Supreme Court upholds validity of Insolvency and Bankruptcy Code (Amendment) Act, 2020

The Supreme Court on Tuesday upheld the Constitutional validity of the amendments made to the Insolvency and Bankruptcy Code (IBC) in 2020 that mandated a minimum of 100 home buyers to come together to file an insolvency application in the National Company Law Tribunal (NCLT) to trigger the IBC against a defaulting developer.

. A three-judge Bench of Justices R ohinton Fali Nariman, KM Joseph and Navin Sinha held that Sections 3 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 which introduced these amendments are not violative of right to equality under Article 14 of the Constitution.

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

. As per Section 3, an insolvency application could be filed only if 100 real estate allottees under the same real estate project or 10 percent of the total allottees of such project come together.

. Dismissing the contention of violation of Article 14, Supreme Court stated that "there cannot be any doubt that intrinsically a financial creditor and an operational creditor are distinct."

. "The contentions of the petitioners that there is hostile discrimination forbidden Article 14 is untenable. There cannot be any doubt that intrinsically a financial creditor and an operational creditor are distinct. An operational creditor is one to whom money is due on account of goods or services supplied to the debtor. The financial creditor on the other hand, is so described, on account of there being the element of borrowing. This distinction is indisputable," the judgment said.

. On why the amendment making 100 or more home buyers to approach NCLT to initiate proceedings against a defaulting developer, the Supreme Court said that "it cannot be in dispute that under the law, an allottee can seek remedies under the RERA or consumer protection act".

"No doubt, Section 71 of the RERA permits a person who has filed a complaint in respect of matters governed by Sections 12, 14, 18 and 19 of RERA to withdraw the complaint and file the same before the Adjudicating Officer under RERA," the Court noted.

. The individual members of the petitioner organisation, Association of Karvy Investors, had filed petitions under Section 7 of the IBC Act before different benches of the National Company Law Tribunal (NCLT) in India, due the non-payment of their dues by private companies.

. The plea challenged the Amendment Act, stating that Section 3 "has imposed a 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 petitioners also claimed that an application under Section 3 of the Amendment Act shall be retrospective, thereby "directly prejudicing the members of the Petitioner Association".

. The primary issue raised in the petition was that a Section 7 petition was earlier permitted to be filed by any financial creditor in its individual capacity. But now, this statutory right has been unreasonably burdened by requiring them to a) figure out the total pool of people and b) get in touch with 10% of that number.

. The Court held that petitioners attempt to overturn the provision on the score that the Explanation attempts to achieve the result of a repeal of Sections 11(a) and 11(d), is totally meritless.

"We are clear in our mind that on a proper understanding of Sections 11(a) and 11(d), it does nothing of the kind. Sections 11(a) and 11(d) remain intact in the manner we have propounded," the apex court said.

.Supreme Court issues notice to Centre in plea challenging Constitutionality of Insolvency and Bankruptcy Code (Amendment) Act, 2020. The petitioners had also challenged Section 32A of the IBC which was inserted by the Amendment Act. It was contended that 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 would further jeopardize the interest of the allottees/creditors.

. However the Supreme Court held that "no case whatsoever was made out to seek invalidation of Section 32A."

"The boundaries of this Court’s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. 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," it held.

. The apex court went on to state that the attempt of petitioners to persuade the Court to believe that 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, was nothing but a thinly disguised attempt at questioning the law of the Legislature based on malice.

. "A law is made by a body of elected representatives of the people. When they act in their legislative capacity, what is being rolled out is ordinary law. Should the same legislators sit to amend the Constitution, they would be acting as members of the Constituent Assembly. Whether it is ordinary legislation or an amendment to the Constitution, the activity is one of making the law. 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," the top court made it clear. . [Read Judgment]

Supreme Court upholds validity of Insolvency and Bankruptcy Code (Amendment) Act, 2020

Debayan Roy

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