Upheld, albeit with directions. Why was IBC (Amendment) Act, 2020 challenged? What prompted SC to invoke Art. 142? Read comprehensive point-wise analysis of the 465-pages judgment

Supreme Court: The 3-Judge Bench of Rohinton Fali Nariman, Navin Sinha and K.M. Joseph, JJ., in a 465-pages long judgment, upheld the validity of several provisions of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, albeit with directions given in exercise of powers under Article 142 of the Constitution of India. While so upholding the impugned amendments, the Bench expressed an observation that:

“There is nothing like a perfect law and as with all human institutions, there are bound to be imperfections. What is significant is however for the court ruling on constitutionality, the law must present a clear departure from constitutional limits.”

The Challenge

In the instant matter, the petitioners approached the Court calling in question the following Sections of the Insolvency and Bankruptcy Code (Amendment) Act, 2020: Sections 3, 4 and 10.

Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It incorporates 3 provisos to Section 7(1).

Section 4 of the impugned amendment, incorporates an additional Explanation in Section 11 (Explanation II) IBC.

Section 10 of the impugned amendment inserts Section 32-A in IBC.

The Petitioners

Majority of the petitioners were the allottees under the real estate projects and they have trained the constitutional gun at the impugned provisos.

Under the second proviso, a new threshold was declared for an allottee to move an application under Section 7 for triggering the insolvency resolution process under IBC. The threshold is the requirement that there should be at least 100 allottees to support the application or 10% of the total allottees whichever is less. Moreover, they should belong to the same project.

Some other petitioners were money lenders, who stepped in to provide finance for the real estate projects. They were also visited with the requirement which is imposed upon them under the first impugned proviso which is on similar lines as those comprised in the second proviso.

Point-wise Discussion & Observations

A. Challenging a Plenary Law

The Court noted the following two contentions urged by some of the petitioners:

A.1. The law was created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests.

In regard with this contention, Court stated that such an argument is nothing but a thinly disguised attempt at questioning the law of the Legislature based on malice. It was observed:

“While malice may furnish a ground in an appropriate case to veto administrative action it is trite that malice does not furnish a ground to attack a plenary law.”

 Reliance was placed on the earlier Supreme Court decisions in K. Nagaraj v. State of A.P., (1985) 1 SCC 523 and State of H.P. v. Narain Singh, (2009) 13 SCC 165.

A.2. Another contention was that, due to its stand before the Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, the supreme legislature was estopped by the principle of promissory estoppel from enacting the impugned enactment.

To this, the Court answered that: “A supreme legislature cannot be cribbed, cabined or confined by the doctrine of promissory estoppel or estoppel. It acts as a sovereign body.

The theory of promissory estoppel, on the one hand, has witnessed an incredible trajectory of growth but it is incontestable that it serves as an effective deterrent to prevent injustice from a Government or its agencies which seek to resile from a representation made by them, without just cause. Reliance was placed on Union of India v. Godfrey Philips( India) Ltd, (1985) 4 SCC 369.

B. Challenge to newly inserted Provisos in S. 7(1)

Under the impugned provisos inserted in Section 7(1) of the Code, an application by an allottee, can be made only if there are hundred allottees or a number representing one-tenth of the total number of allottees, whichever is less, with a further rider that the allottees must be part of the same real estate project.

B.1. Allottee and Real Estate Project

The Court was of the opinion that the definition of the word “allottee” appears to be split up into three categories broadly, they are- plot, apartment and buildings. In the context of the impugned proviso, in calculating the total number of allottees, the question must be decided with reference to real nature of the real estate project in which the applicant is an allottee. If it is in the case of an apartment, then necessarily all persons to whom allotment had been made would be treated as allottees for calculating the figure mentioned in the impugned proviso. As to what would constitute the “real estate project”, it must depend on the terms and conditions and scope of a particular real estate project in which allottees are a part of. These are factual matters to be considered in the facts of each case.

B.2. Workability of Default

 Since, default can be qua any of the applicants, and even a person, who is not an applicant, and the action is, one which is understood to be in rem, in that, the procedures, under IBC, would bind the entire set of stakeholders, including the whole of the allottees, the Court saw no merit in the contention of the petitioner based on the theory of default, rendering the provisions unworkable and arbitrary.

It was explained that if a law contemplates that the default in a sum of R 1 crore can be towards any financial creditor, even if he is not an applicant, the fact that the debt is barred as against some of the financial creditors, who are applicants, whereas, the application by some others, or even one who have moved jointly, fulfill the requirement of default, both in terms of the sum and it not being barred, the application would still lie.

