Supreme Court Upholds Amendments to Insolvency and Bankruptcy Code, 2016: A Detailed Analysis of Manish Kumar vs. Union of India (2021)

Case Background

The case involves a batch of writ petitions filed under Article 32 of the Constitution, challenging the constitutional validity of certain amendments to the Insolvency and Bankruptcy Code (IBC), 2016. The primary challenge was directed against Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020, which introduced new thresholds for certain financial creditors, especially homebuyers and lenders in real estate projects, seeking to initiate the Corporate Insolvency Resolution Process (CIRP).

The petitioners, primarily allottees in real estate projects, argued that the amendments imposed unreasonable restrictions on their right to initiate CIRP, specifically the requirement for a minimum number of allottees to file an application. Additionally, they challenged Section 32A, which provides immunity to corporate debtors from certain liabilities.

Timeline

Legal Framework

The judgment primarily deals with the interpretation and validity of the following sections of the Insolvency and Bankruptcy Code, 2016, as amended:

• Section 7(1): This section deals with the initiation of the corporate insolvency resolution process by a financial creditor. The amendment introduced three provisos to this section, imposing a threshold for certain classes of financial creditors, particularly allottees under a real estate project. The provisos state:
  • “Provided that for the financial creditors, referred to in clauses (a) and (b) of 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 per cent. of the 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.”
• Section 11: This section lists persons not entitled to make an application to initiate CIRP. The amendment added Explanation II, clarifying that nothing in this section prevents a corporate debtor from initiating CIRP against another corporate debtor.
  • “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 32A: This newly inserted section provides immunity to a corporate debtor from certain liabilities and prosecutions for offenses committed prior to the commencement of the CIRP, subject to specific conditions.
  • “32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not— (a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or (b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

Arguments

The petitioners advanced several arguments against the amendments, primarily focusing on the following points:

• Discrimination: The amendments create a hostile discrimination between financial creditors, particularly homebuyers, and other financial and operational creditors by imposing a threshold requirement that is not applicable to others.
• Arbitrariness: The threshold requirement is manifestly arbitrary, unreasonable, and excessive, making it practically impossible for individual allottees to initiate CIRP due to the lack of accessible information and the difficulty in organizing a group of 100 allottees from the same project.
• Retrospectivity: The third proviso to Section 7(1) operates retrospectively, taking away the vested rights of those who had already filed applications under the unamended law.
• Violation of Constitutional Rights: The amendments violate Articles 14, 19(1)(g), 21, and 300A of the Constitution by infringing upon the rights to equality, freedom of trade, life, and property.
• Unworkability: The practical difficulties in meeting the threshold requirements, such as the lack of a mechanism to obtain information about other allottees and the differing dates of default, make the amended law unworkable.
• Section 32A: Section 32A was challenged for granting immunity to corporate debtors and their assets from criminal liabilities, thereby undermining the rights of creditors and the objectives of the Prevention of Money Laundering Act, 2002.

The respondents, on the other hand, defended the amendments, arguing that:

• Reasonable Classification: The amendments are a reasonable classification based on intelligible differentia, distinguishing allottees and debenture holders from other financial creditors due to their numerosity, heterogeneity, and lack of expertise in financial decision-making.
• Rational Nexus: The classification has a rational nexus with the objects of the Code, which include preventing abuse of the process, streamlining the CIRP, and ensuring a more effective and time-bound resolution process.
• No Vested Right: The right to file an application under Section 7 is a statutory right and can be conditioned. The third proviso does not affect any vested rights as no right accrues until the application is admitted.
• Workability: The amendments are workable, and the necessary information to comply with the threshold requirements is available through RERA and the Companies Act.
• Public Interest: The amendments are in the public interest as they prevent misuse of the Code by a few individuals and protect the interests of the larger group of stakeholders.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the amendments to Section 7(1) of the Insolvency and Bankruptcy Code, 2016, particularly the second proviso, are constitutionally valid, especially concerning the threshold requirements for allottees under real estate projects to initiate CIRP.
2. Whether the third proviso to Section 7(1) is valid, particularly regarding its retrospective application and the deemed withdrawal of applications not complying with the threshold requirements.
3. Whether the insertion of Explanation II to Section 11 of the Code is valid and whether it can be applied retrospectively.
4. Whether Section 32A of the Code is constitutionally valid and whether it provides undue immunity to corporate debtors and their assets.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following cases and legal provisions:

