IBC: Supreme Court Upholds Protection For New Owners, Threshold For Homebuyers

The Supreme Court upheld two changes in the insolvency law that will help avoid delays through litigation—new owners can’t be held liable for actions of previous management and homebuyers require a minimum threshold to initiate bankruptcy.

The apex court was hearing 41 petitions challenging March 2020 amendments to the Insolvency and Bankruptcy Act, 2016. These included a challenge to retrospective rollout of the threshold for homebuyers to initiate insolvency. The bench comprising Justice KM Joseph, Justice Rohinton Fali Nariman and Justice Ajay Rastogi also upheld this amendment.

Section 32A Is Constitutional

One of the amendments under challenge extinguishes the liability of a corporate debtor on the date when its resolution plan gets approved by the tribunal and a new management takes over.

This was included in the code as Section 32A. One of the petitioners argued it closed the door for individual investors to recover their claims and leaves them with the only option of pursuing remedies under criminal law against the erstwhile management.

But the court, as per the judgment authored Justice Joseph, said the amendment was done to enable the new management to make a clean break with the past and take over with a clean slate. The court also held that no case was made out to hold the amendment unconstitutional.

“The upholding of the inclusion of Section 32A to the Code gives an impetus to resolution and ensures that a resolution applicant isn’t saddled with the burden of the actions of the erstwhile management,” said Misha, partner at Shardul Amarchand Mangaldas & Co. “In fact the judgment ensures that the intention of the legislature to make the Code workable and in line with the global practices.’’

10% Threshold For Homebuyers To Initiate Insolvency

Another amendment mandated the National Company Law Tribunal to admit insolvency petitions filed by at least 100 or 10% of the total homebuyers or allottees of a real estate firm—whichever is minimum.

The petitioners argued this classification of individual creditors from other financial creditors was a violation of Article 14 of the Constitution which guarantees the right to equality.

They also argued that the amendment had no rationale nexus with the objects sought to be achieved by the code and it weakened the right of every creditor apart from financial institutions and bankers. The petitioners also questioned the applicability of the threshold as the nature of allotments in a project is dynamic and will make it difficult to implement this criteria.

The court disagreed. It observed that the need for a threshold arose for this category of creditors as it would lead to the halt to indiscriminate litigation which would otherwise “result in an uncontrollable docket explosion as far as the authorities which work the Code are concerned’’.

“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 and conditions and scope of a particular real estate project in which allottees are a part of,” the court said. “These are factual matters to be considered in the facts of each case.”

Retrospective Effect Upheld

The amendment requiring the threshold for homebuyers had a retrospective effect, meaning all applications that weren’t yet admitted by the tribunal will have to satisfy this threshold. The amendment gave applicants 30 days to comply with the requirement. The top court also upheld the retrospective nature of the amendment.

"Homebuyers will need to unite and agree a realistic solution for struggling projects,” Rajiv Chandak, partner at Deloitte India, told BloombergQuint. “Amendments brought by government and now upheld by apex court will help such projects and make sure that insolvency is triggered only in case, homeowners with substantial minority file an application.”