B.3. Allottees to be from same real estate project: Constitutionality 

The rationale behind confining allottees to the same real estate project is to promote the object of IBC. Once the threshold requirement can pass muster when tested in the anvil of a challenge based on Articles 14, 19 and 21, then, there is both logic and reason behind the legislative value judgment that the allottees who must join the application under the impugned provisos must be related to the same real estate project. If it is to embrace the total number of allottees of all projects, which a Promoter of a real estate project, may be having, it will make the task of the applicant himself more cumbersome.

B.4. Point of time to comply with the Threshold Requirements

There can be no doubt that the requirement of a threshold under the impugned proviso in Section 7(1) must be fulfilled as on the date of the filing of the application. In the matter of presentation of an application under Section 7, if the threshold requirement under the impugned provisos stands fulfilled, the requirement of the law must be treated as fulfilled.

B.5. Holding by family members and joint holdings: Whether Single Allottee

 In the case of a joint allotment of an apartment, plot or a building to more than one person, the allotment can only be treated as a single allotment. This for the reason that the object of the Statute, admittedly, is to ensure that there is a critical mass of persons (allottees), who agree that the time is ripe to invoke IBC and to submit to the inexorable processes under IBC, with all its attendant perils.

B.6. No power of waiver to Central Government unlike in Companies Act

 Section 399(4) of the Companies Act, 1956, empowers the Central Government to waive certain requirements allowing applicants to approach the Tribunal, if found just and equitable.

However, the scheme of IBC is unique and its objects are vividly different from that of the Companies Act. Consequently, if the Legislature felt that threshold requirement representing a critical mass of allottees alone would satisfy the requirement of a valid institution of an application under Section 7, it cannot be dubbed as either discriminatory or arbitrary.

B.7. Or. 1 R. 8 CPC and S. 12, Consumer Protection Act

Under Order 1 Rule 8 CPC, where there are numerous persons having the same interest in one suit, one or more such persons can, with the permission of the court, sue or be sued or may defend such suit on behalf of or for the benefit of all persons so interested, at the instance of a single person with whom numerous persons share the same interest. Similar is the provision of Section 12 of the Consumer Protection Act, 1986.

However, it is important to not be oblivious to the scheme of IBC and to distinguish it from a civil suit laid invoking Order 1 Rule 8 or the consumer complaint presented by one consumer, sharing the same interest with numerous others. As to whether the procedure contemplated in Order I Rule 8 is suitable, more appropriate and even more fair, is a matter, entirely in the realm of legislative choice and policy.

“Invalidating a law made by a competent Legislature, on the basis of what the Court may be induced to conclude, as a better arrangement or a more wise and even fairer system, is constitutionally impermissible. If, the impugned provisions are otherwise not infirm, they must pass muster.”

 B.8. The Pioneer judgment: Are amendments violative of it

In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, certain amendments to IBC were challenged. The challenged provisions included the Explanation added to Section 5(8)(f).

After culling out the findings of the Court in the Pioneer judgment, the Court opined that the impugned provisos do not set at naught the ruling in Pioneer judgment. In a challenge by real estate developers upholding the provisions in the manner done including the Explanation in Section 5(8)(f) and allaying the apprehension about abuse by individual allottees cannot detract from the law giver amending the very law on its understanding of the working of IBC at the instance of certain groups of applicants and impact it produces on the economy and the frustration of the sublime goals of the law.

B.9. Information Asymmetry

 It was contended that the information relating to allottees in respect of real estate projects and the debenture holders and security holders in regard to the first proviso is not available, which makes it arbitrary and unworkable.

On this, the Court noted that as far as allottees are concerned in regard to apartments and plots, Section 11(1)(b) of the RERA makes it mandatory for the promoter to make available information regarding the bookings. The Court conflated bookings with allotments. Further, the Association of allottees has to be formed under the mandate of the law it is expected to play an important role. It was stated:

“The law giver has therefore created a mechanism, namely, the association of allottees through which the allottees are expected to gather information about the status of the allotments including the names and addresses of the allottees.”

Similarly, contention regarding non-availability of information regarding debenture holders and security holders was turned down in view of statutory mechanism comprised in the provisions of the Companies Act 2013, namely Section 88.

B.10. The first and second provisos classification

The petitioners emphasised the principle that the object itself cannot be discriminate. It was pointed out that the object in the case of impugned provisos between different sections of financial creditors is such discrimination. Further, the corporate debtors are discriminated again in that builders are accorded special treatment qua other corporate debtors.

