Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a landmark legislation in India’s commercial law landscape, designed to consolidate and streamline the insolvency resolution process for corporate entities, individuals, and partnerships. Among its various provisions, the threshold limit provision under Section 4 IBC has emerged as one of the most debated and litigated aspects of the Code. This provision establishes the minimum quantum of defaulted debt required to trigger Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, serving as a crucial gatekeeping mechanism to prevent frivolous or vexatious proceedings.

The concept of  threshold limit under IBC serves multiple purposes: protecting debtors from harassment through proceedings initiated for trivial amounts, ensuring judicial resources are utilized efficiently, and maintaining the balance between creditor rights and debtor protection. The IBC’s threshold mechanism has undergone significant evolution since its inception, particularly in response to the COVID-19 pandemic’s economic disruptions.

Historical Development and Legislative Framework

Original Threshold Limit Under Section 4 of IBC

Section 4 of the Insolvency and Bankruptcy Code, 2016, originally established the threshold limit at Rs. 1,00,000 (One Lakh Rupees). The section states: “This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of default is one lakh rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees” [1].

This provision empowered the Central Government to modify the threshold limit through executive notification, subject to an upper ceiling of Rs. 1 crore. The relatively low initial threshold of Rs. 1 lakh was designed to ensure accessibility of the insolvency process to smaller creditors, particularly operational creditors who typically deal with smaller transaction values.

The COVID-19 Pandemic and Emergency Measures

The outbreak of COVID-19 in early 2020 necessitated extraordinary economic measures to protect businesses from insolvency proceedings during a period of unprecedented financial stress. Recognizing that the existing threshold of Rs. 1 lakh could lead to a flood of insolvency applications against businesses facing temporary liquidity constraints, the Central Government exercised its powers under the proviso to Section 4.

On March 24, 2020, the Ministry of Corporate Affairs issued Notification S.O. 1205(E), which increased the minimum threshold limit for initiating CIRP from Rs. 1,00,000 to Rs. 1,00,00,000 (One Crore Rupees) [2]. This notification was issued under the extraordinary circumstances prevailing due to the pandemic, with the objective of providing relief to corporate debtors facing financial distress due to the nationwide lockdown and economic disruption.

The notification stated: “In exercise of the powers conferred by the proviso to sub-section (1) of section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies the minimum amount of default as rupees one crore in place of rupees one lakh.” This represented a hundred-fold increase in the threshold limit, fundamentally altering the accessibility and scope of insolvency proceedings under the IBC.

Legal Analysis of the Threshold Enhancement

Statutory Interpretation and Scope

The dramatic increase in the threshold limit from Rs. 1 lakh to Rs. 1 crore fundamentally altered the dynamics of insolvency proceedings under the IBC. This change had several immediate implications for different classes of creditors and the overall effectiveness of the insolvency framework.

For financial creditors operating under Section 7 of the IBC, the impact was relatively limited. Financial creditors typically deal with larger loan amounts and often have the flexibility to aggregate multiple defaults or join with other financial creditors to meet the enhanced threshold. Section 7 permits financial creditors to file applications individually or collectively, providing them with strategic options to overcome the higher threshold requirement.

However, operational creditors governed by Section 9 of the IBC faced significantly greater challenges. Operational creditors, including suppliers, service providers, and contractors, typically have smaller individual exposures and cannot aggregate their claims with other operational creditors in the same manner as financial creditors. The requirement that each operational creditor individually meet the Rs. 1 crore threshold effectively excluded a vast majority of operational creditors from accessing the insolvency process.

Impact on Different Classes of Creditors

The enhanced threshold created a dichotomous effect on the creditor landscape. Large corporate creditors and major financial institutions could still effectively utilize the IBC mechanism, while smaller businesses, individual entrepreneurs, and micro, small, and medium enterprises (MSMEs) found themselves largely excluded from the process. This outcome arguably contradicted one of the IBC’s fundamental objectives of creating an inclusive and accessible insolvency resolution framework.

The differential impact on operational versus financial creditors also raised questions about the equitable treatment of different creditor classes under the Code. While the original design of the IBC sought to balance the interests of various stakeholder categories, the enhanced threshold appeared to create an inherent bias favoring financial creditors over operational creditors.

Judicial Interpretation and Prospective Application

The Landmark Arrowline Organic Products Case

The question of whether the enhanced threshold limit would apply retrospectively or prospectively became the subject of extensive litigation across various National Company Law Tribunals (NCLTs). The most significant judicial pronouncement on this issue came from the NCLT Chennai in the case of M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited [3].

In this case, the corporate debtor challenged the maintainability of insolvency proceedings initiated before March 24, 2020, arguing that the enhanced threshold should apply to all pending cases. The NCLT Chennai, however, rejected this contention and held that the notification increasing the threshold limit would apply only prospectively, not affecting cases where defaults had occurred and proceedings had been initiated before the notification date.

Constitutional and Legislative Principles

The NCLT Chennai’s decision was grounded in well-established constitutional and legislative principles governing the retrospective application of executive notifications. The tribunal relied on several Supreme Court precedents to reach its conclusion, establishing important jurisprudential principles for the application of threshold modifications under the IBC.

In the case of Bakul Cashew Co. vs. Sales Tax Officer Quilon, the Supreme Court established the fundamental principle that only the legislature possesses the inherent power to make laws with retrospective effect [4]. When legislative powers are delegated to executive authorities, such powers are limited in scope and cannot ordinarily be exercised retrospectively unless expressly authorized by the parent statute.

Applying this principle to the IBC context, the NCLT observed that the notification enhancing the threshold limit was issued by the Central Government under delegated legislative powers conferred by Section 4. Since the statute did not expressly authorize retrospective application of such notifications, the enhanced threshold could only apply prospectively to future cases.

The tribunal further strengthened its reasoning by referencing the Supreme Court’s decision in Indramaniyarelal Gupta v. W. R. Nath, which held that while the legislature has inherent powers to enact retrospective legislation, executive authorities exercising delegated powers cannot assume such retrospective authority without express statutory authorization [5].

The Kirti Kapoor Precedent

The NCLT Chennai also drew support from the Division Bench decision of the Rajasthan High Court in Kirti Kapoor v. Union of India, which dealt with similar threshold enhancement under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [6]. Although the Rajasthan High Court did not explicitly term the notification as prospective, it applied the doctrine of conditional legislation to hold that such notifications should apply only to future applicants.

This precedent provided additional jurisprudential support for the prospective application principle, establishing a consistent judicial approach across different insolvency and debt recovery statutes in India.

Practical Implications and Implementation Challenges

Operational Creditor Disadvantage

The enhanced threshold limit under IBC created significant practical challenges for operational creditors seeking to recover debts through the IBC mechanism. Unlike financial creditors who typically maintain long-term relationships with corporate borrowers and have larger exposure limits, operational creditors often deal with smaller, transaction-specific obligations.

The requirement for individual operational creditors to meet the Rs. 1 crore threshold effectively eliminated the viability of IBC proceedings for most supplier and service provider relationships. This outcome was particularly problematic for MSMEs, which form the backbone of India’s industrial ecosystem but typically have smaller individual transaction values with their corporate customers.

Strategic Implications for Corporate Debtors

From the perspective of corporate debtors, the enhanced threshold provided significant protection against frivolous or harassment-oriented insolvency proceedings. Companies facing temporary financial distress, particularly during the pandemic period, could avoid premature insolvency proceedings initiated by smaller creditors for relatively minor defaults.

However, this protection came at the cost of potentially enabling strategic default behavior by corporate debtors who might delay payments to smaller creditors, knowing that individual creditors would be unable to initiate insolvency proceedings. This moral hazard aspect of the enhanced threshold raised concerns about the overall integrity of commercial relationships and payment disciplines in the corporate sector.

Judicial Efficiency and Resource Allocation

The enhanced threshold also had positive implications for judicial efficiency and resource allocation within the NCLT system. By filtering out smaller-value cases, the enhanced threshold helped reduce the caseload burden on NCLTs, allowing them to focus on larger, more complex insolvency matters that have greater systemic importance.

However, this efficiency gain came at the cost of access to justice for smaller creditors, raising fundamental questions about the appropriate balance between judicial efficiency and stakeholder access to legal remedies.

Contemporary Judicial Developments

NCLT Delhi’s Interpretation

Subsequent to the Chennai NCLT decision, other benches of the NCLT have generally followed the prospective application principle established in the Arrowline case. The NCLT Delhi, in the case of Udit Jain (Sole Proprietor of M/s U.J. Trading Co.) vs. Apace Builders and Contractors Pvt. Ltd, further clarified that the Rs. 1 crore threshold must be fulfilled by the applicant on the date of filing the application [7].

This interpretation added an additional layer of complexity by requiring creditors to ensure that their claim amount meets the threshold requirement at the time of filing, rather than at the time of default occurrence. This temporal distinction has important implications for cases involving interest accrual, penalty charges, and other time-dependent components of debt calculation.

High Court Interventions

The Kerala High Court’s intervention in the threshold limit controversy added another dimension to the judicial discourse. In a case involving insolvency proceedings initiated with respect to an alleged default of Rs. 31 lakhs, the Kerala High Court stayed an NCLT order that had applied the prospective application principle [8]. This intervention highlighted the ongoing judicial debate about the appropriate application of the enhanced threshold limit and suggested that the issue may require definitive resolution by higher judicial authorities.

Regulatory Framework and Current Status

Current Threshold Limit Status under IBC

As of 2025, the enhanced threshold limit of Rs. 1 crore continues to remain in effect, despite the gradual normalization of economic conditions following the pandemic. The persistence of this enhanced threshold has raised questions about whether the temporary pandemic-relief measure has effectively become a permanent feature of the IBC framework.

