On February 3, 2026, the Supreme Court of India delivered a landmark judgment in Satinder Singh Bhasin v. Col. Gautam Mullick & Ors. [1], which affirmed that a single insolvency petition under the Insolvency and Bankruptcy Code, 2016 can be maintained against multiple corporate entities when they are intrinsically linked in project execution and marketing. By expressly recognizing the permissibility of joint insolvency proceedings under the IBC, the Court provided crucial clarity on proceedings against separate corporate debtors whose operations and obligations to creditors are deeply intertwined, particularly in real estate developments where multiple entities often collaborate. The ruling underscores that corporate structures cannot be used to fragment unified business operations and thereby defeat the core objectives of insolvency resolution.

The Supreme Court Judgment

The case involved 141 allottees of the Grand Venezia Commercial Tower project in Greater Noida who filed a petition against M/s. Grand Venezia Commercial Towers Private Limited and M/s. Bhasin Infotech and Infrastructure Private Limited [1]. The allottees sought initiation of Corporate Insolvency Resolution Process against both companies jointly, claiming they had not received possession despite making substantial payments. The appellants challenged admissibility of a single petition against two distinct entities, arguing that segregating allottees by company would reduce numbers below the statutory threshold of 100 allottees required under Section 7(1) of the Insolvency and Bankruptcy Code.

The Supreme Court bench of Justice Sanjay Kumar and Justice K. Vinod Chandran rejected these arguments, upholding the National Company Law Tribunal and National Company Law Appellate Tribunal orders [1]. The Court observed that Bhasin Infotech originally undertook the project and later granted marketing rights to Grand Venezia. Both entities functioned as a unified commercial operation, being jointly answerable to allottees. The Supreme Court concluded that the corporate debtors were intrinsically linked and a joint insolvency process would maximize asset realization [1].

Legislative Framework Under IBC

The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate laws relating to reorganization and insolvency resolution of corporate persons in a time-bound manner for maximization of value of assets [2]. Section 7 provides that a financial creditor may file an application for initiating corporate insolvency resolution process against a corporate debtor when default has occurred [2]. This provision forms the foundation for creditor-initiated proceedings and has been extensively invoked by financial creditors, including homebuyers recognized as financial creditors following amendments.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 introduced specific thresholds for real estate allottees through the second proviso to Section 7(1), mandating that allottees file applications jointly with not less than one hundred creditors or not less than ten percent of total creditors, whichever is less [3]. This threshold was upheld in Manish Kumar v. Union of India [3], where the Supreme Court held that the amendment prevented frivolous petitions and protected interests of other allottees who might have different views on insolvency proceedings.

Threshold Requirements and Their Application

In Manish Kumar v. Union of India (2021), the Supreme Court examined constitutional validity of threshold requirements for real estate allottees [3]. The Court held that classification was based on intelligible differentia, including numerosity, heterogeneity, and individuality in decision-making among allottees in large real estate projects. The Court reasoned that allowing a single allottee to initiate proceedings could jeopardize interests of hundreds or thousands of other allottees who might prefer different remedies or have faith in the developer.

The Supreme Court clarified that required numbers must be reckoned at the time of filing the application, not at admission stage [3]. This principle was directly applied in the Satinder Singh Bhasin case, where 103 allottees filed the petition, satisfying the threshold. The Court rejected contentions that thresholds should be calculated separately for each corporate entity, holding that where entities are intrinsically linked to the same project, allottees should be counted collectively.

Group Insolvency Principle: The Edelweiss Precedent

The Supreme Court’s decision drew heavily from the National Company Law Appellate Tribunal’s ruling in Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Private Limited [4], which established that group insolvency proceedings can be initiated when multiple corporate entities are jointly involved in collaborative development projects. The case involved five corporate guarantors who were co-borrowers in a township development project in Palwal, Haryana.

The National Company Law Appellate Tribunal held that these corporate debtors were co-borrowers and corporate guarantors, and resolution would not succeed if the entire township was not developed comprehensively [4]. The Tribunal found it was a joint consortium requiring group insolvency to develop the township on corporate debtors’ land along with Corporate Insolvency Resolution Process against Adel Landmarks Limited, the principal borrower. The Tribunal directed group Corporate Insolvency Resolution Process against five corporate debtors apart from ongoing proceedings against the principal borrower [4].

The Edelweiss judgment recognized that when multiple corporate entities jointly participate in a project with inseparable business operations, conducting fragmented insolvency proceedings would jeopardize project completion and adversely affect allottees [4]. The Tribunal emphasized recognizing interconnected roles of corporate guarantors in land development projects, reasoning that their insolvency could not be addressed in isolation without impacting overall project viability. Group insolvency resolution was therefore warranted to create a cohesive plan for project completion.

Determining When Entities Are Intrinsically Linked

The Supreme Court in Satinder Singh Bhasin provided guidance on determining when corporate entities should be considered intrinsically linked for joint insolvency proceedings under the IBC [1]. The test is not merely existence of separate legal personalities, but practical reality of how entities function in relation to the project and their obligations to creditors. Several factors are relevant in this determination.

First, the nature of collaboration in project development and marketing is examined. Where one entity undertakes development while another handles marketing, but both are jointly answerable to allottees, this demonstrates functional integration. Second, operational intertwining is assessed. When business operations cannot be segregated and entities function as a unified commercial operation, this indicates intrinsic linkage. Third, the Court considers whether keeping entities as going concerns requires a consolidated approach. Where separate proceedings would diminish resolution prospects and reduce asset realization, joint proceedings become appropriate [1].

Protection of Homebuyers’ Rights

Recognition of homebuyers and real estate allottees as financial creditors under the Insolvency and Bankruptcy Code represents a significant shift in Indian insolvency law. Prior to 2018 amendments, homebuyers were classified as operational creditors, placing them in a subordinate position. Amendment to Section 5(8) to include amounts raised from allottees under real estate projects as financial debt fundamentally altered real estate insolvency dynamics.

This reclassification empowers homebuyers by giving them rights to initiate Corporate Insolvency Resolution Process proceedings against defaulting developers and provides representation in the Committee of Creditors, where they participate in critical decisions regarding resolution plans. While 2020 amendment threshold requirements impose limitations on individual action, they actually strengthen collective bargaining positions by requiring coordinated action.

The Satinder Singh Bhasin decision further enhances homebuyer protection by ensuring developers cannot escape liability by fragmenting operations across multiple corporate entities [1]. The judgment recognizes that in many real estate projects, developers use multiple special purpose vehicles for different project aspects, and allowing them to avoid joint insolvency would prejudice allottees who dealt with the project as a unified whole.

Maximization of Asset Value through Joint Insolvency Proceedings under IBC

A fundamental objective of the Insolvency and Bankruptcy Code is maximizing value of corporate debtor assets. Section 1(1) explicitly states it is enacted for reorganization and insolvency resolution in a time-bound manner for maximization of value of assets [2]. The Supreme Court’s endorsement of joint insolvency proceedings for intrinsically linked entities directly serves this objective by addressing inefficiencies that arise when functionally integrated entities are subjected to separate insolvency proceedings under the IBC.

When corporate entities are functionally integrated but subjected to separate insolvency proceedings, several inefficiencies arise. There may be duplication of costs with separate resolution professionals and administrative expenses for each entity. Resolution applicants face difficulties formulating viable plans when they cannot acquire the integrated business as a whole. Potential exists for conflicting decisions by different Committees of Creditors, leading to suboptimal outcomes.

Joint insolvency proceedings address these concerns by enabling consolidated approaches to resolution. A single resolution professional can be appointed for related entities, reducing costs and ensuring coordinated decision-making. Resolution applicants can submit plans treating the integrated business as a whole, increasing likelihood of successful resolution. The Committee of Creditors can make informed decisions considering the complete picture of assets and liabilities across related entities. These efficiencies ultimately benefit all stakeholders, including creditors, employees, and corporate debtors [1].

Implications for the Real Estate Sector

The real estate sector in India has been characterized by use of multiple corporate entities for different phases or components of integrated projects. Developers commonly establish separate special purpose vehicles for land holding, development, marketing, and facilities management. While these structures serve legitimate business purposes, they can also fragment liabilities and complicate creditor recovery.

The Supreme Court’s judgment sends a clear message to the real estate industry that corporate structures cannot be used to defeat legitimate creditor claims. Where entities are intrinsically linked in project execution and marketing, they will be treated as jointly liable for insolvency purposes [1]. This has several important implications for how real estate projects are structured and managed.

Developers will need to carefully consider insolvency implications when establishing corporate structures for projects. If entities within a group are functionally integrated and jointly answerable to creditors, they should anticipate possibility of joint insolvency proceedings. This may influence decisions about corporate governance, financial management, and risk allocation within project structures. Additionally, the judgment provides greater certainty to homebuyers and financial creditors, who can pursue joint proceedings against related entities without fear that technical arguments about separate legal personality will defeat their claims.

Conclusion

The Supreme Court’s judgment in Satinder Singh Bhasin v. Col. Gautam Mullick & Ors. represents a significant development in Indian insolvency jurisprudence by affirming that single insolvency petitions can be maintained against multiple corporate entities when they are intrinsically linked in their operations and obligations [1]. This principle ensures that objectives of the Insolvency and Bankruptcy Code, particularly maximization of asset value and efficient resolution, are not frustrated by corporate structures that fragment integrated business operations.

The judgment provides crucial protection to homebuyers and financial creditors in real estate projects by recognizing that developers cannot escape liability through use of multiple corporate entities for different aspects of unified projects. It builds on the National Company Law Appellate Tribunal’s precedent in the Edelweiss case [4] and applies principles consistent with the Supreme Court’s earlier ruling in Manish Kumar v. Union of India [3] regarding threshold requirements for real estate allottees.

The decision strengthens India’s insolvency framework by prioritizing substance over form and ensuring that the Code serves its fundamental purpose of facilitating effective resolution while protecting the interests of all stakeholders. As insolvency law continues to evolve in India, allowing joint insolvency proceedings under the IBC for intrinsically linked entities will remain an important tool for achieving efficient and equitable outcomes in complex corporate insolvency cases.

References

[1] Satinder Singh Bhasin v. Col. Gautam Mullick & Ors., 2026 INSC 104 (Supreme Court of India, February 3, 2026)

[2] Insolvency and Bankruptcy Code, 2016, Preamble and Section 7

[3] Manish Kumar v. Union of India, (2021) 5 SCC 1 (Supreme Court of India)

[4] Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Private Limited, Company Appeal (AT) (Insolvency) No. 377 of 2019 (National Company Law Appellate Tribunal, September 20, 2019)

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A cheque is a type of negotiable instrument that can be easily encashed. It is defined under section 6 of the Negotiable Instruments Act, 1881 as ‘a bill of exchange on a specific banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.’[1] The person who creates the cheque is referred to as the ‘Drawer’, while the individual to whom the cheque is addressed or the recipient of the cheque is known as the ‘Payee’. The entity that is instructed to make the payment, typically the bank, is termed the ‘Drawee’.

DISHONOUR OF CHEQUE

A cheque is considered dishonored when the Payee submits it to the bank for payment and it is subsequently returned unpaid from the bank account. It can be due to multiple reasons as:

• When the signature of the drawer does not match with that of the Cheque
• When the amount in words does not match with that of the numbers on the cheque
• When there is alteration, modification, or overwriting on the cheque
• When the validity of the cheque has expired
• When the cheque has been damaged
• When the drawer has used a cheque from an old chequebook which has been discontinued by the bank

But when the dishonour is due to insufficiency of funds in the drawer’s bank account, the cheque is bounced, it is an offence. The bank rejects and returns such cheques with a memo of insufficient funds. The drawer of the check may be served with a notice that the cheque has bounced, demanding payment of the full amount.

The notice is sent under section 138 of the Negotiable Instruments Act, 1881.[2] If the cheque is bounced due to some other reasons than insufficient funds, then the bank cannot issue such notice and the cheque can be resubmitted. The drawer cannot be prosecuted if the dishonored cheque was a gift.

STRICT LIABILITY

Section 138 of the Negotiable Instruments Act, 1881 imposes strict liability on the drawer so that regular business transactions are easily settled.[3] Dishonour of a Cheque is said to be a criminal offence that is punishable by fine or punishment which may extend to 2 years or both. It is a bailable offence.

PROCEDURE FOLLOWED AFTER CHEQUE GETS DISHONOURED

1. Upon receiving the returned dishonoured cheque from the bank, the payee is obligated to issue a cheque-bound legal notice to the drawer within 15 days of the date the notice is received. This notice must be sent within 30 days of the date of the acknowledgment of the ‘Cheque Return Memo’.
2. After the expiry of 15-day time period, if the drawer is still unable to pay the amount, he can be punished under section 138 of the Negotiable Instruments Act.[4] The complaint can be filed in the court of Judicial Magistrate of First Class or Metropolitan Magistrate.

• If the court finds the payee’s claim satisfactory, then it may call upon the drawer by issuing summons.

1. If the drawer declines to show up in court, the magistrate may issue a warrant against him that is subject to bail. If the accused does not show up in court then a bailable warrant is issued, and if even after the accused does not appear in court, a non-bailable warrant is issued.
2. If the accused pleads guilty, the court sentences him and if the accused pleads not guilty, the accused is given a copy of the complaint made out against him.
3. The parties can then cross-examine one other and present their supporting evidence.

• The judgment is issued by the court and is subject to appeal by either side.

DOCUMENTS REQUIRED TO FILE A CASE OF CHEQUE DISHONOUR IN INDIA

The documents required are as follows:

1. A duplicate copy of the notice delivered to the drawer.
2. Evidence of notice delivery, such as a courier receipt or registered mail receipt.

• Original cheque on record.

1. A cheque return memo issued by the banker to the drawer.
2. Proof of the existence of a legally enforceable debt or liability.

JURISDICTION IN CASE OF FILING CHEQUE DISHONOURED SUIT

According to Section 142(2) of the Negotiable Instruments (Amendment) Act, 2015, the payee can file the complaint before the Magistrate at the place where the drawee banker’s branch is situated and at no other place.[5]

OTHER LIABILITIES

Apart from a complaint under the N.I.A, other remedies can also be invoked:

Criminal Law- An FIR can be filed against the accused. Further, a case can be filed under sections 406 and 420 of the Indian Penal Code,1860 that is Criminal breach of trust and Cheating respectively.[6]

Civil Law- A summary proceeding can be filed under order XXXVII of the Code of Civil Procedure.[7] The facility of summary procedure is available even when the bill or the note is non-negotiable.

Consumer (Protection) Act, 1986- ‘Banking’ as a service is included in section 2(1)(o) of the CPA therefore,[8] when the bank wrongfully dishonours the cheque, it amounts to a deficiency in service on the part of the bank and for that, it must be liable to pay compensation for any loss including the loss of reputation.

LANDMARK JUDGMENTS

1. In the case Dashrath Singh Rathod vs. State of Maharashtra it was held that it is not a valid ground under section 140 of the N.I.A.,[9] that the drawer had no idea about the dishonour of the cheque. The state of mind of the accused, mens rea, knowledge or reasonable beliefs are not essential in such cases.[10]
2. In N Parameswaran Unni vs G Kannan, it was held that when a notice is sent by registered post and is returned with postal endorsement “refused” or “not available in the house” or “house locked” or “shop closed” or “addressee not in the station”, the due service of the notice within 15 days is presumed.[11]
3. In Dashrathbhai Trikambhai vs. Hitesh Mahendrabhai Patel, it was held that the presence of a legally enforceable debt at the date of encashment is important.[12]

RECENT AMENDMENTS IN THE ACT

• 20% of the check’s value will be paid as temporary compensation to the payee by the cheque’s drawer.
• Within 60 days of the date of the court’s order, the interim compensation must be paid.
• The payee must repay the compensation with interest if the court determines that the cheque’s drawer was not at fault and is found not guilty.

APPLICABILITY OF SECTION 138 WHEN ELECTRONIC FUNDS ARE DISHONOURED

ELECTRONIC CLEARING SERVICE (ECS)

ECS is an electronic method of receipt and payment for routine and recurring transactions. ECS essentially allows for the mass transfer of funds from one bank account to numerous bank accounts or the opposite.

ECS credit facilitates the payment of funds for the distribution of dividends, interest, salary, pension, etc., of the user institution whereas ECS debit helps pay periodic or repetitive bills that are owed to the user institution by a large number of consumers, such as phone, electricity and water bills, cess and tax collections, loan instalment repayments, periodic investments in mutual funds, insurance premiums, etc.

When there are insufficient funds to perform an electronic transfer of payments or when the amount to be transferred would exceed the payer’s credit limit, Section 25 of the Payment and Settlement Systems Act, 2007 can be invoked under which the payer is liable to be either imprisoned for 2 years or fined an amount which is twice the amount of the electronic funds’ transfer or both.[13] Thus dishonour of electronic funds is an offence. Certain exceptions to this offence are:

1. If the payment of any amount of money of electronic funds was initiated to discharge another person of any liability by paying in whole or in part;
2. When the electronic funds transfer was initiated in accordance with the relevant procedural guidelines as issued by the system provider;
3. When the beneficiary has given a demand notice within 30 days of receiving information from the bank concerning dishonour of electronic transfer of funds;
4. When the person making the payment has transferred the funds within 15 days of receiving the said notice.

Electronic fund transfers and their regulations are carried out by the Reserve Bank of India. The chief manager of RBI issued a clarification that ‘the act of dishonour of an electronic funds transfer carries the same penalties as the act of dishonour of a cheque and that Section 25 of the Payment and Settlement Systems Act offers the same rights and remedies as Section 138 of the Negotiable Instruments Act’.[14]

Further in Ritu Jain vs The State and another, it was held that when section 25 of the Payment and Settlement Act is invoked, section 138 of the Negotiable Instruments Act is also applicable.[15]

CONCLUSION

Today, in a world that is expanding quickly, we all conduct our business both online and offline. In most cases, we give someone a cheque in the form of an order to pay or withdraw the money from the bank. The new ruling and changes have made it better prepared in case of a conflict, but concurrently, events like frivolous appeals and arbitrary delays to procedures can postpone the payment of the cheque. In many ways, this is still highly harmful to the payee, and to address it, the law needs to be made more comprehensive.

Written by Divyanshi Maheshwari, 3rd Year Law Student at the Institute of Law, Nirma University.

References:

[1] Negotiable Instruments Act 1881, s 6.

[2] Negotiable Instruments Act 1881, s 138.

[3] Negotiable Instruments Act 1881, s 138.

[4] Negotiable Instruments Act 1881, s 138.

[5] Dashrath Rupsingh Rathod vs. State of Maharashtra, (2014) 9 SCC 129.

[6] Indian Penal Code 1860, s 406 & Indian Penal Code 1860, s 420.

[7] Code Of Civil Procedure 1908, o XXXVII.

[8] Consumer (Protection) Act 1986, s 2 (1) (o).

[9] Negotiable Instruments Act 1881, s 140.

[10] Dashrath Rupsingh Rathod vs. State of Maharashtra, (supra).

[11] N. Parameswaran Unni Vs. G. Kannan, (2017) 5 SCC 737.

[12] Dashrathbhai Trikambhai Patel vs. Hitesh Mahendrabhai Patel, Criminal Appeal No. 1497 of 2022 (SC).

[13] Payment and Settlement Systems Act 2007, s 25.

[14] DPSS. CO.PD.No.497/02.12.004/2011-12.

[15] Ritu Jain Vs. The State, W.P.(CRL) 1266/2019.

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Introduction

The Insolvency and Bankruptcy Code, 2016 represents a watershed moment in India’s financial and economic jurisprudence, fundamentally restructuring the nation’s approach to corporate insolvency resolution. At the heart of this transformative legislation lies the Committee of Creditors, an institution that has redefined the balance of power between creditors and debtors in situations of financial distress. The Committee of Creditors operates as the principal decision-making body during the Corporate Insolvency Resolution Process, wielding significant authority over the fate of distressed corporate entities. While Part II of the Insolvency and Bankruptcy Code does not explicitly define the Committee of Creditors for corporate persons, its composition, powers, and limitations are detailed across various provisions of the legislation, particularly within Section 21 read with Section 18.

The evolution of the Committee of Creditors must be understood within the broader context of India’s insolvency framework. Prior to the enactment of the Code in 2016, India’s bankruptcy regime was characterized by multiple, often conflicting pieces of legislation including the Sick Industrial Companies Act of 1985, the Recovery of Debt Due to Banks and Financial Institutions Act of 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.[1] These laws operated in silos, creating a fragmented system that failed to provide timely resolution of stressed assets. The inadequacy of this framework became particularly evident during economic downturns, where prolonged delays in insolvency proceedings resulted in significant value erosion and minimal recovery for creditors.

The Bankruptcy Law Reforms Committee, constituted in 2014 and chaired by Dr. T.K. Viswanathan, was tasked with comprehensively reimagining India’s insolvency landscape.[2] The Committee submitted its seminal report in November 2015, which served as the intellectual foundation for the Insolvency and Bankruptcy Code. Central to the Committee’s recommendations was the proposition that control of a corporate entity must shift from the management to creditors upon default. The report categorically stated that when default takes place, control is supposed to transfer to the creditors, while equity owners have no say in the matter.[3] This philosophical shift from a debtor-in-possession model to a creditor-in-control paradigm represents the foundational principle upon which the Committee of Creditors was conceptualized.

