance oncommittee reports, animportant factor that has influenced the Court”s decisions is that a key aim of the IBC is “to bring the insolvency law in Indi a under a single unified umbrella with theobjective of speeding up the insolvency process”-..

More importantly, the fact that the IBC is a legislation that enables the rescue and revival of the corporate debtorrather than one thatequipsthe creditors to engage in a speedier recovery, has been at the forefront of the determination of its constitutionality.

Given that the resolutionprocess under the IBC is anit is necessary to consider theinterests of all stakeholders relating to the corporate debtor.

All of these, according Constitutional Conundrums In volving Corporate InsolvencyB.KEducational, this decision raises issues with respect to future decisions invo lving consti tutional challenges to the IBC In decisions such as Swiss Ribbons and Manish Kumar, the Court extensively relied on committee reports to determine the purview and intent behind the provisionsunder constitutional challenge In these decisions, the respective committee reports predated the enactmen t of the respective provisions Going forward, it will be interesting to see whether the Court will rely upon committee reports that are prepared after the passage of the relevant legislative provisions under constitutional challenge infuture decisions Third, the judicial deference to legislative and executive efforts in the field of corporate insolvency ought to be viewed in the light of amendments to the law that are occurring at lightning speed This is no t onlybound to caus e uncertainty for all participants in the legal regime but the motivation ofexpediencycould have the effect of shortchanging due process and impinging upon the rule of law.-. For instance, the IBC was amended six times, however, only th ree ofthose amendments are relatable to reports of committees that made recomm endations Effective consultation with stakeholders was carried out on even fewer occasions Even when stakeholders were consulted, the opportunity for effective consultation in rem proceeding,

Constitutional Resolution of Conflicts between Corporate Debtors and Creditors

Fifth, the judiciary has taken cognisanceof the socioeconomic realities in thefinancial sector, and thereby adopted a contextualanalysisof constitutionalprinciplesrelating to the IBC For instance, the Supreme Court has expounded on the gravity of the problem surrounding nonperforming assets that has gripped Indian banks, and its consequential impact on the economy as a whole.

It has evenpaid heed to India”s rankings in the World Bank”s Doing Business Report asitrelates to resolving corporate insolvency.

Similarly, it has applauded the seemingsuccess of the IBC in comparison to its predecessor legislation and noted that it hasresulted in an enhanced flow of financial resources to the commercial sector.

Thejudicial deference to the IBC abounds in the oftquoted observation of the Supreme Court that “the experiment conducted in enacting the Code is proving to be largelysuccessful The defaulter”s paradise is lost In its place, the economy”s rightfulposition has been regained”.

In that sense, one may view the judiciary as a stakeholder inensuring the success of the IBC, which is a piece of beneficiallegislation of which public interest is an integral part.

After an assessmentof the motivations behind the philosophy adopted by the judiciary in assessing the constitutionality of the IBC, we now transition to anexploration of some of the more specific issues that arose for consideration beforethe courts, and how they were resolved.

Corporate debtors who face legal actionfrom creditors tend to resort toconstitutional challenges to forestall such action It has been typical for debtors tochallenge the constitutionality of debt recovery legislation where the debtorcreditorconflict is the most prominent.

Given the multiplicityof actors in a corporate

Constitutional Resolution of Conflicts among Creditors

The very first constitutional challenge to the IBC arose inPerhaps one of the most noticeable judicialsetbacks to the implementation of the IBC arose inThe Parliament amended the Banking Regulation Act, 1949 (“BR Act” to introduce Section 35AA which empowers the Central Government toauthorise the Reserve Bank of India (RBI to issue directions to any bank to initiate the insolvency processunder the IBC against a corporate debtor incase of a default The RBI consequentlyissued a circular calling uponbanks to initiate proceedings under the IBC in case ofdefaults bytheir corporate debtors Whilethe Supreme Court upheld the validity of the legislative framework of Section 35AA of the BR Act, it struck down the RBI circular as the RBI acted without the required prior authorisation of the Central Government, and because the RBI”s mandate related to banks initiating proceedingsunder the IBC for defaults generally, rather than in relation to specific defaults byidentified corporate debtors.

In all, barring the few instances discussed herein, the IBC has not generated muchtraction in relation toconflicts betweenthe corporate debtor on the one hand andthe creditors on the other that have called constitutional principles into application.

However, the scenario has played out rather differently in relation to conflictsamong various categories of creditors, to which we now turn.