The continuation of the higher threshold limit suggests that the government may have determined that the enhanced threshold provides benefits beyond pandemic relief, including reduced frivolous litigation and improved judicial efficiency. However, this decision continues to be debated among insolvency practitioners and legal experts.

Regulatory Considerations for Reform

The current threshold framework under the IBC presents several regulatory considerations that may warrant future reform. The stark differential between the original Rs. 1 lakh threshold and the current Rs. 1 crore threshold suggests that an intermediate threshold level might better balance the competing interests of creditor access and debtor protection.

Some legal experts have suggested implementing a graduated threshold system that differentiates between various types of creditors or industries, similar to the approach adopted in some international insolvency jurisdictions. Such an approach could provide tailored threshold limits that reflect the specific characteristics and needs of different sectors of the economy.

Comparative Analysis with International Practices

International Threshold Practices

International insolvency regimes typically employ varying approaches to threshold limits, reflecting different policy priorities and economic contexts. The United States Bankruptcy Code, for instance, does not impose specific monetary thresholds for initiating bankruptcy proceedings but instead relies on other eligibility criteria and procedural safeguards to prevent abuse.

In contrast, the United Kingdom’s insolvency framework employs multiple threshold levels depending on the type of procedure being initiated. For company voluntary arrangements, the threshold is relatively low, while compulsory liquidation requires higher statutory demand amounts. This graduated approach provides flexibility while maintaining appropriate protective mechanisms.

Lessons for Indian Reform

The international experience suggests that threshold limit design should consider sector-specific characteristics, creditor types, and overall economic conditions. A one-size-fits-all approach, as currently employed under the IBC, may not adequately address the diverse needs of India’s complex economic landscape.

Future reforms to the IBC threshold framework could benefit from incorporating flexible mechanisms that allow for periodic adjustment based on economic conditions, inflation indices, or sector-specific considerations. Such adaptive mechanisms could provide the regulatory agility needed to respond to changing economic circumstances without requiring frequent legislative or executive interventions.

Economic Impact and Policy Considerations

Impact on Credit Markets and Commercial Relationships

The enhanced threshold limit under IBC has had significant implications for credit markets and commercial relationships in India. Suppliers and service providers have been compelled to reassess their credit policies and payment terms when dealing with corporate customers, knowing that the IBC remedy may not be available for smaller defaults.

This change has likely contributed to more cautious credit extension practices among operational creditors, potentially affecting the overall liquidity and efficiency of commercial markets. Some businesses have reportedly shifted toward advance payment requirements or shorter credit terms to mitigate the risk of irrecoverable smaller debts.

MSME Sector Implications

The enhanced threshold has disproportionately affected the MSME sector, which typically operates with smaller transaction values and limited financial resources. MSMEs serving larger corporate clients have found themselves in a particularly vulnerable position, lacking effective legal remedies for debt recovery through the IBC process.

This vulnerability has broader economic implications, as MSMEs constitute a significant portion of India’s industrial base and employment generation. The inability of MSMEs to effectively utilize insolvency proceedings for debt recovery may have contributed to increased payment delays and working capital constraints in this crucial sector.

Future Outlook and Recommendations

Need for Balanced Reform

The experience with the enhanced threshold limit under the IBC highlights the need for a more nuanced and balanced approach to threshold design. Future reforms should consider implementing a graduated threshold system that recognizes the different characteristics and needs of various creditor categories.

A potential reform approach could involve establishing different threshold limits for financial creditors, operational creditors, and different industry sectors. Such differentiation could preserve the accessibility of insolvency proceedings for smaller operational creditors while maintaining appropriate safeguards against frivolous litigation.

Technological Solutions and Alternative Mechanisms

The digital transformation of India’s legal and financial systems presents opportunities for developing alternative mechanisms for smaller debt recovery cases. Online dispute resolution platforms, automated recovery systems, and digital payment enforcement mechanisms could provide efficient alternatives to formal insolvency proceedings for smaller defaults.

Integrating such technological solutions with the IBC framework could help address the access to justice concerns raised by the enhanced threshold while maintaining the efficiency benefits of filtering smaller cases out of the formal insolvency process.

Conclusion

The threshold limit provision under the Insolvency and Bankruptcy Code represents a critical balance point between creditor access and debtor protection in India’s insolvency framework. The dramatic increase from Rs. 1 lakh to Rs. 1 crore in response to the COVID-19 pandemic has fundamentally altered the landscape of insolvency proceedings, creating both intended benefits and unintended consequences.

The judicial interpretation establishing the prospective application of the enhanced threshold has provided important jurisprudential clarity while highlighting the constitutional principles governing executive power and retrospective legislation. However, the continued application of the enhanced threshold long after the pandemic emergency raises important questions about the appropriate permanent level for the IBC threshold.

The experience with threshold modification under the IBC offers valuable lessons for future policy development in insolvency law. The need for flexible, adaptive mechanisms that can respond to changing economic conditions while maintaining appropriate stakeholder protections is evident from the challenges experienced during this transition.

As India’s economy continues to evolve and mature, the IBC framework must similarly adapt to ensure that it continues to serve its fundamental objectives of facilitating efficient insolvency resolution while protecting the legitimate interests of all stakeholders. The threshold limit provision, as a key gatekeeping mechanism, will undoubtedly continue to play a crucial role in shaping the effectiveness and accessibility of India’s insolvency regime.

Future reforms should focus on creating a more nuanced and balanced threshold framework that recognizes the diverse needs of India’s complex economic ecosystem while maintaining the efficiency and integrity of the insolvency process. Only through such thoughtful evolution can the IBC continue to serve as an effective tool for economic development and commercial confidence in India’s dynamic business environment.

References

[1] The Insolvency and Bankruptcy Code, 2016, Section 4.

[2] Ministry of Corporate Affairs, Notification S.O. 1205(E) dated March 24, 2020. 

[3] M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited, NCLT Chennai. Available at: https://ibclaw.in/m-s-arrowline-organic-products-pvt-ltd-vs-m-s-rockwell-industries-ltd-nclt/ 

[4] Bakul Cashew Co. vs. Sales Tax Officer Quilon, Supreme Court of India. 

[5] Indramaniyarelal Gupta v. W. R. Nath, Supreme Court of India. 

[6] Kirti Kapoor v. Union of India, Rajasthan High Court.

[7] Udit Jain vs. Apace Builders and Contractors Pvt. Ltd, NCLT Delhi. Available at: https://taxguru.in/corporate-law/ibc-minimum-threshold-rs-1-crore-date-filing-petition.html 

[8] Kerala High Court intervention in threshold limit case. Available at: https://www.livelaw.in/news-updates/ibc-threshold-march-24-notification-one-crore-kerala-high-court-stays-nclt-167125 

[9] Analysis of threshold limit developments. Available at: https://ibclaw.in/important-judgments-on-threshold-limit-increased-from-1-lakh-to-1-crore-for-filing-cirp-application-under-section-7-or-9-of-insolvency-and-bankruptcy-code-2016-ibc/ 

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Introduction

Judiciary in India is the system of courts which interpret and apply the law and settle various legal debates that citizens linger upon from time to time. The Indian Judiciary System administers a common law system which encompasses into the law of the land customs, securities and legislations. The Supreme Court is the apex court, and the last appellate in India while the High Courts are the top judicial bodies in the states controlled and managed by the Chief Justices of the state. Tribunals on the other hand are set up for meting out various administrative and tax related disputes.

Appeal

• High Courts: 

1. The decree or judgment passed by the court can be challenged on the basis of the facts of the case and the legal interpretation of the legal provisions.
2. In the cases where the party to the dispute raises any objection with respect to the territorial and pecuniary of the court passing the judgment and the decree.
3. On the basis of the failure of justice relating to the incompetence of the court.
4. In the cases where the parties to the dispute have not joined in the original suit, in such matters appeal lies against the judgment/ decree of such court.
5. Where there is a challenge to the interpretation of law which are applied by the subordinate court
6. On the grounds of any defect or error or irregularity in the legal proceedings of the case
7. In the cases where the substantial question of law exists and it is affecting the rights of the parties.

• Supreme Court:

The appellate jurisdiction of the Supreme Court can be invoked by a certificate granted by the High Court concerned under Article 132(1), 133(1) or 134 of the Constitution in respect of any judgement, decree or final order of a High Court in both civil and criminal cases, involving substantial questions of law as to the interpretation of the Constitution. Appeals also lie to the Supreme Court in civil matters if the High Court concerned certifies : (a) that the case involves a substantial question of law of general importance, and (b) that, in the opinion of the High Court, the said question needs to be decided by the Supreme Court. In criminal cases, an appeal lies to the Supreme Court if the High Court (a) has on appeal reversed an order of acquittal of an accused person and sentenced him to death or to imprisonment for life or for a period of not less than 10 years, or (b) has withdrawn for trial before itself any case from any Court subordinate to its authority and has in such trial convicted the accused and sentenced him to death or to imprisonment for life or for a period of not less than 10 years, or (c) certified that the case is a fit one for appeal to the Supreme Court. Parliament is authorised to confer on the Supreme Court any further powers to entertain and hear appeals from any judgement, final order or sentence in a criminal proceeding of a High Court.

The Supreme Court has also a very wide appellate jurisdiction over all Courts and Tribunals in India in as much as it may, in its discretion, grant special leave to appeal under Article 136 of the Constitution from any judgment, decree, determination, sentence or order in any cause or matter passed or made by any Court or Tribunal in the territory of India.

