The Supreme Court has upheld the Constitutional validity of Sections 3, 4, and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020, while stating that we cannot lose sight of the fact that the legislature has power to impair and take away vested rights. (Manish Kumar Vs Union of India & Another)
A three-judge bench headed by the Justices Rohinton Fali Nariman, Navin Sinha & K. M. Joseph has said, “Every sovereign Legislation is clothed with competence to make retrospective laws. It is open to the Legislature, while making retrospective law, to take away vested rights. If a vested right can be taken away by a retrospective law, there can be no reason why the Legislature cannot modify the vested rights.”
The Apex Court said, “we uphold the impugned amendments. However, this is subject to the following directions, which we issue under Article 142 of the Constitution of India:
i. 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 today, also compliant with either the first or the second proviso under Section 7(1), as the case may be, then, they will be exempted from the requirement of payment of court fees.
ii. Secondly, we direct that if applications are moved under Section 7 by the petitioners, within a period of two months from today, in compliance with either of the provisos, as the case may be, and the application would be barred under Article 137 of the Limitation Act, on the default alleged in the applications, which were already filed, if the petitioner file applications under Section 5 of the Limitation Act, 1963, the period of time spent before the Adjudicating Authority, the Adjudicating Authority shall allow the applications and the period of delay shall be condoned in regard to the period, during which, the earlier applications filed by them, which is the subject matter of the third proviso, was pending before the Adjudicating Authority.
iii. We make it clear that the time limit of two months is fixed only for conferring the benefits of exemption from court fees and for condonation of the delay caused by the applications pending before the Adjudicating Authority. In other words, it is always open to the petitioners to file applications, even after the period of two months and seek the benefit of condonation of delay under Section 5 of the Limitation Act, in regard to the period, during which, the applications were pending before the Adjudicating Authority, which were filed under the unamended Section 7, as also thereafter.”
The Supreme Court has observed in its order,
“in the case of allottees of a real estate project, it is the approach of the legislature that in the real estate project there would be 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 under Section 7, the interests of all the other allottees may be put in peril. This is for the reasons that as stakeholders in the real estate project, having invested money and time and looking forward to obtaining possession of the flat or apartment and faced with the same state of affairs as the allottee, who moves the application under Section 7 of the Code, the other allottees may have a different take of the whole scenario.”
The petitioners have approached the Court under Article 32 of the Constitution of India. They call in question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020. Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016. Section 4 of the impugned amendment, incorporates an additional Explanation in Section 11 of the Code. Section 10 of the impugned amendment inserts Section 32A in the Code. The petitioners have challenged that the second proviso, according to which a new threshold has been declared for an allottee to move an application under Section 7 for triggering the insolvency resolution process under the Code. The threshold is the requirement that there should be at least 100 allottees to support the application or 10 per cent of the total allottees whichever is less. Moreover, they should belong to the same project.
The Supreme Court has held, “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…
We have to take the law, therefore, as it is and deal with it on the touchstone of, whether the law is manifestly arbitrary. We have already, no doubt, found that by virtue of the statutory mechanism, there appears to be an information grid available under the law. Undoubtedly, we would have felt more reassured, if the period had been longer than it is. The law came as a bolt from the blue as it were…
As regards the compelled withdrawal under the third proviso of the pending applications is concerned, we hold as follows. Once the Legislature intended that the pending applications must be made compliant with the threshold requirement, consequences for not doing so had to be provided. Otherwise, it would have created complete uncertainty and the applicant would have been dealt with in a manifestly arbitrary manner…”
The Centre has argued that the object and rationale of the impugned provisions are stated to be as follows:
i. Preventing multiple individual applications, which has the effect of not only crowding the docket of the Adjudicating Authority and further holding up a process in which time is of the essence;
ii. Safeguarding the interest of hundreds or even thousands of allottees who may oppose the application of a single home-buyer;
iii. Balancing the interest of members of the same sub Class as also other financial creditors and other operational creditors. The availability of remedies to the members of the sub-class under RERA, in the case of allottees;
iv. Lastly, the process becomes smoother and costeffective. Unnecessary financial bleeding of the corporate debtor who is already in difficulty, is avoided.
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The Supreme Court noted that the legislation, being an economic measure, free play in the joints, must be accorded to the Legislature. The impugned amendment is reasonable, minimal and proportionate. The data gathered by the respondent discloses that between June, 2016 and 5th June, 2018, there were 253 cases filed by allottees in the N.C.L.T.. However, between 6th June, 2018 and 28th December, 2019, as many as 2201 cases were filed by the allottees. Thereafter, pursuant to the Ordinance between December 29th, 2019 and August 26th, 2020, there is a sharp fall, as, nearly in eight months, only 130 cases were filed. It is pointed out that the argument, based on estoppel and malice against the Legislature, is untenable. There can be no estoppel against the Legislature and the decision of this Court in Union of India and others v. Godfrey Philips India Ltd. 23, is relied on. The concept of transferred malice is alien in the field of legislation. The right to file an application under Section 7 is a statutory right and it can be conditioned.