SUPREME COURT HOLDS THAT HOME BUYERS CAN FILE INSOLVENCY PROCEEDINGS IF THEY CONSIST OF TEN PERCENT OF THE ALLOTTEES IN THE PROJECT

The Three Judge Bench of the Hon’ble #SupremeCourt of India comprising of Justices Rohinton Fali Nariman, Navin Sinha and K.M. Joseph passed a Judgment dated 19-01-2021 in the case of Manish Kumar v. Union of India and Another (Civil Original Jurisdiction Writ Petition(C) No.26 Of 2020) and held that in order to maintain an #Insolvency Petition in respect of a #realestate project, there should be at least one hundred real estate allottees or ten percent of the total number of allottees.

In the present case, the Hon’ble Supreme Court of India has upheld the threshold which was imposed by virtue of introduction of Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment). The Bench upheld Section 3 of the IBC (Amendment) Act, 2020 which introduced provisos to Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code).

The Section is reproduced as follows:

“3. In section 7 of the principal Act, in sub-section (1), before the Explanation, the following provisos shall be inserted, namely:—

“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…”

Making a reference to Section 7 of the Code, the Apex Court observed that an action under Section 7 is an action in rem and the Insolvency Application, if allowed, is likely to jeopardize the rights of the Corporate Debtor as it would land the applicant and also the stakeholders, in liquidation of the Corporate Debtor.

“This may necessarily include the corporate debtor as a stakeholder, being protected from applications, which are perceived as frivolous or not representing a critical mass.”

The Home Buyers (Petitioners) who had filed Intervention Applications argued that imposition of such a condition on homebuyers will be violative of the principle of equality enshrined under Article 14 of the Constitution of India as it would amount to hostile discrimination. The Court observed that as per the Judgment in Pioneer Urban Land and Infrastructure Ltd. v/s Govindam Raghvan AIR 2019 SC 1779, although the homebuyers have been categorised as Unsecured Creditors, they stand on a different footing from other Creditors.

“Insisting on a threshold in regard to these categories of creditors would lead to the halt to indiscriminate litigation which would result in an uncontrollable docket explosion as far as the authorities which work the Code are concerned…..The legislative policy reflects an attempt at shielding the corporate debtor from what it considers would be either for frivolous or avoidable applications.”

Furthermore, the Hon’ble Supreme Court observed that the objective behind the amendment is to strike a balance between the right conferred on the allottee by virtue of Section 7 of the Code to move an Application for initiating the Corporate Insolvency Resolution Process (CIRP) and “…giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under the Code…”

The Bench made the following observation:

“All that the amendment is likely to ensure is that the filing of the application is preceded by a consensus at least by a minuscule percentage of similarly placed creditors that the time has come for undertaking a legal odyssey which is beset with perils for the applicants themselves apart from others. As far as the percentage of applicants contemplated under the proviso it is clear that it cannot be dubbed as an arbitrary or capricious figure.”

Furthermore, the Homebuyers contended that such an Amendment has the power to take away the vested rights of the home buyers. Taking into consideration the arguments advanced by the Parties, the Apex Court while dismissing the Intervention Applications filed by the Petitioners concluded that although the homebuyers had a “vested right” to move the application without conditions before the amendment, the legislature has the power to impair and take away such a “vested right”.

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services