• Tribunals:

The Central Government shall constitute an Appellate Tribunal to be called the Customs, Excise and Service Tax Appellate Tribunal consisting of as many judicial and technical members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by this Act. A judicial member shall be a person who has for at least ten years held a judicial office in the territory of India or who has been a member of the Indian Legal Service and has held a post in Grade I of that service or any equivalent or higher post for at least three years, or who has been an advocate for at least ten years.

Powers

• High Courts:

1. It has the power to control over all the courts and tribunals within its jurisdiction except in the matters of Armed Forces under Article 227.
2. It has the power to withdraw a case pending before any subordinate court if it involves the substantial question of law.
3. It is a Court of Record like the Supreme Court which involves recording of judgements, proceedings etc (Article 215).
4. Under the Article 13 & 226 High Court has the power of judicial review. They have the authority to declare any law or ordinance as unconstitutional if it seems to be against the Constitution of India.
5. It can appoint the administration staff according to the need and can decide their salaries, allowance etc.
6. It issues the rules and regulations for the working of subordinate courts.

• Supreme Court:

1. Power to punish for contempt (civil or criminal) of court with simple imprisonment for 6 months or fine up to Rs. 2000. Civil contempt means wilful disobedience to any judgment. Criminal contempt means doing any act which lowers the authority of the court or causing interference in judicial proceedings.
2. Judicial review to examine the constitutionality of legislative enactments and executive orders. The grounds of review are limited by Parliamentary legislation or rules made by the Supreme Court.
3. Deciding authority regarding the election of President and Vice President.
4. Enquiring authority in the conduct and behaviour of UPSC members.
5. Withdraw cases pending before High Courts and dispose of them themselves.
6. Appointment of ad hoc judges- Article 127 states that if at any time there is a lack of quorum of Judges of Supreme Court, the CJI may with the previous consent of the President and Chief Justice of High Court, concerning request in writing the attendance of Judge of High Court duly qualified to be appointed as Judge of the Supreme Court.
7. Appointment of retired judges of the Supreme Court or High Court – Article 128 states that the CJI at any time with the previous consent of the President and the person to be so appointed can appoint any person who had previously held the office of a Judge of SC.
8. Appointment of acting Chief Justice- Article 126 states that when the office of CJI is vacant or when the Chief Justice is by reason of absence or otherwise unable to perform duties of the office, the President in such a case can appoint a Judge of the court to discharge the duties of the office.
9. Revisory Jurisdiction- The Supreme Court under Article 137 is empowered to review any judgment or order made by it with a view to removing any mistake or error that might have crept in the judgement or order.
10. Supreme Court as a Court of Record- The Supreme Court is a court of record as its decisions are of evidentiary value and cannot be questioned in any court.

• Tribunals:

1. A Tribunal shall not be bound by the procedure laid down in the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and subject to the other provisions of this Act and of any rules made by the Central Government, the Tribunal shall have power to regulate its own procedure including the fixing of places and times of its inquiry and decided whether to sit in public or in private.
2. A tribunal shall decide every application made to it as expeditiously as possible and ordinarily every application shall be decided on a perusal of documents and written representations and after hearing such oral arguments as may be advanced.
3. A Tribunal shall have, for the purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely :

(a) Summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of section 123 and 124 of the Indian Evidence Act, 1872 (1 of 1872), requisitioning any public record or document or copy of such record or document from any office;

(e) issuing commissions for the examination of witnesses or, documents;

(f) reviewing its decisions;

(g) dismissing a representation for default or deciding it ex parte;

(h) setting aside any order of dismissal of any representation for default or any order passed by it ex parte; and

(i) any other matter which may be prescribed by the Central Government.

Limitations

• High Courts:

The limitation for filing an appeal from a sentence of death passed by court of sessions or the High Court in its original jurisdiction is 30 days and from any other sentence or order to the High Court is 60 days and to any other court is 30 days.

The period of limitation against an order of acquittal is 90 days but where appeal against such order has to be made after seeking special leave of the court, the period of limitation is 30 days.

• Supreme Court:

1. If an appeal under Section 37 is preferred against an arbitral award in arbitration less than the Specified Value, the same would be governed by Article 116 / Article 117 of the Limitation Act. Under these provisions, the limitation period is computed in the manner recorded in Table I above.
2. If an appeal under Section 37 is preferred against an arbitral award in arbitration of a dispute of the Specified Value, the appeal will be governed by Section 13(1A) of the Commercial Courts Act, 2010(hereinafter referred as “CC”) . The limitation period provided under the CC Act being a special law would apply as compared with the Limitation Act which is a general law, as per section 29(2) of the Limitation Act. Section 13(1A) of the CC Act lays down a period of limitation of 60 days for all appeals; this would therefore be the limitation period for filing an appeal under Section 37 of the A&C Act. The Supreme Court considered the judgment in Kandla Export Corpn. v. OCI Corporation, to deal with the interplay between Section 13 of the CC Act and Section 37 of the A&C Act.

• Tribunals

1. Against the Rule of Law: It can be observed that the establishment of the administrative tribunals has repudiated the concept of rule of law. Rule of law was propounded to promote equality before the law and supremacy of ordinary law over the arbitrary functioning of the government. The administrative tribunals somewhere restrict the ambit of the rule of law by providing separate laws and procedures for certain matters.
2. Lack of specified procedure: The administrative adjudicatory bodies do not have any rigid set of rules and procedures. Thus, there is a chance of violation of the principle of natural justice.
3. No prediction of future decisions: Since the administrative tribunals do not follow precedents, it is not possible to predict future decisions.
4. Scope of Arbitrariness: The civil and criminal courts work on a uniform code of procedure as prescribed under C.P.C and Crpc respectively. But the administrative tribunals have no such stringent procedure. They are allowed to make their own procedure which may lead to arbitrariness in the functioning of these tribunals.
5. Absence of legal expertise: It is not necessary that the members of the administrative tribunals must belong to a legal background. They may be the experts of different fields but not essentially trained in judicial work. Therefore, they may lack the required legal expertise which is an indispensable part of resolving disputes.

       Submitted by

        Roshi Surele

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Introduction

The significance of committee of creditors (hereinafter referred to as ‘CoC’) can be seen throughout the different stages of the Corporate Insolvency Resolution Process (‘CIRP’), in Part II (corporate persons) and Part III (individuals and partnership firms) of the IBC. However, Part II of the IBC does not explicitly define CoC for corporate persons, though CoC is a defined term for individuals and partnership firms in Part III of the IBC.

As per, Sections 18(c) read with 21, once all claims against the corporate debtor are collated the Interim Resolution Professional is duty bound to constitute a CoC. Generally, all the financial creditors make up the CoC and each financial creditor wields voting rights in proportion to the financial debt owed to them. In the situation where a corporate debtor does not have any financial creditors, the proviso to Section 21(8) contemplates and envisages that a CoC will be constituted in terms of Regulation 16 of The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘2016 Regulations’).

The committee of creditors has been enabled and empowered as board of directors under the Insolvency and Bankruptcy Code ( hereinafter referred to as ‘Code’ ), to take the decisions in respect of the Corporate Debtor, during the process of the corporate insolvency resolution process. In pursuance of this enabling system, the adjudicating authority while initiating the process of CIRP for a company, appoints a resolution professional, who executes and co-ordinates all the decision making during the CIRP and thereby conducts the CIRP of the company. As per Section 28 of the code, it is mandatory for Resolution  professionals to take prior approval of the CoC.

Brief history

The primary objective of the codification of Insolvency and Bankruptcy was based on time-bound resolution of debt, maximization of asset-value and revival of the corporate debtor. In the furtherance of the aforementioned objective, the Banking Law Reforms Committee has accentuated upon the “rights of creditors” under the Code. In 2015 report BLRC emphasized on the following-

“… When default takes place, control is supposed to transfer to the creditors; equity owners have no say.”

Not only, BLRC acknowledge the weakness of creditors under the prevalent bankruptcy regime but also, they contended to vest power in the hands of the creditor at the time of financial distress. The same was upheld by the Supreme Court of India in the case of Innoventive Ind. v. ICICI Bank. Thus, further empowering the creditors of the corporate debtor; in order to promote effective resolution of debts and to ensure the revival of the company.

Recent Changes and pertinent Judgements

In the case of Innoventive Industries v. ICICI Bank, the court reiterated and upheld the viewpoint of BLRC committee stating “when the company or a corporate entity makes any kind of default, the control shall necessarily shift to the creditors and shall not remain in the hands of the management of the company.” Further, in the case of Swiss Ribbon v. Union of India, the court ruled that the Financial creditor are involved in the processes of Corporate Debtor from the beginning and hence their presence in restructuring is essential to ascertain and remove the financial stress, which is not present with the operational creditors.” In the case, Phoenix Arc Private Limited v. Spade Financial Services Ltd., the question of law involved was  Section 21 (8) of the Code regarding the creation and constitution of the CoC. The issue demurred, was whether the related party status if extended to a FC shall be as per the present status or shall be as per the time when the financial debt was incurred. In the instant case the court has taken a purposive interpretation rather than literal interpretation and held that if an FC who is a related party tries to do away with such tag of related party through any act and acts in such manner with a sole motive of entering the CoC, shall not be the part of the CoC and will be restricted through provision first of Section 21(2).

Comparison with International Scenarios

As defined under section 21(2) of the Insolvency and Bankruptcy Code, 2016, “the Committee of Creditors(CoC) shall comprise of all financial creditors of the financial debtor provided that…..” this means composition of the committee is already defined under the given code.

However, in the US bankruptcy code, the Creditor’s Committee’s  composition is not predefined, rather a US Bankruptcy trustee is in charge of choosing who will be included in the same.

In Germany, the provisional committee is taken as a compulsory committee according to Sec. 22a para. 1 of the German Insolvency Code. The appointment is resolved upon by the Creditor’s Assembly.