Constitutional Framework and Legal Foundations

The Insolvency and Bankruptcy Code received Presidential assent on May 28, 2016, with its corporate insolvency resolution provisions becoming operational from December 1, 2016. The Code was enacted under Entry 9 of the Concurrent List in the Seventh Schedule to the Constitution of India, which deals with bankruptcy and insolvency. This constitutional positioning enables both Parliament and State Legislatures to legislate on matters of insolvency, though Parliament’s enactment takes precedence in case of any repugnancy.

The constitutional validity of various provisions of the Insolvency and Bankruptcy Code was extensively examined by the Supreme Court of India in the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India.[4] In this matter, multiple writ petitions challenged the constitutionality of several provisions, including those relating to the differential treatment of financial creditors and operational creditors, the composition of the Committee of Creditors, and the exclusion of operational creditors from voting rights. The Supreme Court, in a comprehensive judgment delivered on January 25, 2019, upheld the constitutional validity of the Code in its entirety, finding no violation of Article 14 which guarantees equality before law. The Court recognized that financial creditors possess an intelligible differentia from operational creditors, justifying their predominant role in the Committee of Creditors. Justice R.F. Nariman, writing for the bench, observed that financial creditors are involved with assessing the viability of the corporate debtor from the very beginning and can engage in restructuring of loans and reorganization of the corporate debtor’s business during financial stress, capabilities that operational creditors neither possess nor demonstrate.[5]

Composition and Constitution of the Committee of Creditors

Section 21 of the Insolvency and Bankruptcy Code delineates the framework for constituting the Committee of Creditors. Upon the admission of an application for initiation of Corporate Insolvency Resolution Process under Section 7, Section 9, or Section 10 of the Code, an Interim Resolution Professional is appointed who assumes control of the management of the corporate debtor. The Interim Resolution Professional, acting under Section 18 read with Section 21 of the Code, is duty-bound to collate all claims received against the corporate debtor and determine its financial position. Following this collation and determination, the Interim Resolution Professional constitutes the Committee of Creditors.

The composition of the Committee of Creditors is primarily governed by Section 21(2) of the Code, which provides that the Committee shall comprise all financial creditors of the corporate debtor. Financial creditors are defined under Section 5(7) of the Code as persons to whom a financial debt is owed, including those to whom such debt has been legally assigned or transferred. Financial debt, as elaborated in Section 5(8), encompasses debts disbursed against consideration for the time value of money and includes various forms of financing such as term loans, working capital facilities, bonds, debentures, and other instruments creating a debt obligation.

However, the first proviso to Section 21(2) introduces a significant exclusion, stipulating that a financial creditor who is a related party of the corporate debtor shall not have any right of representation, participation, or voting in meetings of the Committee of Creditors. The concept of related party is exhaustively defined in Section 5(24) of the Code and encompasses a wide range of relationships including directors, key managerial personnel, holding companies, subsidiary companies, associate companies, and persons who control or are controlled by the corporate debtor. The rationale behind this exclusion is to prevent conflicts of interest and ensure that the Committee of Creditors functions independently without influence from parties whose interests may not align with genuine resolution of the corporate debtor’s financial distress.

Where the corporate debtor owes financial debts to multiple financial creditors as part of a consortium or agreement, Section 21(3) provides that each such financial creditor shall be part of the Committee of Creditors, with their voting share determined on the basis of the proportion of financial debt owed to them relative to the total financial debt owed by the corporate debtor. This proportional voting mechanism ensures that creditors with larger exposures have commensurate influence in decision-making, reflecting the principle that those bearing greater financial risk should have correspondingly greater say in determining the resolution strategy.

In situations where a corporate debtor has no financial creditors, or where all financial creditors are related parties and thus excluded from the Committee, the proviso to Section 21(8) read with Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides an alternative mechanism. In such cases, a Committee of Creditors is constituted comprising the largest operational creditors, along with representatives of workmen and employees. This provision ensures that the Corporate Insolvency Resolution Process can proceed even in the absence of eligible financial creditors, though such situations are relatively rare in practice.

Powers and Responsibilities of the Committee of Creditors

The Committee of Creditors exercises extensive powers throughout the duration of the Corporate Insolvency Resolution Process. These powers are fundamental to achieving the objectives of the Code, namely maximization of the value of assets of the corporate debtor, promotion of entrepreneurship, availability of credit, and balancing the interests of all stakeholders. Section 28 of the Code makes it mandatory for the Resolution Professional to obtain prior approval of the Committee of Creditors for all actions undertaken during the Corporate Insolvency Resolution Process, underscoring the Committee’s supervisory authority.

Among the most significant powers vested in the Committee of Creditors is the authority to appoint or replace the Resolution Professional. While the Interim Resolution Professional is initially appointed by the Adjudicating Authority at the time of admission of the insolvency application, Section 22 empowers the Committee of Creditors to either confirm the appointment of the Interim Resolution Professional as the Resolution Professional or to replace them by appointing another insolvency professional. This decision requires approval by a vote of not less than sixty-six percent of the voting share of the financial creditors in the Committee. Notably, under Section 27 of the Code, the Committee of Creditors may subsequently replace the Resolution Professional at any time during the Corporate Insolvency Resolution Process, and the Code does not mandate that the Committee record reasons for such replacement, though this has been subject to some judicial commentary regarding the potential for arbitrary exercise of this power.

The Committee of Creditors also exercises control over the continuation of business operations of the corporate debtor during the insolvency resolution process. Section 25 read with Section 28 empowers the Committee to decide whether the corporate debtor should continue as a going concern or whether certain operations should be suspended or curtailed. These decisions must be taken by a vote of not less than sixty-six percent of the voting share and are critical to preserving the value of the corporate debtor’s assets pending resolution.

Perhaps the most crucial power exercised by the Committee of Creditors pertains to the approval or rejection of resolution plans submitted by resolution applicants. Section 30 of the Code requires that any resolution plan, before being submitted to the Adjudicating Authority for approval, must first be approved by the Committee of Creditors with a voting share of not less than sixty-six percent. The Committee’s decision in this regard is guided by what has been termed as the commercial wisdom of the creditors, a doctrine that recognizes the Committee’s superior position to assess the commercial viability of proposed resolution plans given their financial stake and familiarity with the corporate debtor’s business.

The Committee of Creditors is also empowered under Section 12A of the Code to approve withdrawal of the insolvency application at any time before approval of a resolution plan. Such withdrawal requires approval by ninety percent of the voting share of the Committee, reflecting the legislature’s intent to place significant decision-making authority in the hands of creditors while maintaining a high threshold for decisions that would terminate the insolvency process prematurely.

Judicial Interpretation and Landmark Judgments

The functioning and powers of the Committee of Creditors have been the subject of extensive judicial scrutiny since the Code’s inception. The Supreme Court of India delivered its first comprehensive judgment interpreting the Code in Innoventive Industries Ltd. v. ICICI Bank,[6] decided on August 31, 2017. This case arose from an application filed by ICICI Bank as a financial creditor seeking initiation of Corporate Insolvency Resolution Process against Innoventive Industries Limited under Section 7 of the Code. The corporate debtor challenged the admission of the application on various grounds, including the assertion that its debt obligations had been temporarily suspended under the Maharashtra Relief Undertakings Act, 1958.

The Supreme Court, speaking through Justice R.F. Nariman, noted that this was the very first application moved under the Code and delivered a detailed judgment to ensure that all courts and tribunals took notice of the paradigm shift in the law brought about by the Code. The Court emphasized that entrenched managements are no longer allowed to continue in management if they cannot pay their debts. The judgment traced the legislative history and scheme of the Code, noting that it represented a conscious policy choice to shift control from debtors to creditors upon default. The Court specifically endorsed the principle articulated by the Bankruptcy Law Reforms Committee that when default takes place, control must transfer to creditors while equity owners have no say.[7]

In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court addressed constitutional challenges to the differential treatment accorded to financial creditors and operational creditors, particularly the exclusion of operational creditors from the Committee of Creditors. The Court recognized that this distinction, while creating different classes of creditors, was based on intelligible differentia having rational nexus with the object sought to be achieved by the Code. The Court observed that financial creditors are engaged from the inception in assessing the viability of the corporate debtor, structuring loan agreements with covenants and conditions, and monitoring the corporate debtor’s financial health. In contrast, operational creditors typically supply goods or services without the same level of ongoing financial assessment and restructuring capability. The Court therefore upheld the legislative wisdom in restricting voting rights in the Committee of Creditors to financial creditors, finding no violation of Article 14 of the Constitution.[8]

The interpretation of related party exclusions under the first proviso to Section 21(2) received important clarification in Phoenix Arc Private Limited v. Spade Financial Services Limited,[9] decided by the Supreme Court on February 1, 2021. This case involved complex factual circumstances where certain entities claimed status as financial creditors but were alleged to have been related parties to the corporate debtor at the time the purported financial debts were created, though they had subsequently divested themselves of relationships that would classify them as related parties.

The Supreme Court adopted a purposive interpretation of the first proviso to Section 21(2), holding that while the default rule is that only those financial creditors who are related parties in praesenti would be debarred from the Committee of Creditors, this interpretation must be qualified to prevent circumvention of the provision’s object and purpose. The Court held that where a related party financial creditor divests itself of its relationship or ceases to be a related party with the sole intention of participating in the Committee of Creditors and potentially sabotaging the Corporate Insolvency Resolution Process by diluting the vote share of genuine creditors, such former related party should be considered as debarred under the first proviso. The Court emphasized that determining the status of related parties requires examination of the substance of relationships and transactions, not merely their formal structure, necessitating a lifting of the corporate veil to identify the real actors and beneficiaries behind transactions.[10]

Regulatory Framework and Procedural Requirements

The Insolvency and Bankruptcy Board of India, established under Section 188 of the Code as the regulatory authority for insolvency professionals, information utilities, and insolvency professional agencies, has issued detailed regulations governing the functioning of the Committee of Creditors. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, particularly Regulations 16, 17, 19, 20, and 21, prescribe procedural requirements for constitution of the Committee, conduct of meetings, voting procedures, and maintenance of records.

Regulation 21 specifically addresses the conduct of Committee of Creditors meetings and mandates that minutes of each meeting must be circulated to all participants within forty-eight hours of the meeting. These minutes must record all decisions taken, voting patterns, and any dissent expressed by members. The requirement for prompt circulation of minutes serves the dual purpose of maintaining transparency and creating a contemporaneous record of the Committee’s decision-making process, which may be subject to scrutiny by the Adjudicating Authority or appellate tribunals in case of disputes.

The regulations also prescribe detailed procedures for determining voting shares of financial creditors, mechanisms for representation of financial creditors who wish to appoint authorized representatives or insolvency professionals to act on their behalf, and protocols for resolution of disputes regarding claims or voting rights. These procedural safeguards are essential to ensuring that the Committee of Creditors functions in a structured, transparent, and accountable manner, balancing the need for commercial flexibility with requirements of procedural fairness.

Conclusion

The Committee of Creditors represents a fundamental reimagining of the insolvency resolution process in India, shifting decision-making authority from judicial or quasi-judicial bodies to commercial creditors with direct financial stake in the outcome. This paradigm shift, premised on the belief that creditors are best positioned to assess viability and determine optimal resolution strategies, has been consistently upheld by Indian courts including the Supreme Court. While the Committee’s composition and powers have been subject to constitutional challenges, particularly regarding the exclusion of operational creditors from voting rights, these challenges have been consistently rejected by courts recognizing the intelligible differentia between categories of creditors and the rational nexus of the legislative scheme to the Code’s objectives.

The extensive jurisprudence developed through landmark cases has provided important clarifications on critical issues including the scope of related party exclusions, the extent of the Committee’s commercial wisdom, and the balance between creditor autonomy and judicial oversight. As India’s insolvency framework continues to mature, the Committee of Creditors will remain central to achieving the Code’s objectives of timely resolution, maximization of asset value, and revival of distressed corporate entities, contributing to the broader goals of economic growth and financial stability.

References

[1] Insolvency and Bankruptcy Board of India. (2015). The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design. https://www.ibbi.gov.in/BLRCReportVol1_04112015.pdf 

[2] Press Information Bureau, Government of India. (2015). Summary of the Recommendations of the Bankruptcy Law Reforms Committee. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=130208 

[3] Insolvency and Bankruptcy Board of India. (2015). The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, p. 29-31. https://www.ibbi.gov.in/BLRCReportVol1_04112015.pdf 

[4] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17. https://indiankanoon.org/doc/17372683/ 

[5] Ibid.

[6] M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407. https://indiankanoon.org/doc/181931435/ 

[7] Ibid.

[8] Supra, 4.

[9] Phoenix Arc Private Limited v. Spade Financial Services Limited & Ors., Civil Appeal No. 3044 of 2020. https://ibbi.gov.in/uploads/order/a05b0fb37f6ba33290c7e0bfc690cf75.pdf 

[10] Ibid.

Authorized by Published Rutvik Desai

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Introduction

The provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) regulating the obligation of personal guarantors to corporate debtors were affirmed in a recent decision by the Hon’ble Supreme Court in Lalit Kumar Jain v. Union of India. With the judgement in place, creditors can now file insolvency proceedings against people such as promoters, managing directors, and chairpersons who act as personal guarantors on loans made to corporate debtors or goods and services provided to them.

A personal guarantor is a person or an organization who agrees to pay another person’s debt if the latter fails to do so. This concept of ‘guarantee’ is derived from Section 126 of the Indian Contracts Act, 1872.[1] When banks want collateral that equals the risk they are taking by lending to a company that may not be performing well, a promoter or promoter entity is most likely to provide a personal guarantee. It differs from the collateral that businesses provide to banks in order to obtain loans, because Indian corporate law stipulates that individuals, such as promoters, are distinct from businesses, and that the two are distinct entities.

Brief Legal History

The Ministry of Corporate Affairs published a Notification on November 15, 2019, bringing personal guarantors into the scope of insolvency proceedings under the IBC. The goal was to hold the promoters of the defaulting enterprises accountable for providing personal guarantees for the loans taken out by their enterprises. The lenders filed bankruptcy claims against India’s leading business tycoons, including Anil Ambani, Kapil Wadhawan, and Sanjay Singal, in accordance with the requirements. Many promoters opposed the new laws in several high courts, alleging that the promoters alone should not be held accountable for loan repayment failure.

 In October 2021, the Supreme Court reassigned to itself a slew of writ petitions contesting the IBC’s personal insolvency rules that had been pending in several high courts. When the government issued the notification on personal insolvency in December 2019, the provisions were challenged in court by as many as 19 promoters, who claimed that the company was always run by a management board and that the promoters alone should not be held liable for debt repayment default. As many as 75 promoters and guarantors had challenged the personal insolvency provisions by the time the Supreme Court moved all the cases to itself in December 2020.

Outlook of the petitioners

Firstly, the petitioners believed that the Central Government had overstepped its authority by issuing the Notification, which changed Part III of the IBC in an unjustifiable manner. . Because the legislature made the law in its entirety, leaving nothing for the executive to legislate on, it was referred to as “conditional” rather than “delegated.”[2] Further, the petitioners argued that the rules of the Notification, establish a single procedure for a personal guarantor’s insolvency resolution, regardless of whether the creditor is a financial creditor or an operational creditor. In Swiss Ribbons (P.) Ltd. v. Union of India,[3] the court determined that the nature of loan arrangements executed by a corporate debtor with financial creditors differed significantly from contracts with operational creditors for the supply of products and services. Combining financial and operational creditors equates to treating unequal’s alike and a breakdown of the categorization carefully formed by the Parliament.

Lastly, the promoters and guarantors were of the opinion that the guarantor’s obligation was co-extensive[4] with the corporate debtor’s, and if a resolution plan was approved, the personal guarantor’s responsibility would be extinguished as well. The petitioners relied on the decision in the case of Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta[5] wherein the court observed that an approval of a resolution plan in respect of a corporate debtor amounted to the extinction of all outstanding claims against the debtor.

Supreme Court Judgment

The Supreme Court stated that it was clear that the mechanism used by the Central Government to implement certain provisions of the Act had a specific purpose: to achieve the IBC’s objectives in relation to the priorities. “The apex court said there was an intrinsic connection between personal guarantors and their corporate debtors and it was this “intimate” connection that made the government recognize personal guarantors as a “separate species” under the IBC.”[6]

According to the Hon’ble Supreme Court, there appeared to be compelling grounds why the forum for adjudicating insolvency processes should be common which should be through the NCLT. The NCLT would thus be able to look at the big picture, so to speak, of the nature of the assets available, whether during the corporate debtor’s insolvency proceedings or afterward. The Committee of Creditors would be better able to frame realistic resolution plans if they had a complete picture, keeping in mind the possibility of recovering some of the creditor’s dues from personal guarantors. Based on this discussion, the Court concluded that the contested notification was neither a legislative act nor an instance of improper and selective application of the IBC’s provisions.

The court also cleared up a misunderstanding among petitioners that acceptance of a resolution plan for corporate debtors would also discharge the personal guarantor’s obligations and said that The release or discharge of a principal borrower from his or her obligation by operation of law, or as a result of a liquidation or bankruptcy procedure, does not absolve the surety/guarantor of his or her duty arising from an independent contract. As a result, the Notification was found to be legal and valid, and the writ petitions, transferred cases, and transfer petitions in this case were all dismissed.

Analysis and aftermath

The government has started the procedure and currently offers a full solution for the Corporate Debtor’s CIRP as well as the individual who has supplied a guarantee for that Corporate Debtor. As a result, the gap or limitation in the IBC that had previously limited the adjudication of cases involving corporate guarantors solely has been lifted, and creditors will now be entitled to seek repayment from either of them, i.e. the Corporate Debtor or the Personal Guarantor of the Corporate Debtor. Though the obligations were always coextensive legally in accordance with established principles of law, MCA has now brought Corporate Debtor and Personal Guarantor into the same operational platform. Following that, such personal guarantors might file a claim for insolvency with NCLT.

This will be a significant boost because lenders will now be empowered to pursue funds from promoters/personal guarantors if the amount recovered from the Corporate Debtor is insufficient, and in cases where bankers initiate IBC procedures, they may have to re-evaluate the entire ground scenario. Though the development is exactly as expected, it may cause some anxiety among promoters, particularly those who are either facing IBC procedures (or are expecting to face IBC due to defaults) or who are likely to face IBC due to defaults. This may also force promoters to consider and strategize about the extent to which they might use their personal assets to obtain corporate financing.

Similarly, despite such notification, advisers’ jobs may not be easy due to unanswered questions such as how to handle dual legal cases; to what extent can a creditor collect money from a personal guarantor, and the practical challenges of pursuing both for recovery, among others. As a result, these issues may be presented in a court of law shortly, and the appropriate honorable courts will investigate these issues in accordance with the law and equity principles.

Conclusion

Many famous industrialists who are the promoters of debt-ridden enterprises would be concerned by the ruling but many creditors will breathe a sigh of relief as a result of the immediate judgement, which has opened the door to the personal guarantors’ asset pool under the IBC. Personal guarantors are more likely to “arrange” for the payment of the debt to the creditor bank in order to achieve a quick discharge if insolvency proceedings are filed against them.

Though only time will tell how such things develop and how honest courts administer justice, the government appears to be on the right track to achieve its goal of instilling financial discipline among borrowers, particularly corporate borrowers.

[1] Indian Contract act, 1872, Act No. 9, Section 126

[2] Vasu Dev Singh & Ors. v. Union of India & Ors., 2006 12 SCC 753.

[3] Swiss Ribbons (P.) Ltd. v. Union of India, 2019 4 SCC 17

[4] Kundanlal Dabriwala v. Haryana Financial Corporation, 2012 171 Comp Cas 94

[5] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, 2019 SCC 1478

[6] Lalit Kumar Jain v. Union of India and Ors., Transfer Case (Civil) No. 245/2020

Written by: Aditya Sharma

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Introduction to India’s Insolvency Framework

When India introduced the Insolvency and Bankruptcy Code in 2016, the legislative intent was clear: create a unified, time-bound mechanism to resolve insolvency for all entities, whether corporate bodies, partnership firms, or individuals. Before the Code came into force, India’s insolvency landscape suffered from fragmentation. Multiple statutes governed different aspects of insolvency, with the Sick Industrial Companies (Special Provisions) Act of 1985 proving particularly ineffective in addressing financial distress. This older legislation lacked market-based mechanisms and failed to incentivize stakeholders toward timely resolution. The Code sought to remedy these deficiencies by establishing a creditor-in-control framework designed to maximize asset value while balancing stakeholder interests.

