Libertatem Magazine

Validity of Insolvency and Bankruptcy Code (Amendment) Act Upheld by Supreme Court

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The three-judge Bench of the Supreme Court including Rohinton Fali Nariman, KM Joseph and Navin Sinha, held that the Section 3, 4 and 10 which incorporated the amendments in the Insolvency and Bankruptcy Code (Amendment) Act 2020, did not breach the right to equality pursuant to Article 14 of the Constitution. They upheld the law-making power of the legislature to impair and strip away vested privileges.

Facts of the Case

Most of the Petitioners are the allottees under the real estate project. They have filed a lawsuit under this court and cast the doubt that Section 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 are unconstitutional in nature. 

These amendments allowed at least 100 home buyers to come together to file a National Company Law Tribunal (NCLT) insolvency application to invoke the IBC against a defaulting developer. Section 7 of the IBC was amended by Section 3 of the Amendment Act, while Section 10 of the Amendment Act added Section 32A, a new clause.

In compliance with Section 7 of the IBC Act, the individual members of the petitioner group, the Association of Karvy Investors, lodged petitions before the various benches of the National Company Law Tribunal (NCLT) in India.

Arguments Advanced

Section 3 of the Insolvency and Bankruptcy Amendment Act was challenged contending 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, therefore “directly prejudicing the members of the Petitioner Association”.

Observations of the Court

Supreme Court stated that “there cannot be any doubt that intrinsically a financial creditor and an operational creditor are distinct” while dismissing the charges of breach of Article 14.

The Court pointed out that an effort by the Petitioners to overturn the provision on the ground that the explanation was seeking to achieve the effect of the repeal of Sections 11(a) and 11(d) was entirely without merit. The Apex Court of the country was of the view that “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 went on to say that the effort by Petitioners to convince the Court to believe that the law was generated by pandering to the real estate lobby and succumbing to their pressure or placating their vested interests was nothing but a thinly veiled attempt to challenge the malice-based law of the Legislature.

Judgement of the Court

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

Section 32A of the IBC, which was added by the Amendment Act, was also challenged by the Petitioners. However, the Supreme Court 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 Court issued the following reliefs exercising powers in compliance with Article 142 of the Constitution while upholding the amendments:

If the Applicant’s association transferred the motion for default within a span of 2 months, it has been excluded from paying Court fees.

A time-limit for the period during which previous requests were made by it before the Adjudicating Authority shall be approved by the Adjudicating Authority.

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