A vested right under a statute can be taken away by a retrospective law: SC

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. (Para 362)

Manish Kumar V/s Union of India & Anr.

Writ Petition(C) No.26 of 2020 clubbed with 40 Others

Decided on 19th January, 2021

A Three-Judge Bench of the Supreme Court comprising of Justice Rohinton Fali Nariman, Justice Navin Sinha and Justice K.M. Joseph presided of to decide over the clubbed petitions filed against insolvency of the Respondents.

The petitioners have approached this Court under Article 32 of the Constitution of India. They call in 3 question Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020 (hereinafter referred to as ‘the impugned amendments’, for short). Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘the Code’, for short). 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.

Learned counsel for the Petitioners have addressed the following submissions: (i) The impugned amendment clearly falls foul of the mandate of Articles 14, 19 (1) (g), 21 and 300A of the Constitution. The amendment by virtue of section 3 of the Amendment Act introducing the second proviso in Section 7(1) of the Code makes a hostile discrimination between financial creditors, the category, to which the petitioners belong and the other financial creditors. (ii) The amendment imposing a threshold restriction is afflicted with the vice of palpable and hostile discrimination qua operational creditors. (iii) There are inherent leakages in the impugned provisions which would make it unworkable. The impugned amendment is also bad in law for the reason that it is manifestly arbitrary. The amendment has the legally pernicious effect of creating a class within a class, a result, which is frowned upon by the law. (iv) That there exists adequate shield against a single allottee misusing the Code. The threshold is thrust upon only on the home buyer and is not applicable across the board for other financial creditors. It is discriminatory. There is no rationale. It treats equals unequally and unequals as equals. There is no intelligible differentia bearing a nexus with the object and purpose of the Act. He also emphasised the practical difficulties involved in arranging the necessary numerical strength under the impugned provision. (v) That the real estate owners do not take any loan from financial institutions. They raise capital exclusively from the allottees virtually. In such circumstances, to put this threshold limit is clearly impermissible. The question as to how in such circumstances the law could insist upon a home buyer assembling together other homebuyers and that too one hundred in number or one-tenth of the total number of allottees. Allottees are spread all over the world. It is inconceivable as to how the provision can be worked in a reasonable and fair manner.

Learned ASG Smt. Madhavi Divan submitted that (i) the impugned amendments are perfectly valid. The amendments are part of an economic measure. There was a Report of an Expert Committee. The Expert Committee recommended imposing a threshold amendment in respect of certain classes of financial creditors. The impugned provisions conform to the principle of reasonable classification. Intelligible differentia distinguishes the allottees and debenture holders and security holders covered by the provisos from the other financial creditors. The amendments are essentially an extension of Sections 21(6A) and Section 25A of the Code, under which, the debenture holders and security holders, on the one hand, and allottees, on the other, are treated differently. (ii) It is contended that this court has recognized that allottees/home buyers are not a homogenous group. This Court also recognized, it is pointed out, that the deposit-holders and security-holders form a sub-class/class of financial creditors, who are treated a little differently, on account of the sheer number of such creditors coupled with the heterogeneity within the group that may cause difficulties in the decision-making process. (iii) That there is a rational nexus with the objects of the Code insofar as the impugned provisos are concerned and the classification is permissible under Article 14 of the Constitution. (iv) That there is a rational nexus with the objects of the Code insofar as the impugned provisos are concerned and the classification is permissible under Article 14 of the Constitution. Multiple applications by members of this large class of financial creditors, in such a class, would also add to the burden of the Adjudicating Authority, choke-up its docket and delay the process. (v) Time is of the essence of the Code. Proceedings are in the nature of proceedings in rem. It impacts the rights of creditors, including similarly placed creditors. It is therefore, reasonable and logical to place the threshold. The minimum threshold is a minimum requirement. The threshold is kept low and reasonable.

This Court was of the view that

“Therefore, a conspectus of the provisions would show that having regard to the legislative intention the term ‘allottees’ as defined in Section 2(d) must be understood undoubtedly on its own terms predominantly. But at the same time the other provisions which form part of the Act and therefore the scheme must also be borne in mind. The Argument that the definition of ‘allottee’ suffers from over inclusiveness and under inclusiveness needs to be considered. Under inclusiveness and over inclusiveness are aspects of the guarantee under Article 14. Equals must be treated equally. Unequals must not be treated equally. What constitutes reasonable classification must depend upon the facts of each case, the context provided by the statute, the existence of intelligible differentia which has led to the grouping of the persons or things as a class and the leaving out of those who do not share the intelligible differentia. No doubt it must bear rational nexus to the objects sought to be achieved.” (Para 118)

Court stated the following on the matter of limitation being laid

“The further contention that 10 percent is dynamic and what is 1/10 in the morning may fall short by night if more allotment is made, is untenable in law. The provisions of the Companies Act, 1913 (Section 153-C), Section 399 of the Companies Act, 1956 and Section 244 of the Companies Act, 2013 contain similar provisions. The mere difficulties in given cases, to comply with a law can hardly furnish a ground to strike it down. As to what would constitute the real estate project, it must depend on the terms & conditions and scope of a particular real estate project in which allottees are a part of. These are factual matters to be considered in the facts of each case.” (Para 124)

After hearing the contentions, the court highlighted that

“It is to be noted also that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application under Section 7 of the Code and giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under the Code which must certainly pass inexorably within a stipulated period of time should circumstances exists under Section 33 into corporate death with the unavoidable consequence of all allottees and not merely the applicant under Section 7 being visited with payment out of the liquidation value, the amounts which are only due to the unsecured creditor.” (Para 214)

Regarding the contention of Article 14 being violated, it was observed that

“We must record our understanding of the efforts of the petitioner in the light of the application which is pending and the appeal also which is preferred by the petitioner in NCLAT. We are really concerned and can be called upon only to pronounce on the vires of the Statute on the score that it is unconstitutional on any ground known to law. The only ground which is urged before us is the violation of Article 14. This ground does not merit acceptance. The challenge is repelled.” (Para 245)

After a lot of deliberation, this Court concluded that

“In regard to the first and the second provisos, they have only prospective operation. The creditors covered by these provisos, are not subjected to any time limit (except, no doubt, the bar under Article 137 of the Limitation Act), in the matter of garnering the requisite support. However, prescribing a time limit in regard to pending applications, cannot be, per se, described as arbitrary, as otherwise, it would be an endless and uncertain procedure. The applications would remain part of the docket and also become a Damocles Sword overhanging the debtor and the other stakeholders with deleterious consequencesalso qua the objects of the Code.” (Para 366)

Hence the Court stated

“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, in the manner, which we have detailed in the paragraph just herein before.

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.” (Para 372)

The Writ Petitions and the Transferred Case will stand dismissed subject to the aforesaid directions and the observations contained in the judgment.

View/Download Judgment: Manish Kumar V/S Union of India & Anr.

Risikesh Dhanaki