The IBC is unique in that it makes a star k distinction between financial creditors andoperational creditors While both types of creditors can initiate insolvency proceedingsunder the IBC, only financialcreditors enjoy decisionmaking powers by way of a seat Constitutional Conundrums In volving Corporate InsolvencyInnoventive Industries, wherein the corporate debtor challenged the le gislative competence of the Parliament to enact the IBC The debtor was already under the protection of a moratorium issued under a state legislation, namely the Ma harashtra Relief (Undertakings Special Provisions Act, 1956 (the “Maharashtra Act”. Since both the IBC and the Maharashtra Act are traceable to the Concurrent List in the Seventh Schedule to the Constitution, the Supreme Court found that the IBC is a comprehensive code on matters of corporate insolvency and that the Maharashtra Act is repugnant to the IBC, and hence it cannot “stand in the way of the corporate insolvency resolution process” under the IBC Dharani Sugars and Chemicals Limited vUnion of India.

The starting point for the analysis is whether such distinctions are sustainable in theface of Article 14 of the Constitution Here, courtsfirst consider whether there is anintelligible differentia between the different types of creditors and whether theclassification bears a rational nexus to the object that IBC seeks to achieve.

Furthermore, courts are concerned with whethe r they ought to strike down a legislativeprovision (including a classification on the ground of manifest arbitrariness under Article 14.

The quintessential question of the validity of the classification betweenfinancial creditors and operational creditors came up inWhile such distinctions are understandable, the question thatremains open is whether the Court has relied somewhat excessively onvariations inmarket practice, thereby overgeneralising the issue.

More importantly, the Supreme Court”s assessment draws uponthe fact thatfinancial creditors are more capable ofexercising decision-.-making powersappropriately on the CoC than operational creditors.

The deduction is that financialcreditors are considered to have “skin inth e game” by ensuring a proper resolution of the corporate debtor, while operational creditors display the determination to obtaintheir own individual recoveries The Court brings out this aspect inIn arrivingat such a conclusion, the Supreme Court ha’s drawn heavily on the preparatory stepstaken towards the enactment of the IBC It has placed extensive reliance on the BLRC Report that recommended the distinction between financial and operational creditorsand set out the rationale for thisdistinction.

Swiss Ribbons The Supreme Court identified several distinctions betwee n the two types of creditors and the debts owed to them, including the nature of the securi ty interest, if any, nature and size of the creditors, type of contractual documentat ion, payment schedules, manner of dispute resolution, and the like Anuj Jain by highlighting that “the financial creditor is, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engages in restructuring of the loan as well as reorganisationof the corporate debtor”s business when there is financial stress... [i]n short, the financial creditor is the one whose stakes are intrinsically interwoven with the wellbeing of the corporate debtor”.

The classification issue arose again in thecontext of homebuyers as allottees inreal estate projects Although thousands of allottees found themselves in the lurchwhen real estate and housing companies went into insolvency, there was a lack ofclarity on the position of such allottees under the IBC Hence, the Parliamentamended the statute by way of the Second Amendment to clarify that allottees ofreal estate projects will be considered financial creditors for purpose of insolvencyresolution Accordingly, not onlydo they possess rights to initiate insolvencyproceedings, but they also have participation rights in the CoC, albeit through an authorised representative This classification of allottees as financial creditors was thesubject matter of constitutional challenge in the Supreme Court noted, “It is impossible to say that classifying real estate developers is notfounded uponan intelligible differentiawhich distinguishes them from otheroperational creditors, nor isit possible tosay that such classification is palpablyarbitrary having no rationalrelation to the objects of the Code”.

In arriving at itsconclusion, the Court placed emphasison the ILC Report 2018, which hadrecommended that home buyers be treated as financial creditors rather than asoperational creditors.

The ILC Report 2018 proceeded on the basis that thedisbursements made by allottees of real estate companies were “used as a means offinancing the real estate project, and are thus in effect a tool for raising finance”.

In case of a failure of the project, the real estate company is obligated to refund themonies together with interest, which is based on the time value of money The Supreme Court seemed persuaded withthis analysis when it noted, “What ispredominant, insofar as the real estate developer is concerned, is the fact that suchinstalmentpayments [made by the allottees] are used as a means of finance qua thereal estate project”.

Moreover, the Court also noted that in an operational debt, a person usually supplies goods or services and becomes a creditor inturn for theamounts due to it Whereas, in the case ofa real estate project, it is the homebuyerwho pays amounts in advance and is a creditor of the real estate company, and hencethe allottee has a stake in the outcome of the corporate debtor”s insolvency..

