Arbitrary classification in a one-time settlement scheme violated Article 14 where failed asset transfers did not change promoter ownership.

A one-time settlement scheme that treated defaulting promoters differently depending on whether there had been an abortive attempt to transfer secured assets was found to lack a rational basis. The court noted that, under Section 29 of the State Financial Corporations Act, 1951, ownership in the secured assets continued with the promoter until an actual transfer was completed, so a failed sale attempt did not extinguish proprietary rights. Requiring additional retention money from promoters whose transfer process had failed therefore bore no real connection to the scheme's recovery objective. The impugned classification was held arbitrary and violative of Article 14, and the challenged condition was invalid.

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Issues: Whether the classification made in the one-time settlement scheme between defaulting promoters whose assets had not been transferred and those where an abortive attempt had been made to transfer the assets, and the insistence on additional retention money from the latter class, was constitutionally valid.

Analysis: The scheme's object was recovery of dues from non-performing assets of the Corporation, while Section 29 of the State Financial Corporations Act, 1951 showed that ownership in the secured assets remained with the defaulting promoter until an actual transfer was completed. A mere attempt to transfer, or a failed attempt, did not extinguish the promoter's proprietary rights. The impugned distinction therefore did not rest on any legally relevant difference in the position of promoters whose title in the assets continued to subsist. Making eligibility dependent on whether a transfer attempt had failed, and fastening on the promoter the consequences of a purchaser's default or of an abortive sale process, had no rational connection with the object of the scheme.

Conclusion: The classification was held to be arbitrary and violative of Article 14 of the Constitution of India, and the challenged condition in the scheme was invalid.

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