Homebuyers & IBC (Amendment) Act 2020: Upholding Threshold Limits – Mr. Shubham Mathur & Ms. Simran Sabharwal

Homebuyers & IBC (Amendment) Act 2020: Upholding Threshold Limits

By –Mr. Shubham Mathur, 4th-year student of B.BA LLB (Hons) from Himachal Pradesh National Law University, Shimla

Ms. Simran Sabharwal, 3rd-year student of B.A LLB (Hons) from Rajiv Ghandi National University of Law, Punjab

Introduction

The Supreme Court of India has in its judgement dated January 19, 2021(“Judgement”) in the matter of Manish Kumar v. Union of India (2021) ibclaw.in 16 SC upheld the constitutional validity of the section 7 and section 32A of the Insolvency and Bankruptcy Code(Amendment) Act, 2020. The financial creditors can initiate a Corporate Insolvency Resolution Process (“CIRP”) against corporate debtors under section 7 of the amended act. Section 32A stipulated that corporate debtor shall not be prosecuted for an offence committed prior to the commencement of CIRP once the resolution plan has been approved by the Adjudicating Authority. In this article, the authors examine the order of the Hon’ble Supreme Court providing an analysis of the amendment.

Factual Matrix

The Code amended Section 7 through an ordinance on December 12, 2019. The amended proviso stipulated that for initiation of the Corporate Insolvency Resolution Process (“CIRP”), the application should be filed only if there are-

  • A minimum of 100 allottees, or
  • 10% of the total allottees with a further rider that the allottees must be the part of same real estate project.

Post the ordinance, several writ petition challenging the proposed amendment were filed before Hon’ble Supreme Court. The petitioner claimed that the amendment establishes a class within a class between real estate creditors and other financial creditors, which is in violation of Article 14 and Article 300A of the Constitution by claiming that no intelligible differentia was applied while framing such provisions.. The Supreme Court clubbed all such writ petitions opposing Sections 7 and 32A of the amendment in the case of Manish Kumar v. Union of India.

Manish Kumar’s Decision

In August 2019, the Hon’ble Supreme Court in the case of Pioneer Urban Land v. Union of India [2019] ibclaw.in 13 SC appreciated the economic reform amendment brought by the legislature as a minimum threshold would prevent indiscriminate litigation. As of September 30, 2019, a total of 1,821 cases filed by homebuyers against builders were pending at National Company Law Tribunal. The pending appeal shows the hardship faced by the homebuyers when builders resorted to coercive and delaying tactics.

The Supreme Court of India in the case of Manish Kumar upheld the constitutionality of Sections 7 and 32A. The court appreciated introducing such a threshold as homebuyers will no longer be at the whim of the developers. Prior to such an amendment, each homebuyer had to file a separate case against the developer which not only increased the burden on the docket but also could not separate frivolous cases from authentic issues. A threshold of 10% or 100 homebuyers will ensure that the issue is bonafide and the developer is at fault. A comprehensive meaning to the word allottee in cases of apartment, rent, and buildings was appreciated in the amendment under section 7. This section often has the appearance of a rem proceeding rather than a personam proceeding. The Hon’ble Supreme Court observed that section 32A cannot be held as unconstitutional as all necessary checks and balances have been provided to avoid misuse. No personal liability lies against the corporate debtor unless there is a change in the control and management of the corporate debtor who is not involved in default in any manner.

 Analysing the Legal Framework

Minimum Threshold on Homebuyers under Section 7  of IBC

The first proviso explicitly mentions that a joint application has to be filed for initiation of CIRP by the financial creditor against the corporate debtor under the specified condition i.e., not less than 100 of such creditors or 10% of the total number of creditors in the same real estate project. The application filed by a single applicant will prove to be a veritable threat to the objective of the Code. It will also safeguard the interests of hundreds of allottees who were not able to oppose the application filed by a single homebuyer. 

In Sansar Chand Atri v. State of Punjab and Anr., the court provided that sub-class can be created on reasonable grounds. This is also contemplated under UNCITRAL Legislative Guide. Therefore, the minimum requirement cannot be claimed to ‘create a class within a class.’ A statutory right can necessarily be conditioned.