Arguably, there are difficulties in such an approach which the Court seems tohave disregarded inits zeal tofacilitate the implementation of the IBC in amendedform For example, the constitutionality of the treatment of allottees of real estate Constitutional Conundrums In volving Corporate InsolvencyPioneer Urban Land and Infrastructure Limited In dealing with the constitutionality of the Second Amendment,

The judiciary has adopted a similar stance even when the rightsof certaincreditors underwent a curtailment For instance, the Parliament enacted the Insolvency and Bankruptcy Code (Amendment Act, 2020, which introducedcertain provisos to Section 7 of the IBC by which an application to initiate thecorporate insolvency of the debtor can be made byallottees of realestate projectsonly if it has the support of 100 allotteesor onetenth of the total numberofallottees, whichever isless, both in relation to a single realestate project Hence, allottees of realestate projects find themselves classified as a subcategory of financialcreditors who can initiate insolvency onlywhen there is a critical mass of them, a requirement that does not apply to other types of financial creditors.

The constitutionality of this provision came under attack inHowever, the Supreme Court took recourse to the provisions of the Real Estate (Developmentand Regulation Act, to conclude that thiswas hardly a ground to strike down theamendment The second., and seeminglymore important, challenge to theamendment was that it lacked the reasonable classification required to pass musterunder Article 14. Here, the Court rationalised the distinction between allottees ofreal estate projects and other financial creditors across three different parameters: (aManish Kumar, principally on the groundof improper classification and manifest arbitrariness, which required examination under Article 14 of the Constitution The first contentionwas that the expression “allottees” was vague and arbitrarynumerosity: there would be a large number of allottees compared to other financial creditors, (b heterogeneity: there could be differences between members of a seemingly homogenous group; and (c individuality in decisionmaking: each allottee may consider his own interests while deciding rather than decide in an institutionalised fashion.

An idiosyncrasy of the 2020 amendment tothe IBC is that the critical mass ofallottees must belong to the same real estate project, which too was subject toaconstitutional challenge by the petitioners inGiven that complaints relating todifferent projects may be varied, the Cour t concluded that the requirement “does notsuffer from any constitutional blemish”.

This argument does not stand to reason.

The resolutionprocess applies to the corporate debtor as a whole (that is onan-.

entityrelated basis and not in respect of individualreal estate projects. (that isprojectrelated basis Hence, it is unfathomable as to how the projectrelatedrequirement to determine the critical mass can withstand scrutiny under Article 14 of the Constitution.

In all, we find that the conflict betweendifferent groups of creditors has attractedsignificant judicial attention, calling for a resolution of the conflict against thetouchstone of the Constitution It is reasonable to expect such a disposition, giventhat the IBC began with a classificationof creditors into financial and operationalcreditors, and then its amendments created further categories, such as allottees ofreal estate projects who suffer more personal consequences in case a real estatecompany goes into insolvency No matter which quarters the constitutionalchallenge has emanated from, the judiciary has been extremely slow to call intoquestionthe choice made bythe legislature Again, the jurisprudence is emphaticinthat judicialintervention will be minimal with considerable leeway given to the Parliament to determine the relative rights and standing of the creditors as againstone another Another dominant feature inthis arena is the oversized influence thatthe preparatory work relating to the IBC and its amendments., including the BLRC Report and the ILC Report 2018, play inthe formulation ofconstitutionaljurisprudence.

Another major player under the IBC is the resolutionapplicant, who is a person thatsubmits a resolution plan for a restructuring of the corporate debtor, including byway of a takeover of the business or assetsof the corporate debtor, merger, demerger, or other similar transaction, to bring about an insolvencyresolution ofthe corporate

debtor.

Soon after the enactment of the IBC, a significant loophole emergedthrough which promoters or other personsconnected to the corporate debtor, manyof whom were essentially responsible for its financial predicament, or otherunscrupulous persons, initiated a backdoor entry onterms more favourable tothemselves than the other stakeholders bybecoming resolution applicants Inorderto address this., Section 29A was introduced into the IBC by way of the Insolvencyand Bankruptcy Code (Amendment Ordinance, Section A stipulated a wideranging list of persons who would be disqualified from bidding for thecorporate debtor It immediately became a subject matter of constitutional challengeon various counts.

InandThe Court inMoreover, under Section 29A, it is not necessary to findmalfeasance inorder to disqualify a personfrom bidding for the corporate debtor This was foundconsistent with the legislativ e philosophy of the provision.

