Supreme Court upholds the constitutional validity of Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020.

The Supreme Court has recently upheld the constitutional validity of Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (hereinafter referred to as “IBC (Amendment)” ) in Manish Kumar Vs. Union of India1 and connected cases.

Section 3 of the IBC (Amendment) inserted additional conditions for homebuyers to initiate insolvency proceedings against defaulting builders. The new law requires at least one hundred real estate allottees or ten percentage of the total number of allottees, whichever is lesser, for initiating corporate insolvency resolution process (hereinafter referred to as “CIRP”) and the applications already pending but not admitted by the Adjudicating Authority before commencement of the IBC (Amendment) shall also have to comply with the said requirement within 30 days from commencement of the IBC (Amendment). The Petitioners had challenged these additional conditions as arbitrary and discriminatory amounting to illegal classification. The Hon’ble Apex Court observed that 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. It was further observed that the law has indeed endowed the allottees with different remedies, having different implications, be it under the Consumer Protection Act or under RERA. It was noted that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application under Section 7 of the Code 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 Apex Court further went on to hold that prescribing a time limit in regard to pending applications cannot be arbitrary, as without a time limit, it would be an endless and uncertain procedure.

Section 4 of the IBC (Amendment) added an explanation which provided for a corporate debtor to initiate CIRP against another corporate debtor which the Hon’ble Apex Court was unable to understand how it could be described as being arbitrary for the Legislature to clarify its intention through the device of an Explanation. It was held that an Explanation must be read so as to harmonise with and clear up any ambiguity in the main section. It should not be so construed as to widen the ambit of the section and It is would be an error to explain the Explanation with the aid of the Section, because this reverses their roles.

Section 10 of the IBC (Amendment) added a Section 32A to the original Act which provided for an immunity to the corporate debtor and its property when there is approval of the resolution plan resulting in the change of management of control of corporate debtor. The Petitioners described this Section as constitutionally anathema as it confers an undeserved immunity for the property which would be acquired with the proceeds of a crime. However, the Hon’ble Apex Court observed that the immunity is premised on various conditions being fulfilled. There must be an approved resolution plan. There must be a change in the control of the corporate debtor. The new management cannot be the disguised avatar of the old management. It cannot even be the related party of the corporate debtor. The new management cannot be the subject matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto. These ingredients are also insisted upon for claiming exemption of the bar from actions against the property. Significantly every person who was associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of the offence in terms of the report submitted continues to be liable to be prosecuted and punished for the offence committed by the corporate debtor. It further observed that creation of a criminal offence as also abolishing criminal liability must ordinarily be left to the judgement of the legislature. The combined reading of the various limbs of Section 32A(1) would show that while, on the one hand, the corporate debtor is freed from the liability for any offence committed before the commencement of the CIRP, the statutory immunity from the consequences of the commission of the offence by the corporate debtor is not available and the criminal liability will continue to haunt the persons, who were in-charge of the assets of the corporate debtor, or who were responsible for the conduct of its business or those who were associated with the corporate debtor in any manner, and who were directly or indirectly involved in the commission of the offence, and they will continue to be liable.

With respect to the bar against taking any action against the property of the corporate debtor, the Hon’ble Apex Court held that it is conditional to the property being covered under the Resolution Plan which must be approved by the Adjudicating Authority and, finally, the approved plan, must result in a change in control of the corporate debtor not to a person, who is already identified and described in Section 32A(1). The Hon’ble Apex Court further observed that this bar when viewed in the larger context of the objectives sought to be achieved at the forefront of which is maximisation of the value of the assets which again is to be achieved at the earliest point of time cannot become the subject of judicial veto on the ground of violation of Article 14. It emphasized that attaining public welfare very often needs delicate balancing of conflicting interests and the provisions are born out of experience.


By - Lakshmi Raman