The Presidency Towns Insolvency Act of 1909 [1] and the Provincial Insolvency Act of 1920 [2] have historically governed individual insolvency in India. The former applied exclusively to the three presidency towns of Calcutta, Bombay, and Madras, while the latter covered the rest of the country. These colonial-era statutes, though functional, reflected outdated procedural norms unsuited to modern commercial realities. As early as 1964, the Law Commission of India recommended merging these laws into a single insolvency code, but successive governments never implemented this suggestion. When Parliament finally enacted the Insolvency and Bankruptcy Code, it included provisions to repeal both acts, marking what appeared to be the end of an antiquated dual system.

However, appearances proved deceptive. While the Code was enacted with much fanfare, the specific provision repealing the old insolvency acts has never been brought into force. This peculiar situation has created legal uncertainty, particularly for individuals who stand as personal guarantors to corporate borrowers.

Understanding Section 243 of the Insolvency and Bankruptcy Code and Its Provisions

The Insolvency and Bankruptcy Code contains within it Section 243, titled “Repeal of certain enactments and savings.” Subsection (1) states unequivocally: “The Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 are hereby repealed.” [3] This language appears absolute, yet the section has never been notified, rendering it inoperative. Under the Code’s Section 1(3), different provisions can be brought into force on different dates through Central Government notification. This phased implementation approach allows the government to test and refine the machinery before full-scale deployment.

Subsection (2) of Section 243 of the Insolvency and Bankruptcy Code provides important safeguards even after the repeal takes effect. It ensures that all proceedings pending under the old acts would continue under those frameworks, as if they had never been repealed. Any orders, rules, notifications, or instruments created under the repealed enactments would remain valid and enforceable. This preservation clause prevents chaos that might otherwise result from an abrupt legislative transition. The section further stipulates that actions taken under the old laws would not be invalidated simply because new legislation has arrived.

The drafters included these saving provisions to ensure continuity, recognizing that insolvency proceedings often span years. Parties who initiated cases under the 1909 or 1920 acts would not suddenly find themselves in legal limbo. Courts that began hearing matters under the old framework would retain jurisdiction to conclude them. This careful balance between change and stability reflects legislative prudence, yet it creates an awkward interim period where dual systems operate simultaneously.

Part III of the Code and Its Current Status

Part III of the Insolvency and Bankruptcy Code deals exclusively with “Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms.” This section mirrors many provisions found in Part II, which addresses corporate insolvency, but adapts them to individual circumstances. The framework establishes procedures for both fresh starts and orderly bankruptcy. It recognizes that individuals require different treatment than corporations, particularly regarding exempt assets and discharge from liabilities.

Despite being part of the original 2016 legislation, Part III remains largely dormant. The government has brought into force only those provisions relating to personal guarantors of corporate debtors, following a notification dated November 15, 2019. [4] This selective activation represented a strategic choice by policymakers. Financial institutions had pressed for tools to pursue guarantors even while corporate insolvency processes proceeded against principal borrowers. The government responded by carving out this specific category from the broader individual insolvency framework.

For all other individuals, partnerships, and partnership firms, Part III remains unnotified. This means that proprietors of businesses, partners in traditional firms, and ordinary individuals cannot access the resolution mechanisms theoretically available under the Code. They remain bound by the provisions of the Presidency Towns Insolvency Act and the Provincial Insolvency Act, assuming those acts still have legal force given that their repeal has also not been notified. This creates a curious legal situation where old laws that were supposedly repealed continue to govern because the repeal itself never took effect.

The Regulatory Framework for Personal Guarantors

The notification of November 15, 2019 specifically brought into operation certain sections of Part III, but only insofar as they relate to personal guarantors to corporate debtors. The Code defines a personal guarantor under Section 5(22) as an individual who serves as surety in a contract of guarantee to a corporate debtor. Typically, these are promoters, directors, or other persons closely connected with the borrowing company who have pledged their personal assets to secure corporate loans.

Following the 2019 notification, the Insolvency and Bankruptcy Board of India issued the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019. [5] These rules established procedural frameworks for initiating insolvency proceedings against guarantors. Significantly, the adjudicating authority for such cases became the National Company Law Tribunal, the same forum that handles corporate insolvency. This unified approach allows creditors to pursue both the corporate borrower and its guarantors in a coordinated manner, potentially before the same bench.

Prior to this notification, creditors seeking to proceed against personal guarantors had to approach different forums, typically the Debt Recovery Tribunals or civil courts, depending on the nature of the debt. This fragmentation often led to inconsistent outcomes and delayed recoveries. The 2019 notification aimed to streamline the process while ensuring that corporate insolvency proceedings did not inadvertently shield guarantors from their obligations. It reflected a policy choice to prioritize creditor rights over concerns about overburdening individuals with liability for corporate failures.

The State Bank of India v. V. Ramakrishnan Case

In August 2018, the Supreme Court of India delivered a landmark judgment in State Bank of India v. V. Ramakrishnan & Anr., addressing whether the moratorium under Section 14 of the Code applied to personal guarantors. [6] The National Company Law Tribunal had initially held that guarantors enjoyed protection under the moratorium, reasoning that since resolution plans bind guarantors under Section 31, they must be considered part of the insolvency process. The National Company Law Appellate Tribunal upheld this view, but the Supreme Court reversed both lower forums.

The Supreme Court observed that a plain reading of Section 14 indicated that the moratorium protected only the corporate debtor, not its guarantors. The Court noted that Part III of the Code, which governs individual insolvency including that of personal guarantors, had not been brought into force. More importantly, Section 243, which would repeal the Presidency Towns Insolvency Act and Provincial Insolvency Act, also remained unnotified. The Court concluded that personal guarantors would continue to be governed by the old insolvency acts, not the Code.

Justice Nariman, writing for the bench, emphasized that Parliament’s intent was clear: personal guarantors should not escape independent liability to pay debts merely because the corporate debtor entered insolvency. The moratorium under Section 14 was designed to give corporate debtors breathing space for restructuring, not to shield guarantors who possessed separate assets and could satisfy debts independently. This interpretation aligned with principles under the Indian Contract Act, where a guarantor’s liability is co-extensive with that of the principal debtor but arises from an independent contract.

The judgment had immediate practical implications. Creditors could pursue guarantors through suit, arbitration, or other recovery mechanisms even while corporate insolvency resolution processes proceeded against the principal borrower. This dual-track approach maximized creditor recoveries but raised questions about fairness to guarantors, who often found themselves liable for debts that might be partially or wholly forgiven in the corporate resolution plan.

The Lalit Kumar Jain v. Union of India Judgment

The constitutional validity of the November 2019 notification came under scrutiny in Lalit Kumar Jain v. Union of India & Ors., decided by the Supreme Court on May 21, 2021. [7] Multiple petitions challenged the notification on various grounds, but the Court consolidated them for hearing. The petitioners argued that the Central Government had exceeded its statutory authority by selectively notifying provisions only for personal guarantors while leaving other categories of individuals outside the Code’s ambit. They contended that this differential treatment violated constitutional equality guarantees.

Petitioners also raised the issue of Section 243’s non-notification. They argued that the failure to bring the repeal provision into force created two contradictory legal regimes for personal guarantors. Under the old acts, certain procedures and protections existed that the Code’s framework did not replicate. This inconsistency, they claimed, led to arbitrary outcomes depending on which legal route creditors chose to pursue. Furthermore, petitioners asserted that when a resolution plan is approved for a corporate debtor under Section 31, the guarantor’s liability should also be extinguished, given that the guarantor’s obligation is co-extensive with the principal’s debt.

A two-judge bench comprising Justice L. Nageswara Rao and Justice S. Ravindra Bhat rejected these arguments. The Court held that Section 1(3) of the Code explicitly permitted phased implementation, allowing the government to bring different provisions into force at different times. The amendment to the Code in 2018 had specifically carved out personal guarantors to corporate debtors as a distinct category, recognizing their unique position. Unlike ordinary individuals or partnership firms, personal guarantors have an intimate connection with corporate entities, often serving as promoters or key managerial personnel.

The Court further addressed the Section 243 concern by noting that the non-obstante clause in Section 238 gives the Code overriding effect over all other laws. Even without formally repealing the old insolvency acts, the Code’s provisions would prevail in case of conflict. Additionally, if Section 243 were notified, its subsection (2) would save pending proceedings under the old acts. Notifying the repeal might actually create complications by requiring the transfer of ongoing cases from one forum to another, potentially causing delays rather than efficiency.

On the question of whether resolution plan approval automatically discharges guarantors, the Court firmly held that it does not. Relying on principles of contract law and previous precedents, the bench emphasized that the release of a principal debtor through insolvency proceedings, being an involuntary process imposed by law, does not absolve the surety of independent obligations. The guarantor’s liability arises from a separate contract with the creditor, and creditors retain the right to pursue either the principal or the surety or both, even after resolution plan approval.

This judgment effectively validated the government’s approach to implementing personal guarantor provisions while postponing broader individual insolvency reforms. It provided creditors with powerful tools to pursue guarantors without waiting for complete operationalization of Part III. However, it left personal guarantors in a potentially precarious position, facing liability under a partially implemented statutory framework.

Legal and Practical Implications of Section 243 of the Insolvency and Bankruptcy Code

The current state of Section 243 of the Insolvency and Bankruptcy Code creates several practical challenges for stakeholders. Individuals seeking insolvency relief must still approach courts under the Presidency Towns Insolvency Act or Provincial Insolvency Act, assuming those forums accept jurisdiction given the ambiguous status of these statutes. These century-old laws contain procedures designed for a different economic era, lacking modern provisions for expedited resolution or creditor committees. The forums handling these cases, typically civil courts rather than specialized tribunals, may not possess the expertise that National Company Law Tribunals have developed in handling insolvency matters.

For personal guarantors specifically, the selective notification approach means they face insolvency proceedings under the Code while other individuals do not. This creates an asymmetry where guarantors are subject to the time-bound, creditor-friendly mechanisms of the Code, but cannot invoke its complete framework, including provisions relating to fresh starts or the treatment of excluded debts. The Debt Recovery Tribunals, which previously handled guarantor cases, have been sidelined in favor of National Company Law Tribunals, changing both procedural expectations and substantive outcomes.

Creditors benefit from the current arrangement in the short term. They can pursue corporate insolvency resolution while simultaneously proceeding against personal guarantors, maximizing recovery prospects. The unified forum under the National Company Law Tribunal allows for coordinated proceedings, where the same bench considers both the corporate debtor’s resolution plan and the guarantor’s personal insolvency. This coordination can prevent forum shopping and ensure that resolution plans account for guarantor assets and liabilities.

However, the long-term uncertainty surrounding Section 243’s notification hampers legal certainty. Parties entering into guarantee arrangements cannot predict whether future changes in the legal framework might alter their rights and obligations. The government’s press release dated August 28, 2017, advised stakeholders to continue approaching appropriate authorities under existing enactments rather than Debt Recovery Tribunals, acknowledging the unresolved status of individual insolvency provisions. [8] This guidance, while practical, highlights the incomplete state of insolvency reform.

Policy Considerations and Future Directions

The Insolvency Law Committee, in reports addressing Code implementation, has recognized the challenges posed by the non-notification of individual insolvency provisions. Committee members have suggested that while corporate insolvency directly affects commercial markets and job creation, individual bankruptcy carries social implications requiring careful calibration. In India, insolvency still carries significant social stigma. Families may suffer ostracism, and bankrupt individuals face obstacles in accessing credit or employment even after discharge. These concerns have likely contributed to the government’s cautious approach to implementing Part III comprehensively.

Another consideration involves the infrastructure required for handling individual insolvency cases. Corporate insolvency already strains the capacity of National Company Law Tribunals, with thousands of cases pending. Adding individual insolvency to this burden without adequate judicial appointments and administrative support could overwhelm the system. The government may be building institutional capacity before fully activating individual insolvency provisions, learning from the corporate insolvency rollout’s challenges.

International best practices suggest that effective individual insolvency regimes balance creditor rights with debtor rehabilitation. Systems that impose punitive measures without offering genuine fresh start opportunities often drive debtors underground, reducing overall recoveries. Conversely, overly lenient discharge provisions can undermine credit discipline and raise borrowing costs. Finding this balance requires careful policy design, informed by cultural context and economic conditions.

The treatment of personal guarantors raises particular policy questions. On one hand, promoters and directors who benefit from corporate operations should bear responsibility when those ventures fail, especially if their decisions contributed to distress. Allowing them to escape liability through corporate insolvency alone would create moral hazard and discourage careful lending. On the other hand, imposing unlimited personal liability may discourage entrepreneurship, particularly in sectors requiring significant capital investment where business failure carries high but unavoidable risk.

Comparative Perspectives

Examining how other jurisdictions address personal guarantors and individual insolvency offers instructive contrasts. The United States Bankruptcy Code treats individual and corporate debtors under a single statutory framework but with different chapters addressing their distinct circumstances. Chapter 7 provides liquidation for both, while Chapter 11 (reorganization) and Chapter 13 (individual repayment plans) recognize that individuals require different treatment than corporations. Personal guarantees survive corporate bankruptcy, but guarantors themselves can seek bankruptcy protection if their personal financial situation warrants it.

The United Kingdom’s Insolvency Act similarly maintains parallel tracks for corporate and individual insolvency, with distinct procedures but common principles. The Enterprise Act 2002 reforms reduced the discharge period for individual bankrupts from three years to one year, reflecting a policy shift toward encouraging entrepreneurship and providing quicker fresh starts. However, guarantors of corporate debts remain liable unless they too enter bankruptcy proceedings and obtain discharge, a process requiring full disclosure and potentially significant loss of assets.

These jurisdictions demonstrate that while recognizing guarantor liability as independent from principal debtor obligations is standard, providing guarantors with access to their own insolvency relief mechanisms is equally important. India’s current approach offers the former without fully implementing the latter, creating an imbalance that may require correction as the Code matures.

Section 238 and the Overriding Effect

Section 238 of the Code provides that its provisions shall have effect notwithstanding anything inconsistent contained in any other law currently in force. [9] This non-obstante clause gives the Code supremacy over conflicting provisions in other statutes. In the context of Section 243 of the Insolvency and Bankruptcy Code, courts have interpreted this to mean that even without notifying the repeal of the old insolvency acts, the Code’s provisions would prevail where they have been activated, particularly regarding personal guarantors to corporate debtors.

This interpretation solves some immediate practical problems but creates theoretical inconsistencies. If the Code overrides the old acts through Section 238, why bother with Section 243 at all? The answer lies in legislative completeness and avoiding constitutional challenges. A formal repeal provides clarity and prevents arguments that multiple laws govern the same subject matter, which could lead to forum shopping or inconsistent interpretations. The saving provisions in Section 243(2) also serve important purposes that Section 238 alone cannot achieve, particularly regarding the transition of pending proceedings.

The reliance on Section 238 to justify not notifying Section 243, while legally sustainable, reflects pragmatic accommodation rather than ideal legislative design. It allows the government to proceed incrementally with Code implementation while maintaining flexibility to adjust course based on emerging challenges. However, this flexibility comes at the cost of certainty, leaving stakeholders to navigate ambiguous legal terrain.

Conclusion

Section 243 of the Insolvency and Bankruptcy Code stands as a peculiar example of enacted but inoperative legislation. While the provision clearly states that the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920 are repealed, the absence of notification means these colonial-era statutes technically remain in force for most individuals. Only personal guarantors to corporate debtors have been brought within the Code’s framework, following the selective implementation strategy adopted through the November 2019 notification.

This situation creates a bifurcated insolvency regime where corporate debtors and their personal guarantors operate under modern, time-bound procedures, while other individuals and partnerships remain subject to century-old laws of uncertain applicability. The Supreme Court judgments in State Bank of India v. V. Ramakrishnan and Lalit Kumar Jain v. Union of India have clarified that this arrangement is constitutionally permissible and serves legitimate policy objectives, particularly creditor protection and debt recovery.

Looking ahead, complete implementation of individual insolvency provisions under Part III will require not only notification of Section 243 of the Insolvency and Bankruptcy Code but also development of institutional capacity and public education about insolvency as a financial management tool rather than a stigma. The government’s cautious approach reflects legitimate concerns about social impacts and administrative readiness, but prolonged delay risks perpetuating an inefficient dual system that serves neither debtors nor creditors optimally.

Until Section 243 is notified and Part III becomes fully operational, India’s insolvency landscape will remain incomplete. The promise of a unified, modern code for resolving financial distress across all categories of debtors remains partially fulfilled. Stakeholders must navigate this transitional period with awareness of both the Code’s stated provisions and the practical reality of their selective implementation. The challenge for policymakers lies in completing the reform agenda while managing the social, economic, and institutional complexities that have slowed progress thus far.

References

[1] Presidency Towns Insolvency Act, 1909 (Act No. 3 of 1909). Available at: https://indiankanoon.org/doc/108877772/ 

[2] Provincial Insolvency Act, 1920 (Act No. 5 of 1920). Available at: https://indiankanoon.org/doc/393016/ 

[3] Insolvency and Bankruptcy Code, 2016, Section 243. Available at: https://ibclaw.in/section-243-repeal-of-certain-enactments-and-savings/ 

[4] Ministry of Corporate Affairs, Notification dated November 15, 2019. Available at: https://www.iiipicai.in/notifications/ 

[5] Insolvency and Bankruptcy Board of India, Rules and Regulations. Available at: https://www.ibbi.gov.in/legal-framework/notifications 

[6] State Bank of India v. V. Ramakrishnan & Anr., (2018) 17 SCC 394. Available at: https://indiankanoon.org/doc/163084985/ 

[7] Lalit Kumar Jain v. Union of India & Ors., Transfer Case (Civil) No. 245/2020, decided on May 21, 2021. Available at: https://indiankanoon.org/doc/60477445/ 

[8] Ministry of Finance, Press Release dated August 28, 2017. Available at: https://taxguru.in/income-tax/no-repealment-of-presidency-towns-insolvency-act-1909-provincial-insolvency-act-1920.html 

[9] Insolvency and Bankruptcy Code, 2016, Section 238. Available at: https://www.indiacode.nic.in/handle/123456789/2154 

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The introduction of the Insolvency and Bankruptcy Code in 2016 marked a transformative moment in India’s corporate restructuring landscape. The legislation was designed to provide a time-bound mechanism for resolving insolvency and bankruptcy matters for corporate entities, partnership firms, and individuals. However, the applicability of IBC to NBFCs has remained a subject of intense judicial scrutiny and legislative evolution. The question of whether Non-Banking Financial Companies fall within the purview of the Code has generated significant debate among stakeholders, practitioners, and adjudicating authorities, primarily because of the systemic importance these entities hold in the financial ecosystem.

The Code excluded financial service providers from its initial scope, creating uncertainty surrounding the applicability of IBC to NBFC insolvency proceedings. This exclusion was rooted in the understanding that financial firms, particularly those handling public deposits and providing critical financial intermediation services, require specialized resolution mechanisms distinct from ordinary corporate debtors. The collapse of major NBFCs such as Infrastructure Leasing and Financial Services and Dewan Housing Finance Corporation Limited exposed critical gaps in the existing regulatory framework and catalyzed the government’s decision to bring certain categories of NBFCs within the Code’s ambit through targeted statutory and regulatory modifications [1].

Legislative Framework Governing Financial Service Providers

The Code defines “corporate person” to mean a company, limited liability partnership, or any other person incorporated with limited liability, but explicitly excludes financial service providers from this definition. This exclusion is critical because only corporate persons as defined can be subjected to the Corporate Insolvency Resolution Process under the Code. The term “financial service provider” is defined to mean a person engaged in the business of providing financial services pursuant to authorization or registration granted by a financial sector regulator [2].

Financial services under the Code encompass a broad range of activities including accepting deposits, safeguarding and administering assets consisting of financial products belonging to another person, effecting contracts of insurance, offering or managing assets consisting of financial products, rendering advice on buying or selling financial products, availing financial services, selling or providing payment instruments, and other related activities. These services represent the core functions traditionally associated with banks, insurance companies, and other financial intermediaries that handle public money and maintain the stability of the financial system [3].

The Reserve Bank of India Act provides the foundational regulatory framework for NBFCs in India. An NBFC is defined as a financial institution which is a company and whose principal business involves receiving deposits under any scheme or arrangement, or engaging in activities such as loans and advances, acquisition of shares, stocks, bonds, debentures, or securities issued by government or other marketable securities, leasing, hire-purchase, insurance business, or chit business. The definition specifically excludes institutions whose principal business relates to agricultural activity, industrial activity, purchase or sale of goods other than securities, providing services, or dealing in immovable property. This definitional framework creates a category of entities that perform banking-like functions without holding a banking license.

The statutory scheme governing NBFCs includes provisions for registration, maintenance of reserves, and regulatory oversight by the Reserve Bank of India. Every NBFC must obtain a certificate of registration from the Reserve Bank of India and maintain a minimum net owned fund as prescribed. The regulatory framework also empowers the Reserve Bank of India to inspect NBFCs, call for information, issue directions, and take corrective action when the affairs of an NBFC are conducted in a manner detrimental to the interests of depositors or creditors [4].