Therefore, the procedure for the appointment of the committee varies vastly when it comes to the appointing body.

Suggestions

There are instances where CoC exercises certain unbridled powers, such as, at the  time of change of Resolution Professional in terms of Section 27 of the IBC, CoC is not obliged to record its reasons. Additionally, the IBC does not subject the resolution plan per se to judicial scrutiny and the limits of judicial review have been circumscribed to the parameters in Section 30(2) and Section 61(3) of the IBC.  IBC has cordoned off the entire bankruptcy framework in such a way that once the Coc is constituted under  Section 21, it exercises exclusive access to negotiations and retains the final hand in dealing business decisions.

Conclusion

The recent judgements explaining the purview of appointment of committee of creditors shall certainly be a boon for the insolvency regime in the country and will lead to development of trust in the same. The above mentioned judgments clear the standpoint regarding who can be appointed in the Committee of Creditors, ensuring that the Resolution Proceedings be not only expeditious but also genuine and fair. 

Submitted by-

  ROSHI SURELE

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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: 

A creditors’ committee is a group of people who represent a company’s creditors in a bankruptcy proceeding. As such, a creditors’ committee has broad rights and responsibilities, including devising a reorganization plan for bankrupt companies or deciding whether they should be liquidated. The creditors’ committee is usually further divided between secured and unsecured creditors.

Brief Legal history: 

The Bankruptcy Law Reforms Committee (‘BLRC’) was tasked with the onerous responsibility of rewiring the insolvency and bankruptcy framework in India. The BLRC presented an exhaustive report in November 2015 (‘BLRC Report’) for crafting a comprehensive code.

The Committee of Creditors (‘CoC’) was fashioned as one of the steering bodies driving the insolvency process under the Insolvency and Bankruptcy Code, 2016. Part II of the IBC does not define CoC for corporate persons, though CoC is a defined term for individuals and partnership firms in Part III of the IBC.

Recent Changes: 

Generally, as per IBC, the COC consists of the financial creditors only. In other words, all the Creditors who have financed the corporate debtor against the consideration of time value of money are included in the Committee of Creditors. In case if there are no financial creditors, in such case eighteen largest Operational Creditors along with one representative from workmen and from employee will be the members of the COC. The powers of these members are quite akin to the powers of the members of the financial creditors. The Operational creditors will not find any place in the COC except in case if the debt of the operational creditors are more than 10%, in such case the operational creditors will participate the COC through a representative. after supreme court’s judgement on Essar Steel case, it can be concluded that the Code is moving towards achieving its intended goal of swift redeployment of productive assets trapped in insolvent companies, and discouraging the notion that big loans are the lenders’ problem, not the borrowers’. The net result is significantly positive for credit discipline in India.

Important Judgement:  

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

A petition for initiating the insolvency resolution process against Essar was admitted by the National Company Law Tribunal. ArcelorMittal was the successful resolution applicant. The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above INR 1 crore would not be entitled to any distributions. The NCLT approved ArcelorMittal’s resolution plan and asked the CoC to distribute 85% of the amount under the resolution plan amongst financial creditors and the remaining 15% amongst the operational creditors. The decision of NCLT was subsequently challenged. Hon’ble supreme court upheld the primacy of the Committee of Creditors (‘CoC’) in distribution of funds of INR 42,000 crore received under the resolution plan submitted by ArcelorMittal.

Role the COC in CIPR (corporate insolvency resolution process): The Supreme Court upheld the concept of supremacy of the commercial wisdom of the CoC in approval of the resolution plan, provided they take into consideration/ account for interest of all stakeholders.

 Comparison with International Scenarios: 

The Bankruptcy Law Review Committee report 2015 pondered upon various aspects of the Code including the formation and composition of the CoC, concluding that members of the CoC have to be creditors both with the capability to assess viability, as well as be willing to modify terms of existing liabilities in negotiations. With this reasoning, operational creditors were intentionally left out of the CoC under the presumption that such creditors would neither be able to decide on matters regarding the insolvency of the entity, nor would they be willing to take the risk of postponing payments for better future prospects. This reasoning of the BLRC stands in stark contrast with the Legislative Guide on Insolvency Law (“LGIL“) proposed by The United Nations Commission on International Trade Law (“UNCITRAL“), wherein the UNCITRAL recognised that the first key objective of a resolution process is to balance the advantages of near-term debt collection through liquidation against preserving the value of the debtor’s business through reorganization.

UK Insolvency laws: Secured creditors are generally not represented on a creditor committee if they are fully secured or over-secured. Where they are under-secured, however, their interests are more likely to align with those of unsecured creditors and their participation in the committee or in voting by creditors may be appropriate, at least to the extent that they are under-secured. An example of this would be the Company Voluntary Arrangement (CVA) mechanism under UK insolvency laws, where secured creditors are entitled to vote only in specific circumstances.

Under German insolvency law: the creditors vote by groups. The consent of every group is needed. Within a group the majority of creditors (as headcount) and creditors having the majority of debt need to approve the insolvency plan.

Changes and Suggestions:

 The legislature was quick to amend the Code to protect the interests of homebuyers by according them the status of a financial creditor, allowing each and every homebuyer irrespective of the quantum of his financial debt to a vote on the CoC. it has is tilted the already lopsided scales further against operational creditors, ultimately leading to frequent challenges to resolution plans by operational creditors before courts and delaying the resolution process.

Conclusion: 

A comprehensive overhaul of the constitution of the CoC is thus urgently required to preserve the purpose and the actual intent of the Code. A reference could be made to Section 230 of the Companies Act, 2013, where certain provisions are made that secure the interests of all creditors. This security is however, contingent on the actual appointment of operational creditors to the CoC which is the primary need of the hour.

Submitted by: Purvi Goyal

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Introduction

On 4th April 2015, the Commerce and Industry Minister, Govt of India, Mrs. Nirmala Sita Raman, introduced the Indian Foreign Trade Policy for 2015-20. The Foreign Trade Policy has been formulated for five years. It appears into, regulates and legal guidelines are enacted for the export and import of goods. The creation of the Foreign Trade Policy is incorporated with the imaginative and prescient of the Honorable Prime Minister of India on ‘Make in India’, ‘Digital India’, and ‘Skills India’. The government of India has formulated the trade policy as a way to improve ‘ease of doing business’.
Improving export and import will assist India in being a contributor to the prevailing technology of globalization. The approved framework of Foreign Trade Policy is Directorates General of Foreign Trade. The state of the external environment and new features of the global trading landscape such as mega regional agreements and global value chains will profoundly affect India’s trade. Aim is to help various sectors of the Indian economy to gain global competitiveness.

Legal framework

According to Section 5 of the Foreign Trade ( Development and Regulations) Act 1992, the government of India can from time to time formulate laws relating to Foreign Trade Policy. This section also specifies that the laws made should have special provisions or exceptions should be included for Special Economic Zones. The provisions below Foreign Trade Policy are unique provisions and could be successful over well known ones. If any benefits were provided earlier than the date of graduation of the Foreign Trade Policy then it’ll continue.

● DGFT has been assisting the clients by giving them time schedules. It has also provided email id, phone number, a website for the stakeholders to communicate and to facilitate  them. Further, help desks have also been established in different zones. DGFT has also been modernized by allowing an online complaint system. The online complaint system allows users to register complaints and see its status.

● The trading, export, import, development, multilateral and bilateral relations via way of means of the Special Economic Zone is also sorted by the Department.

Trade facilitation

• A system of online complaint has also been formulated wherein the exporters can file online applications who are seeking to get their issues resolved. The Export Data Processing and Monitoring System has been started by the Reserve Bank of India  to look into the exports.

• The Foreign national trading policy additionally introduced the construct of city of Export Excellence that acknowledges cities that have a production of quite Rs. 750 Crore. These cities have the potential to extend quality exports from the country. These cities that are notified are being supplied with financial backing from the Central Government.

•The policy has also resulted in the formation of a National Committee for Trade Facilitation. This Committee was established in response to India’s signature on the World Trade Organization’s Trade Facilitation Agreement. The Committee is in charge of putting the terms of the WTO Trade Facilitation Agreement into action.

World Trade Organization

In 2018, the United States filed a complaint against India at the world trade center The criticism become concerning the guidelines which might be selling exports within side the country. The United States claimed that guidelines to sell exports are in opposition to the guidelines of the World Trade Centre. The United States claimed that the export subsidies can not be maintained and is in opposition to the guidelines of WTO. A document become made after analyzing the criticism by the WTO Panel on this
issue which stated that the provisions of Foreign Policy of India which might be promoting export by making use of export subsidiaries are illegal.

The report launched through the WTO panel may affect the export market of India. These promotional export subsidiaries had usually been a stimulant for the exports. The subsidiaries have supported exports by decreasing the price of exports. This may highly effect the diverse exporting sectors, given the modern scenario of the awful monetary fitness of the us of a and uncertainty because of the change struggle fare of America and China.

Ceasing the advancement of trade might lead to deplorable results within the trade and moment showcase of India. Hence, the nation ought to point to define such remote approaches which are congruent with the approaches of the World Exchange Organization. The Government ought to carefully define.

