2021 (1) TMI 802 - SC - Insolvency and Bankruptcy

Validity of Sections 3, 4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act 2020 - petitioners are allottees under real estate projects - calculation for number of allottees - Is the total number of the allottees, to be calculated qua the Units promised? or Is it to be based on the number of units constructed or is it to be the number of units allotted or units where the agreement to sell is entered into? HELD THAT - The instant case, it is necessary to analyse the limbs of Section 11. Sections 7, 9 and 10, read with Section 5, provide for the procedure to be adopted by the Adjudicating Authority in dealing with applications for initiating CIRP by the financial creditor, operational creditor and corporate debtor. It is after that Section 11 makes its appearance in the Code. It purports to declare that an application for initiating CIRP cannot be made by categories expressly detailed in Section 11. Section 11(a) vetoes an application by a corporate debtor, which is itself undergoing a CIRP. An argument sought to be addressed by the petitioner is that the purport of the said provision is that it prohibits not only a corporate debtor, which is undergoing a CIRP, from initiating a CIRP against itself, which, but for the fact, it is undergoing a CIRP, would be maintainable under Section 10 of the Code, but it also proscribes an application by a corporate debtor for initiating a CIRP against another corporate debtor. It appears to be clear to us, and this will be corroborated by the further provisions as well, that the real intention of the Legislature was that the prohibition was only against the corporate debtor, which is already faced with the CIRP filed by either a financial creditor or operational creditor, jumping into the fray with an application under Section 10. Finally, coming to Section 11(d), it disentitles the making of an application to initiate CIRP by a corporate debtor in respect of whom a liquidation order has been made. We have already noticed the scheme of the Code. The Legislature intends to have a two-stages approach to the problem of insolvency as regards the corporate debtor. On the basis of an application by the eligible person, a CIRP is initiated. If it is admitted, a Committee of Creditors is constituted before the curtains are wrung down on the insolvency resolution process by the inexorable passage of time, which is fixed under Section 12. If a resolution plan finds approval at the hands of the Committee of Creditors and also the Adjudicating Authority, liquidation is staved off. Should there be no resolution plan within the time limit or the resolution plan is not approved, the curtains rise for the process of liquidation process to be played out in terms of the Code. The first act of the drama consists of the order of liquidation to be passed under Section 33 of the Code. It is this order which is referred to in Section 11(d). There is also an order of liquidation permissible earlier, under Section 33(4). No doubt after the introduction of the explanation to Section 33(2), an order of liquidation may be passed in terms thereof. Once, this order is passed, the Legislature intended that a corporate debtor, in regard to whom the CIRP was initiated and which has culminated in the order of liquidation being passed after no resolution of the insolvency took place, cannot again initiate a fresh CIRP, putting under the carpet, as it were, a whole process in the recent past - to use the words recent past may not be correct for unlike Section 11(b) and 11(c), in a case, where there is an order for liquidation under Section 33, then, an application under Section 10, would not be maintainable. The person disentitled under Section 11(d) would be the corporate debtor and the disentitlement is qua itself. Apparently, interpreting Section 11, there appears to have been some cleavage of opinion. This is apparent from the case set up on behalf of the petitioners and the case set up on behalf of the Union of India. The intention of the Legislature was always to target the corporate debtor only insofar as it purported to prohibit application by the corporate debtor against itself, to prevent abuse of the provisions of the Code. 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. A clarificatory amendment, it is not even in dispute, is retrospective in nature. The Explanation merely makes the intention of the Legislature clear beyond the pale of doubt. The argument of the petitioners that the amendment came into force only on 28.12.2019 and, therefore, in respect to applications filed under Sections 7, 9 or 10, it will not have any bearing, cannot be accepted. The Explanation, in the facts of these cases, is clearly clarificatory in nature and it will certainly apply to all pending applications also. 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. Is Section 32A unconstitutional? - HELD THAT - No case whatsoever is made out to seek invalidation of Section 32A. The boundaries of this Court s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. 