The travails surrounding Section 29A resurfaced, requiring constitutionalconsideration in a different form In Swiss Ribbons, the Supreme Court upheldthe constitutionality of Section 29A by relying on the exposition of the statutory provisions and its raison d”etre provided in the earlier decisions of ArcelorMittal India Private Limited vSatish Kumar Gupta Chitra Sharma vUnion of India Swiss Ribbons noted that there is no vested interest with any person inapplying for treatment as a resolutionapplicant Arun Kumar Jagatramka, a failed insolvency resolution process ended with the NCLT passing a liquidation order in respect of the corporate debtor One of the promoters of the company who would otherwise have been ineligible to propose a reso lution plan under Section 29A instead floated a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013. The adjudicatory auth orities refused to entertain the scheme, against which the affected promoter mounted a twopronged constitutional challenge First, the promoter called into question the constitutional validity of Section 35(1f of the IBC which prec ludes the sale of a corporate debtor”s property in liquidation to any person not qualified to be a resolution applicant under the IBC Moreover., there is no bar in Se ction 230 of the Companies Act against a person ineligible under Section 29A of the IBC from proposing a scheme of arrangement However, the Supreme Cour t underscored the need to read the

The second challenge related to theconstitutionalvalidityof Regulation.

2B(1 of the Insolvency and Bankruptcy Board of India (Liquidation Process Regulations, 2016, which stipulates that a personnot eligible to submit a resolution planunder the IBC is precluded frominitiating a scheme of arrangement under Section 230 of the Companies Act.

Here, the Court ruled that Regulation 2B(1 was merely clarificatory in nature, and that the position of lawunder it would have ensued even in its absence.

Hence, it refused to entertain the constitutional challenge The Court suggestedthat “the need for judicial intervention or innovation from the NCLT and NCLAT should be kept at its bare minimum and should not disturb thefoundational principles of the IBC”.

In a different vein, the judiciary has encountered constitutional challenges whenresolution applicants enjoy the benefit ofcertain protective mechanisms under the IBC InThe Parliament has since codifiedthe clean slate theory in the formof Section 32Aof the IBC, enacted by the Insolvency and Bankruptcy Code (Amendment.

Act, 2020, which stipulates that once a resolution plan has resulted in a change incontrol of the corporate debtor in favour of a person who was not (a a promoter, controller, or manager of the corporate debtor at the time of insolvency or (b anyperson who had aided or conspired in the commission of an offence, the corporatedebtor shall be free from prosecution for such an offence from the date of approvalof the resolution plan In these circumstances, the property of the corporate debtorshall be free from legal action, such as attachment, seizure, retention, confiscation, Constitutional Conundrums In volving Corporate InsolvencyEssar Steel, the Supreme Court pr opounded what later came to be referred to as the “clean slate” theory, by which a successful resolution applicant cannot be foisted with liabilities relating to the co rporate debtor once the resolution process is concluded The corporate insolvency pr ocess represents the sole and exhaustive process for dealing with claims relating to the corporate debtor As the Court in Essar Steel poignantly noted,” A successful reso lution applicant cannot suddenly be faced with undecidedŽ claims after the reso lution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the busi ness of the corporate debtor”.

In addition toresolution applicants as discussed above, constitutional issueshave emerged in relation topersonalguarantors of corporate debtors, who weregenerally promoters, directors, or other persons associated with the corporatedebtors At the outset, the IBC was made effective only in relation to corporatedebtors However, by way of a notification,the government brought into forcecertain provisions of Part III of the IBC that deal with insolvency resolution forindividuals and partnership firms, but only in so far as they relate to personalguarantors to corporate debtors and not for other individuals This selectiveapplication to one class of individuals was the subject matter of a challenge beforethe Supreme Court, including on the ground that the notification wasthe Supreme Court upheld the Government”s notification by observing that theintention of the legislature was always to treat personal guarantors of corporatedebtors differently from other categories of individuals.

Hence, the government”s issue of the notification was “not an instance of legislative exercise, or amountingto impermissible and selective application of provisions of the Code”.

Accordingly, the notification was found not to be Manish KumarThe Supreme Court articulated that the absence of such a protective mechanism would hinder any resolution applicant from making a bid for the corporate debtor to bring about the successful conclusion of a resolution process, ultra vires Section 1(3 of the IBC, which states that different dates may be provided to bring into force different prov isions of the Code In Lalit Kumar Jain vUnion of India, ultra vires Here again, harsh as it may be to individuals who are personal guarantors in respect of corporate debtors, the Court”s approach ended up smoothening the operation of the IBC in the case of personal guarantors, such as promoters and directors, who are commonly required by banks and financial institutions to issue a personal guarantee.

