Manish Kumar Vs. Union Of India & Anr

Facts of the case
The case involved a petition filed by a company, which had been declared as a non-performing asset (NPA) by a bank. The bank, as a financial creditor, initiated insolvency proceedings against the company under section 7 of the IBC. The company challenged the bank's right to initiate proceedings on the ground that the entire debt had not been repaid. The petitioners have filed a writ petition under Article 32 of the Constitution of India, 1950, challenging the constitutional validity of section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. They are specifically challenging section 3 of the Ordinance, which introduces new provisions to section 7(1) of the IBC and imposes additional conditions for real estate allottees to approach the National Company Law Tribunal (NCLT). The petitioners also argue that the amendments to sections 11 and 32A are in violation of Articles 14 and 21 of the Constitution of India.

Manish Kumar Vs. Union Of India & Anr.

Writ Petition: W.P.(C) 26 Of 2020
Supreme Court Of India
Bench: Rohinton Fali Nariman, K.M. Joseph, Ajay Rastogi

Issues Involved:

1. Freedom Of Legislature To Experiment In Economic Laws

   This case discusses the freedom of the legislature to experiment with economic laws and the power of the legislature to amend a law when necessary. It highlights the importance of giving the legislature a certain degree of regard in making economic choices.
   
   The case also discusses a specific case related to the Real Estate (Regulation and Development) Act and the Insolvency and Bankruptcy Code, in which the court found that an amendment to the Code was clarificatory in nature and did not infringe on constitutional articles. Additionally, it was determined that the two laws must co-exist, with the Code taking precedence in case of a clash. The Act includes the establishment of regulatory authorities, advisory councils, and appellate tribunals, along with penalties for offenses.
    

2. Meaning Of The Term 'Allottee' And How Many Allottees Can Be Raised From The Impugned Provisos

   The definition of the word 'allottee' is divided into three categories: plots, apartments, and buildings. The impugned proviso states that an applicant can present an application under Section 7 of the Code if they have 100 allottees or a number representing one-tenth of the total number of allottees, whichever is less.
   
   The word 'whichever' is used in this context, which means that if the total number of allottees is less, then one-tenth of the total number will be less, and if in such circumstances, it is lesser than one hundred, such number of allottees can make an application under Section 7 under the impugned provisos. The calculation of the total number of allottees is a double-edged sword as the more the numerator, the more will be the resultant figure required under the proviso.
   
   The section being discussed is Section 7(1), which outlines the conditions under which allottees can be made. Specifically, allottees can only be made if there are a minimum of one hundred allottees, or a number representing one-tenth of the total number of allottees, whichever is less, and the allottees must be part of the same real estate project. It is being argued that the term "allottee" should be interpreted in the same way it is defined in RERA. If this is not done, it is claimed that the amendment in question would be vague and arbitrary.
    

3. Provisos Requiring Support Of One Hundred Persons Or One-Tenth Of The Allottee

   The argument presented is that there can only be one default in a complaint. However, if the required number of allottees for an application under Section 7 of the Code is drawn from allottees who entered into agreements with the builder on different dates, the date of default would be different for each allottee. This would infringe on the allottee's absolute right to make an application under Section 7 of the Code.

Contentions

1. Petitioners Arguments
   The company argued that a financial creditor cannot initiate insolvency proceedings unless the entire debt has been repaid. The company relied on the wording of section 7, which states that a financial creditor can initiate proceedings if a default has occurred in repayment of a debt exceeding one lakh rupees. The company argued that the use of the word "debt" implies that the entire debt must be repaid before insolvency proceedings can be initiated. They added that the provisions of the law in question do not comply with Article 14 of the Constitution of India as they are considered manifestly arbitrary.
   
   This is because the provisions protect valuable properties from being subjected to proceedings, which is to the detriment of homebuyers and other creditors. It is pointed out that financial creditors have more power than operational creditors in managing the affairs of the debtor with the Resolution Professional. Financial creditors get to decide who becomes the Resolution Professional and approve or disapprove the resolution plan. Almost all significant decisions require the approval of financial creditors.
   
   Despite all these privileges, a large number of financial creditors covered by the provisos are required to initiate a proceeding after the impugned amendment, which is unjustifiable. Financial creditors in the allottee category are now worse off.
    
2. Respondent Argument
   The respondent, on the other hand, argued that the wording of section 7 does not require the entire debt to be repaid before insolvency proceedings can be initiated. The bank argued that the section only requires a default in repayment of a debt exceeding one lakh rupees, and that the word "debt" in the section refers to the amount of money that is owed, not the entire debt.
   
   They argued that the provision in question was introduced to prevent abuse of the provisions of the Code by certain classes of financial creditors, and to give priority to last mile funding to corporate debtors. The Legislature's intention was always to target the corporate debtor only insofar as it purported to prohibit application by the corporate debtor against itself. It could never have been the intention of the Legislature to create an obstacle in the path of the corporate debtor from recovering the liabilities due to it from others.
   
   The provisions of the impugned Explanation are clarificatory amendments and are necessary to fill critical gaps in the corporate insolvency framework. The experience gained from the working of the Code showed that resolution applicants were reticent in putting up a Resolution Plan, and when they did, it was not fair to the interest of the corporate debtor and the other stakeholders.

Principle
The principle at issue in the case was the interpretation of section 7 of the IBC. The Supreme Court was tasked with interpreting the meaning of the word "debt" in the section and determining whether the entire debt must be repaid before insolvency proceedings can be initiated.

Analysis
The Supreme Court, in its judgment, held that a financial creditor can initiate insolvency proceedings against a defaulting company under section 7 of the IBC even if the entire debt has not been repaid. The court held that the text of section 7 makes it clear that the threshold for initiating insolvency proceedings is a default in repayment of a debt exceeding one lakh rupees, and not the entire debt amount.

The court also noted that requiring the entire debt to be repaid before initiating proceedings would defeat the purpose of the IBC, which is to provide a time-bound process for the resolution of insolvency cases. The law being examined is related to economics, and therefore the court should not take a strict approach in analyzing it under Article 14. In economic matters, lawmakers are given more freedom to create laws based on sound principles and logic.

The Insolvency and Bankruptcy Code was necessary for the country to catch up with the rest of the world in terms of improving ease of doing business, increasing the recovery of loans, maximizing the assets of struggling businesses, and balancing the interests of all parties involved.

The petitioners are allowed to file applications even after the two-month period and can seek the benefit of condonation of delay under Section 5 of the Limitation Act for the time during which their applications were pending before the Adjudicating Authority, whether filed under the amended or unamended Section 7.

Comment
The Supreme Court's decision in this case clarifies an important issue regarding the interpretation of section 7 of the IBC. By holding that a financial creditor can initiate insolvency proceedings even if the entire debt has not been repaid, the court has ensured that the IBC's time-bound process for the resolution of insolvency cases can be effectively implemented.

This decision is likely to have a positive impact on the overall effectiveness of the IBC and the resolution of insolvency cases in India. Laws cannot be perfect and are prone to imperfections like any other human institution. However, for a court to declare a law unconstitutional, it must clearly violate the limits set by the constitution.