By:- Avika Saini
IN THE SUPREME COURT OF INDIA
|NAME OF THE CASE
|Manish Kumar v/s Union of India
|WRIT PETITION(C) NO.26 OF 2020
|DATE OF THE CASE
|Union of India and Another
|Rohinton Fali Nariman, K.M. Joseph, Ajay Rastogi
|STATUTES / CONSTITUTION INVOLVED
|Insolvency and Bankruptcy Code (Amendment) Act 2020 , Constitution of India.
|IMPORTANT SECTIONS / ARTICLES
|Sections 3, 4, and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020 , Article 142 of the Constitution of India.
The Supreme Court of India in the judgment of Manish Kumar and others vs. Union of India ruled against a group of allottees of real-estate projects who had challenged the amendments to the Insolvency and Bankruptcy Code (Amendment) Act 2020. The Petitions inter alia challenged the constitutional validity of amendments to Section 7(1) of the Insolvency and Bankruptcy Code, 2016.
Amendment to Section 7(1) incorporated a proviso that allottees under a real estate project (financial creditors), desirous of triggering the insolvency resolution process under the Code, are required to file an application jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of allottees under the same real estate project, whichever is less.
Further, the Petitioners sought to challenge another proviso amending Section 7 (1) of the Code, that those applications under Section 7 which had not been admitted would stand withdrawn within thirty days, if the newly declared minimum threshold of one hundred allottees or ten per cent of the allottees, whichever is lower, was not garnered by the respective applicants.
However, the SC in what may be viewed as a blow to allottees of real estate projects, has upheld the provisions amending Section 7 (1) of the Code.
FACTS OF THE CASE :-
The petitioners have approached the Court under Article 32 of the Constitution of India. They call in question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020. Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016. Section 4 of the impugned amendment, incorporates an additional Explanation in Section 11 of the Code. Section 10 of the impugned amendment inserts Section 32A in the Code. The petitioners have challenged that the second proviso, according to which a new threshold has been declared for an allottee to move an application under Section 7 for triggering the insolvency resolution process under the Code. The threshold is the requirement that there should be at least 100 allottees to support the application or 10 per cent of the total allottees whichever is less. Moreover, they should belong to the same project.
The Supreme Court has held, “A vested right under a statute can be taken away by a retrospective law. A right given under a statute can be taken away by another statute. The Supreme court cannot ignore the fact that there was considerable public interest behind such a law. The sheer numbers, in which applications proliferated, combined with the results it could produce, cannot be brushed aside as an irrational or capricious aspect to have been guided by in making the law.
As regards the compelled withdrawal under the third proviso of the pending applications is concerned, we hold as follows. Once the Legislature intended that the pending applications must be made compliant with the threshold requirement, consequences for not doing so had to be provided. Otherwise, it would have created complete uncertainty and the applicant would have been dealt with in a manifestly arbitrary manner.
The Supreme Court noted that the legislation, being an economic measure, free play in the joints, must be accorded to the Legislature. The impugned amendment is reasonable, minimal and proportionate. The data gathered by the respondent discloses that between June, 2016 and 5th June, 2018, there were 253 cases filed by allottees in the N.C.L.T. However, between 6th June, 2018 and 28th December, 2019, as many as 2201 cases were filed by the allottees.
Thereafter, pursuant to the Ordinance between December 29th, 2019 and August 26th, 2020, there is a sharp fall, as, nearly in eight months, only 130 cases were filed. It is pointed out that the argument, based on estoppel and malice against the Legislature, is untenable. There can be no estoppel against the Legislature and the decision of this Court in Union of India and others v. Godfrey Philips India Ltd. 23, is relied on. The concept of transferred malice is alien in the field of legislation. The right to file an application under Section 7 is a statutory right and it can be conditioned.
ISSUE RAISED BEFORE THE COURT :-
The petitioners have approached Supreme Court under Article 32 of the Constitution of India. They call in question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020.
ARGUMENTS FROM THE APPELLANT SIDE:- The Petitioners contended that the second proviso to Section 7(1) of the Code was unreasonable, arbitrary, irrational, ultra-vires the Indian Constitution and violated basic fundamental rights. It was contended that the amendments resulted in hostile discrimination between the Petitioners and the other financial creditors, lacking any intelligible differentia. The Petitioners argued that the 1st Amendment was impractical as there was an information asymmetry. It was also argued that there existed no platform for the exchange and availability of information with details pertaining to the allottees. The Petitioners contended that if the aforesaid proviso were upheld, they would for all practical purposes fall outside the purview of a financial creditor and their status would be worse than that of an operational creditor.
ARGUMENTS FROM THE RESPONDENT SIDE:- On the other hand, the Respondent’s raised a counterargument stating that the Amendment Act was perfectly valid and formed part of an economic measure. The Respondents further contended that the Amendment Act was introduced to prevent multiplicity of proceedings from being filed and to ease the burden of pending cases before the already overburdened adjudicating authorities.
i. Preventing multiple individual applications, which has the effect of not only crowding the docket of the Adjudicating Authority and further holding up a process in which time is of the essence;
ii. Safeguarding the interest of hundreds or even thousands of allottees who may oppose the application of a single home-buyer;
iii. Balancing the interest of members of the same sub-Class as also other financial creditors and other operational creditors. The availability of remedies to the members of the sub-class under RERA, in the case of allottees;
iv. Lastly, the process becomes smoother and cost effective. Unnecessary financial bleeding of the corporate debtor who is already in difficulty, is avoided.
