Manish Kumar v. Union of India
Supreme Court of India · 19 January 2021 · 3 judges
The Court upheld the 2020 IBC amendments: the threshold of 100 or ten per cent for allottees and certain financial creditors under Section 7, the deemed withdrawal of pending applications, Explanation II to Section 11, and Section 32A.
Facts
The Insolvency and Bankruptcy Code (Amendment) Act, 2020 added three provisos to Section 7(1). Financial creditors referred to in Section 21(6A)(a) and (b), and allottees under a real estate project, could now apply to initiate insolvency only jointly, with at least one hundred creditors of the same class (or allottees of the same project) or ten per cent of them, whichever is less. Pending applications not yet admitted had to be brought into compliance within thirty days or be deemed withdrawn. The Act also inserted Explanation II to Section 11 and a new Section 32A giving immunity to the corporate debtor and its property for offences committed before the insolvency process, on approval of a resolution plan. Allottees and other creditors challenged these provisions under Article 32 as violating Articles 14, 19, 21 and 300A.
Questions before the Court
- Do the first and second provisos to Section 7(1), requiring a minimum number of applicants, violate Article 14?
- Is the third proviso, deeming pending applications withdrawn unless made compliant within thirty days, invalid for affecting vested rights retrospectively?
- Is Explanation II to Section 11 valid, and does it apply to pending applications?
- Is Section 32A, granting immunity to the corporate debtor and its property for prior offences, unconstitutional?
What the Court held
- The first and second provisos are valid. Allottees and security holders are not totally deprived of the right to apply; the requirement only ensures prior consensus of a small percentage of similarly placed creditors, and the figure is not arbitrary or capricious.
- The threshold must be met on the date the application is filed; a valid application does not fail because some applicants later withdraw.
- The third proviso is valid. Pending applicants had a vested right, but in the public interest the retrospective withdrawal is not manifestly arbitrary, and withdrawal does not bar a fresh compliant application even on the same default.
- Explanation II to Section 11 is clarificatory and applies to pending applications: a corporate debtor covered by Section 11 is barred only from initiating insolvency against itself, not against other corporate debtors.
- Section 32A is valid. It is an economic measure to attract resolution applicants; immunity is conditional, and persons responsible for the offences remain liable. Under Article 142 the Court exempted the petitioners from court fees on fresh compliant applications on the same default filed within two months, and directed condonation of delay for the period the earlier applications were pending.
Why it matters
The judgment applies judicial deference to economic legislation in upholding entry thresholds for allottees and similar classes of financial creditors under Section 7. It explains when a vested right of action may be taken away retrospectively, holds that the threshold is tested on the date of filing, and upholds the clean slate immunity in Section 32A. It also uses Article 142 to soften the effect of the deemed withdrawal of pending applications.
In the Court's words
Copied from the official judgment; each passage links to its page.
“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. As far as the percentage of applicants contemplated under the proviso it is clear that it cannot be dubbed as an arbitrary or capricious figure.”
“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. Providing for the consequence of withdrawal before admission, which we have explained, does not have the consequence of preventing the fresh filing, even in regard to the same default, after complying, no doubt, with the requirement of the first or the second proviso, cannot be dubbed as arbitrary.”
“It could never had been the intention of the Legislature to create an obstacle in the path of the corporate debtor, in any of the circumstances contained in Section 11, from maximizing its assets by trying to recover the liabilities due to it from others. Not only does it go against the basic common sense view but it would frustrate the very object of the Code, if a corporate debtor is prevented from invoking the provisions of the Code either by itself or through his resolution professional, who at later stage, may, don the mantle of its liquidator. The provisions of the impugned Explanation, thus, clearly amount to a clarificatory amendment.”
“The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate.”
Provisions interpreted
Related judgments
- Distinguishes Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019)“It is clear that impugned provisos do not set at nought the ruling of this Court in Pioneer (supra).” (page 195)
Case and bench
- Parties
- Manish Kumar v. Union of India
- Case
- Writ Petition (C) No. 26 of 2020 (with connected writ petitions and Transferred Case (C) No. 228 of 2020)
- Decided
- 19 January 2021
- Bench
- Rohinton Fali Nariman, Navin Sinha, K.M. Joseph
- Opinions
- Unanimous. Judgment delivered by K.M. Joseph, J.