Applicability of IBC to NBFCs: The Intersection of Insolvency Law and Financial Regulation

The Code initially maintained a clear separation between financial service providers and other corporate entities. This distinction was based on the premise that financial firms require specialized resolution mechanisms given their interconnectedness with the broader financial system and the presence of public stakeholders. The Bankruptcy Law Reforms Committee, which provided the foundation for the Code, had specifically recommended that financial firms be excluded from the general insolvency framework, anticipating that a separate regime would be developed for such entities.

However, the question of the applicability of IBC to NBFCs has remained a matter of debate, as the Code did not completely foreclose the possibility of bringing financial service providers within its ambit. Section 227 of the Code grants the Central Government the power to notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under the Code in such manner as may be prescribed. This provision provides flexibility and enables the government, in consultation with financial sector regulators, to extend the Code’s application to specific categories of financial service providers when deemed necessary. [5].

The amendment to the Code through the Insolvency and Bankruptcy Code (Amendment) Act in 2020 clarified that insolvency and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed. This amendment removed any ambiguity about the government’s power to create a modified insolvency framework for financial service providers while recognizing that a one-size-fits-all approach would be inappropriate for entities performing financial intermediation functions.

Judicial Interpretation of Financial Service Provider Status

Judicial interpretation has played a decisive role in determining the applicability of IBC to NBFCs, particularly through the construction of the term “financial service provider”. In the case involving Jindal Saxena Financial Services, the National Company Law Appellate Tribunal examined whether an NBFC registered with the Reserve Bank of India could be subjected to the Corporate Insolvency Resolution Process. The tribunal held that the Code is a self-contained legislation relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals, but an exception has been specifically carved out keeping financial service providers outside the purview of the Code [6].

The tribunal emphasized that merely being registered as an NBFC does not automatically exempt all transactions undertaken by such an entity from the Code’s application. However, where an NBFC is engaged in providing financial services as defined in the Code and holds valid registration from the Reserve Bank of India, it qualifies as a financial service provider excluded from the definition of corporate person. The tribunal noted that the NBFC in question had been granted a certificate of registration by the Reserve Bank of India to commence or carry on the business of a non-banking financial institution, and the memorandum of association showed objectives including carrying on investment company business and all types of financial operations including housing finance, consumer finance, and industrial finance.

Another significant judgment involved Housing Development Finance Corporation Limited’s application against RHC Holdings. The National Company Law Appellate Tribunal addressed the contention that not all NBFCs should be treated as financial service providers, particularly those that are non-deposit taking entities or holding companies. The appellant argued that the legislative intent in exempting financial service providers was to protect systemically important entities where public money is involved, and this protection should not extend to entities that do not impact public interest. However, the tribunal held that the definition of financial services is inclusive and not limited to the nine activities specifically enumerated in the Code. Any entity providing services that fall within the broad definition of financial services and registered with a financial sector regulator qualifies as a financial service provider [7].

These judicial pronouncements established the principle that NBFCs registered with the Reserve Bank of India and engaged in providing financial services as defined in the Code are excluded from the definition of corporate person and cannot be subjected to the Corporate Insolvency Resolution Process unless specifically brought within the Code’s ambit through notification under Section 227. The courts recognized that the legislative intent was to exclude entities performing financial intermediation functions from the general insolvency framework while preserving the government’s discretion to bring specific categories within the Code’s purview when necessary.

The Notification Framework for NBFCs under IBC

The deteriorating financial condition of several large NBFCs and the systemic risks posed by their potential failure prompted the government to exercise its powers under Section 227 of the Code. On November 15, 2019, the Ministry of Corporate Affairs notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules. These rules established a special framework for conducting insolvency and liquidation proceedings for financial service providers, incorporating elements of the Code while introducing modifications tailored to the unique characteristics of financial firms.

On November 18, 2019, the government issued a specific notification designating the Reserve Bank of India as the appropriate regulator for NBFCs, including housing finance companies, with an asset size of five hundred crore rupees or more as per the last audited balance sheet. This threshold-based approach ensured that only systemically important NBFCs would be subjected to the modified insolvency framework, while smaller NBFCs would continue to be governed by the existing regulatory mechanisms under the Reserve Bank of India Act. The notification effectively brought a significant segment of the NBFC sector within the Code’s operational framework while maintaining regulatory oversight and specialized provisions for financial firms [8].

The rules provide that the provisions of the Code relating to the Corporate Insolvency Resolution Process, liquidation process, and voluntary liquidation process for a corporate debtor shall apply mutatis mutandis to financial service providers, subject to specific modifications. These modifications reflect the unique nature of financial service providers and the need to balance creditor rights with systemic stability concerns and the protection of third-party assets held in trust or custody by such entities.

The Regulator-Driven Framework for NBFC Insolvency

Unlike the creditor-driven model that characterizes the Corporate Insolvency Resolution Process for ordinary corporate debtors, the framework for NBFCs introduces significant regulatory oversight and control. An insolvency application against an NBFC can only be initiated by the appropriate regulator, which is the Reserve Bank of India for NBFCs notified under the rules. This requirement ensures that insolvency proceedings are commenced only after careful consideration of the systemic implications and upon an informed decision by the regulatory authority. The Reserve Bank of India’s comprehensive database of credit information and regulatory oversight enables it to assess whether initiating insolvency proceedings serves the public interest and the interests of depositors and creditors.

Upon filing of an application by the Reserve Bank of India, an interim moratorium comes into effect immediately. This interim moratorium continues until the adjudicating authority admits or rejects the application. The interim moratorium provides protection against actions by individual creditors during the critical period between filing and admission, preventing a chaotic rush to enforce claims that could further destabilize the financial service provider. The license and registration authorizing the financial service provider to engage in the business of providing financial services shall not be suspended or cancelled during the interim moratorium and the Corporate Insolvency Resolution Process, ensuring continuity of operations.

When the adjudicating authority admits the application, it appoints an Administrator proposed by the Reserve Bank of India rather than a resolution professional selected through the usual process. The Administrator exercises powers and performs functions equivalent to those of an insolvency professional, interim resolution professional, resolution professional, or liquidator as the case may be, but operates under the guidance and oversight of the Reserve Bank of India. This arrangement recognizes that resolution of financial service providers requires specialized expertise in financial regulation and risk management that may not be possessed by general insolvency professionals [9].

The Reserve Bank of India may constitute an Advisory Committee consisting of three or more members with expertise in finance, economics, accountancy, law, public policy, or other relevant areas to assist the Administrator in the operations of the financial service provider during the Corporate Insolvency Resolution Process. The Advisory Committee provides technical guidance and ensures that decisions made during the resolution process take into account the specific characteristics of financial service provision and the interests of various stakeholders including depositors, creditors, and the financial system as a whole.

Treatment of Third-Party Assets and Regulatory Approval

The rules contain specific provisions addressing the treatment of third-party assets in the custody or possession of the financial service provider. Financial service providers often hold assets in trust for beneficiaries, maintain segregated client accounts, or safeguard securities and funds belonging to customers. The moratorium provisions do not apply to such third-party assets or properties in custody or possession of the financial service provider, including any funds, securities, and other assets required to be held in trust for the benefit of third parties. The Administrator is required to take control and custody of these third-party assets only for the purpose of dealing with them in the manner notified by the Central Government, ensuring that legitimate interests of third parties are protected during the insolvency process.

On January 30, 2020, the government issued a notification specifying the manner of dealing with third-party assets in custody or possession of financial service providers. The notification requires the Administrator to ensure that third-party assets owned by persons other than the financial service provider at the insolvency commencement date are maintained separately and distinctly from the assets of the financial service provider. This segregation prevents the commingling of third-party assets with the insolvent estate and protects the rights of parties who have entrusted assets to the financial service provider for safekeeping or other purposes.

A critical modification in the NBFC insolvency framework relates to regulatory approval of the resolution plan. After the Committee of Creditors approves a resolution plan, the Administrator must seek a no objection from the Reserve Bank of India regarding the persons who would be in control or management of the financial service provider after approval of the resolution plan. The Reserve Bank of India must issue the no objection based on the fit and proper criteria applicable to the business of the financial service provider, without prejudice to the disqualification provisions applicable to resolution applicants. If the Reserve Bank of India does not refuse the no objection within forty-five working days of receiving the application, it is deemed that no objection has been granted. This provision ensures that only suitable persons assume control of the financial service provider while preventing indefinite delays in the resolution process.

The DHFL Case: Pioneering NBFC Resolution under IBC

The insolvency resolution of Dewan Housing Finance Corporation Limited represents the first major test of the modified framework for financial service providers and a defining moment in the applicability of IBC to NBFCs. In November 2019, the Reserve Bank of India superseded the board of directors of Dewan Housing Finance Corporation Limited under Section 45-IE of the Reserve Bank of India Act, appointing an Administrator to manage the affairs of the company. The supersession was necessitated by serious governance concerns, financial irregularities, and the company’s inability to meet its payment obligations, which posed risks to depositors and the financial system.

On November 29, 2019, the Reserve Bank of India filed an application before the National Company Law Tribunal seeking initiation of the Corporate Insolvency Resolution Process against Dewan Housing Finance Corporation Limited. The tribunal admitted the application on December 3, 2019, marking the commencement of insolvency proceedings against the first financial service provider under the newly notified rules. The case involved claims from financial creditors exceeding eighty thousand crore rupees and raised complex questions about the treatment of depositors, the valuation of assets, and the allocation of proceeds from fraudulent and wrongful trading recoveries.

The Committee of Creditors, comprising major banks and financial institutions, evaluated multiple resolution plans submitted by prospective applicants. After a detailed evaluation process, the Committee of Creditors approved the resolution plan submitted by Piramal Capital and Housing Finance Limited with a vote of 93.65 percent in January 2021. The resolution plan provided for the acquisition of Dewan Housing Finance Corporation Limited’s business as a going concern, payment to creditors based on a waterfall mechanism, and change in the status of the company from a deposit-taking housing finance company to a non-deposit-taking housing finance company as required by the Reserve Bank of India’s no objection.

Challenges to the resolution plan were raised by certain creditors and the former promoters. The National Company Law Appellate Tribunal partially modified the tribunal’s order, directing reconsideration of the treatment of recoveries from avoidance transactions under Section 66 of the Code. However, the Supreme Court ultimately upheld the resolution plan approved by the Committee of Creditors and set aside the appellate tribunal’s modifications. The Supreme Court held that the National Company Law Appellate Tribunal had exceeded its jurisdiction by interfering with clauses pertaining to the treatment of recoveries from fraudulent and wrongful trading. The court emphasized that the commercial wisdom of the Committee of Creditors cannot be interfered with and that the resolution plan becomes binding once approved by the adjudicating authority.

The Supreme Court also addressed the rights of former promoters whose board was superseded under Section 45-IE of the Reserve Bank of India Act. The court held that supersession under the Reserve Bank of India Act has a permanent effect where directors vacate their offices, unlike the temporary suspension under the Code. Therefore, the former promoters had no right to participate in Committee of Creditors meetings or demand access to the resolution plan during the process. However, once approved by the tribunal, the resolution plan becomes a public document and the former promoters are entitled to certified copies. The Supreme Court’s judgment provided critical clarity on the interplay between the Reserve Bank of India’s regulatory powers and the Code’s insolvency framework.

Regulatory Powers for NBFC Resolution

The amendments to the Reserve Bank of India Act introduced through the Finance Act 2019 significantly enhanced the regulatory authority’s powers concerning NBFC resolution. Section 45-IE of the Reserve Bank of India Act empowers the Reserve Bank of India to supersede the board of directors of an NBFC (other than a government company) if satisfied that in the public interest, or to prevent the affairs of the NBFC from being conducted in a manner detrimental to the interests of depositors or creditors, or for securing proper management of the NBFC, or for financial stability, it is necessary to do so. The supersession can be ordered for a period not exceeding five years, extendable for another five years.

Upon supersession of the board of directors, the chairman, managing director, and other directors vacate their offices from the date of supersession. All powers, functions, and duties that may be exercised by the board of directors or by resolution in general meeting are transferred to the Administrator appointed by the Reserve Bank of India. The Administrator is bound to follow directions issued by the Reserve Bank of India and may be assisted by a committee of experts with experience in law, finance, banking, administration, or accountancy. This framework provides the Reserve Bank of India with comprehensive control over the management of a distressed NBFC pending resolution.

Section 45-MBA of the Reserve Bank of India Act provides the regulatory authority with extensive powers for resolution of NBFCs. After inspecting the books of accounts of an NBFC, the Reserve Bank of India may frame schemes of amalgamation, reconstruction, or splitting up of viable and non-viable businesses to preserve the continuity of the NBFC. The schemes may provide for establishment of bridge institutions or temporary institutional arrangements, reduction of pay and allowances of senior management, cancellation of shares held by promoters or senior management, and sale of assets. These resolution tools enable the Reserve Bank of India to undertake restructuring measures outside the formal insolvency framework when appropriate.

The interaction between the Reserve Bank of India’s regulatory powers and the Code’s insolvency framework creates a comprehensive toolkit for addressing NBFC distress. The Reserve Bank of India can exercise its powers under the Reserve Bank of India Act for early intervention and resolution, or initiate insolvency proceedings under the Code when restructuring is not viable. This flexibility allows the regulatory authority to tailor the resolution strategy to the specific circumstances of each case, balancing the interests of creditors with systemic stability concerns.

Challenges and Concerns in the NBFC Insolvency Framework

The modified framework for NBFC insolvency, while representing a significant advancement, presents several challenges and areas requiring further clarification. The requirement that only the Reserve Bank of India can initiate insolvency proceedings against NBFCs departs from the creditor-driven model and may delay the commencement of resolution in cases where the regulator is hesitant to take action. Financial creditors and operational creditors who would have standing to initiate insolvency proceedings against ordinary corporate debtors must rely on the Reserve Bank of India to file applications on their behalf, potentially limiting their ability to enforce claims.

The interaction between the Reserve Bank of India’s no objection requirement and the commercial wisdom of the Committee of Creditors raises questions about the balance of power in the resolution process. While the Supreme Court upheld the primacy of the Committee of Creditors’ commercial decisions in the Dewan Housing Finance Corporation Limited case, the Reserve Bank of India’s no objection based on fit and proper criteria introduces an additional layer of scrutiny. If the Reserve Bank of India withholds no objection to a resolution plan approved by the Committee of Creditors, it could create deadlock and delay resolution. The deemed approval mechanism after forty-five working days provides some safeguard, but the practical application of this provision remains to be tested.

The definition of financial service provider and the determination of which NBFCs fall within this category continue to generate uncertainty. The rules apply only to NBFCs with assets of five hundred crore rupees or more, but the definitional question of whether all registered NBFCs are financial service providers affects NBFCs below this threshold. Courts have held that NBFCs registered with the Reserve Bank of India and engaged in providing financial services are excluded from the Code’s general application, but this creates a gap for smaller NBFCs that may not be systemically important yet require insolvency resolution mechanisms.

The treatment of depositors in NBFC insolvency proceedings raises important policy questions. Depositors are typically unsecured creditors under the Code’s waterfall mechanism and may receive limited recoveries compared to secured financial creditors. However, depositors in NBFCs are often retail individuals who placed funds based on trust in the regulatory framework and may not have the sophistication to assess credit risk. The framework does not provide preferential treatment for depositors as is the case for banks under deposit insurance schemes, potentially undermining public confidence in NBFCs.

Comparative Analysis with Other Jurisdictions

Financial institution resolution frameworks in other jurisdictions provide useful context for evaluating India’s approach to NBFC insolvency. The United States established the Orderly Liquidation Authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide a specialized resolution mechanism for systemically important financial institutions. The Orderly Liquidation Authority enables the Federal Deposit Insurance Corporation to conduct an orderly liquidation of covered financial companies to prevent the disorderly collapse that could threaten financial stability. The framework requires agreement among the Treasury Department, Federal Deposit Insurance Corporation, and Federal Reserve, ensuring coordinated decision-making.

The United Kingdom employs a special resolution regime for banks and certain investment firms, administered by the Bank of England. The regime provides resolution tools including transfer of the business to a private sector purchaser, transfer to a bridge bank, transfer to an asset management vehicle, and bail-in of creditors. The framework prioritizes continuity of critical functions, protection of depositors and public funds, and minimization of disruption to the financial system. The resolution authority exercises extensive powers to restructure the failing institution while imposing losses on shareholders and creditors according to a specified hierarchy.

The European Union established the Bank Recovery and Resolution Directive creating a harmonized framework for resolution of credit institutions and investment firms across member states. The directive requires institutions to prepare recovery plans and resolution authorities to prepare resolution plans. When an institution is failing or likely to fail, resolution authorities can apply resolution tools including sale of business, establishment of a bridge institution, asset separation, and bail-in. The framework emphasizes burden-sharing by shareholders and creditors while protecting depositors and essential functions.

These international frameworks share common features including regulatory authority over resolution decisions, specialized tools tailored to financial institutions, protection of depositors and critical functions, and mechanisms to impose losses on shareholders and creditors while maintaining financial stability. India’s framework for NBFC resolution incorporates many of these elements through the combination of the Reserve Bank of India’s regulatory powers and the modified Code provisions. However, the framework remains in early stages of implementation and may require further refinement based on experience.

Future Directions and Reforms

The framework for NBFC insolvency under the Code represents an interim arrangement pending development of a comprehensive financial resolution regime. The government had proposed the Financial Resolution and Deposit Insurance Bill in 2017 to create a specialized resolution framework for financial sector entities including banks, insurance companies, and NBFCs. The bill was withdrawn in 2018 due to concerns about certain provisions, particularly the bail-in mechanism that could have imposed losses on depositors. However, the need for a comprehensive framework addressing resolution of all categories of financial service providers remains.

Future reforms should address the gaps and ambiguities in the current framework. Clarification of the definition of financial service provider and the criteria for determining which entities fall within this category would reduce uncertainty and litigation. Development of clear guidelines for the Reserve Bank of India’s exercise of discretion in initiating insolvency proceedings would enhance predictability and ensure consistent treatment of similarly situated NBFCs. Establishment of a depositor protection mechanism for NBFCs, similar to deposit insurance for banks, would strengthen public confidence and align the framework with international best practices.

The framework could benefit from enhanced coordination mechanisms between the Reserve Bank of India, the Committee of Creditors, and the adjudicating authority. While the Reserve Bank of India’s oversight ensures regulatory concerns are addressed, overly restrictive regulatory intervention could undermine the efficiency of the resolution process. Development of protocols and timelines for regulatory review and no objection would balance these considerations. The Advisory Committee mechanism could be strengthened with clearer mandates and decision-making authority to provide meaningful input during the resolution process.

The application of the framework to non-deposit taking NBFCs and holding companies raises questions about the appropriate scope of the special regime. These entities may not pose the same systemic risks as deposit-taking NBFCs, and subjecting them to the regulator-driven framework may not be necessary. The government could consider differentiating between categories of NBFCs based on their systemic importance, business models, and stakeholder profiles, applying graduated levels of regulatory oversight and procedural requirements accordingly.

Conclusion

The applicability of the Insolvency and Bankruptcy Code (IBC) to Non-Banking Financial Companies (NBFCs) represents a carefully calibrated approach balancing the need for effective insolvency resolution with the unique characteristics of financial service providers. The initial exclusion of financial service providers from the Code’s scope reflected concerns about systemic stability and the complexity of resolving financial firms. However, the failures of major NBFCs demonstrated that the absence of a clear insolvency framework created significant risks to creditors and the financial system.

The framework established through Section 227 of the Code and the subsequent rules introduces a modified insolvency regime for systemically important NBFCs. By combining the procedural mechanisms of the Code with regulatory oversight by the Reserve Bank of India, specialized provisions for third-party assets, and requirements for regulatory approval of resolution plans, the framework addresses many of the concerns that warranted the initial exclusion of financial service providers. The successful resolution of Dewan Housing Finance Corporation Limited demonstrates that the framework can facilitate orderly resolution of large, complex financial institutions.

Nevertheless, the framework remains a work in progress requiring refinement based on experience and evolving regulatory needs. The tension between creditor rights and regulatory oversight, the treatment of depositors, the scope of the financial service provider exclusion, and the relationship with other regulatory powers all require careful consideration. The development of a comprehensive financial resolution regime would provide a more robust foundation for addressing distress in the financial sector while the current framework serves as an important interim mechanism enabling resolution of systemically important NBFCs under judicial supervision.

The evolution of NBFC insolvency law reflects broader themes in India’s financial sector regulation, including the movement toward greater transparency and accountability, the recognition that no institution is too big to fail, and the importance of balancing multiple stakeholder interests in resolution processes. As the framework matures through implementation and potential legislative reforms, it will contribute to a more resilient financial system capable of addressing distress in financial institutions while protecting creditors, depositors, and the public interest.

