Text

Dilip B. Jiwrajka v. Union of India, 2023

---

Brief Facts of the Case

The petitioner, Dilip B. Jiwrajka, had questioned the constitutional validity of various
provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC"), as amended by the
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The grievance was
particularly against Sections 29A and 240A of the IBC, which disqualified promoters and
other connected persons of corporate debtors from being part of the resolution process. The
petitioner was a promoter of Alok Industries, an insolvent company.

The key problem occurred when the petitioner wanted to file a resolution plan in order to take
back control of the company. But since the disqualification under Section 29A(c), which
prohibits wilful defaulters and individuals handling non-performing assets (NPAs) from
bidding, the petitioner was disqualified. Additionally, he alleged discrimination under Article
14 on the basis that Section 240A granted a carve-out to MSMEs but not to other categories
of promoters, thus making an arbitrary classification.

Legal Issues Involved

1. Whether Section 29A(c) of the IBC, excluding defaulting company promoters from
the resolution process, is contrary to Article 14 of the Constitution.
2. Whether Section 240A of the IBC, granting exemptions to MSMEs from the
operation of certain provisions of Section 29A, is arbitrary and discriminatory.
3. Whether the statutory disqualification contained in Section 29A should be made to
have a retrospective operation and apply to resolution applicants having past control
over NPAs.


Arguments Advanced by the Petitioner

1. Senior Counsel Mr. Arvind Datar contended that the petitioner had filed a compliant
resolution plan that was endorsed by the Committee of Creditors (CoC). But the
statutory bar under Section 29A(c), which was brought about after the insolvency
process had commenced, was retrospective in operation and thus vitiated a genuine
business opportunity.
2. He argued that Section 240A indiscriminately favored MSME promoters by
permitting them to file resolution plans despite previous default, but placed
comparable promoters of large corporate debtors in the same position. This, in his
view, amounted to hostile discrimination and infringed Article 14. The classification
had no reasonable nexus with the IBC's goal and hence was subject to being struck
down.
3. It was also urged that the complete exclusion of all promoters who have earlier
managed NPAs did not take into consideration bona fide business failures or
economic downturns and tarred all such promoters with the same brush, regardless of
intent, circumstances, or good faith.


Arguments Put Forward by the Respondents
1. The Impugned Provisions have been defended by the Solicitor General Mr. Tushar
Mehta stating that the motive of Section 29A is that the management of the corporate

4
debtor must not again come in the hands of those individuals whose failure brought
about its financial deterioration. The legislative intention was to sanitize the process
of insolvency and prevent moral hazard.

2. He stressed that the disqualification was preventive, not punitive. In weeding out
errant promoters and wilful defaulters, the Code aimed to introduce real external
bidders who would drive up the value of the assets and ensure a clean break from
previous mismanagement.
3. In the context of MSME exemption under Section 240A, the Union contended that
MSMEs operate in special economic and institutional conditions. They are subject to
credit constraints and tend to be less likely to attract external resolution applicants
owing to scale factors. Thus, allowing promoters to bid for their own businesses in
such instances was a well-considered policy decision intended to revive business
instead of liquidating it.
4. The petitioners also depended upon the Supreme Court's previous decisions in Swiss
Ribbons v. Union of India and Chitra Sharma v. Union of India, where it maintained
the sanctity of the IBC system and laid weight on the economic logic of barring
tainted promoters.


Judgment
The Supreme Court rejected the petition and affirmed the constitutional validity of
Sections 29A and 240A of the IBC.
The Court started with a recognition of the paradigm-shifting impact of the IBC in reshaping
insolvency jurisprudence in India. It reaffirmed that IBC resolution is not a right but a
statutory grace conditional upon regulatory requirements. The Legislature has the authority to
impose disqualifications and qualifications on resolution applicants in order to provide
transparency, accountability, and creditor faith.
On Section 29A(c), the Court held that excluding defaulting promoters from the process of
resolution rested on an intelligible differentia and had a rational nexus with the object which
was sought to be attained – avoiding backdoor entries by the persons who were responsible
for causing the financial loss to the company. The provision was not arbitrary or capricious


simply because it had a retrospective effect. The principle that legislation may have
retrospective application if it is in public interest and satisfies due process was upheld.
Dealing with the challenge to Section 240A, the Court expressed the view that the distinction
between MSMEs and big companies was constitutionally valid. The distinction arose from
structural and contextual differences in access to capital, size of operation, and investors'
attractiveness. The legislature had thoughtfully taken a targeted route to make viable micro
and small businesses eligible for rehabilitation through promoter-led resolution.
The Court drew upon empirical economic evidence and legislative documents such as the
Report of the Insolvency Law Committee to demonstrate that the MSME carve-out had a
valid policy rationale. It was not for the Court to replace its own economic judgment with
that of the legislature. The fact that a better scheme of classification was possible could not
be a reason to strike down a validly enacted provision.
Additionally, the Court emphasized that commercial acumen of the CoC cannot supersede
statutory disqualifications. Resolution plans, even if cleared by the CoC, would have to
adhere to the eligibility criteria specified in law. It dismissed the claim of the petitioner that
commercial approval would automatically vest a resolution plan with legitimacy.
Finally, the Court further observed that the petitioner did have adequate time to be involved
in the process and amend the plan or plead for disqualification challenges before the
NCLT/NCLAT, but hadn't done the same. Challenge here was primarily a bid to overrule
legal fallouts of past non-conformity instead of a bona fide constitutional complaint.


Importance of the Decision
This decision supports the constitutional soundness and policy logic of Section 29A of the
IBC, which aims to uphold the purity of the insolvency resolution process by excluding
particular classes of applicants. It clarifies that such exclusions are not arbitrary but rather
based on rational economic reasoning and in conformity with the Code's goals.
By sustaining the differential treatment of MSMEs under Section 240A, the Court recognized
sectoral regulatory flexibility. It noted that equality before the law under Article 14 does not
necessarily connote same treatment of unequals. The decision has potential long-term
ramifications for insolvency jurisprudence, particularly in regulating the revival of businesses
against the moral integrity of the process.
The judgment also reaffirms the limited role of judicial review of economic legislation,
especially when the classification by the legislature is supported by expert opinions and a

6
reasoned policy decision. Courts are not places for economic calibration of legislative
decisions unless there is patent arbitrariness or legislative incompetence.
The Supreme Court ruling in Dilip B. Jiwrajka v. Union of India is a classic endorsement of
legislative sagacity inhered in the IBC, specifically with regards to promoter disqualification
and treatment of MSMEs. It is an exemplary exercise of wise restraint where the Court
avoided entrenching into the economic blueprint of a transformative law and, instead, abjured
in favour of the underlying policy considerations justifying the provisions of disqualification.
The decision advances the settled and stable insolvency framework that promotes economic
recovery at balance with responsibility, and also sheds more light on the boundaries of Article
14 within financial law.

---

Detail Information

Title

Dilip B. Jiwrajka v. Union of India, 2023

Court

: supreme court., 2024

Lenght/Sections/Order/Rules

-

Language

English

Case Number/Citation

(2024) 5 SCC 435/ Writ Petition

Matter(s)

-

Councels

Counsel for the Petitioner – Mr. Arvind Datar, Sr. Adv., with Ms. Arundhati Katju and Mr. Tushar Ladu. Counsel for Respondents – Mr. Tushar Mehta, Solicitor General, with Ms. Aishwarya Bhati, ASG, and others for the Union of India.

Statement of Responsibility

Jay Goyal/Unitedworld School of Law, Karnavati University

See Also

File Attachment

Comments

---

You must be logged in to post a comment