Home Legal News Supreme Court Upholds Sections 3, 4 & 10 of Insolvency and Bankruptcy Code Amendment Act 2020

Supreme Court Upholds Sections 3, 4 & 10 of Insolvency and Bankruptcy Code Amendment Act 2020

by Shreya
writ jusridiction NCLT
A bench comprising Justices RF Nariman, Navin Sinha and KM Joseph of Supreme Court in its recent verdict has upheld amendments made by Parliament in the Insolvency and Bankruptcy Code (IBC). The court has upheld constitutional validity of Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020. The impugned amendments mandated a minimum of 100 home buyers to collectively file an insolvency application in the National Company Law Tribunal to initiate application of IBC against a defaulting developer.

The top court has also rejected contention of the petitioners that the changes made in 2020 by Parliament in the Insolvency and Bankruptcy Code were “created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests”.

The court stated,
“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.


A bench of Justices R F Nariman, Navin Sinha and K M Joseph said, “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.”

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The court provided the following reliefs exercising powers under Article 142 of the Constitution while upholding the amendments,:

(1)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

(2)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.

(3) We make it clear that the time limit of two months is fixed only for conferring the benefits of exemption from court feesand 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

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Section 3 of the Insolvency and Bankruptcy Code (Amendment) 2020 inserted certain additional conditions for homebuyers to initiate insolvency proceedings against defaulting builders. The said provision, adds certain provisos to Section 7 of the Insolvency and Bankruptcy Code (IBC) to state there should be at least one hundred real estate allottees or ten percentage of the total number of allottees, which ever is lesser, to maintain an insolvency petition in respect of a real estate project. The amendment also stated that the application of Section 3 of the amendment Act shall be retrospective, affecting pending applications.

The first amendment under section 3 of Insolvency and Bankruptcy Code 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 of Insolvency and Bankruptcy Code 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 of Insolvency and Bankruptcy Code 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 Insolvency and Bankruptcy Code, “failing which the application shall be deemed to be withdrawn before its admission.”

The second amendment in Insolvency and Bankruptcy Code 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 Insolvency and Bankruptcy Code 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 further said,

“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.”

The court further said,

“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, 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.”

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