(1) Section 7(1) of the Code before the amendment read as follows:
7. Initiation of corporate insolvency resolution process by financial creditor:
(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.”
Explanation- For the purposes of this subsection, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.
The amendment to the same by Section 3 of the impugned amendment incorporates 3 provisos to Section 7(1), which reads as under:
“Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:
Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:
Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.
(2) Section 11 before the amendment read as follows:
11. Persons not entitled to make applications. – The following persons shall not be entitled to make an application to initiate corporate insolvency resolution process under this Chapter, namely: –
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or
(d) a corporate debtor in respect of whom a liquidation order has been made. Explanation 1 [I]. – For the purposes of this section, a corporate debtor includes a corporate applicant in respect of such corporate debtor.”
The explanation which was inserted through the impugned amendment reads as follows:
“Explanation II.- For the purposes of this section, it is hereby clarified that nothing in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another corporate debtor.
(3) Section 32A inserted through the impugned amendment reads as follows:
32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31 if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, a reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled:
Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.
(2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person, who was not—
(i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
Explanation.—For the purposes of this sub-section, it is hereby clarified that,—
(i) action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, detention or confiscation of such property under such law as may be applicable to the corporate debtor;
(ii) nothing in this subsection shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such action may be taken under such law as may be applicable.
(3) Subject to the provisions contained in sub-section (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.
The Bench comprising of Justices R.F. Nariman, N. Sinha and K.M. Joseph observed that on the basis of existence of default against one applicant and in the event the corporate insolvency resolution process of the corporate debtor is unsuccessful, liquidation would commence, which not the objective of the Code. If a single allottee, , is allowed to move a Section 7 application, the interests of all the other allottees may be jeopardised and the entire project put in peril. Considering the issue of the arbitrariness and practicality of the minimum threshold of allottees suffering the same fate under the same real estate project coming together to jointly file a Section 7 application, the Court held that the rationale behind 1st Amendment is to promote the object of the Code and streamline the working of the Code.
One of the Petitioners argued that the minimum threshold as laid down under the Amendment Act should not be limited to the same real estate project but applicable for all projects being executed/developed by a Promoter. The SC held that this would make the task of the applicant more cumbersome. It was held that an individual allottee was always free to avail of other remedies in its arsenal including under the Real Estate (Regulation and Development) Act, 2016 , the Consumer Protection Act, 2019, or by filing a civil suit, and the Amendment Act would not exhaust the Petitioners’ alternative remedies.
The SC further clarified that it does not matter whether a person has one or more allotments in the name of his family; all independent allotments would qualify as separate allottees and would be accounted for in the calculation of hundred allottees/one-tenth of the allottees. It was then clarified that in case of a joint allotment to more than one person, the allotment is to be treated as a single allotment. This clarification was to make clear the object of the Amendment Act, which is to ensure that there is a critical mass of persons ‘who agree that the time is ripe’ to invoke the Code.
In respect to the contention on different default dates of each allottee, the SC held that any number of applicants, without any amount being due to them, could move a Section 7 application, provided that they are financial creditors and the default is in the sum of one crore, even if the one crore amount is owed to none of the applicants but to any other financial creditor. It is not necessary that there must be a default qua any of the applicants.
The SC observed that if the Legislature, after taking into consideration the sheer magnitude of provisos in question which would encompass a significant number of a group of creditors, finds it to be within the ambit of intelligible differentia, distinguishing the allottees from the other financial creditors; the SC would not be inclined to sit in judgment over the wisdom of such a measure. Reliance was placed on the doctrine of separation of powers stating that the presumption would be that the democratically elected representatives of the people drafting our legislation, would be conscious of every fact which would go to sustain the constitutionality of the law.
Addressing the concern of whether the condition of allottees were not rendered equivalent to or even worse off than an operational creditor, the SC distinguished basis that the developer is the debtor, as an allottee funds his own apartment by paying amounts in advance. An operational creditor has no interest regarding the financial soundness of the corporate debtor. However, the allottee of a real estate project is vitally concerned with the financial health of the corporate debtor.
The SC upheld the amendment and rejected the arguments put forth by the Petitioners. Whilst acknowledging that the period of thirty days to comply with the requirement of the minimum threshold could have been fairer and longer, the SC was unable to conclude that the thirty-day time limit was impossible to comply with. Prescribing a time limit in regard to pending applications, cannot be described as arbitrary, as otherwise, it would result in an endless and uncertain procedure. Further, withdrawal of the proposed applicant as contemplated under the Code, will not stand in the way of invoking the same default and filing the application afresh.
In summation, the SC upheld the provisos on the basis that they satisfied the litmus test to be justified as reasonable classification introduced in furtherance of the objects of the Code and that the case was not one of no intelligible differentia.
The Judgment marks another key milestone in the overall progression and development of the Code. The SC upon reviewing the data made available to it, in all its wisdom has determined that the Amendment Act would not only further streamline the insolvency process as envisaged under the Code but would also serve as a blockade against frivolous applications filed by opportunistic litigators not representing the critical mass.
Some would argue that this Judgment would be detrimental to home buyers/allottees of real estate projects, the net effect of the Amendment Act would likely achieve its primary objective of advancing the objects of the Code and enable speedy redressal. Alternative remedies remaining available, the overall effect of the Judgment and the Amendment Act seems sound.