References

[1] Bansal, S. (2018). NBFCs and IBC: The Lost Connection. Bar & Bench. https://www.barandbench.com/columns/nbfcs-and-ibc-the-lost-connection 

[2] Insolvency and Bankruptcy Code, 2016, Section 3(17). https://ibclaw.in/section-3-definitions-under-insolvency-and-bankruptcy-code-2016-ibc-2016-part-i-preliminary/ 

[3] Insolvency and Bankruptcy Code, 2016, Section 3(16). https://ibclaw.in/section-3-definitions-under-insolvency-and-bankruptcy-code-2016-ibc-2016-part-i-preliminary/ 

[4] Reserve Bank of India Act, 1934, Chapter III-B. https://www.indiacode.nic.in/bitstream/123456789/2398/1/a1934-2.pdf 

[5] Insolvency and Bankruptcy Code, 2016, Section 227. https://ibclaw.in/section-227-power-of-central-government-to-notify-financial-service-providers-etc/ 

[6] Randhiraj Thakur, Director Mayfair Capital Private Limited v. Jindal Saxena Financial Services Private Limited, Company Appeal (AT) (Insolvency) Nos. 32 & 50 of 2018, NCLAT (2018). 

[7] Housing Development Finance Corporation Ltd. v. RHC Holding Private Ltd., NCLAT (2019). https://ibclaw.in/the-definition-of-financial-services-as-defined-in-sec-316-of-the-code-is-not-limited-to-the-9-activities-as-shown-at-clause-a-to-i-of-sec-316-housing-development-finance-corporation-ltd-vs/ 

[8] Ministry of Corporate Affairs. (2019). Notification S.O. 4139(E). https://www.pib.gov.in/Pressreleaseshare.aspx?PRID=1591728 

[9] Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. https://corporate.cyrilamarchandblogs.com/2019/11/road-to-resolution-of-financial-service-providers-a-firm-first-step-ibc/ 

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The landscape of Cryptocurrency Regulation in India has evolved significantly from complete regulatory uncertainty to a structured tax framework coupled with stringent anti-money laundering measures. The journey from the Reserve Bank of India’s attempted banking ban to the present-day comprehensive taxation regime represents a fundamental shift in how digital assets are treated within the country’s financial ecosystem. While cryptocurrency remains unrecognized as legal tender, the government has established a distinct regulatory pathway that acknowledges the economic reality of virtual digital assets while maintaining strict oversight through taxation and compliance requirements.

The Indian cryptocurrency landscape operates within a dual framework where trading and holding digital assets is permissible under specific conditions, yet these assets cannot serve as payment instruments for goods and services. This nuanced position reflects the government’s attempt to balance technological innovation with financial stability concerns, creating a unique regulatory environment that differs substantially from both permissive jurisdictions and those imposing complete prohibitions.

Historical Evolution and Judicial Intervention in Cryptocurrency Regulation in India

The Supreme Court Landmark Judgment

The regulatory trajectory of cryptocurrency in India witnessed a watershed moment through the Supreme Court’s decision in Internet and Mobile Association of India v Reserve Bank of India [1]. On March 4, 2020, a three-judge bench comprising Justice Rohinton Fali Nariman, Justice S. Ravindra Bhat, and Justice V. Ramasubramanian struck down the Reserve Bank of India’s circular dated April 6, 2018. This circular had effectively prohibited banks and financial institutions regulated by the RBI from providing services to entities dealing in virtual currencies, thereby crippling the cryptocurrency ecosystem in India. This landmark judgment not only restored banking access to cryptocurrency exchanges but also set the stage for the development of India’s framework for cryptocurrency regulation, including taxation and compliance requirements for virtual digital assets..

The Court’s 180-page judgment established several critical legal principles. The Supreme Court recognized that while virtual currencies possessed characteristics of money and could perform functions similar to real currencies, they existed within a distinct category. The Court acknowledged that virtual currencies “belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to fund” while simultaneously recognizing the RBI’s regulatory authority over these instruments given their potential impact on the country’s financial system.

However, the pivotal aspect of the judgment centered on the principle of proportionality. The Court held that the RBI failed to demonstrate that less intrusive regulatory measures were considered before imposing a blanket banking ban. The judgment emphasized that no RBI-regulated entity had suffered any direct or indirect loss due to their interface with virtual currency exchanges. This absence of demonstrable harm made the prohibition disproportionate to the purported risks. The Court stated that when the RBI itself maintained it had not banned virtual currencies, and when the Government of India remained unable to formulate definitive policy despite multiple committee recommendations, the blanket restriction could not satisfy the test of proportionality required under Article 19(1)(g) of the Constitution of India, which guarantees the fundamental right to practice any profession or carry on any occupation, trade, or business.

This judicial intervention proved transformative for cryptocurrency regulation in India, allowing exchanges to resume operations with banking access. Nevertheless, the Court explicitly refrained from declaring the legal status of cryptocurrencies, leaving that determination to legislative action. The judgment merely removed a disproportionate regulatory barrier while preserving the government’s authority to regulate virtual currencies through appropriate legislation.

Taxation Framework for Virtual Digital Assets

Income Tax Act Provisions

The Union Budget of 2022 introduced a comprehensive taxation regime for virtual digital assets through amendments to the Income Tax Act, 1961. Section 115BBH, which became effective from April 1, 2022, established the fundamental tax structure for income arising from the transfer of virtual digital assets. The provision defines virtual digital assets broadly to encompass any information, code, number, or token generated through cryptographic means, specifically excluding Indian currency and foreign currency [2].

The taxation mechanism under Section 115BBH imposes a flat rate of thirty percent on income arising from the transfer of virtual digital assets. This rate applies uniformly regardless of whether the income is characterized as capital gains from investment activities or business income from trading operations. The distinction between short-term and long-term capital gains, which typically influences tax rates for other asset classes, becomes irrelevant for virtual digital assets. Furthermore, the provision mandates that in addition to the thirty percent base rate, applicable surcharge and four percent health and education cess must be calculated, potentially elevating the effective tax rate substantially for high-income individuals.

The restrictive nature of Section 115BBH manifests through its explicit prohibition on deductions. While computing taxable income from virtual digital assets, no deduction is permissible except for the cost of acquisition of the transferred asset. This means transaction fees charged by exchanges, blockchain network fees, custodial charges, advisory expenses, or any other costs associated with holding or transferring virtual digital assets cannot be claimed as deductions. The practical effect is that only the difference between the sale consideration and the original purchase price constitutes the deductible amount.

Additionally, Section 115BBH contains stringent provisions regarding losses. Any loss incurred from the transfer of one virtual digital asset cannot be set off against gains from another virtual digital asset or against income under any other head of the Income Tax Act. Furthermore, such losses cannot be carried forward to subsequent assessment years. Each financial year’s cryptocurrency trading activity stands isolated for tax computation purposes, with losses effectively lapsing at the year-end while gains remain fully taxable.

Tax Deducted at Source Requirements

Complementing the direct taxation under Section 115BBH, the government introduced Section 194S to ensure transaction visibility and tax collection at source. This provision, effective from July 1, 2022, mandates that any person responsible for paying consideration to a resident for the transfer of virtual digital assets must deduct tax at source at the rate of one percent [3].

The threshold for triggering tax deduction at source varies based on the taxpayer’s category. For specified persons, defined as individuals or Hindu Undivided Families whose business turnover does not exceed one crore rupees or professional receipts do not exceed fifty lakh rupees, and who have no income from business or profession, the threshold stands at fifty thousand rupees per financial year. For all other taxpayers, including companies, firms, and limited liability partnerships, the threshold reduces to ten thousand rupees per financial year.

The operational mechanism of Section 194S places the deduction responsibility on the payer of the consideration. In transactions occurring through cryptocurrency exchanges, the exchange platform typically assumes this responsibility, automatically deducting one percent from the sale proceeds before crediting the amount to the seller’s account. However, in peer-to-peer transactions conducted outside exchange platforms, the buyer bears the obligation to deduct the tax and deposit it with the government within prescribed timelines, failing which penalties and interest charges apply.

An important aspect of Section 194S involves transactions where virtual digital assets are exchanged for other virtual digital assets rather than fiat currency. In such scenarios, the buyer must still deduct tax deducted at source in cash at one percent of the transaction value, requiring the buyer to arrange cash payment of the tax even when the transaction itself involves no cash component. This creates practical compliance challenges for pure cryptocurrency-to-cryptocurrency exchanges.

The tax deducted at source under Section 194S can be claimed as credit against final tax liability when filing income tax returns. However, the one percent deduction at the transaction level, combined with the thirty percent tax on net gains, creates significant liquidity constraints for active traders who must ensure sufficient funds remain available to discharge both obligations.

Anti-Money Laundering Framework

Prevention of Money Laundering Act Application

The landscape of Cryptocurrency Regulation in India underwent another fundamental transformation on March 7, 2023, when the Ministry of Finance issued a notification bringing virtual digital asset service providers within the ambit of the Prevention of Money Laundering Act, 2002 [4]. This notification classified entities providing specified services related to virtual digital assets as reporting entities under the anti-money laundering legislation, subjecting them to the same compliance obligations as banks and other traditional financial institutions.

The notification defined reportable activities as those carried out for or on behalf of another person in the course of business, encompassing exchange between virtual digital assets and fiat currencies, exchange between different forms of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over such assets, and participation in and provision of financial services related to an issuer’s offer and sale of virtual digital assets. This activity-based approach ensures that the obligation applies regardless of whether the entity operates from within India or offshore, provided services are offered to Indian users.

The designation as reporting entities under the Prevention of Money Laundering Act triggered comprehensive compliance obligations. Virtual asset service providers must now register with the Financial Intelligence Unit-India as a prerequisite for legal operation. This registration requirement applies equally to domestic cryptocurrency exchanges and foreign platforms serving Indian customers. Failure to register exposes platforms to enforcement actions including financial penalties, criminal prosecution, and website blocking measures.

Know Your Customer and Due Diligence Requirements

Following their classification as reporting entities, virtual asset service providers must implement rigorous customer due diligence procedures aligned with Prevention of Money Laundering Act standards [5]. These requirements mandate comprehensive identity verification processes during customer onboarding, extending beyond basic documentation to include advanced authentication measures such as selfie-based verification, geolocation capture, bank account verification through penny-drop transactions, and collection of multiple identification documents.

The customer due diligence obligations continue beyond initial onboarding. Virtual asset service providers must conduct ongoing due diligence by monitoring transaction patterns to ensure consistency with the customer’s known business activities, risk profile, and declared source of funds. When transactions appear inconsistent with the customer’s profile or when material changes occur in the customer’s circumstances, the provider must undertake enhanced due diligence including reverification of identity and source of wealth documentation.

The regulatory framework imposes specific requirements for high-risk customers, particularly politically exposed persons. When onboarding or continuing relationships with politically exposed persons, virtual asset service providers must obtain senior management approval, establish the source of wealth and source of funds, and conduct enhanced ongoing monitoring of the business relationship. These heightened measures reflect international best practices recommended by the Financial Action Task Force.

Record retention constitutes another critical compliance obligation. Virtual asset service providers must maintain all customer identification records, transaction records, and supporting documentation for a minimum period of five years following termination of the business relationship or closure of accounts. These records must be maintained in formats that permit their production to competent authorities within reasonable timeframes upon request.

Suspicious Transaction Reporting

Virtual asset service providers bear the responsibility of monitoring transactions for suspicious activity that may indicate money laundering or terrorist financing. Upon identifying suspicious transactions, providers must file Suspicious Transaction Reports with the Financial Intelligence Unit-India within prescribed timelines [6]. The determination of suspicion involves professional judgment based on various red flag indicators including transaction patterns inconsistent with customer profiles, use of privacy-enhancing technologies like mixers or tumblers, transactions involving jurisdictions identified as high-risk by international bodies, rapid movement of funds across multiple accounts, and transactions lacking apparent economic rationale.

The regulatory framework prohibits the use of certain privacy-enhancing technologies and services. Virtual asset service providers cannot facilitate transactions involving cryptocurrency mixers, tumblers, or privacy-focused tokens that obscure transaction trails. This prohibition reflects the regulatory emphasis on transaction transparency and traceability as fundamental pillars of the anti-money laundering framework.

The Financial Intelligence Unit-India has demonstrated vigorous enforcement of these obligations. In December 2023, show-cause notices were issued to multiple major cryptocurrency exchanges including Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex for non-compliance with Prevention of Money Laundering Act provisions [7]. These actions resulted in platform blocking, financial penalties, and in some cases, freezing of bank accounts. Subsequently, platforms that achieved compliance through proper registration and implementation of required controls received authorization to resume operations.

Regulatory Bodies and Their Roles

The cryptocurrency regulatory architecture in India involves multiple governmental bodies, each exercising distinct oversight functions. The Reserve Bank of India maintains its role as the primary monetary authority, expressing consistent caution regarding cryptocurrency risks to macroeconomic stability and the integrity of the Indian rupee. Despite the Supreme Court’s striking down of its banking ban, the Reserve Bank of India continues advocating for stringent regulation and has embarked on developing the Digital Rupee, its central bank digital currency initiative.

The Ministry of Finance formulates overall policy direction for virtual digital assets and oversees implementation of the taxation regime. The Central Board of Direct Taxes, functioning under the Ministry of Finance, administers and enforces the taxation provisions contained in Sections 115BBH and 194S, issuing clarifications and conducting assessments to ensure compliance.

The Financial Intelligence Unit-India, operating under the Ministry of Finance, has emerged as the de facto regulator for anti-money laundering compliance within the cryptocurrency sector. Through its registration and enforcement powers under the Prevention of Money Laundering Act, the Financial Intelligence Unit-India exercises substantial control over which platforms can legally operate in India and establishes compliance standards that platforms must meet.

The Securities and Exchange Board of India, while not currently exercising direct regulatory authority over cryptocurrencies, has proposed involvement in a multi-regulator framework. The Securities and Exchange Board of India’s position acknowledges that if cryptocurrencies or tokens are structured as securities or investment contracts, they would naturally fall within its regulatory purview. The organization has advocated for coordinated regulatory action involving multiple authorities rather than single-agency oversight.

Current Legal Status and Market Reality

Cryptocurrencies occupy a legally recognized but carefully circumscribed space within Indian law. They are classified as virtual digital assets under the Income Tax Act and subject to taxation, yet they explicitly do not constitute legal tender. The practical implication is that while individuals can legally purchase, hold, and transfer cryptocurrencies through registered exchanges, these assets cannot serve as payment instruments for goods and services in the manner fiat currency functions.

The absence of comprehensive cryptocurrency-specific legislation beyond taxation and anti-money laundering provisions creates certain ambiguities. The proposed Cryptocurrency and Regulation of Official Digital Currency Bill, mentioned in parliamentary bulletins, has not progressed to enactment. This legislative vacuum means that while taxation and anti-money laundering frameworks are well-established, other aspects such as consumer protection mechanisms, dispute resolution procedures, and regulatory standards for cryptocurrency exchanges beyond anti-money laundering compliance remain underdeveloped.

Despite regulatory challenges including high taxation rates and compliance costs, India maintains a substantial cryptocurrency user base estimated at over one hundred million users [8]. Trading activity continues through both registered domestic exchanges that comply with Financial Intelligence Unit-India requirements and offshore platforms, though the latter face periodic enforcement actions if operating without proper registration.

Global Standards and International Coordination

India’s cryptocurrency regulation approach aligns with recommendations from international standard-setting bodies, particularly the Financial Action Task Force. The activity-based definition of virtual asset service providers, the mandatory registration and licensing regime, the emphasis on customer due diligence and transaction monitoring, and the requirement for suspicious transaction reporting all reflect Financial Action Task Force guidelines for virtual asset service providers.

The classification of virtual digital asset service providers as reporting entities under the Prevention of Money Laundering Act implements the Financial Action Task Force’s risk-based approach to anti-money laundering and counter-terrorist financing regulation. India’s framework recognizes that virtual assets present money laundering and terrorist financing risks similar to traditional financial instruments, necessitating comparable regulatory oversight.

International cooperation forms an essential component of effective cryptocurrency regulation given the borderless nature of digital assets. India’s participation in G20 discussions regarding cryptocurrency regulation demonstrates recognition that unilateral regulatory actions may prove insufficient. The Organisation for Economic Co-operation and Development’s Crypto-Asset Reporting Framework, which establishes standards for cross-border tax information exchange regarding cryptocurrency transactions, represents another international initiative likely to influence India’s evolving regulatory approach.

Challenges and Compliance Considerations

The stringent taxation regime imposes substantial compliance burdens on cryptocurrency investors and traders. The prohibition on loss set-off means that even investors experiencing net losses across their cryptocurrency portfolio may face tax liability on profitable transactions. The thirty percent flat rate, applied without distinction between long-term and short-term holdings, eliminates tax planning strategies available for other asset classes.

Accurate tax computation requires detailed transaction recordkeeping. Investors must maintain comprehensive logs documenting purchase dates, acquisition costs, sale dates, sale proceeds, and exchange rates for each transaction. The multiplicity of transactions common in active cryptocurrency trading, combined with the variety of transaction types including spot trading, derivatives, staking rewards, airdrops, and peer-to-peer transfers, creates significant recordkeeping complexity.

The Prevention of Money Laundering Act compliance obligations impose operational costs on virtual asset service providers. Implementation of robust customer due diligence systems, transaction monitoring infrastructure, suspicious activity detection algorithms, and regulatory reporting mechanisms requires substantial technological and human resource investment. These costs particularly affect smaller platforms and may create barriers to entry for new market participants.

Enforcement actions against non-compliant platforms demonstrate regulatory seriousness. The Financial Intelligence Unit-India has not hesitated to issue show-cause notices, impose financial penalties, order website blocking, and initiate criminal proceedings against platforms failing to meet registration and compliance requirements [9]. This aggressive enforcement posture incentivizes compliance but also creates uncertainty regarding enforcement standards and criteria.

Conclusion

Cryptocurrency regulation in India represents a pragmatic middle path between outright prohibition and unregulated permissiveness. Through the combination of comprehensive taxation under Sections 115BBH and 194S of the Income Tax Act and stringent anti-money laundering obligations under the Prevention of Money Laundering Act, the government has established a system that acknowledges the economic reality of virtual digital assets while maintaining regulatory control through taxation and transaction monitoring.

The Supreme Court’s landmark judgment in Internet and Mobile Association of India v Reserve Bank of India established the constitutional boundaries within which cryptocurrency regulation must operate, requiring proportionality and demonstrable harm before prohibitive measures can be justified. This judicial foundation, combined with the legislative framework for taxation and anti-money laundering compliance, creates a structured environment for cryptocurrency activity in India.

Looking forward, Cryptocurrency Regulation in India continues to evolve. Potential developments include enactment of comprehensive cryptocurrency legislation, refinement of taxation provisions based on operational experience, enhanced coordination among regulatory bodies through formalized multi-regulator frameworks, and continued alignment with international standards. The government’s development of the Digital Rupee as a central bank digital currency may influence broader cryptocurrency policy as authorities gain operational experience with digital assets.

For market participants, success requires rigorous compliance with both taxation obligations and anti-money laundering requirements. Cryptocurrency investors must maintain detailed transaction records, calculate tax liability accurately, ensure timely payment of taxes including tax deducted at source, and file complete disclosures through Schedule VDA in income tax returns. Virtual asset service providers must prioritize registration with the Financial Intelligence Unit-India, implementation of robust know your customer and customer due diligence systems, continuous transaction monitoring, and prompt suspicious transaction reporting.

The cryptocurrency regulatory framework in India, though stringent, provides legal certainty that permits cryptocurrency activity within defined parameters. This regulatory clarity, even with its compliance burdens, represents progress from the earlier period of complete uncertainty when cryptocurrency’s legal status remained undefined.

References

[1] Supreme Court of India. Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCC OnLine SC 275 (decided March 4, 2020). Available at: https://www.scconline.com/blog/post/2020/03/04/sc-quashes-rbis-ban-on-cryptocurrency-trading/ 

[2] Income Tax Act, 1961, Section 115BBH (introduced through Finance Act, 2022). Analysis available at: https://taxguru.in/income-tax/taxation-cryptocurrency-virtual-digital-assets-india-understanding-sections-115bbh-194s-method-taxation.html 

[3] Income Tax Act, 1961, Section 194S (introduced through Finance Act, 2022). Details at: https://www.cryptact.com/en/blog/vda-income-tax-india-2025-complete-guide-to-crypto-tax-rules-sections-and-filing-process 

[4] Ministry of Finance, Government of India. Notification S.O. 1074(E) dated March 7, 2023.  Available at: https://fiuindia.gov.in/pdfs/AML_legislation/AMLCFTguidelines10032023.pdf 

[5] Financial Intelligence Unit-India. AML & CFT Guidelines For Reporting Entities Providing Services Related to Virtual Digital Assets (March 10, 2023). Available at: https://fiuindia.gov.in/pdfs/AML_legislation/AMLCFTguidelines10032023.pdf 

[6] Prevention of Money Laundering Act, 2002. Legislative framework analyzed at: https://iclg.com/practice-areas/anti-money-laundering-laws-and-regulations/india 

[7] Global Legal Insights. Blockchain & Cryptocurrency Laws and Regulations 2026 – India. Available at: https://www.globallegalinsights.com/practice-areas/blockchain-cryptocurrency-laws-and-regulations/india/ 

[8] CoinDCX. Crypto Legal Status in India 2026: Tax Rules, FIU, RBI & More. Available at: https://coindcx.com/blog/cryptocurrency/crypto-legal-status-in-india/ 

[9] Oxford Law Blogs. Digital Assets & the Indian Anti-Money Laundering Regime (July 25, 2023). Available at: https://blogs.law.ox.ac.uk/oblb/blog-post/2023/07/digital-assets-indian-anti-money-laundering-regime 

The post Cryptocurrency Regulation in India: Tax System and Legal Framework appeared first on Bhatt & Joshi Associates.