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 this Court to interfere. It must be remembered that the immunity is premised on various conditions being fulfilled. There must be a resolution plan. It must be approved. There must be a change in the control of the corporate debtor. The new management cannot be the disguised avatar of the old management. It cannot even be the related party of the corporate debtor. The new management cannot be the subject matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto. These ingredients are also insisted upon for claiming exemption of the bar from actions against the property. Significantly every person who was associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of the offence in terms of the report submitted continues to be liable to be prosecuted and punished for the offence committed by the corporate debtor - As to what priority must be accorded to which interest must remain a legislative value judgement and if seemingly the legislature in its pursuit of the greater good appears to jettison the interests of some it cannot unless it strikingly ill squares with some constitutional mandate suffer invalidation. Vested Right; Retrospectivity; 3rd proviso in section 7 - HELD THAT - The third proviso is a one-time affair. It is intended only to deal with those applications, under Section 7, which were filed prior to 28.12.2019, when, by way of the impugned Ordinance, initially, the threshold requirements came to be introduced by the first and the second impugned provisos. In other words, the legislative intention was to ensure that no application under Section 7 could be filed after 28.12.2019, except upon complying with the requirements in the first and second provisos. The Legislature did not stop there. It has clearly intended that the threshold requirement it imposed, will apply to all those applications, which were filed, prior to 28.12.2019 as well, subject to the exception that the applications, so filed, had not been admitted, under Section 7(5) - the Legislature intended that in every application, filed under Section 7, by the creditors covered by the first proviso and by the allottees governed by the second proviso, should also be embraced by the newly imposed threshold requirement for which, it was intended, should be complied within 30 days from the date of the Ordinance. However, this restriction was not to apply to those applications which stood admitted as on the date of the Ordinance. It is also clear that the consequence of failure to comply with the threshold requirement, in regard to applications, which have been filed earlier, was that they would stand withdrawn. Whether the right under the unamended Section 7 was a vested right of the financial creditors or allottees covered by the provisos 1 and 2, respectively? - HELD THAT - Legal rights are, in a wider sense, of four distinct kinds. They are rights, liberties, powers and immunities. Duty is the correlative of a right, while, no rights correspond to liberties. Liabilities have a nexus with the power exercised by another person, with regard to whom, the liability exists in another party. When somebody has an immunity against another, it disables the latter, and thus, it constitutes a disability for him. Salmond notes further that the term right is often used in the wide sense to include liberty by which it is meant to have one left free to do as he pleases - It may be asked whether a right of action is a right or a power. Is there a duty with anyone in the case of a right to an action? We need not probe this further as a power is also a right in the wider sense. The right to sue and right to appeal has been so recognized as we will notice. It is clear that the institution of a suit leads to the inference that the right of appeal is preserved. There is a vested right of appeal. The vested right of appeal accrues to the litigant and exists from the day of the institution of the lis (suit). Therefore, while the remedy of an appeal may be provided under the statute that right becomes a vested right only from the point of time that the suit is filed either by the appellant or the opposite party. All of this undoubtedly is subject to a subsequent enactment not interfering with the right of an appeal - Thus, what is relevant, this Court went on to find under the Saurashtra Act, there was no requirement of any notice to terminate the tenancy. It was found that the landlord was entitled to recover the possession under the said Act, if there was subletting. In other words, the Court went on to hold that a right accrued to the landlord under the Saurashtra Act upon the appellant subletting the premises. It was during the pendency of the Saurashtra Act. This right survived the repeal of the Saurashtra Act and thus the suit under the Saurashtra Act was maintainable. This Court also held that the application filed in 2016 or 2017 cannot suddenly revive a debt which is no longer due as it is time barred. Apparently, the petitioners are seeking to lay store by the principle that a new law cannot extinguish a vested right of action even if it be pertaining to the period of limitation - The right to sue clearly could be said to arise, immediately upon the condition being broken. We may, in this context also, notice that one of the five characteristics for a legal right to exist, is that every legal right has a title. It is further stated, in Salmond on Jurisprudence that every legal right has a title, which are apparently the facts or events by reason of which the right has become vested in its owner. Now, it must be noticed also, at this stage that the Limitation Act, in fact, contemplates the time, within which the suit must be brought, beginning necessarily on the supposition, that at least, on the very first day of the period of time, from which a plaintiff can