MANISH KUMAR V/S UNION OF INDIA

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INTRODUCTION:

The petitioners had contested the constitutionality of the Insolvency and Bankruptcy (Amendment) Act, 2020’s Sections 3, 4, and 10. The main issue stemmed from the fact that these amendments added a proviso to Section 7 of the IBC, 2016 (Initiation of Corporate Insolvency Resolution Process by Financial Creditor), which required that, in the event that real estate home buyers wanted to initiate CIRP against a corporate debtor, they had to do so with the support of at least 100 homebuyers, or 10% of the project’s total allottees. For other creditors, on the other hand, there is no such requirement. Thus, in accordance with Article 14 of the Constitution, the homebuyers argued that the IBC’s classification was irrational and violated their fundamental right to equality. However, the Apex Court upheld the validity of the amendments concluding that if a single allottee is allowed to file an application, then the interest of all the other allottees will get jeopardize. 

FACTS OF THE CASE:

• The Petitioners in the matter have approached the Supreme Court by way of Writ Petition under Article 32 of the Indian Constitution. 
• The Petitioners challenged the validity of Sec 3, 4 & Sec 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020.
• Section 3 of the Amendment Act modifies Section 7(1) of the Insolvency and Bankruptcy Code, 2016 and adds a new provision requiring allottees under real estate projects (financial creditors) to file an application jointly with at least 100 other allottees under the same project, or with at least 10% of allottees under the same project, whichever is less, in order to initiate the insolvency resolution process under the Code.
• Section 4 of the Amendment Act modifies the Section 11 of the Insolvency and Bankruptcy Code, 2016 and adds an extra explanation under the Section 11.
• Section 10 of the Amendment Act includes Section 32A in the Insolvency and Bankruptcy Code, 2016.

ISSUES INVOLVED:

• Whether the Sec 3, 4 & 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020 was valid or not?

CONTENTIONS OF THE PETITIONER:

1. It is evident that the challenged amendment violates the requirements of Articles 14, 19 (1)(g), 21, and 300A of the Constitution. The amendment  made by Section 3 of the Amendment Act, introduces the second proviso in Section 7(1) of the Code, resulting in clear discrimination between financial creditors, the category to which the petitioners belong, and other financial creditors.
2. The challenged provisions have inherent leakages that render them impractical.
3. The right to make an application should not be tied to a threshold limit, as stated in the challenged provisions.
4. The first proviso is arbitrary and impracticable because information about allottees in real estate projects, as well as debenture and security holders, is unavailable.
5. The Amendment has the legally harmful consequence of creating a class within a class, which is contrary to the law.
6. The amendment which is imposing a threshold restriction is presenting a visible & hostile discrimination against operational creditors.
7. A substantive right cannot be taken away by a procedural requirement. Home buyers have been given the substantive right to invoke the code by submitting an application under Section 7. Also a proviso cannot override the main provision. 

CONTENTIONS OF RESPONDENT:

1. The Amendment is valid & reasonable.
2. The data gathered by the respondent discloses that between June, 2016 and 5^th June, 2018, there were 253 cases filed by allottees in the N.C.L.T. However, between June 6, 2018 and December 28, 2019, allottees filed a total of 2201 cases. Thereafter, pursuant to the Amendment between December 29^th, 2019 and August 26^th, 2020, there is a sharp fall, as, nearly in eight months, only 130 cases were filed.
3. The purpose of the Amendment Act was to lessen the backlog of cases before the already overburdened adjudicating authority by preventing the filing of multiple proceedings.
4. The amendment also protect the rights of thousands or even hundreds of allottees who might object to the application of a single house buyer.
5. The amendments make the process more efficient and economical as unnecessary financial bleeding of the corporate debtor who is already in difficulty, is avoided.

JUDGMENT:

The Supreme Court upheld the constitutionality of the amendments and determined that, in comparison to other creditors, homebuyers are in a distinct position. As a result, the threshold limit established for the start of CIRP in real estate homebuyer cases is not unreasonable nor inconsistent with Article 14 of the Constitution. According to the Judges, if the single allottee is permitted to file an application under Sec 7, then the interest of all other allottees might get compromised along with the whole project. Moreover, the allottees have other effective remedies under the Real Estate (Regulation and Development) Act, 2016 , the Consumer Protection Act, 2019, or filing a civil suit. The Supreme Court also explained that all independent allotments would qualify as separate allottees and would be taken into account in the computation of hundred allottees/one-tenth of the allottees, it makes no difference if an individual possesses one or more allotments in the name of his family.

ANALYSIS:

The Parliament has broad authority to implement and alter economic laws, including the IBC, 2016. The legislature has the authority to change such laws to address how the legislation is actually implemented in the real world. The court stated that allottees of a real estate project constitute a diverse group. The majority of them may wish to give the developer extra time to complete the project. Also the allottees can avail themselves of effective alternative remedies using the terms of either the Consumer Protection Act of 2019 or RERA, 2016. As a result, the court did not find any justification for interfering with the Parliament’s wise legislation. 

The rationale for imposing such a threshold limit on homeowners is understandable. Its purpose is to keep the CIRP moving forward quickly while balancing the interests of all parties involved. Consequently, it makes sense to categorize homebuyers separately from other debtors. The rationale for implementing this threshold limit is that it would decrease the number of indiscriminate actions taken by multiple homebuyers against a single individual or organization. Further the law’s stipulation that all 100 applications come from the same project has a valid logic. If many allottees from various projects lead combined proceedings, their grievances, remedies, and so on may differ, causing confusion and complicating an already tricky process. 

So, the Apex Court upheld the amendments of the Insolvency and Bankruptcy (Amendment) Act, 2020’s Sections 3, 4, and 10 & further granted specific filing relief to real estate creditors.

CONCLUSION:

This judgment is considered as one of the landmark judgments which helped in the development and evolution of the Insolvency and Bankruptcy Code, 2016. The Apex Court after considering all the facts has very well upheld the provisions of the Amendment and is of the view that such amendment will help in easy and speedy resolution of insolvency process along with acting as a barrier to absurd and irrelevant applications.

REFERENCES:

1. https://indiankanoon.org 
2. https://www.scconline.com 

This Article is written by Sargam Bansal, G.H.G Institute of Law, Sidhwan Khurd, Intern at Legal Vidhiya

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