Ratio Decidendi

The core legal principles established by the Supreme Court in this judgment are:

• Reasonable Classification: The amendments to Section 7(1) of the IBC, which impose a threshold for certain classes of financial creditors, particularly homebuyers, are a reasonable classification based on intelligible differentia and have a rational nexus with the objects of the Code. The Court held that the classification is not arbitrary or discriminatory.
• Retrospective Operation: The third proviso to Section 7(1), which has a retrospective effect, is valid but the court directed that the authorities shall condone the delay in filing fresh applications to comply with the threshold requirement.
• Statutory Right: The right to file an application under Section 7 is a statutory right and can be conditioned by the legislature. No vested right accrues until the application is admitted.
• Section 32A’s Validity: Section 32A is valid as it is a policy decision to provide a clean slate to resolution applicants and is subject to ample safeguards. The immunity granted is not absolute and is subject to specific conditions.
• Explanation II to Section 11: The insertion of Explanation II to Section 11 is clarificatory and does not violate any constitutional provision. It is intended to prevent abuse of the Code.

Obiter Dicta

The Supreme Court made several obiter dicta observations, including:

• The amendments are intended to streamline the CIRP and prevent its abuse by a few individuals, thereby protecting the interests of the larger group of stakeholders.
• The court clarified that the amendments do not contradict the principles laid down in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416.
• The court emphasized the importance of a time-bound resolution process and the need to prevent delays in the CIRP.
• The court acknowledged the practical difficulties faced by homebuyers in meeting the threshold requirements but clarified that the necessary information is available through RERA and the Companies Act.
• The court highlighted that the amendments are a policy decision and are subject to judicial review only on limited grounds.

Implications

The Supreme Court’s judgment has significant implications for various stakeholders:

• Homebuyers: The judgment upholds the threshold requirements, making it more challenging for individual homebuyers to initiate CIRP. They must now organize themselves into a group of 100 or 10% of the total allottees to file an application. However, the court’s direction to condone delays in filing fresh applications to comply with the threshold requirement provides some relief.
• Real Estate Developers: The judgment provides clarity and stability to the real estate sector by preventing frivolous applications and ensuring a more organized resolution process. The immunity granted under Section 32A encourages participation in the CIRP.
• Financial Creditors: The judgment clarifies the distinction between different classes of financial creditors and the conditions for initiating CIRP. It provides a framework for a more efficient and time-bound resolution process.
• Lenders: The judgment gives more clarity on the process of insolvency resolution, which will help lenders in real estate projects to better assess the risk and manage their portfolios.
• Insolvency Professionals: The judgment emphasizes the need for a time-bound resolution process and the importance of adhering to the provisions of the Code.
• Adjudicating Authority: The judgment provides guidance on the interpretation of the amended provisions and the need to ensure a fair and efficient resolution process.

Conclusion

The Supreme Court’s judgment in Manish Kumar v. Union of India is a landmark decision that upholds the validity of the amendments to the Insolvency and Bankruptcy Code, 2016. The court has clarified the position regarding the threshold requirements for certain financial creditors, particularly homebuyers, and has provided a framework for a more organized and efficient resolution process. While the judgment may pose challenges for individual homebuyers, it provides stability and clarity to the real estate sector and ensures that the objectives of the Code are met. The decision balances the interests of various stakeholders and promotes a more effective and time-bound resolution process.

Flowchart of CIRP Initiation by Homebuyers