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SC Upholds Changes in IBC to Initiate Case Against Debtor Firms

File photo of the Supreme Court.

File photo of the Supreme Court.

Observing that 'malice' was not a ground to challenge a law made by legislature, the top court also rejected the vehement contention of the petitioners that the changes made in 2020 by Parliament in the IBC were created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests.

In a significant verdict, the Supreme Court Tuesday upheld amendments made by Parliament in the Insolvency and Bankruptcy Code (IBC) which made changes including that either one hundred home buyers or ten per cent of allottees of a housing project will be needed to initiate insolvency resolution process against defaulting real estate firms instead of earlier provision which permitted even a person to set law into motion. Observing that ‘malice’ was not a ground to challenge a law made by legislature, the top court also rejected the vehement contention of the petitioners that the changes made in 2020 by Parliament in the IBC were created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests.

Such an argument is nothing but a thinly disguised attempt at questioning the law of the Legislature based on malice. A law is made by a body of elected representatives of the people. When they act in their legislative capacity, what is being rolled out is ordinary law. Should the same legislators sit to amend the Constitution, they would be acting as members of the Constituent Assembly. Whether it is ordinary legislation or an amendment to the Constitution, the activity is one of making the law. While malice may furnish a ground in an appropriate case to veto administrative action it is trite that malice does not furnish a ground to attack a plenary law, a bench of Justices R F Nariman, Navin Sinha and K M Joseph said.

It rejected the contention that the right to initiate insolvency proceedings has been wrongly been taken away from one or few home buyers to benefit the real estate firms and the case did not involve a challenge to the law. What is significant is the statement that the right created by a Statute, can be taken away by a statute. We will expatiate on these aspects. In the case of the allottees of a real estate project, it is the approach of the Legislature that in a real estate project there would be a large number of allottees. There can be hundreds or even thousands of allottees in a project. If a single allottee, as a financial creditor, is allowed to move an application, the interests of all the other allottees may be put in peril. Some of them may approach the Authority under the RERA. Others may, instead, resort to the Fora under the Consumer Protection Act, though, the remedy of a civil suit is, no doubt, not ruled out, it said. Justice Joseph, who wrote 465-page judgement for the bench, upheld the amendments made in Sections 3, 4 and 10 of the IBC (Amendment) Act 2020. The first amendment under section 3 provided 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.

It provided under section 7 that financial creditors who are allottees under a real estate project can file the application for initiating corporate insolvency resolution process against the corporate debtor 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. The amended provision said a pending application for initiating corporate insolvency resolution process against a corporate debtor needed to be modified within 30 days and be joined by 100 home buyers or 10 per cent of them if it has not been accepted by the adjudicating authority under IBC, failing which the application shall be deemed to be withdrawn before its admission."

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The second amendment clarified that a corporate debtor, which was barred earlier, can also initiate a corporate insolvency resolution process against another corporate debtor. The third amendment had inserted section 32A in the IBC and provided 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 if the resolution plan results in the change in the management or control of the corporate debtor.

The court said a supreme legislature cannot be cribbed, cabined or confined by the doctrine of promissory estoppel or estoppel. It acts as a sovereign body. The theory of promissory estoppel, on the one hand, has witnessed an incredible trajectory of growth but it is incontestable that it serves as an effective deterrent to prevent injustice from a Government or its agencies which seek to resile from a representation made by them, without just cause, it said. The bench used its extraordinary powers under Article 142 and granted reliefs such as exemption from paying court fees for filing application with the adjudicating authority under IBC to those who had filed petitions against the amendments before it. If any of the petitioners move applications in respect of the same default, as alleged in their applications, within a period of two months from toda, then, they will be exempted from the requirement of payment of court fees, in the manner, which we have detailed in the paragraph just herein before, it said.

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first published:January 19, 2021, 21:49 IST