Information Utility (IU) is a professional organization which is registered under Section 210 of the Insolvency and Bankruptcy Code, 2016 whose function is to gather, assemble, accumulate, validate and disseminate financial information from companies and creditors to facilitate insolvency, liquidation, and bankruptcy.

When we study the origins and functioning of the Indian credit recovery infrastructure, it can be seen that originally the only remedy was suits under the provisions of CPC which was long and cumbersome. Here, the process had two parts i.e. debt adjudication which end in a judgment/decree followed by execution proceedings under Order 21 CPC for recovery of decreed amount. Later, with the enactment of the RDBFI Act, 1993, DRTs were established as exclusive forums for speedy adjudication and recovery of debts due to Banks and Financial Institutions (FIs). As per the RDBFI Act, DRTs had the power to issue a Recovery Certificate certifying the amount payable by the debtor after debt adjudication in a summary procedure. This amount was thereafter recovered by the Recovery Officer attached to DRT as per the procedure of recovery of tax under Schedule II of the Income Tax Act, 1961. So, the design was to speed up the recovery once the debt adjudication by DRTs. Although, the RDDBFI Act gave 180 days for disposal of recovery applications, cases have been pending for many years due to prolonged hearings. Almost 70,000 cases involving more than Rupees 5 lakh crore were pending in DRTs as of April 2016. Majority of the delay is at the debt adjudication stage with long drawn processes and adjournments in DRTs. It was for overcoming this hurdle and to further speed up recovery that the SARFAESI Act was enacted. This Act give the Banks and FIs the power to recover their debts classified as non-performing assets by various modes including taking possession and sale of the security, without approaching any Court or Tribunal. Interestingly, the SARFEASI Act dispenses the requirement of debt adjudication and the debt amount stated by the creditor in their demand notice issued under Section 13(2) is conferred sanctity to trigger recovery actions under the Act. When we read through the provisions of the aforesaid Acts and the procedure laid down by them for recovery, it is clear that one of the major causes for delay in securing recovery was the time taken for ascertaining the debt amount payable.

Most of the litigation in money recovery laws are in the nature of disputes on the amount claimed for recovery by the creditors. This kind of litigation and resultant delay in recovery can be avoided if there is a mechanism for collection, collation, authentication and dissemination of information regarding debts/defaults by independent third parties that are reliable as evidence of debt/default.

The law-makers of the country seem to have appreciated this point while enacting the Insolvency and Bankruptcy Code, 2016 (IBC) which in its Chapter V under Part IV talks about ‘Information Utilities’ (IUs) which is a first of its kind in the world. In this regard, it is significant to note the following statements in the Report of the Bankruptcy Law Reforms Committee:

“Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court. Hence, the Committee envisions a competitive industry of information utilities who hold an array of information about all firms at all times. When the IRP commences, within less than a day, undisputed and complete information would become available to all persons involved in the IRP and thus address this source of delay.”

This article attempts to understand the concept and working of IUs as contemplated under the IBC regime and its utilities in securing the objectives of IBC:

What is ‘Information Utility’?

IUs are entities that would act as data repositories of financial information which would receive, authenticate, maintain and deliver financial information pertaining to a debtor with a view to facilitate the insolvency resolution process in a time-bound manner. IU maintains an information network which would store financial data like borrowings, default and security interests among others of debtors for providing such information to businesses, financial institutions, adjudicating authorities, insolvency professionals and other stakeholders.

As per Section 3(21) of IBC, ‘Information Utility’ is defined as a person registered with the IBBI under Section 210. Furthermore, as per Section 209 of IBC, a person shall be eligible to carry on business as IU only if a certificate of registration is obtained from the IBBI. As per Section 210 of IBC, a certificate of registration shall be issued to an entity to function as IU if all the technical formalities are completed as prescribed by the IBBI.

Historical perspective of ‘Information Utilities’

The setting up of IUs was preceded by a regime of Credit Information Companies (CICs) and Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) that provided credit-related information services including details of security interests.

In his Budget speech made in  Parliament on 28^th February 1994, the then Finance Minister of India announced that Reserve Bank of India (RBI) would put in place arrangements for circulating names of defaulting borrowers among the Banks and FIs. The purpose of the same was to alert them and to put them on guard against the borrowers who have defaulted in their dues to other lending institutions. Pursuant to the above announcement, a Working Group was set up under the Chairmanship of Mr N.H. Siddiqui (Chief General Manager, RBI) which submitted its Report in 1999 recommending the establishment of CICs. Accordingly, Credit Information Bureau (India) Ltd. (CIBIL) was incorporated in August 2000. Later, pursuant to the enactment of the Credit Information Companies (Regulation) Act, 2005, three other CICs have also been set up in India. Further, in 2013, RBI constituted another Committee under the Chairmanship of Mr Aditya Puri (Managing Director, HDFC Bank) to examine the reporting formats used by CICs and other related issues. This Committees’ report led to the standardisation of data formats for reporting corporate, consumer and MFI data by all credit institutions and streamlining the process of data submission by credit institutions to CICs. In 2015, all credit institutions were directed by RBI to become members of all the CICs and submit current and historical data about specified borrower to them and to update it regularly.

Later, in the year 2011 the then Finance Minister declared in his budget speech about creation of a central registry of equitable mortgages. Pursuant to the same, the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) was established to maintain and operate a registration system for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest over property, as contemplated under the SARFAESI Act. CERSAI is providing a platform for filing registrations by the Banks and FIs with an option for other lenders and the public to search its database.

The idea to establish IUs appears to be an outcome of the research and efforts to set up a hybrid model unique to India by incorporating the best features of CICs, CERSAI and other similar agencies across the world that are engaged in financial information services.

How an ‘Information Utility’ can be created under IBC?

As per Section 196 of IBC, IBBI is entrusted with the power to grant, renew, withdraw, suspend or cancel registration to IUs. This provision further empowers IBBI to make regulations for registration and matters connected therewith. In exercise of the said power, IBBI has notified the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (“the IU Regulations”) which provide detailed regulations for registration and working of IUs.

As per Regulation 3 of the IU Regulations, registration can be applied by any public company having a minimum net worth of fifty crore rupees and; (a) whose sole object is to provide core services and other services under the IU Regulations, and discharge such functions as may be necessary for providing these services; (b) its shareholding and governance is in accordance with Chapter III of the IU Regulations; (c) its bye-laws are in accordance with Chapter IV of the IU Regulations; (d) its promoters, directors, key managerial personnel, and persons holding more than 5%, directly or indirectly, of its paid-up equity share capital or its total voting power, are fit and proper persons.

A person eligible for registration as aforesaid may make an application to IBBI in Form A of the Schedule to the IU Regulations, along with a non-refundable application fee of five lakh rupees. After due enquiry as contemplated under the IU Regulations, IBBI shall issue a Certificate of Registration in Form B of the Schedule within sixty days of receipt of the application excluding the time taken for removal of difficulties and for obtaining additional documents, if any. Such certificate of registration is valid for a period of five years from the date of issue and it may be renewed by filing an application for renewal at least six months before the expiry of its registration along with the renewal fees of five lakh rupees. IUs are also required to pay annual fee of fifty lakh rupees to IBBI, within fifteen days from commencement of the financial year. However, no annual fee shall be payable in the financial year in which an IU is granted registration or renewal.

The shareholding pattern and governance of IUs should be in compliance to the requirements under Chapter III of the IU Regulations. Furthermore, all changes in the shareholding and voting power of IUs are to be reported to the IBBI. As per Regulation 8 of the IU Regulations, no person shall at any time, directly or indirectly, either by itself or together with persons acting in concert, acquire or hold more than 10% of the paid-up equity share capital or total voting power of an IU. However, there are certain exemptions to the said restriction as follows:

• None of the restrictions on shareholding are applicable to the holding of shares or voting power by the Central Government or a State Government.
• A government company, stock exchange, depository, bank, insurance company and public financial institution either by themselves or together in concert, acquire or hold up to 25% of the paid-up equity share capital or total voting power of an IU.
• Holding up to 51% of paid-up equity share capital or total voting power of an IU by a person directly or indirectly, either by itself or together with persons acting in concert, is allowed up to 3 years from the date of its registration, if the IU is registered before 30^th September, 2018.
• Indian companies (i) which are listed on a recognised stock exchange in India, or (ii) where no individual, directly or indirectly, either by himself or together with persons acting in concert, holds more than 10% of the paid-up equity share capital, may hold up to 100% of the paid-up equity share capital or total voting power of an information utility up to three years from the date of its registration, if such IU is registered before 30th September, 2018.

Importance and Utility of Information Utilities

The Bankruptcy Law Reforms Committee (BLRC) led by Mr T. K. Viswanathan which designed the IBC, visualised four pillars of supporting institutional infrastructure to make the processes under IBC to work efficiently. They are:  (1) a private industry of IUs, (2) a private industry of Insolvency Professionals (IPs) with oversight by private insolvency professional agencies (IPAs), (3) adjudication infrastructure at the National Company Law Tribunal (NCLT) and DRT, and (4) a regulator i.e.  IBBI. As noted rightly by the BLRC, IU is a very significant institution for the successful operation of the processes under IBC.

IBC was enacted with a view to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of the value of assets of such persons. Section 12 of IBC thus mandates that the Corporate Insolvency Resolution Process (CIRP) of a corporate debtor (CD) must conclude within 330 days from the insolvency commencement date which includes (a) normal CIRP period of 180 days, (b) one-time extension, if any, up to 90 days of such CIRP period granted by the adjudicating authority, and (c) the time taken in legal proceedings in relation to the CIRP of the corporate debtor. This ambitious time-limit prescribed for concluding CIRP appears to be based on an assumption that information relevant for the process will be easily accessible to the parties involved viz. creditors, adjudicating authorities, insolvency resolution professionals, etc. This assumption appears to be based on the confidence of the framers of the law in the idea of IUs envisaged under IBC. As the timelines specified by IBC are strict, they can be met only if the IUs stand ready to provide all relevant information quickly.

The relevant financial information in this stage includes the details of the default, disputes on the same, other financial information of debtors such as records of its debt, liabilities at the time of solvency, assets over which the security interest is created by debtor, timely records of its default and its financial statements of preceding years. Furthermore, it is quintessential for the adjudicating authority to ascertain the existence of default as claimed by the applicant and such existence would decide the fate of the application for CIRP.

As per the scheme of IBC, once CIRP gets initiated against any  corporate debtor, the management of its affairs vest in the Interim Resolution Professional (IRP) and thereupon all the powers of its Board of Directors stands suspended and the same is exercised by the IRP. During such phase, there is every possibility for the Resolution Professionals to face non-cooperation from the management and the suspended Board of the  corporate debtor in disseminating relevant financial information. In these circumstances, an independent and reliable third party which is a repository of validated information regarding debt/default that is capable of providing the same quickly can add significant value to the process.

IBBI has now strengthened the role of IUs by allowing it to access the data of MCA-21 database and CERSAI portals to speed up the process of debtor default authentication. By ensuring access of MCA-21 and CERSAI portal data to an IU, IBBI is also providing the mechanism for quick and reliable data for all the stake-holders in the processes under IBC. It may also be noted that RBI has directed all the Scheduled Commercial Banks (Including RRBs), small finance banks, local area banks, non-banking financial companies and all the co-operative banks of the country to put in place appropriate systems and procedures for submission of financial information to IUs.

Functions of ‘Information Utility’ as contemplated under the IBC

As per Section 213 of IBC, IUs shall provide services which include core services to any person, if such person complies with the terms and conditions of the IU Regulations. Furthermore, as per Section 3(9) of IBC, “core  services” means – (a) accepting electronic submission of financial information; (b) safe and accurate recording of financial information; (c) authenticating and verifying financial information submitted by person; and (d) providing access to information stored with IUs to persons as may be specified.

As per Section 3(13) of IBC, “financial information”, in relation to a person, means one or more of the following categories of information, namely:  (a) records of the debt of the person; (b) records of liabilities when the person is solvent; (c) records of assets of person over which security interest has been created; (d) records, if any, of instances of default by the person against any debt; (e) records of the balance sheet and cash-flow statements of the person; and (f) such other information as may be specified.

Section 214 of the IBC elaborate the functions to be performed by IUs for the purpose of providing core services. The major obligations of IUs as per Section 214 can be summarised as follows:

• Acceptance of financial information in electronic form from persons who are under obligation to submit the same under IBC and also from other persons who intend to submit the same. This acceptance is to be in such form and manner as specified under the IU Regulations.
• Authentication of the financial information so received by all the parties concerned.
• Storage of the financial information received as aforesaid in a universally accessible format after the same is duly authentication by all the parties concerned.
• Providing the financial information stored by it as aforesaid to any person who intend to access such information in such manner as may be specified by the IU Regulations.
• Publication of such statistical information as may be specified by the IU Regulations.

While performing aforesaid obligations, IUs are required to meet such minimum service quality standards as may be specified by IBBI and they are also required to ensure systems to facilitate inter-operatability with other IUs. As per Section 215 of IBC, while it is mandatory for the financial creditors to submit financial information and information relating to assets in relation to which any security interest has been created; submission of information is optional for the operational creditors. Insolvency professionals also may submit reports, registers and minutes in respect of any insolvency resolution, liquidation or bankruptcy proceedings to an IU for storage.

Significance of Information Utility in the operation of processes under IBC

As per the scheme of IBC, a CIRP can be triggered by the corporate debtor itself or by the financial or operational creditors of such corporate debtor. Application for CIRP by a financial creditor is governed by Section 7 of the IBC read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.  The application is to be filed as per Form 1 of the said Rules along with the record of the default recorded with the IU or such other record or evidence of default as may be specified. As per Part V of the said Form 1, record of default with IU is listed among the documents acceptable as evidence of default. Upon submission of application, NCLT is required to ascertain the existence of default from the records of an IU or on the basis of other evidence furnished by the financial creditor. It is significant to note that this activity is to be completed by NCLT within fourteen days of the receipt of application. This timeline can be met only if such ascertainment can be done from the records of an IU. Furthermore, upon initiation of CIRP when public announcement is made by the IRP calling for claims, financial creditors may submit their claims along with sufficient proof of such claims. In this regard, it may be noted that the records available with an IU is accepted as a proof of existence of debt due.

Whereas, application for CIRP by operational creditors is governed by Section 9 of the IBC read with Rules 5 & 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. On the occurrence of a default, operational creditors are required to deliver either a demand notice of the unpaid debt to the debtor as per Form 3 of the said Rules or a copy of an invoice attached with a notice in Form 4. On receipt of notice, the debtor may, within 10 days, bring to the notice of the creditor about any pre-existing dispute on such debt and get out of the clutches of IBC. On expiry of 10 days from the said notice, if the payment is not done by the defaulter, the operational creditor can file application for CIRP in Form 5 of the aforesaid Rules. As per the aforesaid Forms 3 and 5, record of default with IU is listed as one of the documents to prove the debt. Furthermore, upon initiation of CIRP when the public announcement is made by the IRP calling for claims, operational creditors may submit their claims along with records available with IU which are acceptable as proof for the debt.

Similarly, in an application for CIRP by corporate applicants and in the claims submitted by the other categories of claimants/creditors including workmen, records with IU is accepted as proof of such debt/default. Furthermore, as per IBC and the Rules, the records with IUs can be accessed and relied by the adjudicating authority as evidence for the default/debt in their proceedings. Hence, IUs play a very significant role in enabling timely completion of the processes under IBC.

Operating Procedure of ‘Information Utility’ under IBC

IBC provides little guidance on how IUs are to function, leaving the details to subordinate regulation. Section 240 of IBC empowers the IBBI to make regulations by notification with regard to the registration of IUs, their functioning and on matters connected thereto. The IU Regulations were notified in exercise of this power in order to prescribe the details on how IUs shall operate to meet their objectives as contemplated under IBC.

As per the IU Regulations, a person shall register itself with an IU for submitting information to; or for accessing information stored with any of the IUs. Upon such registration, IU shall verify the identity of the applicant and assign him with a unique identifier and intimate the same to him. A person registered once with an IU shall not register itself with any IU again. A registered user may submit information to any IU and not only to the IU with which he is registered. Different parties to the same transaction may use different IUs to submit, or access information in respect of the same transaction and a user may access information stored with an IU through any IU.

A user can submit information of debts or defaults to the IU and on receipt of the same, IU is to assign a unique identifier to the information and intimate the same to the user along with an acknowledgement. In the case of information of default, IU is to expeditiously undertake the process of authentication and verification of the information of default. For this purpose, IU is to deliver the information of default to the debtor seeking confirmation of the same within the specified time. If the debtor fails to respond, IU is to send three reminders giving 3 days’ time in each case for the debtor to respond. If the debtor do not respond even after three reminders as aforesaid, the information is deemed to be authenticated. In case if the debtor confirms the information of default, the information is treated as authenticated and green colour is assigned to the status. If the debtor disputes the information of default the information is treated as disputed and red colour is assigned to the status. Whereas, in cases where the debtor does not respond even after three reminders, the information is‘Deemed to be authenticated’ and yellow colour is assigned to the status. After recording the status of information of default, IU is to communicate the status of authentication in physical or electronic form of the relevant colour, as aforesaid, to the registered users who are- (a) creditors of the debtor who has defaulted; (b) parties and sureties, if any, to the debt in respect of which the information of default has been received.

IUs are required to store the information received by it in their facilities located in India and they shall allow the following persons to access the information stored with it- (a) the user which has submitted the information; (b) all the parties to the debt and the host bank, if any, if the information is regarding record of debts or assets or instances of default by a person against any debt; (c) the corporate person and its auditor, if the information is of liabilities of a person during solvency or balance sheet and cash-flow statements of the person; (d) the insolvency professional; (e) the adjudicating authority; (f) the IBBI; (g) any person authorised to access the information under any other law; and (h) any other person who the persons referred to in (a), (b) or (c) have consented to share the information.

Provisions to ensure protection of the data with Information Utilities

As per the provisions of IBC, data entrusted with the IUs by the users are to be held as a custodian and hence they shall not have ownership over the data available with them. As such, it is one of the most important duties of the IUs to ensure safety of the data and its protection from unauthorised interferences and data theft. To ensure safety of the data, the IU Regulations prescribe the following to be complied by the IUs:

• Establish adequate procedures and facilities to ensure that its records are protected against loss or destruction and adopt secure systems for information flows.
• Storage of all information in a facility located in India shall be governed by the laws of India.
• Not to outsource the provision of core services to a third-party service provider.
• Not to use the information stored with it for any purpose other than providing services under these Regulations, without the prior approval of the Board.
• Not to seek data/details of users except as required for the provision of services under IBC.
• Adequate arrangements, including insurance is to be made for indemnifying the users for losses that may be caused to them by any wrongful act, negligence or default of the IU, its employees or any other person whose services are used for the services.
• Appoint external auditor having relevant qualifications to audit its information technology framework, interface and data processing systems every year. The auditor’s report along with the comments of the Governing Board of IU is to be submitted to the IBBI within one month from the receipt of the same.
• Establish an appropriate risk management framework in line with the Technical Standards.
• Declare a Preservation Policy providing for the form, manner and duration of preservation of information stored with it; and details of the transactions of the IU with each user in respect of the information stored with it.
• Inspection by the IBBI with such periodicity as may be considered necessary. Disciplinary actions can be taken by IBBI including imposition of penalty under Section 220(3) of IBC.

Evidentiary Value of Information with Information Utilities

Authenticated information stored by IUs with regard to a debt or its default amounts to admission of such debt and default thereto by and between the parties to such debt or default. In the light of this fact, evidentiary value of information with IUs can be appreciated by referring to certain provisions of the Evidence Act, 1872. As per Section 65-B of the Evidence Act, information contained in any electronic record shall be deemed to be a document and shall be admissible in the court of law. Furthermore, Section 31 of the Evidence Act state that admissions are not conclusive proof of the matters admitted, but they may operate as estoppels under the provisions hereinafter contained.  In the context of information with IUs, Section 115 of the Evidence Act is significant, which state as follows:

“When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.”

When we examine the provisions of IBC with regard to IUs as explained in the preceding paragraphs of this article, it can be noted that the adjudicating authorities are given the option to accept records with IUs as proof/evidence of debts and defaults. This is on the basis of estoppel which would operate against the parties as per the aforesaid provisions of the Evidence Act. In Swiss Ribbons Pvt. Ltd. v. Union of India, constitutional validity of the various provisions of IBC was considered by the Supreme Court of India. One of the arguments in the matter was that IBC provides for private information utilities not only to collect financial data, but also to check whether a default has occurred or not. It was also argued that certification of debt/default by IUs is in the nature of a preliminary decree issued without any hearing and without any process of adjudication. On this ground along with others, the constitutional validity of IBC was challenged in this matter. However, the  Supreme Court of India upheld the constitutional validity of IBC and on the basis of statements made by the then Attorney General of India, declared at para 57 of the judgment that the record of default with IU is only a prima facie evidence of default, which is rebuttable by the  corporate debtor. So, the records with IUs are not conclusive proof and they are only a prima facie evidence of default, which is rebuttable by the corporate debtor.