Following a plethora of judicial precedents, the Court concluded that:

“It is clear that the law does not interdict the creation of a class within a class absolutely. Should there be a rational basis for creating a sub-class within a class, then, it is not impermissible.”

It was noted that allottees are indeed financial creditors. They do possess certain characteristics, however, which appear to have appealed to the Legislature as setting them apart from the generality of financial creditors. These features are: (i) Numerosity; (ii) Heterogeneity; (iii) Individuality in decision making.

“In the case of the allottees of a real estate project, it is the approach of the Legislature that in a real estate project there would be large number of allottees. There can be hundreds or even thousands of allottees in a project. If a single allottee, as a financial creditor, is allowed to move an application under Section 7, the interests of all the other allottees may be put in peril. This is for the reason that as stakeholders in the real estate project, having invested money and time and looking forward to obtaining possession of the flat or apartment and faced with the same state of affairs as the allottee, who moves the application under Section 7 IBC, the other allottees may have a different take of the whole scenario.”

It was added that some of them may approach the Authority under the RERA. Others may, instead, resort to the fora under the Consumer Protection Act, though, the remedy of a civil suit is, no doubt, not ruled out. In such circumstances, if the Legislature, taking into consideration, the sheer numbers of a group of creditors, viz., the allottees of real estate projects, finds this to be an intelligible differentia, which distinguishes the allottees from the other financial creditors, who are not found to possess the characteristics of numerosity, then, it is not for the Court to sit in judgment over the wisdom of such a measure.

“This is not a case where there is no intelligible differentia. The law under scrutiny is an economic measure. As laid down by this Court, in dealing with the challenge on the anvil of Article 14, the Court will not adopt a doctrinaire approach.”

 B.11. Allottees v. Operational Creditors

One of the contentions raised by petitioners was as regards the hostile discrimination between petitioner (allottees) and operational creditors. The advantages which financial creditor have over operational creditors was referred to.

The Court was of the view that as far as the argument relating to violation of Article 14 qua operational creditor was concerned, there is no merit in the same. Quite apart from the fact that under IBC they are dealt with under different provisions and a different procedure is entailed thereunder, even the earlier decisions have treated the financial creditor differently from the operational creditor. Reliance was placed on Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416. It was observed:

“While it may be true that the allottee is not a secured creditor and he is not in the position of a bank or the financial institution, the contentions of the petitioners that there is hostile discrimination forbidden (under) Article 14 is untenable. There cannot be any doubt that intrinsically a financial creditor and an operational creditor are distinct.”

It was noted that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application under Section 7 IBC and giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under IBC which must certainly pass inexorably within a stipulated period of time should circumstances exists under Section 33 into corporate death with the unavoidable consequence of all allottees and not merely the applicant under Section 7 being visited with payment out of the liquidation value, the amounts which are only due to the unsecured creditor.

C. Challenge to newly inserted Explanation II to S. 11

It was contended that an Explanation cannot modify the main provision to which it is an Explanation. Section 11(a) and Section 11(b) unequivocally bar a Corporate Debtor from filing a Corporate Insolvency Resolution Process application qua another Corporate Debtor under Section 7 and Section 9 IBC. It was complained that the label of an Explanation has been used to substantially amend, which is an arbitrary and irrational exercise of power.

It was pointed out that the word “includes” in Explanation I to Section 11 would indicate that an Application for CIRP is barred not only against itself but also against any other Corporate Debtor when the applicant-Corporate Debtor is found placed in circumstances expressed in Section 11. If the purport of  Explanation II, which was impugned, is that the intention of the law was to only bar an Application for CIRP by a Corporate Debtor against itself, then, it will be unworkable and practically impossible. Explanation II, it was contended, is manifestly arbitrary. It was further contended that the amendment cannot be used retrospectively and take away the vested right.

Dealing with this challenge, the Court analysed the limbs of Section 11 and  Explanation I. Then finally coming to Explanation II, it was opined that The intention of the Legislature was always to target the corporate debtor only insofar as it purported to prohibit application by the corporate debtor against itself, to prevent abuse of the provisions of IBC. It could never had been the intention of the Legislature to create an obstacle in the path of the corporate debtor, in any of the circumstances contained in Section 11, from maximizing its assets by trying to recover the liabilities due to it from others. It was further held:

“The provisions of the impugned Explanation II, thus, clearly amount to a clarificatory amendment. A clarificatory amendment, it is not even in dispute, is retrospective in nature.”