sue, the right is already vested in him. This would reinforce us in our view that a vested right to sue could be said to accrue, and it would always precede the institution of the suit. At any rate, it could be said to exist from the very first day, on which the time begins to run, under the Limitation Act. Thus, a vested right to sue could be tested with reference not to the date on which the suit is filed as would be the case where a question arises, whether a right of appeal exists. Thus, a right to sue is not created by the statute. It is an inherent right unless is barred by some law. Therefore, the principle that a right to take advantage of a statute not being an accrued right may not apply - We are unable to accept the stand of the learned ASG, that a vested right to emerge still require an order under Section 7(5) of the Code. It is no doubt a stage, when the authority finds there is default and takes the matter forward including appointing to begin with the IRP and ordering a moratorium. In this regard, it is to be noted that in the scheme of the Code, what takes place before admission, is that the applicant tries to establish the debt and default. This is akin to the stage of a trial in a suit. No doubt, this happens only if the application is free from defects. But this is a far cry from saying that a vested right of action did not inhere even on the version of the ASG upon the act of the creditor invoking the Code. Section 6 of General Clauses Act, 1897 - HELD THAT - No support can be drawn from Section 6 of the General Clauses Act, 1897. Section 6 makes it clear that the rights or privileges which may be asserted are subject to the law not being couched contrary to such rights/privileges. In this case it is precisely because the 3rd proviso covers the applications filed prior to the amendment which had not been admitted, that the petitioners have challenged the provision. It is open to the Adjudication Authority to reject the application but that does not mean that the applicants had no vested right of action. The possibility of a plaint being rejected under Order VII Rule 11 or an appeal being dismissed under Order XLI Rule 11 without notice being issued to the respondent or the fact that the suit can be dismissed at later stages, cannot detract from the right of the plaintiff or the appellant, being a substantive right. The same principle should suffice to reject the contention, based on admission under Section 7(5) alone, giving rise to the vested right in regard to an applicant under Section 7 of the Code - A vested right is not limited to property rights. A right of action should conditions otherwise exist, can also be a vested right. Such a right can be created by a Statute and even on a repeal of such a Statute, should conditions otherwise exist, giving a right under the repealed Statute, the right would remain an accrued right. When a Statute made by the sovereign Legislature is found to have retrospective operation and the challenge is made under Article 14 of the Constitution, (i) the Court must consider whether the law, in its retrospectivity, manifests forbidden classification. (ii) Whether the law, in its retrospectivity, produces manifests arbitrariness, (iii) if a law is alleged to be violative of Article 19(1)(g), firstly, the Court, in an action by a citizen, would, in the first place, find whether the right claimed, falls, within the ambit of Article 19(1)(g). The Court will further enquire as to whether such a law is made, inter alia, by way of placing reasonable restrictions by looking into the public interest. In the case of law, which is found to be not unfair, it would also not fall foul of Article 21 - Where the law is challenged on the ground that it is violative of Fundamental Rights under Article 14, necessarily the Court must enquire whether it is a capricious, irrational, disproportionate, excessive and, finally, without any determining principle. As far as the nature of the right in question is concerned, which would include the value of the rights, it is a right of action. The right of action is, undoubtedly, a vested right. The role of the applicant essentially fades out after the admission of the application is made under Section 7(5). The scheme of the Code has been unraveled by us. The right, which is given, is a right in rem. It is not a mere personal right, in the sense that it is right in rem. The applicant is not even required to plead the default qua him as the default to any financial creditor, in the requisite sum, provided it is not barred under Article 137, suffices. The consequences of the application would be that it may land the applicant and also all the stakeholders, in liquidation of the corporate debtor - The only area where any ambiguity can be said to exist is the effect of the application being treated as withdrawn. The further aspect, which is to be borne in mind, is the circumstances in which the legislation is created. It is here that the mischief rule and the aspect of public interest looms large. At the end of the day, the tussle is between the individual right versus the public interest. Now, public interest is a concept, which is capable of embracing, within its scope, the interest of different sections of the public. This would include the sections of the public to which the applicant himself belongs. Public interest would, undoubtedly, also encompass, the economy of the country, which can be understood in terms of