
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.