Supreme Court upholds Constitutional Validity of IBC Amendment Act, 2020

Supreme Court upholds Constitutional Validity of IBC Amendment Act, 2020

The Supreme Court bench of Justices Rohinton Fali Nariman, KM Joseph and Navin Sinha upheld the Constitutional validity of the amendments made to the Insolvency and Bankruptcy Code (IBC) in 2020, which authorized a minimum of hundred allotees/home-buyers to collectively file an insolvency application in the National Company Law Tribunal (NCLT) to invoke IBC against a defaulting real-estate developer.

The verdict was delivered in the case of Manish Kumar vs. Union of India and others and connected petitions. The Apex Court held that Sections 3, 4 and 10 of the IBC (Amendment) Act, 2020 were not violative of right to equality under Article 14 of the Constitution.

Insolvency and Bankruptcy (Amendment) Act, 2020:

Section 3 of the Amendment Act amended Section 7 of IBC, whereas Section 10 of the Amendment Act introduced a new provision- Section 32A.

Section 3 of the IBC (Amendment) 2020 inserted certain additional conditions for homebuyers to initiate insolvency proceedings against defaulting builders. The provision adds certain provisos to Section 7 of IBC to state there should be at least one hundred real estate allottees or ten per cent of the total number of allottees, whichever is lesser, to maintain an insolvency petition in respect of a real estate project.

Section 4 of the Amendment Act 2020 inserted the following explanation to Section 11: Explanation II-For the purposes of this section, it is herebyclarified 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.

Brief facts of the case is that the individual members of the petitioner organization, Association of Karvy Investors, had filed petitions under Section 7 of the IBC, Act before different benches of the NCLT in India, due to the non-payment of their dues by private companies.

The petitioners challenged the Amendment Act on the ground that Section 3 had imposed stringent and onerous condition on the right of an individual financial creditor to file an application to initiate corporate insolvency resolution process under Section 7 of the IBC.

The prime issue raised in the petition was that, petition filed under Section 7 was earlier permitted to be filed by any financial creditor in its individual capacity. However now, this statutory right has been unreasonably burdened by requiring them to first, figure out the total pool of people and second, get in touch with ten per cent of that number.

The petitioners also challenged Section 10 of the Act which inserted Section 32A in the IBC, whereby the liability of a Corporate Debtor, will cease to exist on the date a Resolution Plan is approved and new management takes over the Corporate Debtor, which leaves the individual creditor without any remedies.

Observation of the Supreme Court:

The Apex Court after hearing the case, rejected the arguments advanced by the petitioner. The Court with respect to Section 3 of the IBC (Amendment) Act, 2020, observed, "Insisting on a threshold in regard to these categories of creditors would lead to the halt to indiscriminate litigation which would result in an uncontrollable docket explosion as far as the authorities which work the Code are concerned."

Court further added, "In the case of the allottees, this is not a situation where while treating them as financial creditors they are totally deprived of the right to apply under Section 7 as part of the legislative scheme. The legislative policy reflects an attempt at shielding the corporate debtor from what it considers would be either for frivolous or avoidable applications".

The Court remarked that Explanation II inserted to Section 11 is a 'clarificatory amendment'. "the explanation merely makes the intention of the Legislature clear beyond the pale of doubt. The argument of the petitioners that the amendment came into force only on 28th December, 2019 and, therefore, in respect to applications filed under Sections 7, 9 or 10, it will not have any bearing, cannot be accepted. The Explanation, in the facts of these cases, is clearly clarificatory in nature and it will certainly apply to all pending applications also".

With respect to Section 7, Court opined that, "the financial creditors covered by the third proviso, having invoked, at any rate unamended Section 7, they had a vested right. The 450 application under Section 7 is not meant to be a recovery mechanism. The Code, as is clear from its title, deals with insolvency resolution, to begin with. If there is insolvency, the application, with reference to any of the large number of creditors, suffices.Thus, withdrawal under the third proviso would not be bar a fresh application even on the same cause of action. It can, at any rate, be condoned under Section 5 of the Limitation Act."

To conclude the Court upheld the validity of Section 32A and highlighted it to be as a 'provision born out of experience'. "The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean state. We must not overlook the principle that the impugned provision is part of an economic measure", the Supreme Court observed.