D. Challenge to newly inserted S. 32-A

It was contended that the immunity granted to the corporate debtors and its assets acquired from the proceeds of crimes and any criminal liability arising from the offences of the erstwhile management for the offences committed prior to initiation of CIRP and approval of the resolution plan by the adjudicating authority further jeopardizes the interest of the allottees/creditors. It will cause huge losses which is sought to be prevented under the provisions of the Prevention of Money Laundering Act, 2002. Section 32-A, it was argued, is therefore arbitrary, ultra vires and violative of Article 300-A and Articles 14, 19 and 21.

Answering this, the Court was of the clear view that no case whatsoever is made out to seek invalidation of Section 32-A. The boundaries of the Court’s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. It was observed:

“The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. 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 slate.”

Further, it was stated that it must be remembered that the immunity is premised on various conditions being fulfilled. In Court’s opinion, there was no basis at all to impugn the Section on the ground that it violates Articles 19, 21 or 300A.

E. Restrospectivity in third proviso to S. 7 and effect on vested rights

The third proviso is a one-time affair. It is intended only to deal with those applications, under Section 7, which were filed prior to 28.12.2019. In other words, the legislative intention was to ensure that no application under Section 7 could be filed after 28.12.2019, except upon complying with the requirements in the first and second provisos. The Legislature did not stop there. It has clearly intended that the threshold requirement it imposed, will apply to all those applications, which were filed, prior to 28.12.2019 as well, subject to the exception that the applications, so filed, had not been admitted, under Section 7(5).

The Court considered, whether the right under the unamended Section 7 was a vested right of the financial creditors or allottees covered by the provisos 1 and 2, respectively.

It was the Court’s view that there is a right which is vested in the cases where, the petitioners have filed application, fulfilling the requirements under unamended Section 7 of IBC. The very act of filing the application, even satisfies the apparent test propounded by the Additional Solicitor General, that the right under Section 7 is only one to take advantage of the statute and unless advantage is actually availed it does not create an accrued right. When applications were filed under the unamended provisions of Section 7, at any rate it would transform into a vested right. The vested right is to proceed with the action till its logical and legal conclusion.

It was noted, every sovereign Legislature is clothed with competence to make retrospective laws. It is open to the Legislature, while making retrospective law, to take away vested rights. If a vested right can be taken away by a retrospective law, there can be no reason why the Legislature cannot modify the vested rights.

During the course of discussion, it was also noted that imposing the threshold requirement under the third proviso, is not a mere matter of procedure. It impairs vested rights. It has conditioned the right instead, in the manner provided in the first and the second proviso. The Court already upheld the first and second proviso, which, in fact, operates only in the future. In that sense, the Legislature has purported to equate persons who had not filed applications with persons like the petitioners who had filed the applications under the unamended law.

Lastly, the Court discussed certain factors including clarity regarding “withdrawal” under the third proviso, as also the question of court fees. Analysing such points, the Court finally passed certain directions.

Conclusion & Relief

The Court upheld the impugned amendments, albeit subject to certain directions issued under Article 32 of the Constitution:

(i) If any of the petitioners move applications in respect of the same default, as alleged in their applications, within a period of two months from today, also compliant with either the first or the second proviso under Section 7(1), as the case may be, then, they will be exempted from the requirement of payment of court fees, in the manner, which we have detailed in the paragraph just herein before.

(ii) If applications are moved under Section 7 by the petitioners, within a period of two months from today, in compliance with either of the provisos, as the case may be, and the application would be barred under Article 137 of the Limitation Act, on the default alleged in the applications, which were already filed, if the petitioner file applications under Section 5 of the Limitation Act, the period of time spent before the Adjudicating Authority, the Adjudicating Authority shall allow the applications and the period of delay shall be condoned in regard to the period, during which, the earlier applications filed by them, which is the subject matter of the third proviso, was pending before the Adjudicating Authority.

(iii) The time limit of two months is fixed only for conferring the benefits of exemption from court fees and for condonation of the delay caused by the applications pending before the Adjudicating Authority. In other words, it is always open to the petitioners to file applications, even after the period of two months and seek the benefit of condonation of delay under Section 5 of the Limitation Act, in regard to the period, during which, the applications were pending before the Adjudicating Authority, which were filed under the unamended Section 7, as also thereafter. [Manish Kumar v. Union of India, 2021 SCC OnLine SC 30, dated 19-01-2021]

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