MANISH KUMAR VS UNION OF INDIA : CASE SUMMARY
The Supreme Court in Manish Kumar Vs Union of India (2021) 5 SCC 1 held that Section 3, 4 and 10 of Insolvency and bankruptcy Code (Amendment) Act, 2020 are constitutionally valid.
FACTS OF THE CASE
Several Writ Petitions were filed before the Supreme Court challenging Section 3, 4 and 10 of Insolvency and bankruptcy Code (Amendment) Act, 2020.
Section 3 of the Amendment Act incorporates three provisos to Section 7 (1) :
Provided that for the financial creditors, referred to in clauses (a) and (b) of the 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 percent of 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proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.
Amendment Act added Explanation II to Section 11 of IBC, which is as under:
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.
Section 32 A exempted Corporate Debtor from Criminal Liability for offences committed prior to initiation of CIRP.
FINDINGS OF THE SUPREME COURT
The Supreme Court observed that grounds on which plenary legislation can be challenged are well established. Firstly, a law can be challenged if Parliament has usurped powers and made law which does not come within its domain and is against separation of powers. Secondly, a law contravening Fundamental Rights can also be declared void. Thirdly, apart from Fundamental Rights, Supremacy of Constitutional Rights are preserved against ordinary legislation.
One of the grounds of challenge to the amendment was that this amendment has been brought under pressure from Real Estate Developers. The Court rejected this argument and held that malice does not furnish a ground to attack a plenary law. Another ground was raised before the Supreme Court that Union of India had argued in Pioneer Urban Land that Home Buyers are Financial Creditors. Parliament is therefore estopped from principle of promissory estoppel. The Supreme Court held that Supreme Legislature cannot be cribbed, cabined or confined by the doctrine of promissory estoppel or estoppel.
It was contended that provision that 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 is vague. Following questions are raised – (i) Is total number of the allottees to be calculated qua the units proposed ? (ii) Is it to be based on number of units constructed or is it to be based on number of units allotted or units where agreement of sale is entered into ?
A Real Estate Project is a development of a building or apartment or development of land into plots or apartments. It would also include common area. The expression apartment has been defined widely under RERA and includes blocks, chambers, dwelling units, flats, offices, showrooms, shops, Godown, premises, suite, tenement, unit or by any other name and which is separate and self-contained part of any immovable property. It can be used for residential or commercial use. Allotment under RERA can be in form of plot, building or an apartment.
Explanation to Section 5 (8) (f) incorporates definition of “allottee” from RERA. Section 2 (d) of RERA defines allottee. An allottee may be allotee of a plot or an apartment or building. An allottee would include a person to whom an apartment is allotted or sold. Alottee will also include a person to whom the promotor has transferred the apartment otherwise by way of sale.
Promotor under RERA has been defined as person who constructs or causes to be constructed an independent building or apartments or convert an existing building or a part thereof into apartments for purpose of selling. Promotor also includes such persons who develops land into project.
Real Estate Project has been defined under Section 2 (zn) of RERA which consists of – (i) Development of building (ii) a building which consists of apartment (iii) Converting an existing building or part thereof into apartment (iv) the development of land into plots or apartments as the case may be.
The Supreme Court observed that the term “allottees” as defined under Section 2 (d) must be understood undoubtedly on its own terms. But at the same time other provision which form part of the Act and therefor scheme must also be borne in mind.
If applicant is able to garner a magical figure of 100 allottees, then he can file Application before NCLT under Section 7. One tenth number is meant to apply in those cases where one tenth number is less than 100 allottees.
All allottees and assignee of allotment would qualify both to be considered for the purpose of calculating the total number of allottees but confined to the particular real estate project and therefore for arriving at a figure of 100 allottees or one -tenth of allottees as the case may be.
It was also contended that 10% is dynamic will change frequently. The Supreme Court observed that contention that 10% is dynamic and is untenable in law.
The issue of default and limitation
It was contended that default in different agreement may be different. This will prejudice the right of the allottee to file Section 7 Application. The Supreme Court observed that explanation to Section 7 makes it clear that a financial debt which is owned to any other financial creditor of the Corporate Debtor would suffice to make an application on the basis that the default has occurred.