Conclusion

It can be concluded that creation of IU is definitely a step towards ensuring an information-rich environment for the working of IBC. IUs certainly provide an infrastructure which ensure relevant financial information of debtors easily accessible at anytime from anywhere. This infrastructure undoubtedly empower the creditors and lenders to make informed choices and also provide essential financial information enabling time-bound insolvency resolution process. While, the purpose of setting up the above regime of IUs was to reduce information asymmetry; IUs not only reduce information asymmetry, but it is also enable the processes of IBC to meet the strict timelines prescribed. It can also be seen that the IUs are significant as they provide for improved credit risk assessment and improve the recovery processes. Though there is no doubt about the significance of the IUs; it may take a while before they become relevant as expected. As the first step, IBBI has registered National E-Governance Services Limited (a Union Government company) as the first IU of the country on September 25, 2017. Being sanguine about the developments thus far, we can expect that the data available with the IUs will grow in terms of quantity and quality over a period of time making them an important pillar in the overall resolution process.

Refrences: 

Civil Procedure Code, 1908 (Act  5 of 1908).

Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act  51 of 1993).

Indu Bhan, “Long Due – Banks can now confiscate security in case of a loan default”, Financial Express, August 19, 2016.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act  54 of 2002).

Prasanth V. Regy and Shubho Roy, “Understanding Judicial Delays in Debt Tribunals”, Paper No. 195 in the Working Paper Series of National Institute of Public Finance and Policy at New Delhi, May 2, 2017.

Government of India, “Report of the Bankruptcy Law Reforms Committee” (Ministry of Finance, November 2015).

Insolvency and Bankruptcy Board of India established under Section 188 of the Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016).

Reserve Bank of India, “Report of the Working Group to explore the possibilities of setting up a Credit Information Bureau in India” (Department of Banking Operations and Development, October 1999)

Credit Information Companies (Regulation) Act, 2005

Equifax Credit Information Services Private Limited, Experian Credit Information Company of India Private Limited and CRIF High Mark Credit Information Services Private Limited have been granted Certificate of Registration by RBI.

Monetary Financial Institutions.

Reserve Bank of India, “Report of the Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies”, (Department of Banking Operations and Development, January 2014)

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017

As per Explanation to Regn. 3 of Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, a person is considered as fit and proper, if he (a) is having integrity, reputation, character and financial solvency (b) has never been convicted by a Court for an offence or sentenced to imprisonment for a period less than 6 months, and (c) has not suffered any restraint order issued by financial sector regulator or adjudicating authority.

IBBI (Information Utilities) Regulations, 2017, Regns. 5 and 6.

Id, Regn.  8(3).

Id,  proviso to Regn. 8(1)

Id, Regn. 8(2)(a).

Id,  Regn. 8(2)(b).

Supra Note 7.

Government of India, “Report of the Working Group on Information Utilities” (Ministry of Corporate Affairs, January 2017).

This cap of 330 days was brought by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (w.e.f. 16-8-2019).

MCA-21 is an e-Governance initiative of Ministry of Company Affairs (MCA), Government of India that enables an easy and secure access of the MCA services to the corporate entities, professionals and citizens of India. It is designed to fully automate all processes related to the enforcement and compliance of the legal requirements under the Companies Act, 1956, the New Companies Act, 2013 and the Limited Liability Partnership Act, 2008. Its database will contain the master data and the charges registered on companies and LLP.

Insolvency and Bankruptcy Board of India, Circular No. IBBI/IU/025/2019 dated 07-09-2019.

Notification No: DBR.No.Leg.BC.98/09.08.019/2017-18 dated December 19, 2017 issued by Reserve Bank of India.

Insolvency and Bankruptcy Code, 2016 (31 of 2016), Ss. 214(d) and (h).

As per Section 5(7) of IBC, “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred. Eg. – Banks and financial lenders.

As per Section 5(20) of IBC, “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Eg. – Suppliers and vendors.

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 38.

Insolvency and Bankruptcy Code, 2016 (31 of 2016), S.6.

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regn. 8(2)(a)

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Chapter V (Regns.17 to 27).

Id, Form C of the Schedule.

Deemed authentication was inserted by Notification No. IBBI/2019-20/GN/REG046 dated 25/07/ 2019. Prior to this, there was no option for deemed authentication when debtor do not respond to notice for authentication.

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 21.

Host bank means the financial institution hosting the repayment account.

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn. 30.

Id, Regn. 31.

Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, Regn 34.

Id,  Regn. 33.

Id, Regn. 35.

Id,  Regn.37.

2019 SCC OnLine SC 73.

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The pre-existing dispute which may be ground to thwart an application under Section 9 of the I&B Code, 2016 (“Code”)has to be a real dispute, a conflict or controversy. Such conflict of claims or rights should be apparent from the reply to Demand Notice as contemplated by Section 8(2) of the Code.

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a paradigm shift in India’s approach to corporate insolvency and debt recovery. Among its various provisions, the interpretation of what constitutes a ‘dispute’ has emerged as one of the most contentious and frequently litigated aspects. This concept serves as a critical threshold test that determines whether an operational creditor can successfully initiate corporate insolvency resolution proceedings against a corporate debtor. The legislative intent behind incorporating the dispute mechanism was to prevent the misuse of insolvency proceedings for debt recovery purposes and to ensure that genuine commercial disputes are resolved through appropriate forums rather than through the insolvency framework. The significance of correctly understanding and applying the concept of ‘Dispute’ Under IBC cannot be overstated, as it directly impacts the rights of both creditors and debtors. A narrow interpretation could potentially allow creditors to bypass legitimate disputes and force solvent companies into insolvency proceedings, while an overly broad interpretation might enable unscrupulous debtors to abuse the provision and delay legitimate claims. The judiciary has therefore been tasked with striking a delicate balance between these competing interests while remaining faithful to the objectives of the IBC.

Legislative Framework and Statutory Definition of  ‘Dispute’ Under IBC

The Insolvency and Bankruptcy Code, 2016 provides a statutory definition of ‘dispute’ under Section 5(6), which states: “Dispute includes a suit or arbitration proceedings relating to the existence of the amount of debt, the quality of goods or service, or the breach of a representation or warranty.” This definition is deliberately inclusive rather than exhaustive, as evidenced by the use of the word “includes” rather than “means.” The legislative choice of an inclusive definition suggests that Parliament intended to cast a wide net that would encompass various forms of disputes beyond those explicitly mentioned in the provision.

The three specific categories mentioned in Section 5(6) provide important guidance on the types of disputes contemplated by the legislature. First, disputes relating to the existence of the amount of debt cover situations where parties disagree on whether any debt exists at all or contest the quantum of the alleged debt. Second, disputes concerning the quality of goods or services address situations where the debtor contends that the creditor failed to deliver goods or services of the agreed quality or specification. Third, disputes involving breach of representation or warranty encompass situations where parties disagree on whether certain representations were made or warranties were honored during the course of their commercial relationship.

Section 8 of the IBC establishes the procedural framework that operational creditors must follow before initiating insolvency proceedings. This section mandates that an operational creditor must first deliver a demand notice to the corporate debtor demanding payment of the operational debt. The corporate debtor then has ten days from receipt of this notice to either repay the debt or bring to the notice of the operational creditor the existence of a dispute between the parties or record of pendency of a suit or arbitration proceeding filed before receipt of such notice in relation to such dispute. This procedural requirement serves as an important safeguard against premature initiation of insolvency proceedings.

Section 9 of the IBC deals with the application for initiating corporate insolvency resolution process by operational creditors. This section specifically provides that the adjudicating authority shall reject an application if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. The interplay between Sections 5(6), 8, and 9 creates a comprehensive framework for determining when disputes should prevent the admission of insolvency applications.

The Mobilox Innovations Judgment: A Watershed Moment

The interpretation of ‘dispute’ under the IBC underwent significant clarification when the Supreme Court delivered its landmark judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited on September 21, 2017. [1] This case arose from a commercial relationship where Mobilox Innovations engaged Kirusa Software to provide tele-voting services for a television program. After Kirusa rendered the services and raised invoices, Mobilox withheld payments alleging breach of a non-disclosure agreement that had been executed between the parties.

When Kirusa issued a demand notice under Section 8 of the IBC, Mobilox responded by asserting the existence of serious and bona fide disputes between the parties. Despite this assertion, the National Company Law Tribunal initially dismissed the application, and the matter was subsequently appealed to the National Company Law Appellate Tribunal, which remitted the case back to the adjudicating authority. The matter eventually reached the Supreme Court, which used this opportunity to provide comprehensive guidance on interpreting the concept of ‘dispute’ under the IBC.

The Supreme Court engaged in a detailed analysis of the legislative history of the IBC by examining the Insolvency and Bankruptcy Bill, 2015 and comparing it with the enacted legislation. The Court noted three significant changes between the Bill and the final Act. First, the Bill had used the phrase “the existence of a dispute” while the enacted Code uses “existence of a dispute, if any and record of pendency of the suit or arbitration proceeding.” Second, the word “includes” replaced the word “means” in the definition of dispute, thereby changing the nature of the definition from restrictive to inclusive. Third, the Bill’s definition of dispute as meaning a “bona fide suit or arbitration proceedings” was modified in the enacted Code by removing the expression “bona fide” from Section 5(6).

These textual changes carried significant interpretive implications. The Supreme Court held that the word “and” appearing in Section 8(2)(a) between the phrases “existence of a dispute” and “record of pendency of suit or arbitration proceeding” must be read as “or” to give effect to legislative intent and avoid anomalous situations. The Court reasoned that if the word “and” were given its literal conjunctive meaning, disputes would only encompass pending suits or arbitration proceedings, thereby excluding situations where disputes arose shortly before the insolvency process was triggered or where parties had not yet approached a court or arbitral tribunal despite the existence of a genuine dispute. Such a narrow interpretation would create significant hardships and defeat the legislative purpose of preventing premature initiation of insolvency proceedings against debtors involved in legitimate commercial disputes.

The Supreme Court also examined various foreign judgments to understand how similar provisions had been interpreted in other jurisdictions. Drawing from this comparative analysis, the Court emphasized the concept of “genuine dispute,” which it described as a dispute that is bona fide and truly exists in fact. The Court clarified that the grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory, or misconceived. This formulation sought to prevent both the abuse of insolvency proceedings by creditors seeking to bypass genuine disputes and the misuse of the dispute defense by debtors attempting to evade legitimate debts.

Most significantly, the Supreme Court articulated what has come to be known as the “plausible contention test.” Under this test, the adjudicating authority must determine whether there exists a plausible contention that requires further investigation and whether the dispute raised is not a patently feeble legal argument or an assertion of fact unsupported by evidence. The Court emphasized that the adjudicating authority should not examine the merits of the dispute in detail but should merely satisfy itself that a genuine dispute exists that warrants resolution through appropriate judicial or quasi-judicial forums rather than through the insolvency process. The role of the adjudicating authority is to separate the grain from the chaff and reject spurious defenses that amount to mere bluster.

The Supreme Court concluded that so long as a dispute truly exists in fact and is not spurious, hypothetical, or illusory, the adjudicating authority must reject the insolvency application. The Court also held that the dispute need not have culminated in formal legal proceedings prior to receipt of the demand notice, as requiring such formality would create unreasonable barriers and defeat the purpose of protecting debtors from premature insolvency proceedings.

Judicial Interpretation and Evolution

The principle established in Mobilox received further judicial validation and refinement in subsequent cases. In Samee Khan v. Bindu Khan, the courts reiterated the principle that the word “and” may be read as “or” to further the object of a statute and avoid anomalous situations. [2] This interpretive principle, which has deep roots in statutory interpretation jurisprudence, supports a purposive reading of Section 8(2)(a) that gives effect to the legislative intent of protecting debtors involved in genuine disputes.

However, different benches of the National Company Law Tribunal initially adopted divergent approaches to interpreting the concept of dispute under IBC, leading to some uncertainty in the application of the law. In the matter of Shivam Construction Company v. Ambience Private Limited, the Delhi Bench of the NCLT adopted a broad interpretation of the term dispute. The Tribunal held that it is not mandatory for a debtor to have initiated a suit or arbitration proceeding prior to receiving a demand notice to assert the existence of a dispute. According to this view, a mere response to the demand notice showcasing the existence of a bona fide dispute would suffice to establish the existence of a dispute for purposes of Section 9(5)(ii)(d) of the IBC. The Delhi Bench emphasized that the definition of dispute is inclusive rather than exhaustive, and therefore disputes could be established through means other than formal legal proceedings.

In contrast, the Mumbai Bench of the NCLT in DF Deutsche Forfait AG and Another v. Uttam Galva Steel Limited adopted a more restrictive interpretation. [3] This Tribunal held that the existence of a dispute means that a suit or arbitration proceeding must be pending before an operational creditor serves a demand notice. According to this interpretation, merely raising a dispute in reply to a demand notice does not amount to notice of an existing dispute, nor does filing a suit or initiating arbitration proceedings subsequent to receipt of the demand notice constitute an existing dispute. This narrower interpretation placed greater emphasis on the requirement of pre-existing formal proceedings.

The divergence between these interpretations created practical difficulties and uncertainty for both creditors and debtors. However, the Supreme Court’s decision in Mobilox and subsequent appellate decisions have largely resolved these conflicts in favor of a broader interpretation that does not require formal legal proceedings to establish the existence of a dispute under IBC, provided that the dispute is genuine and not spurious.

The Ahluwalia Contracts Case: Clarifying Pre-Existence

The concept of pre-existing dispute under IBC received important clarification in the case of Ahluwalia Contracts (India) Limited v. Raheja Developers Limited. [4] In this case, Ahluwalia Contracts had entered into agreements with Raheja Developers for construction and plumbing works. After completing the works, Ahluwalia served a demand notice under Section 8 of the IBC for unpaid invoices amounting to approximately Rs. 3.37 crores. Raheja Developers did not respond within the stipulated ten-day period but instead issued a notice invoking arbitration almost one month after receiving the demand notice. Meanwhile, Ahluwalia had already filed an application under Section 9 of the IBC before the National Company Law Tribunal.

The NCLT initially held that the dispute existed prior to issuance of the demand notice and therefore rejected the insolvency application. However, on appeal, a three-judge bench of the National Company Law Appellate Tribunal took a different view. The NCLAT emphasized that the dispute must be pre-existing, meaning it must have existed before the demand notice was issued. The Appellate Tribunal noted that on the date of issuance of the demand notice, no arbitration proceeding had been initiated or was pending, and the arbitration notice was filed only after receipt of the demand notice under Section 8 of the IBC. Therefore, the corporate debtor could not rely on the arbitration notice to suggest a pre-existing dispute.

The NCLAT observed that apart from the notice invoking arbitration, there was nothing on record to suggest that the corporate debtor had raised any pre-existing dispute. In the absence of evidence demonstrating that a dispute was raised prior to issuance of the demand notice, the dispute could not be held to be pre-existing merely by showing an arbitration notice issued after the demand notice. This decision established an important principle that while formal legal proceedings are not always necessary to establish a dispute, there must be some evidence of the dispute existing before the demand notice was issued. A debtor cannot create a dispute for the first time in response to a demand notice if no dispute existed beforehand.

Parameters for Determining Existence of  ‘Dispute’ Under IBC

Based on the evolving jurisprudence, certain clear parameters have emerged for determining whether a dispute exists that would preclude admission of an insolvency application. First, the dispute must be prima facie bona fide and must exist naturally in the given factual matrix. This means that the dispute cannot be artificially created or manufactured for the purpose of avoiding insolvency proceedings. The dispute must flow naturally from the commercial relationship and transactions between the parties.

Second, the grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory, or misconceived. The adjudicating authority must examine whether the contentions raised by the corporate debtor have some basis in fact and law or whether they are merely frivolous assertions designed to delay or avoid payment of legitimate debts. This examination does not involve a detailed adjudication of the merits but rather a prima facie assessment of whether the dispute has substance.

Third, the existence of a dispute need not be proved with the same rigor as would be required in a civil trial. The corporate debtor is not required to establish beyond doubt that it will succeed in defending the claim. Rather, it must merely show that there exists a plausible contention that requires further investigation through appropriate legal proceedings. This lower threshold recognizes that the insolvency process is not meant to be a substitute for dispute resolution mechanisms.

Fourth, the dispute should be natural and not artificially constructed to appear as a dispute. There must be genuine disagreement between the parties on substantive issues relating to the debt. Mere assertions without any supporting evidence or merely raising technical objections without substance would not constitute a genuine dispute. The adjudicating authority must look beyond the form to the substance of the contentions raised.

Procedural Requirements and Timing Considerations

The procedural framework established by the IBC places specific timing requirements on both creditors and debtors. When an operational creditor seeks to initiate insolvency proceedings, it must first comply with the requirements of Section 8 by delivering a demand notice to the corporate debtor in the prescribed form. This notice must demand payment of the operational debt and must be delivered in accordance with the procedural requirements specified in the Code and the rules made thereunder.

Upon receiving the demand notice, the corporate debtor has a period of ten days to respond. During this period, the corporate debtor may choose one of two courses of action. It may repay the unpaid operational debt, thereby resolving the matter without the need for insolvency proceedings. Alternatively, it may bring to the notice of the operational creditor the existence of a dispute between the parties or the record of pendency of a suit or arbitration proceeding that was filed before receipt of the notice or invoice in relation to such dispute. The corporate debtor must exercise this option within the ten-day period, as the statute does not provide for any extension of this timeline.

The timing of when a dispute arose and when it was communicated has significant implications. As established in the Ahluwalia Contracts case, the dispute must pre-exist the demand notice. However, as clarified in Mobilox, the dispute need not have been formalized into legal proceedings before the demand notice was issued. What matters is whether there was a genuine disagreement between the parties regarding the debt before the operational creditor issued the demand notice under Section 8.

If the corporate debtor fails to respond within the ten-day period, or if it responds but fails to establish the existence of a genuine dispute, the operational creditor may file an application under Section 9 of the IBC with the adjudicating authority. The application must be filed within the prescribed format and must be accompanied by the required documents and evidence. The adjudicating authority will then examine whether all statutory requirements have been met and whether any dispute exists that would preclude admission of the application.

Role and Limitations of the Adjudicating Authority

The role of the National Company Law Tribunal as the adjudicating authority under the IBC is carefully circumscribed when it comes to examining disputes. The Supreme Court in Mobilox emphasized that the adjudicating authority should not conduct a detailed examination of the merits of the dispute at the stage of admission of an insolvency application. The authority’s role is limited to determining whether a plausible contention exists that requires further investigation and whether the dispute raised is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

This limited scrutiny serves important policy objectives. The IBC is designed to provide a time-bound resolution mechanism for corporate insolvency, and extended litigation about the existence of disputes would undermine this objective. At the same time, the limited scrutiny ensures that genuine disputes are not brushed aside in the rush to admit insolvency applications. The adjudicating authority must therefore perform a delicate balancing act, examining disputes sufficiently to identify spurious defenses while avoiding detailed adjudication that would delay proceedings and defeat the Code’s objectives.

The adjudicating authority must examine the correspondence between the parties, any contractual documents, and other evidence on record to determine whether a dispute existed before the demand notice was issued. It must assess whether the corporate debtor’s contentions have any factual or legal basis or whether they are merely bluster designed to evade legitimate obligations. However, this examination should not extend to determining which party is likely to succeed on the merits of the dispute. Questions of fact and law that require detailed investigation should be left to be determined by appropriate courts or arbitral tribunals.

Implications for Operational Creditors and Corporate Debtors

The judicial interpretation of the concept of ‘Dispute’ Under IBC has significant practical implications for both operational creditors and corporate debtors. Operational creditors must carefully evaluate whether any dispute exists before initiating insolvency proceedings under Section 9 of the IBC. If correspondence or other evidence suggests that the corporate debtor had raised legitimate concerns about the quality of goods or services, the existence or quantum of debt, or breaches of representations or warranties, the operational creditor faces the risk that its insolvency application will be rejected on the ground of pre-existing dispute.

Operational creditors should therefore conduct thorough due diligence before invoking the insolvency process. This includes reviewing all correspondence with the corporate debtor, examining any complaints or concerns raised, and assessing whether any disputes were pending resolution through other forums. If genuine disputes exist, operational creditors may be better served by pursuing resolution through appropriate dispute resolution mechanisms rather than attempting to use insolvency proceedings as a debt recovery tool.

For corporate debtors, the law provides important protection against premature or improper initiation of insolvency proceedings. However, this protection is available only where genuine disputes exist. Corporate debtors cannot manufacture disputes for the purpose of avoiding insolvency proceedings. Any dispute raised must be genuine, must be supported by evidence, and must relate to the matters specified in Section 5(6) of the IBC. Corporate debtors who raise frivolous or spurious disputes risk not only rejection of their defense but also potential liability for costs and damages.