all the objects, for which the Code was enacted. They would include the speed with which the Code is worked. It would include, also, safeguarding the interests of all the stakeholders. This may necessarily include the corporate debtor as a stakeholder, being protected from applications, which are perceived as frivolous or not representing a critical mass. Clarity regarding 'withdrawal' under the third proviso - HELD THAT - The third proviso does not indicate as to whether a fresh application after complying with the requirement of the ingredients of the first and second proviso is maintainable. It does not also indicate what would be the position even if such application is maintainable by the same applicant, with regard to the periods spent in the context of ruling of this Court that the Limitation Act applies and the relevant Article is Article 137 and therefore, any application filed beyond the period of three years from the date of the default is barred - the other way of looking at these issues is that Order XXIII(1) applies only in the case of a civil suit. In regard to the application under Article 137 which is what an application under Section 7 of the Code is, it could it be said that Order XXIII(1) is inapplicable. Secondly, could it not be said that it is not a case of a voluntary withdrawal by the applicant and the withdrawal of the application is declared by the Legislature, and therefore, Order XXIII(1) would not apply. The application made under Rule 4 is the application under Section 7 by the financial creditor. However, rule 8 is silent as to any similar prohibition as is contained in Order XXIII(1)4(b). Unless the principle of Order XXIII Rule 1 which is based on public policy, is applied, a fresh application, compliant with the first two provisos in Section 7, may not be barred. In this regard, since under the Explanation in Section 7(1), default occurs when default qua any financial creditor is made out, the cause of action can become different, in which case, even the principle of Order XXIII Rule 1, may not apply - since withdrawal is ordained by the third proviso, it would not be a withdrawal under Rule 8 on request. Secondly, even for the principle based on public policy to apply to a withdrawal under Rule 8, there must be a request and withdrawal. We do not pronounce on the effect of the same, viz., withdrawal on request. Suffice it to conclude and hold that the withdrawal under the third proviso would not bar a fresh application by the same party after complying with the provision of the first or second proviso as the case may be on the same default. Limitation - HELD THAT - Having regard to the Explanation in Section 7, it will always be open to the applicant to set up a different default to any financial creditor and move afresh. This unique feature of the Code is highly relevant in determining the validity of the Amendment. The application under Section 7 is not meant to be a recovery mechanism. The Code, as is clear from its title, deals with insolvency resolution, to begin with. If there is insolvency, the application, with reference to any of the large number of creditors, suffices. Withdrawal under the third proviso would not be bar a fresh application even on the same cause of action. It can, at any rate, be condoned under Section 5 of the Limitation Act. It is here we would also exercise our power under Article 142 to direct that if fresh applications are filed by the petitioners after complying with the first and second proviso, then on applications being filed under Section 5, of the Limitation Act, in regard to the period of pendency of applications, the authority shall condone the delay - Finally, the actual time provided. Is it manifestly unfair? Would not six weeks, two months or even more lengthier periods, be more fair? Undoubtedly, it would be, from the point of view of the applicants. Another way to approach the problem is, was it impossible for the creditor/creditors to seek information, get into touch with the other creditors and persuade them to join him/them. As far as court fees is concerned, there is no extra liability as the amount remains the same, viz., ₹ 25,000/-, irrespective of the number of applicants. If the condition in the third proviso was impossible to comply with, then, it would also be manifestly arbitrary. If there is insolvency and it affects creditors, ordinarily, self-interest would guide them into following the best course available to them. We have also seen the presence of plural remedies. No doubt, calculation of one-tenth in a case, may, undoubtedly, require the quantification of total number of creditors. This would be necessary, no doubt, only if hundred creditors cannot be found to support the application. The withdrawal under the third proviso, will not stand in the way of the applicant, invoking the same default and filing the application and even the principle of Order XXIII Rule 1 of the CPC will not apply and will not bar such application. As far as limitation is concerned, we have explained as to what is to be the impact. The nature of the vested right and the impact of the law, the public interest, the sublime objects, which would be fulfilled, would, in the facts of this case, constrain us from interfering, even though, this Court may have a different view about the period of time, which is allowed to the applicant. Court fees - HELD 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. Petition dismissed.