Requirement of allottees from the same project
The Supreme Court observed that rationale behind confining the allottees to the same real estate project it to promote the object of the code. Different Real Estate Projects may be at different stages. The requirement of allottees drawn from the same project stands to reason.
Point of time to comply with threshold requirements
The Supreme Court held that required number of allottees have to be seen at the time of filing of an Application under Section 7 IBC and not at time of admission stage.
Joint holding of a Unit
If a unit is jointly owned by two or persons, they will be treated as one member for purpose of filing of an application under Section 7 of IBC.
Order 1 Rule 8 CPC & the Amendment
It was contended that more liberal approach has been provided under Order 1 Rule 8 CPC wherein if several persons are having the same interest, one person, with the consent of the Court, can sue or defend suit. The decision of the Court will be binding on all similarly situated persons. The Supreme Court held that the objective of IBC is different wherein Corporate Debtor has to go through CIRP and if the CIRP fails then through liquidation. The Court further observed that this is a legislative domain and Court cannot interfere in the same.
Information Asymmetry
The Supreme Court also rejected that there is case of any information asymmetry. The Court observed that under RERA several information are required to be disclosed. Section 11 (1) (b) of RERA makes it compulsory to disclose information regrading booking. Similarly, under Section 88 (1) of Companies Act, 2013 registers of debenture holders and security holders have to be maintained.
Classification of Allottees and Other Financial Creditors
The Supreme Court observed that Article 14 does not interdict creation of a class within a class absolutely. Should there be rational basis for creation of class within a class, that is not impermissible. Allottees although belonging to Financial Creditors have certain distinct features – (i) Numerosity (ii) Heterogeneity and (iii) individuality in decision making, which the Supreme Court considered to be intelligible differentia. In Real Estate Project there would be large number of allottees. If a single allottee is allowed to file Application under Section 7 IBC, interests of all other allottees may be put in Peril.
Classification of allottees and other Operational Creditors
It was contended that classification between allottees and Operational Creditors are arbitrary. The same was rejected by the Supreme Court relying on Swiss Ribbons Pvt. Ltd Vs Union of India (2019) 4 SCC 17 and Pioneer Urban Land & Infrastructure Land Vs Union of India (2019) 8 SCC 216.
Debenture Holders and Security Holders
The Supreme Court held that first proviso is invulnerable. The intention of legislature by inserting sub-section 6A in Section 21 and Section 25A is to treat Financial Creditors differently. They are marked by unique features in terms of numerosity and heterogeneity.
Challenge to Explanation II to Section 11
It was contended that an explanation can not modify the main provision. Explanation II effectively repeals Section 11 (a) and (d).
The Court observed that Section 11 purports to declare that an application for initiating CIRP cannot be made by categories expressly detailed in Section 11. The Supreme Court held that explanation is clarificatory. Section 11 (a) and (d) remains intact and is not whittled down by Explanation II to Section 11.
Constitutionality of Section 32 A
It was contended that Article 32 A is arbitrary, ultra vires, and violative of Article 300A and Articles 14, 19 and 21. It provides undeserved immunity which would be acquired through proceeds of crime.
The Supreme Court observe that the provision is well thought out. It is not that if the wrongdoers are allowed to get away. They remain liable. Only criminal liability of Corporate Debtor is extinguished.
Constitutionality of Third Proviso of Section 7
3rd proviso of Section 7 also made the amended provisions applicable on those applications which had been filed but has not been admitted. It was contended that amendment could not have been applied with retrospective effect as it takes away vested rights of such applicants.
The Court observed that right of action is, undoubtedly, a vested right. Role of the Applicant fades out after admission of application under is made under Section 7 (5). The right which is given is in rem. The applicant may result in liquidation if CIRP is unsuccessful.
The Supreme Court held that imposing the threshold requirement under the 3rd proviso in not a mere matter of procedure. It impairs vested rights. Legislature has purported to equate persons who had not filed applications with persons like the Petitioners who had filed applications under unamended law.
The Supreme Court observed that a vested right can be taken away by retrospective law. The Supreme Court observed the public interest behind amendment cannot be ignored. 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.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.