Corporate debtors should maintain proper documentation of all disputes and should raise concerns promptly when issues arise. Waiting until a demand notice is received to suddenly raise disputes that were never mentioned previously is likely to be viewed unfavorably by adjudicating authorities. Contemporaneous correspondence, complaints, and other evidence of disputes will carry greater weight than after-the-fact assertions.

Conclusion

The interpretation of the term ‘dispute’ under the Insolvency and Bankruptcy Code, 2016 represents a critical aspect of the insolvency resolution framework. The Supreme Court’s judgment in Mobilox Innovations established foundational principles that have shaped subsequent judicial interpretation and application of this concept. The inclusive definition of dispute, the plausible contention test, and the recognition that disputes need not be formalized into legal proceedings before demand notices are issued collectively create a balanced framework that protects the interests of both creditors and debtors.

The evolution of jurisprudence in this area reflects the broader objectives of the IBC, which seeks to balance multiple competing interests. On one hand, the Code aims to provide creditors with an effective mechanism for recovering debts and resolving corporate insolvency in a time-bound manner. On the other hand, it seeks to prevent abuse of the insolvency process and protect viable businesses from being pushed into insolvency due to commercial disputes that should be resolved through other mechanisms. The interpretation of dispute Under IBC serves as a crucial gatekeeper that ensures the insolvency process is used appropriately.

Looking forward, continued judicial vigilance will be necessary to maintain this balance as the insolvency resolution framework matures. Adjudicating authorities must remain alert to both spurious disputes raised by debtors seeking to evade legitimate obligations and improper attempts by creditors to use insolvency proceedings to bypass genuine disputes. The principles established through judicial interpretation provide a sound foundation for addressing these challenges and ensuring that the IBC achieves its intended objectives.

References

[1] Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353

[2] Samee Khan v. Bindu Khan, (1998) 7 SCC 59

[3] DF Deutsche Forfait AG v. Uttam Galva Steels Limited 

[4] Ahluwalia Contracts (India) Limited v. Raheja Developers Limited, Company Appeal (AT) (Insolvency) No. 703 of 2018

[5] Insolvency and Bankruptcy Code, 2016 

[6] Supreme Court of India, Judgments Database

[7] National Company Law Tribunal

[8] National Company Law Appellate Tribunal

[9] Ministry of Corporate Affairs, Insolvency and Bankruptcy Board of India

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 represents a watershed moment in India’s banking and financial legislation. This statutory framework emerged as a response to the mounting crisis of non-performing assets that threatened to destabilize the country’s banking sector. The Act empowers secured creditors to enforce their security interests without approaching courts or tribunals, fundamentally altering the landscape of debt recovery in India. However, this radical departure from traditional legal processes raised serious constitutional questions that demanded judicial scrutiny. The constitutional validity of SARFAESI Act, 2002 was comprehensively examined by the Supreme Court, resulting in landmark interpretations that continue to shape financial jurisprudence in the country.

The enactment of this legislation in 2002 was preceded by years of deliberation on how to address the inefficiencies plaguing debt recovery mechanisms. Prior to SARFAESI, financial institutions were largely dependent on the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which established Debt Recovery Tribunals. However, these tribunals proved inadequate in delivering the speed and efficiency required to tackle the growing mountain of bad debts. The banking sector witnessed a alarming accumulation of non-performing assets that reached approximately one lakh crores, severely constraining the availability of credit and threatening economic growth. Against this backdrop, Parliament enacted SARFAESI to provide banks and financial institutions with powerful tools for asset recovery.

Legislative Background and Necessity

The problem of non-performing assets in India’s banking system reached critical proportions by the turn of the millennium. Banks found themselves trapped in protracted litigation that could extend for years, sometimes decades, before any meaningful recovery could be achieved. This systemic inefficiency not only affected the profitability of financial institutions but also impaired their ability to extend fresh credit to productive sectors of the economy. The capital locked in these non-performing assets represented a significant drain on the financial system’s capacity to support economic development. Parliament recognized that existing legal mechanisms were insufficient to address this challenge effectively.

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, despite creating specialized tribunals, failed to achieve the desired results. Debt Recovery Tribunals became overburdened with cases, and the recovery process remained painfully slow. Financial institutions continued to suffer from inadequate liquidity, and the mounting non-performing assets threatened the stability of the entire banking system. The need for a more robust and expeditious mechanism became increasingly apparent. SARFAESI was conceived as a solution that would enable secured creditors to bypass lengthy judicial proceedings and directly enforce their security interests, thereby accelerating the recovery process and freeing up capital for productive lending.

The Landmark Mardia Chemicals Judgment

The constitutional validity of SARFAESI faced its first major challenge in the case of Mardia Chemicals Ltd. v. Union of India, decided on April 8, 2004[1]. This case involved multiple petitioners who challenged various provisions of the Act, particularly targeting the constitutional validity of the enforcement mechanism under the statute. Mardia Chemicals Ltd., a Gujarat-based company, had defaulted on loans from various financial institutions and found itself subjected to proceedings under the newly enacted SARFAESI Act. The company, along with other borrowers, filed writ petitions challenging the Act’s provisions as arbitrary, unreasonable, and violative of fundamental rights guaranteed under the Constitution.

The petitioners raised several substantial questions regarding the constitutional validity of the Act. They argued that Parliament had no justifiable reason to enact such legislation when the Debt Recovery Tribunals Act already existed to address the same problem. They contended that SARFAESI granted excessive and unchecked powers to banks and financial institutions without adequate judicial oversight, thereby violating principles of natural justice. The most contentious provision challenged was the requirement under the original version to deposit seventy-five percent of the claim amount as a precondition for filing an appeal before the Debt Recovery Tribunal. This requirement, the petitioners argued, created an insurmountable barrier for borrowers seeking to challenge potentially erroneous or excessive claims by banks.

Supreme Court’s Reasoning and Findings

The Supreme Court, in a detailed and well-reasoned judgment delivered by a three-judge bench comprising Chief Justice V.N. Khare, Justice Brijesh Kumar, and Justice Arun Kumar, upheld the constitutional validity of the Act while striking down certain harsh provisions[2]. The Court recognized that while some provisions might appear severe to borrowers, the legislation served a legitimate and compelling public interest. The judgment emphasized that the object of the Act was to achieve faster recovery of dues declared as non-performing assets, ensure better availability of capital and liquidity, and ultimately support the growth of the country’s economy. The Court found that these objectives were constitutionally permissible and in the larger public interest.

The Court specifically addressed the question of whether enacting SARFAESI was necessary when the Debt Recovery Tribunals Act already existed. The judges concluded that Parliament possessed the authority to determine legislative necessity and had made a considered judgment that the existing mechanism was inadequate. The Court noted that Debt Recovery Tribunals had not produced the desired results in recovering bad debts expeditiously, and therefore, a more effective mechanism was required. The Court held that the mere existence of one statute does not preclude Parliament from enacting another statute to address the same or related problems more effectively. The legislative wisdom in assessing the need for new legislation was held to be largely beyond judicial review.

Article 14 and the Deposit Requirement

The most significant aspect of the Mardia Chemicals judgment was the Court’s treatment of the deposit requirement. The Supreme Court struck down the provision requiring borrowers to deposit seventy-five percent of the claim amount before filing an appeal under the original version of the Act[3]. The Court held that this requirement was manifestly arbitrary, unreasonable, and oppressive, thereby violating the equality guarantee enshrined in Article 14 of the Constitution. The judges observed that such a stringent precondition effectively denied the right of appeal to a vast majority of borrowers who, by definition, were already facing financial distress and would be unable to deposit such substantial amounts.

The Court reasoned that while the legislature’s intent to prevent frivolous appeals was legitimate, the means adopted were disproportionate and excessive. Requiring a borrower who disputed the very quantum or validity of the debt to deposit three-fourths of that debt as a condition for being heard on appeal was inherently contradictory and unjust. This provision created an unreasonable classification between borrowers who could afford to deposit such amounts and those who could not, without any rational nexus to the objective sought to be achieved. The Court emphasized that access to appellate remedies is an essential component of procedural fairness and cannot be made prohibitively expensive or practically impossible.

Statutory Safeguards and Procedural Fairness

Despite striking down the deposit requirement, the Supreme Court found that the Act provided adequate safeguards to protect borrowers’ rights and ensure procedural fairness. The Court examined the notice mechanism mandated under the statute, which requires secured creditors to issue a demand notice to borrowers, providing them with sixty days to discharge their liability. This notice must specify the amount payable and inform the borrower of the creditor’s intention to enforce the security interest if payment is not made within the stipulated period. The Court held that this requirement ensured that borrowers received fair warning before any coercive action was taken.

Furthermore, the Court emphasized the importance of banks considering any objections raised by borrowers in response to the notice. While the Act does not mandate a formal adjudicatory process at this stage, the Court held that principles of natural justice require creditors to apply their minds to objections raised by borrowers. Banks must internally examine the representations made and communicate their reasons, however briefly, for rejecting such objections. This interpretative guidance provided by the Court ensured that the enforcement mechanism would not operate in an arbitrary manner. The availability of an effective remedy before the Debt Recovery Tribunal, allowing aggrieved borrowers to challenge actions taken by secured creditors, was held to be a crucial safeguard that balanced the interests of both parties.

Regulatory Framework and RBI Guidelines

The constitutional validity of SARFAESI is significantly reinforced by the comprehensive regulatory framework established by the Reserve Bank of India. The Act empowers the RBI to issue guidelines and directions to banks, financial institutions, and Asset Reconstruction Companies regarding the implementation of the statute. These guidelines ensure that the extraordinary powers granted under SARFAESI are exercised within a structured framework that promotes fairness, transparency, and accountability. The RBI has issued detailed master directions covering various aspects of securitisation, asset reconstruction, and enforcement of security interests[4].

The classification of an account as a non-performing asset, which is a prerequisite for invoking SARFAESI provisions, is governed by prudential norms prescribed by the RBI. These norms specify that an asset becomes non-performing when interest or principal remains overdue for a period exceeding ninety days. This standardized classification criterion prevents arbitrary or whimsical categorization of accounts by creditors. The RBI’s regulatory oversight extends to Asset Reconstruction Companies, which must obtain registration and comply with stringent operational requirements. The guidelines mandate that these entities formulate detailed plans for asset realization and maintain proper records of their operations, ensuring that the reconstruction and recovery process is conducted professionally and ethically.

Section 13 and Enforcement of Security Interest

The enforcement mechanism under Section 13 of the SARFAESI Act represents the core substantive provision that enables secured creditors to recover their dues without court intervention. This section permits creditors to take possession of secured assets, manage or appoint managers for business operations, and sell or lease the secured assets to realize their claims. The constitutional validity of this SARFAESI provision was specifically challenged in Mardia Chemicals, and the Supreme Court upheld it as a reasonable exercise of legislative power. The Court observed that the powers granted to secured creditors under this provision are not arbitrary but are subject to procedural safeguards and oversight by Debt Recovery Tribunals.

The notice requirement under this section serves as a critical checkpoint in the enforcement process. Before taking any action, the secured creditor must issue a notice to the borrower demanding payment of dues within sixty days. This notice period provides borrowers with an opportunity to either discharge their liability or raise substantive objections to the claim. Only after the expiry of this period, and after considering any objections raised, can the creditor proceed to enforce the security interest. The statutory scheme thus ensures that borrowers are not taken by surprise and have adequate time to respond. The Supreme Court has consistently emphasized that this notice is not merely a formality but represents a substantive right of the borrower that must be scrupulously observed by creditors.

Right to Appeal Under Section 17

Section 17 of the SARFAESI Act provides the statutory remedy for borrowers who are aggrieved by measures taken by secured creditors. Any person affected by enforcement action under the statute can file an application before the Debt Recovery Tribunal within forty-five days of such action. This appellate mechanism was crucial to the Supreme Court’s finding that the Act provided adequate safeguards against arbitrary enforcement. The Tribunal is empowered to examine whether the conditions precedent for enforcement have been satisfied, whether the claim amount has been correctly calculated, and whether the procedure prescribed under the Act has been properly followed.

The amendments made to this section following the Mardia Chemicals judgment have modified the deposit requirement, with current provisions mandating deposit of a lower percentage of the disputed amount. These changes reflect Parliament’s responsiveness to judicial concerns while maintaining deterrents against frivolous appeals. The Tribunal’s jurisdiction is exclusive and comprehensive, covering all aspects of the enforcement process. Courts have consistently held that the availability of this statutory remedy makes writ petitions under Article 226 of the Constitution generally unmaintainable against actions taken under SARFAESI, except in cases involving jurisdictional errors or mala fides[5].

Non-Applicability to Agricultural Land

An important constitutional safeguard built into SARFAESI is the exemption of agricultural land from its purview. The Act specifically excludes agricultural land from the definition of secured assets that can be subjected to enforcement proceedings under its provisions. This exemption recognizes the special status accorded to agricultural land in India’s constitutional and legal framework. Agricultural activities form the livelihood base for a substantial portion of the country’s population, and protecting agricultural land from summary recovery proceedings serves important social and economic policy objectives.

The Supreme Court has affirmed this statutory exemption and clarified its scope in various judgments. The protection extends to land primarily used for agricultural purposes, ensuring that farmers and agricultural enterprises are not subjected to the stringent enforcement mechanism of SARFAESI. However, when agricultural land is converted to non-agricultural use or when it serves as security for non-agricultural business activities, questions regarding the applicability of this exemption may arise. Courts have consistently interpreted this provision in a manner that protects the agrarian community while preventing abuse of the exemption by borrowers who use agricultural land as a shield against legitimate recovery proceedings for commercial debts.

The Role of Debt Recovery Tribunals

Debt Recovery Tribunals play a pivotal role in the SARFAESI framework, serving as the appellate forum where borrowers can challenge actions taken by secured creditors. These specialized tribunals possess expertise in financial matters and are equipped to adjudicate disputes arising from enforcement of security interests expeditiously. The Supreme Court has repeatedly emphasized that the DRT is not merely a rubber stamp but exercises meaningful appellate jurisdiction, examining both factual and legal aspects of enforcement actions. The Tribunal can set aside enforcement measures if it finds that the secured creditor has not complied with statutory requirements or has acted in a manner contrary to law or principles of natural justice.

The jurisdiction of Debt Recovery Tribunals under SARFAESI is complementary to their jurisdiction under the Recovery of Debts Due to Banks and Financial Institutions Act. However, the nature of proceedings differs significantly. Under SARFAESI, the Tribunal functions primarily as an appellate body reviewing actions already taken, whereas under the RDDB Act, it adjudicates original claims for recovery. This distinction is constitutionally significant because it addresses concerns about denial of opportunity to be heard. The appellate jurisdiction ensures that borrowers have effective recourse against potentially erroneous or excessive enforcement actions, thereby satisfying due process requirements under the Constitution[6].

Subsequent Judicial Developments

Since the landmark Mardia Chemicals judgment, numerous decisions by the Supreme Court and various High Courts have further refined the interpretation and application of SARFAESI provisions. Courts have addressed questions ranging from the interpretation of “non-performing asset” to the procedural requirements for taking possession of secured assets. The judicial trend has been to balance the need for expeditious recovery against the protection of borrowers’ legitimate rights. Courts have consistently held that while SARFAESI enables creditors to bypass lengthy court proceedings, this does not mean that the enforcement process is immune from judicial scrutiny when jurisdictional errors or violations of statutory procedure occur.

In Phoenix ARC Private Limited v. Vishwa Bharati Vidya Mandir, the Supreme Court reiterated that writ petitions under Article 226 are generally not maintainable against private entities like Asset Reconstruction Companies acting under SARFAESI[7]. The Court emphasized that the statutory remedy before the Debt Recovery Tribunal provides an adequate alternative forum for redressal of grievances. However, the Court has carved out narrow exceptions where writ jurisdiction can be invoked, particularly in cases involving jurisdictional errors, complete violation of principles of natural justice, or actions that are manifestly illegal or without authority of law. These judicial pronouncements have created a balanced framework that respects the legislative intent behind SARFAESI while ensuring that fundamental rights are not trampled in the name of expeditious recovery.

Constitutional Validity and Public Interest

The constitutional validity of SARFAESI Act ultimately rests on its ability to serve important public interests while respecting individual rights guaranteed under the Constitution. The Supreme Court’s validation of this legislation recognizes that the banking sector’s health is intimately connected to the overall economic well-being of the nation. Non-performing assets represent a significant drain on financial resources that could otherwise be deployed for productive purposes. By enabling faster recovery of bad debts, SARFAESI contributes to financial stability, ensures availability of credit at reasonable rates, and promotes economic growth.

However, this public interest must be balanced against the rights of individual borrowers, particularly the right to property and the right to be heard. The constitutional validity of SARFAESI is maintained because the statute incorporates safeguards that protect these rights. The notice requirement, the right to raise objections, the appellate mechanism before Debt Recovery Tribunals, and the regulatory oversight by the RBI collectively ensure that the enforcement process does not operate arbitrarily or oppressively. The Supreme Court’s interpretative guidance, particularly the emphasis on procedural fairness and the striking down of the harsh deposit requirement, has reinforced these safeguards and ensured that SARFAESI operates within constitutional parameters[8].

Amendments and Legislative Refinements

Following the Mardia Chemicals judgment, Parliament enacted the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, to address the concerns raised by the Supreme Court. These amendments modified the deposit requirement for filing appeals, reducing the percentage and providing greater discretion to tribunals in determining appropriate amounts. Subsequent amendments in 2016 brought further refinements to various provisions of the Act. These legislative modifications demonstrate Parliament’s commitment to creating a balanced framework that addresses both creditors’ need for efficient recovery mechanisms and borrowers’ rights to fair treatment.

The 2016 amendments particularly focused on clarifying the right of redemption available to borrowers. These changes specified that borrowers could redeem their mortgaged property by paying the entire outstanding amount only until the date of publication of the auction notice, not until the actual date of sale. This amendment aimed to provide certainty to auction purchasers and streamline the recovery process. While these amendments have sometimes been criticized as tilting the balance too heavily in favor of creditors, courts have generally upheld their validity as reasonable legislative responses to practical difficulties encountered in implementing the statute. The ongoing process of refinement through amendments reflects the dynamic nature of financial legislation and its need to adapt to changing economic circumstances[9].

Conclusion

The constitutional validity of the SARFAESI Act, 2002, as affirmed by the Supreme Court in Mardia Chemicals and subsequent judgments, represents a careful balancing of competing interests and values. The Act addresses a genuine and pressing problem—the accumulation of non-performing assets that threatened the stability of India’s banking sector. By providing secured creditors with powerful tools for recovery, the legislation serves important public interests in maintaining financial stability and ensuring credit availability. However, the Act also incorporates safeguards that protect borrowers’ constitutional rights, including the right to notice, the right to raise objections, and the right to appeal before specialized tribunals.

The judicial interpretation of SARFAESI has played a crucial role in maintaining this balance. The Supreme Court’s willingness to strike down provisions that created unreasonable barriers to justice, while upholding the core enforcement mechanism, demonstrates the judiciary’s commitment to constitutional values. The comprehensive regulatory framework established by the Reserve Bank of India further ensures that the extraordinary powers granted under the Act are exercised responsibly and transparently. As India’s financial sector continues to evolve, SARFAESI remains a vital tool for managing non-performing assets, and its constitutional foundations, as established through decades of judicial interpretation, provide stability and predictability to all stakeholders in the debt recovery process.

References

[1] Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311. Available at: https://indiankanoon.org/doc/1059476/

[2] iPleaders. “Overview of the SARFAESI Act, 2002.” Available at: https://blog.ipleaders.in/overview-of-the-sarfaesi-axt-2002/

[3] LawyersClubIndia. “Constitutional validity of SARFAESI Act 2002.” Available at: https://www.lawyersclubindia.com/articles/constitutional-validity-of-sarfaesi-act-2002-7395.asp

[4] Reserve Bank of India. “Master Circulars.” Available at: https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7319

[5] IBC Laws. “Important Supreme Court and High Court Judgments of 2022 on SARAFESI Act, 2002.” Available at: https://ibclaw.in/important-supreme-court-and-high-court-judgments-of-2022-on-sarafesi-act-2002-recovery-of-debts-and-bankruptcy-act-1993/

[6] ClearTax. “SARFAESI ACT, 2002- Applicability, Objectives, Process, Documentation.” Available at: https://cleartax.in/s/sarfaesi-act-2002

[7] Phoenix ARC Private Limited v. Vishwa Bharati Vidya Mandir, (2022) 5 SCC 345. Available at: https://indiankanoon.org/doc/186727474/

[8] Nishith Desai Associates. “Constitutionality of the amended definition of NPA upheld.” Available at: https://www.nishithdesai.com/SectionCategory/33/Regulatory-Hotline/12/49/RegulatoryHotline/5710/1.html

[9] Lexology. “Section 13(8) of SARFAESI Act: SC settles conundrum on right of redemption of borrower.” Available at: https://www.lexology.com/library/detail.aspx?g=cb279b8d-82e3-4417-9179-e565637a3d16

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