The amendment cannot be called arbitrary as it will only have a prospective operation. The petitioners claimed that it is certainly impossible to determine the details of the allottees, hindering the justice mechanism. However, a register of members has to be maintained as per Section 88 of the Companies Act, 2013. These can be perused and the information can be gathered.

The threshold test was challenged under Section 399 (2) of the Companies Act, 1956 wherein the issue of joint holdings by family members was raised. This contention was rejected by the Court mentioning that even if a single apartment is in the name of 100 persons, a single allottee that comprises of relative or friends can move an application. This would amount that only one allottee qua one apartment is before the authority.

The Insolvency Law Committee Report, 2020 also recommended the insertion of a minimum number of financial creditors. Therefore, it is not justified to state the amendment as tormented with hostile discrimination against the creditors. The minimum requirement will not only make the process smoother but also cost-effective.

Challenge to newly inserted Explanation II to S. 11

It was argued that an Explanation should not change the key provision under which it was mentioned. Sections 11(a) and 11(b) of the IBC expressly prohibit a corporate debtor from filing a CIRP application against another corporate debtor. It 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 term “includes” in Explanation I to Section 11 indicates that an application for CIRP is barred not only against the petitioner but also against any other corporate debtor if the applicant corporate debtor is included in the circumstances described in Section 11.If the purpose of the statute was to only prohibit an application for CIRP by a corporate debtor against itself, so Explanation II, which has been challenged, would be unworkable and technically unlikely. It was argued that Explanation II is clearly subjective. It was further argued that the provision should not be used retroactively to remove the vested privilege.

In addressing this issue, the Court looked at Section 11’s limbs and Explanation I. Finally, it was stated that the legislature’s purpose was always to punish the corporate debtor only insofar as it purported to preclude the application by the corporate debtor against itself, in order to discourage misuse of the IBC provisions.

The legislature should never have intended to put a roadblock in the way of a corporate debtor exploiting its assets by attempting to recover obligations owed to it from another in some of the situations described in Section 11. Further, it was 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.”

Assistance of Vested Rights for Bonafide Creditors

The third proviso does not affect any vested right of the creditor who has filed the applications prior to December 28, 2019.The prescribed condition of the minimum requirement adds authenticity and weightage to the claim of class action. A time-bound resolution process will aid to complete the procedure in an effective and efficient manner.

This will aid in protecting the collective interests of others in a class of creditors as the minimum threshold is a common feature of class action litigation.

The Hon’ble Court also pointed out that enforcing the third proviso’s threshold condition is not merely a matter of procedure. It jeopardises vested interests. Instead, it has constrained the right in the manner set out in the first and second provisos. The first and second proviso had been upheld by the court and will operate in the future. As a result, legislators attempted to equate those who had not submitted applications with those who had filed applications under the unamended act.

Post Amendment Effect on Section 32A

The petitioners argued that Section 32A gives corporate debtors immunity from properties gained by mismanagement prior to the start of CIRP. This is unconstitutional, beyond the pale, and in violation of the golden triangle as well as Article 300A of the Indian Constitution. The immunity granted by section 32A is conditional on the effective settlement applicant not being engaged in any criminal activity. The exemption granted by section 32A, on the other hand, is contingent on the effective settlement applicant not being engaged in any criminal activity. The Court also relied on the Insolvency Law Committee’s opinion in upholding Section 32A’s constitutionality.

Despite the fact that the corporate debtor is immune from any offence committed prior to the commencement of CIRP, there is no statutory immunity for any offence committed by the corporate debtor, and criminal liability will be placed.

Conclusion

The amendments are logical and legitimate method to strike a fair balance between all the stakeholders. The judgment will boost speedy recovery mechanism. As a result, the authors believe that the Hon’ble SC, by the instant order, has affirmed the statutory legitimacy as well as the economic significance of section 32A. The amendment was necessary as it has reduced the risk of individual allottees crowding the adjudicating authority. Furthermore, since real estate creditors’ right of appeal is not entirely denied under the Code, the additional threshold cannot be deemed discriminatory. The reality is that real estate borrowers who do not meet the additional provisions of the amendment act will have to recourse to other statutes such as Real Estate (Regulation and Development) Act, 2016. Hence, this amendment will become a connecting link between all the parties of the transaction.


 

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