IBC amendments imposing numerical threshold on homebuyers gets SC nod

The Supreme Court has cleared the Centre’s amendments to the Insolvency and Bankruptcy Code (IBC) fixing a threshold of at least 100 homebuyers or 10% of the total flat purchasers in a real estate project for initiation of a resolution plan before the National Company Law Tribunal.

Not doubting the legislature’s reason for enacting a law, meant to serve as an economic measure, a three-judge bench of justices RF Nariman, Navin Sinha and KM Joseph said, “It is no part of a court’s function to probe into what it considers to be more wise or a better way to deal with a problem. In economic matters, the wider latitude given to the Law Giver is based on sound principle and tested logic over time.”

Flat purchasers formed the bulk of petitioners before the court who challenged the proposed amendments introduced by the Centre last year to the Insolvency and Bankruptcy Code of 2016. These changes came into effect on December 28, 2019. According to the petitions, the changes introduced by the Centre did not favour homebuyers as gathering the requisite numbers and that too of persons under the same real estate project before NCLT was a challenge. This threshold was introduced by way of a proviso to Section 7(1) of the Code. The new law further stated that the plea of homebuyers who failed to meet this threshold would automatically stand withdrawn after 30 days.

The Centre defended the amendments to the Code before the court stating that the amendments were part of an economic measure that were modelled on the same lines as Companies Act. The government argued that such a threshold was placed in order to limit frivolous applications as homebuyers as a class of financial creditors was the most numerous and heterogeneous. This would choke the docket of the deciding authority and would be counterproductive to the object of ensuring time-bound Resolution Process, the Centre argued.

The bench said, “It must be remembered that the requirement is a mere one-tenth of the allottees. This is a number which goes to policy and lies exclusively within the wisdom of the Legislature. Hence, we have no hesitation in repelling the contentions in this regard.” 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, the court observed, leading to docket explosion thus derailing the insolvency proceedings under the Code.

Another provision whose validity was challenged before the apex court was Section 32A which granted immunity to corporate debtor from criminal prosecution for an offence committed prior to the commencement of the corporate insolvency resolution process (CIRP). Even the property of the corporate debtor acquired allegedly from the proceeds of crime was to enjoy protection from any kind of attachment, seizure or confiscation under the amended Code.

The said provision was to kick in from the date the resolution plan got approved. This protection came with certain conditions. There must be a resolution plan that must be approved by the authority under the Code. There must be a change in the control of the corporate debtor and the new management cannot be the “disguised avatar of the old management” or its related party. It should also not be the subject matter of an investigation pending against the corporate debtor.

Justice KM Joseph, writing the 465-page judgment for the bench said, “Having regard to the object of the Code, the experience of the working of the code, the interests of all stakeholders, including most importantly, the imperative need to attract resolution applicants who would not shy away from offering reasonable and fair value as part of the resolution plan, if the legislature thought that immunity be granted to the corporate debtor as also its property, it hardly furnishes a ground for this court to interfere.”

Further, the court noted that extinguishment of the criminal liability of the corporate debtor also helped achieve maximization of the value of assets, considered important for the new management to “make a clean break with the past and start on a clean slate”.

The bench noted that the petitions were seeking the court to make a foray into the forbidden territory of legislative value judgment, which the judges clearly avoided, saying, “Invalidating a law made by a competent Legislature, on the basis of what the court may be induced to conclude, as a better arrangement or a more wise and even fairer system, is constitutionally impermissible. If, the impugned provisions are otherwise not infirm, they must pass muster.”