Constitutionality of Dispute Resolution Mechanisms and Procedural Matters

The manner of treatment by the Supreme Court of other stakeholders throughthe lens of constitutionality results ina similar outcome as in the case of conflictsbetween corporate debtors and creditors as well as When it comes to processrelated matters, the Supreme Court has been liberal inexercising its jurisdictionunder Article 142 of the Constitution with a view to “doing complete justice” in mattersunder the IBC that are before it One suchinstance was where a corporate debtor and creditors preferred an outofcourtsettlementwhen the insolvency resolution process was still pending before theadjudicatory authorities In the initial sequence of cases, the Supreme Court notedthat the adjudicatory authorities had no power to approve settlements outside of thescope of the IBC.

However, in a strange turn of events, despite the absence ofpowers withadjudicatory authorities to do so, the Supreme Court exercised itsdiscretionary power under Article 142 torecord the settlement and dispose ofmattersaccordingly The Court did so in brief ordersthat are devoid of necessaryreasoning on jurisprudential questions an i ssue compounded by the fact that orderspassed by it under Article 142 do not constitute binding precedent.

At the same time, in order toavert the logjam regarding settlements, the Supreme Court recommended that the relevant legal regime be amended to include inherentpowers for the adjudicating authorities to allow settlements, to obviate unnecessaryappeals to the Supreme Court for its imprimatur to such settlements.

Aided by the ILC Report 2018, the Parliament picked upthe gauntlet thrown by the Supreme Court by enacting Section 12A of the IBC, which conferspower upon theadjudicating authority toallow settlementsand the withdrawal of an application forinsolvencyresolution so long as the withdrawal enjoys the support of 90 per cent of the voting share of the CoC Unsurprisingly, Section 12A was the subject of a constitutional challenge In Constitutional Conundrums In volving Corporate Insolvencyinter se creditors With this, we move to our final examination of certain re sidual processoriented matters that have witnessed the invocation of constitutional considerationsSwiss Ribbons, the Supreme Court adopted the usual stance of noninterference in economiclegislation to conclude that there was

Conclusion

The Supreme Court has exercised the powerunder Article 142 in other circumstancesas well, for example, to order the recommencement of a resolution process afresh,andto provide an opportunity to resolution applicants to pay off the nonperforming assetsof their related parties to be eligible interms of Section 29A of the IBC to propose a resolution plan..

Hence, wherever there has been a need to remove difficulties or totread unchartered territories, the Court has no t refrained from taking on a more activerole to ensure a proper implementation of the IBC.

One knottyprocedural issue is whether the IBC can stipulate a mandatory timeperiod for completion of the insolvency resolution process InAccordingly, while leaving the timeline intact, the Court struckdown the word “mandatorily” on the groundof manifest arbitrariness under Article 14 as an excessive and unreasonable restriction on the ability of a litigant to carry onbusiness.

The effect of the ruling is to replace the expression “mandatorily” in thestatute with “ordinarily” to mitigate the harshness of a mandatory timeline onlitigants.

If our analysis suggested that the Indian judiciary has adopted a passive stance inrelationto substantive matters pertaining to the IBC, our findings regarding mattersof procedure are altogether different The Court has exercised its powers moreactively to implement realistic solutions to ensure the unhampered enforcement of the IBC to fully realise the legislative goals of the Parliament.

There is no gainsaying that the IBC isone of the most significant pieces oflegislation in recent times to affect the financial sector The enormity of its impacton the constitutional jurisprudence of the country is evident from the freneticlevelof judicial activity witnessed withinthe mere fiveyear period since the legislation Essar Steel, the Supreme Court found that the failure to meet timelines is often beyond the litigant, and hence “may well be an excessive interference with a litigant”s fundamental right to nonarbitrary treatment under Article 14 and therefore unreasonable restriction on a litigant”s fundamental right to carry on business under Article 19(1g of the Constitution”.

Given the context and circumstances surrounding the legislation and itsenactment, the courts have underplayed any role in industriously monitoringlegislative activity against constitutional yardsticksand, on the other hand, they haveeffectively joined forces with Parliament to expediate the success of the IBC Forexample, the judiciary has painstakingly sought to elicitlegislative intention bymeans of the preparatory documents thatwent into the making of the legislation, which has played an outsized role in ensuring the sustainability of the IBC in thewake ofrepeated constitutional challenges The judiciary has engaged in innovativeapproaches to rationalise matters and devise outcomes wherever difficulties haveemerged In some areas, the judiciary has evenoffered cues to the legislative branchto rectify omissions and grey areas, which the Parliament has promptly done the judiciary has followed the path of cooperation as opposed to circumspection inthissphere We donot profess to predict the future but, discerning from the judicialtrendsemanating thus far, there is clarity on one aspect—anyone challenging the constitutionality of the IBC will carry an unduly high burden on their shoulders toobtain a successful outcome.

— Constitutional Conundrums In volving Corporate Insolvency-.