Objectives of the Foreign Trade Policy in India

1. To enable substantial growth in exports from India and import to India to boost the economy.
2. To improve the balance of payment and trade.
3. To increase the technological ability for manufacturing and cost-effectiveness of enterprise and services, thereby enhancing their aggressive electricity in evaluation to different countries, and to motivate the accomplishment of internationally commonplace requirements of quality.
4. Creation of opportunities by engaging in good and ethical practices.
5.  To ensure long-term growth by providing access to critical raw materials, as well as other components, consumables, and capital goods needed to boost production on and deliver efficient services.
6. provide buyers or clients with high-quality goods and services at globally
competitive rates and quality. ‘Canalization’- an important feature of Foreign
Trade Policy under which specific classes of goods can be imported only by
designated agencies.
7. Creation of opportunities by engaging in good and ethical practices.
8. Establishing the Advance Licensing System for foreign products required for producing numerous products for export. associate degree Advance License is issued by the board General of Foreign Trade to permit nontaxable import of inputs, that ar physically integrated with the export product
9. Allow the import of technology and equipment’s which may help in achieving better international standards of quality and reduce the cost of production.
10. Accelerating the economy’s transition from low-  to high-level economic activities by transforming it into a globally focused and thriving economy

Simplification and Merger of Reward Schemes:

1: Merchandise Exports from India Scheme(MEIS)

The earlier 5 schemes for worthwhile products exports with exceptional styles of responsibility script with various conditions (sector precise or real consumer only) connected to their use, namely, Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri – Infrastructure Incentive Scrip and VKGUY have now been changed with the aid of using a unmarried scheme referred to as Merchandise Export from India Scheme (MEIS). It is critical to be aware that there could
be no conditionality connected to the scrips issued beneathneath the scheme. For supply of rewards beneathneath MEIS, the international locations had been classified into 3 groups, while the costs of rewards beneathneath MEIS could variety from 2% to 5%. Notified items exported to notified markets could be rewarded on realized FOB price of exports in loose overseas exchange. The debits closer to simple customs responsibility and further responsibility of customs/ excise responsibility/carrier tax could additionally be allowed adjustment as responsibility drawback/CENVAT credit, as in keeping with as per the department of revenue rule.

The basic objective of Merchandise Exports from India Scheme (MEIS) is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing India’s export competitiveness.

Service Exports from India Scheme (SEIS)

Service Exports from India Scheme (SEIS) has changed in advance Served from India Scheme (SFIS) and pursuits to inspire export of notified offerings from India. It applies to ‘provider vendors placed in India’ as a substitute of ‘Indian provider vendors’. Service vendors placed in India covers exporters who’re presenting offerings from India, irrespective of the charter or profile. Under the brand new policy, the advantage is likewise prolonged to airport operations and floor dealing with offerings protecting seventy seven offerings. Under SEIS, the chosen offerings might be rewarded on the
fees of 3% on internet forex earned. The fee of praise beneathneath SEIS might be primarily based totally on internet forex earned. The praise issued as responsibility credit score script might be freely transferable and usable for all kinds of items and provider tax debits on procurement of offerings/items. Debits might be eligible for CENVAT credit score or drawback.

Conclusion

With the help of foreign trade policies, a country can lead to equality of pricing to ensure a stable demand and supply situation within the economy. Foreign trade policy also enables a nation to import certain products at the time of a natural calamity and therefore manage scarcity when demand is high by providing better quality and quantity of goods. It also assists in raising the standard of living and making commodities available at a lower cost. Therefore, the Foreign Trade Policy in India is a complete policy to enhance the position of India in the international market and create benefits
for all.

India has also been one of the most sought after foreign investment destinations. The MEIS and SEIS are great initiatives to enhance the export of goods and services and has consolidated the various schemes which existed before.

By Sneha Samarpita

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CORPORATE GROUP INSOLVENCY

A corporate group is a cluster of companies existing in various structure formats. A corporate group structure may have several operational advantages over isolated entities, such as greater efficiency, better management control and tax incentives. Corporate groups operate through a variety of forms, which may include: operational links such as a dependency on the supply of essential goods; and financial links, which include inter-corporate guarantees or inter-corporate loans and advances. From an economic perspective, these corporate groups are ‘one organism.’ ’ But, from a legal perspective, the principle set forth by Salmon v. Salmon of a separate legal entity is still followed. When one entity of a corporate group enters insolvency, it may make the operations of the entire group difficult. However,` the Insolvency and Bankruptcy Code 2016 (IBC) does not provide for the insolvency resolution of corporate group entities. Group insolvency resolution is said to be a complex subject and it was decided by the law makers in our country that the new Insolvency Law i.e. IBC, being new to India, it may be too soon to introduce such a complex subject like the group insolvency. The rationale being that group insolvency could involve lifting of the corporate veil which could affect the corporate debtor significantly and hence could be taken up after the present system is well established. While the Code is silent about group insolvency, the courts are attempting to fill in this gap through legal professions. The courts had to deal with prayers for consolidation of cases of group companies, notwithstanding the fact that there are no provisions in IBC at present for the same. At the point when the Videocon Group went insolvent, fifteen distinctive resolution applications were filed against its fifteen diverse group companies. The case was State Bank of India Vs Videocon Industries Limited (VIL) & Ors (MA/2385/2019 in C.P.(IB)-02/MB/2018 dated 12.02.2020 of NCLT, Mumbai Bench

The court stated that,” considering the high stakes of the stakeholders and the lengthy arguments raised by various parties demanding a verdict urgently on the issue of ‘ Consolidation’ , no choice is left but to take the call, although with due care that not to exceed the jurisdiction enshrined in the Insolvency Code.”

Further in another case of ArcelorMittal India (P) Ltd. vs. Satish Kumar Gupta reported in (2019) 2 SCC 1, the supreme court considered the matter of lifting of the corporate veil and deciding on group insolvency. The court held that “…where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the Law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole…”

NCLAT

Furthermore, the recent collapse of the IL&FS Group, involving another 169 group entities or we can say that the collective default by the Videocon group entities, has further made sure that there is a need to lift the corporate veil for group entities in certain situations, and also regulate the insolvency of groups.

Also in another case of Adel Group, the NCLAT initiated procedural coordination to ensure simultaneous proceedings with a common Resolution Professional for various companies belonging to the same group.

The Insolvency and Bankruptcy Board of India in order to bring foe=rward the group insolvency in India has set up a  Working Group on Group Insolvency and this group has complied it’s recommendations for the introduction of the same in the country. The WG has suggested that the group insolvency framework may be introduced in two phases.

 PHASE I

•         It will introduce procedural co-ordination and rules against perverse behaviour.
•         Procedural co-ordination may be implemented via joint CIRP application against group entities and further the formation of group CoCs without supplanting ‘substantive rights of creditors’ at the individual CoC level.
•         Further the WG recommended that claims of group entities should stand subordinate to claims of unrelated creditors in ‘exceptional situations of fraud, diversions of funds, etc.’

PHASE II

•         The WG noted that the second phase should introduce substantial consolidation and cross border insolvency 
•         Substantive consolidation refers to the pooling of assets of all group entities into a single estate to fulfil payment obligations. 

Conclusion

To conclude, modifications to the Prudential Framework for Resolution of Stressed Assets released by the Reserve Bank of India on June 7, 2019, may also be considered in relation to asset restructuring for group entities. But till group insolvency is not well recognized by the code in India, the courts, through its capacity of legal translation or judicial interpretation will act as saviors in this field. In any case, specific provisions identified with this concept should be incorporated in the code so as to get sureness and consistency in the law.

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Section 243 of the Code: Yet to be Notified

Introduction

The apt rationale behind introducing the Insolvency and Bankruptcy Code (hereinafter referred to as “ Code”) was to have consolidated and codified legislation instead of multiple laws dealing with several aspects of a company. The fact that the inefficiency of Sick Industrial Companies (Special Provisions) Act, 1985, to effectively dealing with the resolution of stress pertinent to stakeholders affected by business failure or the inability to pay a debt, either through revival or closure of a company, directed towards its lack of market mechanism where the stakeholders had the incentive to resolve stress in a time-bound manner. Therefore, the Code was established to provide an institutionalized creditor-in-control mechanism for revival and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value of assets of such persons and maintaining the interest of the stakeholder. The code has incorporated several sections dedicated to resolving the company related issues of the stakeholders, yet there are some Insolvency resolution provisions for individuals under the Insolvency and Bankruptcy Code to be notified.

Section 243 of the Code 

The Presidency Towns Insolvency Act, 1909 has been enacted to cover the insolvency of individuals, partnerships, and associations of the individuals in the presidency town. The law commission of India in its report of February 1964 recommended combining the two acts to form a single code on insolvency. However, the recommendation was never implemented. The Presidency Towns Insolvency Act, 1909, continues to be one of the imperative laws for insolvency regimes covering individuals. While the insolvency resolution process is well defined in the Code now, the rules pertaining to individual bankruptcy are yet to be notified. Although, the presidency towns insolvency act, has been repealed under Section 243(1) of IBC which reads as follows-

Section 243: Repeal of certain enactments and savings.

243. (1) The Presidency Towns Insolvency Act, 1909 (3 of 1909) and therefore the Provincial Insolvency Act, 1920 (5 of 1920) are hereby repealed.

The rules of IBC, haven’t framed for insolvency of people except for personal guarantors to corporate debtors, therefore there are not any notified rules for individual insolvency despite the provision of Section 243 when reading with Section 1, which has inherent force from the date of commencement of code. As a result, on harmonious interpretation, it is often said until and unless rules are framed, Section 243 is ineffective and individual insolvency laws still subsist.

Applicability of the Section

On several occasions, the government and the concerned ministry have clarified their stance regarding the applicability of section 243 of the Code which provides for the repeal of said enactments. Despite provisions related to insolvency resolution and bankruptcy for individuals and partnerships as incorporated in Part III of the Code, they are yet to be notified. Therefore, the stakeholders who intend to pursue their insolvency cases may approach appropriate authority/ court under the existing enactments, instead of approaching the Debt Recovery Tribunals.

