The Supreme Court on Tuesday upheld the Constitutional validity of the amendments made to the Insolvency and Bankruptcy Code (IBC) in 2020 that mandated a minimum of 100 home buyers to come together to file an insolvency application in the National Company Law Tribunal (NCLT) to trigger the IBC against a defaulting developer.
A three-judge Bench of Justices Rohinton Fali Nariman, KM Joseph and Navin Sinha held that Sections 3 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 which introduced these amendments are not violative of right to equality under Article 14 of the Constitution.
Section 3 of the Amendment Act amended Section 7 of IBC, while Section 10 of the Amendment Act introduced a new provision, Section 32A.
As per Section 3, an insolvency application could be filed only if 100 real estate allottees under the same real estate project or 10 percent of the total allottees of such project come together.
The individual members of the petitioner organisation, Association of Karvy Investors, had filed petitions under Section 7 of the IBC Act before different benches of the National Company Law Tribunal (NCLT) in India, due the non-payment of their dues by private companies.
The plea challenged the Amendment Act, stating that Section 3 “has imposed a stringent and onerous condition on the right of an individual financial creditor to file an application to initiate corporate insolvency resolution process under Section 7 of the IBC”.
The petitioners also claimed that an application under Section 3 of the Amendment Act shall be retrospective, thereby “directly prejudicing the members of the Petitioner Association”.
The primary issue raised in the petition was that a Section 7 petition was earlier permitted to be filed by any financial creditor in its individual capacity. But now, this statutory right has been unreasonably burdened by requiring them to a) figure out the total pool of people and b) get in touch with 10% of that number.
The plea states,
“Section 3 of the Impugned Act along with the other provisions of the IBC makes it clear that even though no difference exists between different classes of Financial Creditors under the IBC, the Impugned Act, seeks to differentiate between the Creditors as referred to under Sub Section 6A and those referred to under Sub Section 6, without any substantial difference existing in law. As a consequence, thereof Section 3 of the Impugned Act is violative of Article 14 of the Constitution of India and is liable to be struck down.”
The government “failed to appreciate” that the individual investors of a company are not necessarily localised and are spread out across the country, they contended.
Highlighting the “logistical nightmare” brought forth by Sections 3 and 10, the plea stated that the contact details of the investors of the company are not publicly available.
“Most of such investments are made through an intermediary, which itself is hand in gloves with the defaulting Corporate Debtor. In the absence of the contact details being available with the Investor about other similar investors in the Company, it is not possible for them to contact each other and arrive at a consensus to prefer an Application against the Corporate Debtor,” the petition states.