Summary

Issues Involved:

1. Application to initiate a corporate insolvency resolution process.
2. Provisions and requirements under the Insolvency and Bankruptcy Code (IBC), 2016.
3. Role and appointment of Interim Resolution Professional (IRP) and Resolution Professional (RP).
4. Time limits for completion of the Corporate Insolvency Resolution Process (CIRP).
5. Provisions under the Real Estate (Regulation and Development) Act, 2016 (RERA).
6. Classification of creditors and the applicability of the IBC to different classes.
7. Retrospective application of amendments and vested rights.
8. Constitutional validity of amendments to the IBC.
9. Provisions regarding the immunity from prosecution for corporate debtors under Section 32A.

Detailed Analysis:

1. Application to Initiate a Corporate Insolvency Resolution Process:

The judgment discusses the application process for initiating a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016. It outlines the necessary particulars required for such an application, including details of the financial creditor, corporate debtor, proposed interim resolution professional, and financial debt.

2. Provisions and Requirements under the IBC, 2016:

The judgment elaborates on the various sections of the IBC, including:
- Section 7: Application by financial creditors.
- Section 8 and 9: Application by operational creditors.
- Section 10: Application by the corporate applicant.
- Section 12: Time-limit for completion of the insolvency resolution process.
- Section 14: Moratorium.
- Section 17: Management of affairs of the corporate debtor by the IRP.
- Section 21: Committee of creditors.
- Section 22: Appointment of resolution professional.
- Section 25: Duties of the resolution professional.
- Section 30: Submission and approval of resolution plans.
- Section 31: Approval of the resolution plan by the adjudicating authority.
- Section 33: Liquidation process.

3. Role and Appointment of Interim Resolution Professional (IRP) and Resolution Professional (RP):

The judgment details the roles and duties of the IRP and RP, including the management of the corporate debtor's affairs, constitution of the committee of creditors, and the process for inviting and presenting resolution plans.

4. Time Limits for Completion of the CIRP:

Section 12 of the IBC mandates the completion of the CIRP within 180 days, extendable by 90 days, with a maximum period of 330 days, including any extensions and time taken in legal proceedings. The judgment emphasizes the importance of adhering to these time limits to ensure the efficiency and effectiveness of the insolvency resolution process.

5. Provisions under the Real Estate (Regulation and Development) Act, 2016 (RERA):

The judgment discusses the provisions of RERA, including the definition of 'allottee,' 'apartment,' 'building,' 'development,' and 'promoter.' It also covers the obligations of promoters, the rights and duties of allottees, and the establishment of the Real Estate Regulatory Authority and Appellate Tribunal.

6. Classification of Creditors and the Applicability of the IBC to Different Classes:

The judgment addresses the classification of creditors, particularly financial creditors, operational creditors, and allottees under real estate projects. It discusses the rationale behind treating these classes differently under the IBC and the implications of such classifications.

7. Retrospective Application of Amendments and Vested Rights:

The judgment examines the retrospective application of amendments to the IBC, particularly the threshold requirements for initiating CIRP by financial creditors and allottees. It considers the impact on vested rights and the constitutional validity of such retrospective application.

8. Constitutional Validity of Amendments to the IBC:

The judgment upholds the constitutional validity of the amendments to the IBC, including the threshold requirements for initiating CIRP and the provisions under Section 32A. It emphasizes the legislative intent to balance the interests of all stakeholders and ensure the efficient resolution of insolvency cases.

9. Provisions Regarding the Immunity from Prosecution for Corporate Debtors under Section 32A:

Section 32A provides immunity to corporate debtors and their properties from prosecution and attachment for offenses committed prior to the commencement of the CIRP, subject to certain conditions. The judgment upholds the validity of this provision, highlighting its importance in encouraging resolution applicants and ensuring the successful resolution of insolvency cases.

Conclusion:

The judgment provides a comprehensive analysis of the provisions and requirements under the IBC, the classification of creditors, the retrospective application of amendments, and the constitutional validity of the amendments. It emphasizes the legislative intent to balance the interests of all stakeholders and ensure the efficient resolution of insolvency cases.