Relevant judgment

In the case SBI v. V Ramakrishnan, the court took the stance on the enforcement of section 243 of the Code. The Court stated that Section 243, which contemplates the repealing of all the personal insolvency laws, has not come into force but it would not be necessary due to the presence of Section 238, which gives the Code an overriding effect over all other laws in cases of conflict as has been settled in an earlier judgment. Whereas, in the recent case Lalit Kumar Jain vs. Union of India and Ors., the court emphasized on the applicability of the said section, by reiterating, as far as individual personal guarantors are concerned, they will continue to be proceeded against under the aforesaid two Insolvency Acts and not under the Code. Indeed, by a Press Release dated 28-8-2017, the Government of India, through the Ministry of Finance, cautioned that Section 243 of the Code, which provides for the repeal of the said enactments, has not been notified till date, and further, that the provisions relating to insolvency resolution and bankruptcy for individuals and partnerships as contained in Part III of the Code are yet to be notified.

Conclusion

While Rules & Regulations with respect to Personal Guarantors of Corporate Debtors are anticipated to be notified soon, It might take still longer to come. A key official involved in framing it, says: “While insolvency provisions for companies would not create a direct social impact, individual bankruptcy provisions will directly have social fallouts.” 

 Submitted by 

Roshi Surele

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Introduction

The Goods and Services Tax (GST) regime in India has fundamentally transformed the indirect taxation landscape since its implementation in 2017. One of the most significant challenges in contemporary tax administration relates to GST compliance by foreign entities, especially those providing e-commerce services to Indian consumers while potentially circumventing tax obligations. This phenomenon creates an uneven playing field where compliant businesses face competitive disadvantages against non-compliant entities, resulting in market distortions and revenue losses for the government.

The issue becomes particularly acute when foreign entities utilize various mechanisms to avoid GST registration requirements, either by not establishing requisite business presence in India or by exploiting loopholes in enforcement. This practice not only violates tax laws but also contravenes fundamental principles of fair trade and competition, potentially triggering violations under multiple legal frameworks including the Competition Act, 2002, and provisions of the Indian Penal Code.

Understanding GST and Its Regulatory Framework

The Goods and Services Tax Act represents India’s most significant indirect tax reform, consolidating multiple indirect taxes into a single, destination-based tax system. GST operates on the principle of “one nation, one tax,” creating a unified common market across India. The tax is levied at every stage of production and distribution, with the final burden falling on the consumer at the point of consumption.

The GST structure comprises three components: Central GST (CGST) levied by the Central Government, State GST (SGST) levied by State Governments for intra-state supplies, and Integrated GST (IGST) for inter-state transactions. This multi-stage taxation system ensures that value addition at each stage is taxed while providing input tax credit mechanisms to prevent cascading effects.

The destination-based nature of GST means that tax revenue accrues to the state where consumption occurs, rather than where production happens. This fundamental principle has significant implications for foreign entities providing services to Indian consumers, as it establishes the taxable nexus within Indian territory regardless of the supplier’s location.

Mandatory GST Registration Requirements for Foreign Entities

Legal Framework Under Section 24 of the CGST Act

The Central Goods and Services Tax Act, 2017, under Section 24, specifically mandates GST registration for certain categories of persons irrespective of their turnover threshold [1]. This provision is crucial for ensuring tax compliance by non-resident entities engaging in business activities within India.

GST compliance by foreign entities becomes mandatory when they supply goods or services to recipients in India, regardless of whether they maintain a physical presence in the country. The Act defines a “non-resident taxable person” as any individual or entity that occasionally undertakes transactions involving the supply of goods or services but lacks a fixed place of business or residence in India.

Establishment of Distinct Persons Under IGST Act

The Integrated Goods and Services Tax Act, 2017, through its Section 8, provides crucial clarity on the treatment of establishments belonging to the same entity but located in different jurisdictions [2]. The provision states that an establishment in India and another establishment of the same person outside India shall be treated as establishments of distinct persons.

This legal framework ensures that transactions between related entities across borders are properly regulated and taxed. The implications are far-reaching, as they prevent multinational corporations from structuring their operations to avoid GST obligations by claiming intra-entity transactions.

Online Information Database Access and Retrieval Services (OIDAR)

Foreign entities providing OIDAR services face specific registration and compliance obligations under the GST regime [3]. These services include online access to databases, information retrieval systems, and digital platforms that facilitate commercial transactions. The registration requirement applies regardless of the entity’s physical presence in India, emphasizing the tax system’s focus on the location of consumption rather than supply.

Entities providing OIDAR services must obtain GST registration and file monthly returns using Form GSTR-5A. This requirement reflects the government’s recognition that digital services create substantial value within India and should contribute to the tax base accordingly.

Threshold Criteria and Special Category States

The GST registration threshold varies based on the location of business operations within India. For most states, the mandatory registration threshold is set at Rs. 40 lakhs of aggregate turnover in a financial year [4]. However, special category states benefit from a reduced threshold of Rs. 10 lakhs, reflecting their unique economic circumstances and developmental needs.

Special category states, as determined by the National Development Council, include Assam, Nagaland, Jammu & Kashmir, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Uttarakhand, Tripura, Himachal Pradesh, and Sikkim. The classification considers factors such as challenging terrain, low population density, significant tribal populations, strategic border locations, infrastructure limitations, and economic backwardness.

Electronic Commerce Operators and Platform Liability

The GST framework places specific obligations on electronic commerce operators, recognizing their role as intermediaries in facilitating commercial transactions [5]. These platforms must obtain GST registration regardless of their turnover and are required to collect tax at source from suppliers using their services.

Electronic commerce operators face dual responsibilities: they must register for GST in their capacity as service providers and simultaneously act as tax collection agents for transactions facilitated through their platforms. This regulatory approach ensures that digital marketplaces contribute to tax compliance rather than becoming vehicles for evasion.

The law requires electronic commerce operators to maintain detailed records of all transactions, issue tax invoices for their services, and file periodic returns disclosing platform activities. These obligations extend to foreign platforms operating in India, creating enforceable compliance requirements regardless of the operator’s location.

Penalties and Enforcement Mechanisms

Administrative Penalties Under Section 122

The CGST Act prescribes severe penalties for non-compliance with registration requirements. Under Section 122, entities that fail to obtain mandatory GST registration face penalties equivalent to the higher of Rs. 10,000 or ten percent of the tax amount evaded [6]. This penalty structure reflects the government’s commitment to ensuring compliance across all categories of taxpayers.

Late registration attracts additional penalties, calculated based on the duration of non-compliance and the quantum of tax evasion. The penalty framework is designed to eliminate any financial advantage that might accrue from delayed or avoided registration, ensuring that compliance remains economically rational.

Goods and Vehicle Detention Powers

Tax authorities possess extensive powers to detain goods and vehicles involved in non-compliant transactions. These enforcement mechanisms serve as practical deterrents against tax evasion, as they can significantly disrupt business operations for non-compliant entities.

The detention powers extend to digital transactions through mechanisms that can freeze bank accounts, block payment gateways, and restrict platform access for non-compliant entities. These digital enforcement tools represent an evolution in tax administration, adapting traditional enforcement methods to contemporary business models.

Competition Law Implications

Abuse of Dominant Position Under Section 4

Tax evasion by foreign entities operating through digital platforms can constitute abuse of dominant position under Section 4 of the Competition Act, 2002 [7]. When non-compliant entities offer services at artificially low prices due to tax avoidance, they create unfair competitive advantages that distort market dynamics.

The Competition Act defines dominant position as the ability to operate independently of competitive forces or affect competitors and consumers in one’s favor. Foreign entities that avoid GST obligations while competing with compliant Indian businesses may be leveraging their regulatory arbitrage to establish or maintain market dominance.

Section 4(2)(a) specifically prohibits imposing unfair or discriminatory prices in the purchase or sale of goods or services. Price advantages gained through tax evasion fall squarely within this prohibition, as they represent artificial distortions rather than legitimate competitive advantages.

Predatory Pricing and Market Distortion

The Competition Act’s provisions against predatory pricing become relevant when foreign entities use tax savings to subsidize below-cost pricing strategies. Predatory pricing involves selling goods or services below cost with the intent to eliminate competition or prevent new entrants from establishing themselves in the market.

When foreign entities avoid GST obligations, they effectively gain cost advantages that enable predatory pricing strategies. This practice harms competition by creating barriers for compliant businesses and can lead to market concentration in favor of non-compliant entities.

Criminal Law Ramifications

Cheating Under Section 420 of the Indian Penal Code

Tax evasion through deliberate non-registration or misrepresentation of business activities may constitute cheating under Section 420 of the Indian Penal Code [8]. The provision criminalizes dishonest inducement of property delivery, which applies when customers are misled about tax compliance status or when competitors suffer losses due to unfair pricing enabled by tax evasion.

The criminal liability extends to individuals responsible for compliance decisions within foreign entities. Corporate officers, directors, and key personnel involved in structuring operations to avoid Indian tax obligations may face personal criminal liability under Indian law.

Jurisdictional Challenges and Enforcement

Enforcing criminal provisions against foreign entities presents jurisdictional challenges, particularly when the entities lack physical presence in India. However, Indian courts have increasingly recognized their jurisdiction over foreign entities that derive substantial revenue from Indian operations, regardless of their physical location.

The concept of “long-arm jurisdiction” allows Indian authorities to pursue enforcement actions against foreign entities whose actions have significant effects within Indian territory. This principle is particularly relevant for digital service providers whose entire value creation occurs within India despite their offshore location.

