Supreme Court upholds the validity of Sections 3, 4 & 10 of Insolvency and Bankruptcy Code (Amendment) Act, 2020

Manish Kumar v. Union of India

Writ Petition (C) N0.26 of 2020 decided on 19.01.2021.

Bench:Rohinton Fali Nariman, Navin Sinha, K.M. Joseph, JJ.

Facts:

The petitioners approached the Apex Court challenging the Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (herein referred to as impugned amendment).

Section 3 of the impugned amendment amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (herein referred to as ‘Code’). Section 4 of the impugned amendment incorporates an additional explanation in Section 11 of the Code. Section 10 of the impugned amendment inserts Section 32A in IBC.

The three judge bench of Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2020.

Issue: Is Section 3 of the impugned amendment constitutionally valid, wherein, 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 rider that allottee must be part of the same real estate project? Is this arbitrary and amounts to irrational classification under Article 14?

Held:Regarding this issue, the Court dismissed the contention of the violation of Article 14 of the Constitution of India and stated that the contention of the petitioners that there is hostile discrimination forbidden Article 14 is untenable. While upholding the Section 3 of the Amendment Act, which introduced the threshold limit for homebuyers’ application for insolvency against builder, the Court observed that the minimum threshold shield frivolous and avoidable applications. All that the amendment is likely to ensure is that the filing of the application is preceded by a consensus of at least by a miniscule percentage of similarly placed creditors. Also, an allottee can seek individual remedies under the RERA or Consumer Protection Act.

The Court held that, 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.

Issue:Does Section 4 of the impugned amendment which adds Explanation II to Section 11 of the Code, attempts to result in repeal of Section 11(a) and 11(d)? Is it an arbitrary exercise of power?

Held: The Court held that the explanation added by way of amendment amounts to clarificatory amendment only. The court 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 the Code. 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.

Issue: Does Section 32A confer an undeserved immunity for the property which would be acquired with the proceeds of a crime?

Held: The Court held that no case is being made out to seek invalidation of Section 32A. 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 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. Section 32A provides immunity to the corporate debtor and its property when there is approval of the resolution plan resulting in the change of management of control of corporate debtor. This is subject to the successful resolution applicant being not involved in the commission of the offence.