The Supreme Court on Tuesday upheld the Insolvency and Bankruptcy Code (Amendment) Act, 2020, that mandates a threshold of at least 10% of property-purchasers in a project or one hundred of the total allottees for initiating insolvency proceedings against the genuine estate developer.
This implies that a single property-purchaser is barred from approaching the National Company Law Tribunal (NCLT) beneath Section 7 of the IBC to initiate insolvency proceedings against the genuine estate developer/builder. Section 3 also makes it possible for property-purchasers to seek the Corporate Insolvency Resolution Process (CIRP) against builder only when one hundred allottees or at least 10% of allottees make a joint application to NCLT.
Prior to the move, a property-purchaser – just like any economic or operational creditor – could file an insolvency case against their realty developer if the default quantity involved is `1 lakh or more. However, this rule was tweaked with the aim to avoid a couple of potentially unscrupulous components inside the property-purchaser neighborhood from abusing the spirit of the IBC by unsettling genuine estate corporations at the behest of or in connivance with rival firms. However, property-purchasers continue to be treated as economic creditors.
A Bench led by justice Rohinton Nariman dismissed about 40 petitions filed by property-purchasers and other people difficult the rule, saying the petitioners have failed to prove arbitrariness in the provision of the threshold that was introduced by the 2020 amendment.
“A vested right under a statute can be taken away by a retrospective law. A right given under a statute can be taken away by another statute. We cannot ignore the fact that there was considerable public interest behind such a law. The sheer numbers, in which applications proliferated, combined with the results it could produce, cannot be brushed aside as an irrational or capricious aspect to have been guided by in making the law. Being an economic measure, the wider latitude available to the Law Giver, cannot be lost sight of,” the apex court stated.
According to top rated court, “from the standpoint of public interest, every application maintained by a single applicant, is perceived as a veritable threat to the fulfillment of the objectives of the Code. The continuance of the applications could not, therefore, be in public interest. It is, as if, the Legislature intended to apply its brakes in the form of asking the applicants to obtain the consensus of a minimum number of similar stakeholders, before the applications could be further processed.”
“Public interest would, undoubtedly, also encompass, the economy of the country, which can be understood in terms of all the objects, for which the Code was enacted. They would include the speed with which the Code is worked. It would include, also, safeguarding the interests of all the stakeholders. 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,” it stated.
In its August 2019 order, the apex court had upheld the government choice to grant property-purchasers the status of economic creditors. Subsequently, the government introduced the IBC (Amendment) Act, 2020, that mandated a threshold of at least 10% of property-purchasers in a project or one hundred of the total allottees for initiating insolvency proceedings against the genuine estate developer. This was accomplished to avoid genuine estate projects from becoming stalled by couple of disgruntled property-purchasers/investors.
Legal authorities stated that bringing such a threshold just for property-purchasers was arbitrary even though no such point exist for other economic or operational creditors. “SC has upheld the amendment, however, has failed to consider several crucial nuances with respect to private lenders. Home allottees and private lenders have been painted with the same brush, whereas lenders were always the original intended beneficiary of IBC. The only relief for pending applications that are deficient, is that they will be permitted to withdraw and refile before NCLT without having to repay court fees. However, only two months-time has been granted to meet the threshold. This paves the way for corporate debtors to retain control of their otherwise insolvent enterprise at the cost of helpless individuals, advocate Srijan Sinha told FE.
“We aim to file a review in order to seek certain clarifications as well as modifications,” Sinha, who appeared for Association of Karvy Investors, stated.
Challenging Sections 3 & 10 of the Act, the petitions alleged that the new law was in violation of Articles 14 (equality ahead of law) of the Constitution as it had rendered the purchasers, who are economic creditors, remediless and also subjected them to discrimination by placing a pre-situation in the type of minimum quantity of allottees of a unique project necessary for filing an application beneath Section 7 of the IBC for initiation of the IRP.
According to petitions, “the government has failed to appreciate that the contact details of individual investors spread across the country may not be available publicly, thus making it impossible to proceed against a developer, the petition stated, adding because of this logistical nightmare, the impugned Act effectively diminishes the right of individual financial creditors to prefer an application under Section 7 of IBC.”