Market Impact and Economic Distortions

Unfair Competitive Advantages

Non-compliance with GST obligations creates systematic competitive advantages for foreign entities at the expense of domestic businesses. Compliant businesses must factor GST costs into their pricing strategies, while non-compliant entities can offer identical services at lower prices by avoiding tax obligations.

This distortion becomes particularly pronounced in price-sensitive markets where small cost advantages can translate into significant market share gains. The cumulative effect is a gradual erosion of the competitive position of compliant businesses, potentially leading to market concentration in favor of non-compliant entities.

Revenue Loss and Fiscal Impact

Tax evasion by foreign entities represents a significant loss of revenue for both Central and State Governments. The digital economy’s rapid growth magnifies these losses, as increasing proportions of economic activity shift to platforms operated by foreign entities.

The fiscal impact extends beyond direct tax losses to include reduced input tax credits for businesses purchasing from non-compliant suppliers and distorted price signals that affect resource allocation across the economy. These effects compound over time, creating long-term structural challenges for tax administration.

Impact on Innovation and Investment

Unfair competition from tax-evading foreign entities can discourage domestic innovation and investment in digital platforms and services. When compliant businesses face systematic cost disadvantages, they may reduce investment in research, development, and capacity expansion.

This dynamic is particularly concerning in emerging technology sectors where Indian businesses compete directly with well-funded foreign entities. Tax-related competitive disadvantages can prevent Indian companies from achieving the scale necessary for effective competition, perpetuating dependence on foreign platforms.

Regulatory Response and Enforcement Evolution

Digital Tax Administration

Indian tax authorities have developed sophisticated digital tools for identifying and addressing non-compliance by foreign entities. These include automated systems for monitoring cross-border transactions, artificial intelligence for pattern recognition, and blockchain technologies for transaction verification.

The government has also established specialized enforcement units focused on digital economy taxation. These units combine tax expertise with technology capabilities to address the unique challenges posed by borderless digital transactions.

International Cooperation Mechanisms

India has entered into numerous bilateral and multilateral agreements to facilitate information exchange and enforcement cooperation in tax matters. These agreements enable Indian authorities to obtain information about foreign entities’ operations and to coordinate enforcement actions with their home jurisdictions.

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative provides additional frameworks for addressing tax avoidance by multinational enterprises. India’s participation in these initiatives strengthens its ability to address cross-border tax evasion effectively.

Legal Precedents and Judicial Interpretation

High Court Decisions on Non-Resident Taxation

Indian High Courts have consistently held that the location of service consumption, rather than service provision, determines tax liability under the GST regime. This principle supports broad application of GST obligations to foreign service providers, regardless of their physical presence in India.

Notable judgments have established that foreign entities cannot avoid Indian tax obligations by structuring their operations through intermediate jurisdictions or by claiming that their services are provided from outside India when the actual consumption occurs within Indian territory.

Supreme Court Guidance on Digital Taxation

The Supreme Court of India has provided important guidance on the taxation of digital services, emphasizing that the economic substance of transactions should prevail over their legal form. This approach supports aggressive enforcement against foreign entities that use artificial structures to avoid tax obligations.

The Court has also recognized the sovereign right of countries to tax economic activities that create value within their territories, regardless of the service provider’s location. This principle provides strong legal foundation for GST enforcement against foreign digital service providers.

Future Regulatory Developments

Proposed Legislative Amendments

The government has proposed several amendments to strengthen GST compliance by foreign entities. These include enhanced registration requirements, expanded definitions of taxable presence, and increased penalties for non-compliance.

Proposed changes also include simplified compliance procedures for genuine small-scale foreign suppliers while tightening requirements for large-scale commercial operations. This balanced approach aims to reduce compliance burdens for legitimate small businesses while ensuring that significant commercial activities contribute appropriately to the tax base.

Technology-Driven Enforcement

Future enforcement strategies will likely rely heavily on technology solutions, including real-time transaction monitoring, automated compliance verification, and blockchain-based audit trails. These technologies will enable more efficient identification of non-compliant entities and faster enforcement actions.

The integration of international tax databases and automated information exchange systems will further enhance authorities’ ability to track and regulate foreign entities’ activities within India.

Conclusion

The challenge of ensuring GST compliance by foreign entities operating in India represents a critical test of the country’s tax administration capabilities in the digital age. The existing legal framework provides robust mechanisms for addressing non-compliance, but effective enforcement requires continued evolution of administrative capabilities and international cooperation.

The intersection of tax law, competition law, and criminal law creates multiple avenues for addressing non-compliance, ensuring that foreign entities cannot gain unfair advantages through regulatory arbitrage. Maintaining effective GST compliance by foreign entities is critical, and the success of these measures depends on consistent enforcement and advanced technological capabilities to monitor global digital transactions

Moving forward, the focus must be on creating a regulatory environment that encourages compliance while supporting legitimate business activities. This requires balancing enforcement rigor with procedural clarity, ensuring that compliant businesses can operate efficiently while non-compliant entities face meaningful consequences for their actions.

The broader implications extend beyond tax compliance to fundamental questions of economic sovereignty and fair competition in the digital age. India’s approach to these challenges will likely influence global standards for digital taxation and provide a model for other developing economies facing similar challenges.

References

[1] Central Goods and Services Tax Act, 2017, Section 24.

[2] Integrated Goods and Services Tax Act, 2017, Section 8. 

[3] GST Registration For Foreign Companies. Available at: https://www.indiafilings.com/learn/gst-registration-for-foreign-companies/ 

[4] Minimum turnover for GST Registration Threshold. Available at: https://www.indiafilings.com/learn/what-is-the-minimum-turnover-for-gst/ 

[5] Compulsory GST Registration: Section 24 Explained in Detail. Available at: https://tax2win.in/guide/compulsory-registration-gst-act-section-24 

[6] Central Goods and Services Tax Act, 2017, Section 122. Available at: https://cbic-gst.gov.in/ 

[7] Competition Act, 2002, Section 4. Available at: https://www.cci.gov.in/images/legalframeworkact/en/the-competition-act-20021652103427.pdf 

[8] Indian Penal Code, 1860, Section 420.

[9] Abuse of dominant position under Competition Act, 2002. Available at: https://blog.ipleaders.in/abuse-of-dominant-position-under-competition-act-2002/ 

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Introduction

Multi-Level Marketing (MLM) represents a complex business model that has gained significant traction in India while simultaneously raising regulatory concerns. The term refers to a sales strategy employed by direct sales companies where existing members are encouraged to recruit new participants while selling products or services to consumers. This business model creates a hierarchical structure where distributors earn commissions not only from their direct sales but also from the sales made by their recruited downline members.

The regulatory landscape governing Multi-Level Marketing operations in India has evolved considerably over the years, primarily in response to numerous fraudulent schemes that masqueraded as legitimate MLM businesses. The distinction between legitimate direct selling and illegal pyramid schemes remains a critical concern for regulatory authorities, businesses, and consumers alike. Understanding this distinction requires a thorough examination of the existing legal framework, judicial precedents, and regulatory guidelines that govern MLM operations in India.

Historical Context and Legal Evolution

The regulation of Multi-Level Marketing and similar schemes in India began with the enactment of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 [1]. This legislation was introduced to combat fraudulent investment schemes that promised quick returns to participants. Initially, many MLM companies found themselves scrutinized under this Act, leading to significant legal challenges and the need for clearer regulatory guidelines.

The Prize Chits and Money Circulation Schemes (Banning) Act, 1978, was designed to protect consumers from schemes that primarily focused on money circulation rather than genuine product sales. Under Section 2(c) of this Act, a “money circulation scheme” is defined as “any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme” [1].

The evolution of Multi-Level Marketing regulation gained momentum when the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, Government of India, issued comprehensive guidelines for Direct Selling in 2016 [2]. These guidelines were formulated to distinguish between legitimate direct selling operations and illegal money circulation schemes, providing much-needed clarity to the industry.

Regulatory Framework Under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978

The Prize Chits and Money Circulation Schemes (Banning) Act, 1978, serves as the primary legislation governing schemes that involve money circulation. Section 2(c) of the Act provides the definition of money circulation schemes, which has been extensively interpreted by Indian courts in various judgments.

The Supreme Court of India, in State of West Bengal v. Swapan Kumar Guha [3], provided an authoritative interpretation of Section 2(c) of the Act. Justice A.N. Sen, who delivered the leading judgment, established four essential ingredients that must be present for a scheme to fall under the definition of a money circulation scheme:

First, there must be a scheme in existence. Second, the scheme must have members who participate in it. Third, the scheme must be designed for making quick or easy money based on events or contingencies related to member enrollment, or it must involve receiving money or valuable items as consideration for promises to pay money contingent on member enrollment. Fourth, the dependency on enrollment-related events or contingencies remains unaffected by whether the money comes from entrance fees or periodic subscriptions.

The Supreme Court emphasized that not every activity involving quick or easy money automatically falls under Section 2(c) of the Act. The critical factor is whether the money-making opportunity depends on events or contingencies specifically related to member enrollment into the scheme. This distinction has become fundamental in determining the legality of various business models, including MLM operations.

Judicial Interpretation and Landmark Cases

The Amway India Enterprises v. Union of India case [4] represents a significant judicial pronouncement on MLM operations in India. The Andhra Pradesh High Court, in this case, examined the Amway business model and concluded that it constituted a money circulation scheme under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

The court observed that the scheme provided easy and quick money to distributors, with each member paying INR 4,400 upon enrollment. The judgment noted that this enrollment fee, combined with future earnings through marketing and recruiting other members, constituted events or contingencies related to enrollment. The court stated, “from the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him” [4].

This judgment established important precedents for evaluating MLM schemes. The court emphasized that when a business model primarily relies on enrollment fees and recruitment-based earnings rather than genuine product sales to end consumers, it falls within the prohibited category of money circulation schemes.

Direct Selling Guidelines 2016: A Regulatory Milestone

The Department of Consumer Affairs issued comprehensive Direct Selling Guidelines in 2016 [2], marking a significant shift in the regulatory approach toward MLM and direct selling businesses. These guidelines were developed to provide clarity and establish standards for legitimate direct selling operations while preventing fraudulent schemes.

The guidelines mandate that direct selling companies must submit an undertaking to the Department of Consumer Affairs before commencing operations. This undertaking serves as a declaration of compliance with the established guidelines and provides regulatory authorities with oversight capabilities.

One of the fundamental principles established by these guidelines is that participation in direct selling must be entirely voluntary. Companies are prohibited from charging participation fees, including entry fees, registration fees, or any other charges for joining the business opportunity. This requirement directly addresses one of the key concerns identified in judicial pronouncements regarding money circulation schemes.

The guidelines also mandate that direct selling companies cannot compel consumers to purchase products or services in quantities exceeding what they can reasonably sell or consume. This provision ensures that the business model focuses on genuine product distribution rather than inventory loading, which has been a common practice in fraudulent schemes.

Written agreements complying with the Indian Contract Act, 1872, must be provided to all participants, clearly stating the terms and conditions of participation. These agreements must include comprehensive cancellation and refund policies, ensuring that participants have clear exit options if they choose to discontinue their involvement.

Product-Based vs. Enrollment-Based Revenue Models

The distinction between product-based and enrollment-based revenue models lies at the heart of MLM regulation in India. Legitimate MLM operations must demonstrate that their primary revenue source comes from actual product sales to end consumers rather than from recruitment activities or enrollment fees.

Product-based MLM models focus on distributing genuine products or services through a network of independent distributors. These distributors earn commissions based on their personal sales volume and may receive additional compensation based on the sales performance of their recruited team members. The key requirement is that products must have real market value and be sold to genuine consumers who are not part of the MLM network.

Enrollment-based models, which are prohibited under Indian law, primarily generate revenue from recruitment activities and enrollment fees. These schemes typically require participants to pay significant joining fees and emphasize recruitment over product sales. The compensation structure in such schemes is heavily weighted toward recruitment bonuses rather than retail sales commissions.

The regulatory framework requires MLM companies to maintain detailed records demonstrating that a significant portion of their revenue comes from product sales to non-participants. This requirement helps distinguish between legitimate business operations and illegal money circulation schemes.

Compliance Requirements for Multi-Level Marketing Companies

MLM companies operating in India must adhere to stringent compliance requirements established by the Direct Selling Guidelines 2016 [2]. These requirements encompass various aspects of business operations, from organizational structure to consumer protection measures.

Companies must establish a physical office in India to conduct their operations, ensuring local presence and accountability. This requirement facilitates regulatory oversight and provides consumers with accessible recourse mechanisms for addressing grievances.

Transparency in compensation structures represents another critical compliance requirement. MLM companies must provide clear and unambiguous information regarding how fees, remunerations, and salaries are calculated. This transparency enables participants to make informed decisions about their involvement and helps prevent misleading earnings claims.

The establishment of comprehensive buyback policies ensures that participants can return unsold products for refunds, typically within specified timeframes and under reasonable conditions. These policies protect distributors from inventory risks and demonstrate the company’s confidence in product marketability.

Consumer protection measures include detailed disclosure requirements regarding business opportunities, potential earnings, and associated risks. Companies must provide realistic earnings disclosures based on actual distributor performance data rather than theoretical projections or exceptional success stories.

Regulatory Challenges and Enforcement

The enforcement of Multi-Level Marketing regulations in India faces several challenges, primarily due to the sophisticated nature of modern MLM schemes and the global reach of many operations. Regulatory authorities must continuously adapt their oversight mechanisms to address evolving business models and technological platforms.

State-level enforcement agencies play a crucial role in investigating suspected violations and taking appropriate action against non-compliant operations. However, the interstate nature of many MLM businesses requires coordination between multiple regulatory authorities, which can complicate enforcement efforts.

Consumer awareness represents another significant challenge in MLM regulation. Many participants lack sufficient understanding of the legal distinctions between legitimate and illegal schemes, making them vulnerable to fraudulent operations. Educational initiatives and public awareness campaigns have become essential components of the regulatory framework.

International Perspectives and Best Practices

India’s approach to MLM regulation reflects international best practices while addressing specific domestic concerns. Many countries have implemented similar regulatory frameworks that distinguish between legitimate direct selling and illegal pyramid schemes.

The United States Federal Trade Commission has established guidelines that emphasize product sales to non-participants as the primary criterion for legitimate MLM operations. Similar approaches have been adopted by regulatory authorities in Australia, Canada, and European Union member states.

These international perspectives have influenced India’s regulatory development, particularly in areas such as earnings disclosure requirements, product return policies, and prohibition of enrollment fees. The adoption of globally recognized standards helps protect Indian consumers while facilitating legitimate international MLM operations.

Technology and Digital Platforms

The emergence of digital platforms and social media has transformed MLM operations, creating new regulatory challenges and opportunities. Modern MLM companies increasingly rely on online platforms for recruitment, training, and sales activities, requiring regulatory frameworks to address digital-specific concerns.

Online recruitment practices must comply with the same standards as traditional methods, including prohibition of misleading earnings claims and mandatory disclosure of risks. Social media promotions by MLM participants are subject to advertising regulations and must include appropriate disclaimers.

Digital payment systems and e-commerce platforms have simplified MLM operations while creating new compliance requirements. Companies must ensure that their digital infrastructure supports required record-keeping, reporting, and consumer protection measures.

Consumer Protection and Redressal Mechanisms

Consumer protection remains a central focus of MLM regulation in India. The regulatory framework provides multiple avenues for consumers to seek redress for grievances related to MLM operations.

The Consumer Protection Act, 2019 [5], provides consumers with comprehensive protection against unfair trade practices, including those related to MLM operations. Consumer forums at district, state, and national levels have jurisdiction to hear complaints related to deficient services or unfair practices by MLM companies.

The establishment of dedicated grievance redressal mechanisms within MLM companies ensures that consumer complaints are addressed promptly and effectively. These internal mechanisms must meet specific standards regarding response timeframes, escalation procedures, and resolution outcomes.

Economic Impact and Market Dynamics

The MLM industry in India has experienced significant growth, contributing to employment generation and economic development. Legitimate MLM operations provide income opportunities for millions of participants while facilitating product distribution across diverse geographic markets.

However, the economic impact of fraudulent schemes creates substantial negative consequences, including financial losses for participants and reduced consumer confidence in direct selling as a whole. Regulatory measures aim to maximize positive economic contributions while minimizing adverse effects from illegal operations.

Market dynamics in the MLM sector are influenced by regulatory changes, consumer awareness levels, and technological developments. Companies must continuously adapt their business models to remain compliant while maintaining competitive positions in evolving markets.

Future Regulatory Developments

The regulatory landscape for Multi-Level Marketing operations in India continues to evolve in response to changing market conditions and emerging challenges. Future developments may include enhanced digital compliance requirements, stricter enforcement mechanisms, and expanded consumer protection measures.

Regulatory authorities are considering amendments to existing guidelines to address issues such as cryptocurrency-based MLM schemes, international operations targeting Indian consumers, and sophisticated fraud techniques that exploit regulatory gaps.

The integration of technology in regulatory oversight, including data analytics and artificial intelligence, may enhance the ability to identify and investigate suspected violations. These technological tools could improve enforcement efficiency while reducing regulatory burden on compliant operations.

Conclusion

The regulation of Multi-Level Marketing in India represents a complex balance between protecting consumers from fraudulent schemes and allowing legitimate direct selling businesses to operate effectively. The legal framework, anchored by the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and supplemented by the Direct Selling Guidelines 2016, provides comprehensive standards for distinguishing between legal and illegal operations.

The distinction between product-based and enrollment-based revenue models remains fundamental to regulatory compliance. Companies must demonstrate that their primary focus is on genuine product sales rather than recruitment activities to avoid classification as prohibited money circulation schemes.

Compliance with regulatory requirements demands ongoing attention to multiple aspects of business operations, from organizational structure to consumer protection measures. Companies that prioritize transparency, product quality, and consumer welfare are more likely to achieve long-term success within the regulatory framework.

The evolving nature of MLM operations, particularly with the integration of digital platforms and global reach, requires continuous adaptation of regulatory approaches. Future developments will likely focus on enhancing enforcement capabilities while maintaining support for legitimate business operations that contribute positively to India’s economy.

Understanding and complying with MLM regulations in India requires careful consideration of legal requirements, judicial interpretations, and best practices. Companies, participants, and consumers all benefit from a clear understanding of the regulatory framework and their respective rights and responsibilities within it.

References

[1] The Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Available at: https://www.indiacode.nic.in/handle/123456789/1628 

[2] Direct Selling Guidelines 2016, Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, Government of India. Available at: https://consumeraffairs.nic.in/ 

[3] State of West Bengal v. Swapan Kumar Guha, (1982) 1 SCC 561. 

[4] Amway India Enterprises v. Union of India, 2007, Andhra Pradesh High Court. 

[5] The Consumer Protection Act, 2019. 

[6] Reserve Bank of India – Guidelines on Money Circulation Schemes. 

[7] Ministry of Consumer Affairs – Consumer Protection Guidelines. Available at: https://consumeraffairs.nic.in/ 

[8] Indian Kanoon Database – Legal Judgments and Acts. Available at: https://indiankanoon.org/ 

[9] Direct Selling Association of India – Industry Guidelines. Available at: https://www.indiandsa.in/ 
                                                                           

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