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Increasing of Threshold Requirement Under the Insolvency and Bankruptcy Code (Amendment) Act 2020 defended by Centre

Increasing of Threshold Requirement Under the Insolvency and Bankruptcy Code (Amendment) Act 2020 defended by Centre
A bunch of petitions were filed challenging the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act 2020. One of those petitions was filed by the Association of Karvy Investors challenging Section 3 of the Act for being retrospective in nature and affecting the pending applications.

It was said in the petition that the provision adds some proviso to Section 7 to state there should be at least one hundred real estate allottees or ten percent of the total number of allottees, whichever is lesser, to maintain an insolvency petition in respect of a real estate project. Another point that was challenged was increasing the threshold limit for initiating insolvency proceedings from 1 lakh to 1 crore. 

On Tuesday, Supreme Court heard arguments by Advocates Shikhil Suri, Piyush Singh, Rahul Rathore, Dinesh C. Pandey, Dhruv Gupta, and Purti Marwaha Gupta. The matter then got listen for 8th October i.e., Thursday where the bench led by Justice R. F. Nariman, and comprising of Justices Navin Sinha and K. M. Joseph heard arguments by Madhavi Diwan, Additional Solicitor General (ASG). 

She started by submitting that "The concept of 'going solo' has been long diluted by Your Lordships in Pioneer(decision). To iron out the creases, Your Lordships had held that 51% of votes in favor of a plan would go as 100%. So this principle of 10% homebuyers or 100 is an extension of the same logic. We introduced this measure to facilitate the process, to prevent unnecessary delay, and to do away with the clogging before the COC or the adjudicating authority.”

She said "The joint-filing is an extension of the principle of the act of one binding all. The homebuyers at that stage had not objected and had in fact supported it. It was the developers who were opposing it as they didn't want the resolution process to go smoothly. "Joint-filing was inherent in section 7, even as it stood originally. Even then it read that a financial creditor, either by itself or jointly with the other financial creditors, may file an application for the initiation of the resolution process. Now it has just been made mandatory. By virtue of a notification dated 27.2.2019, even a Guardian, executor or trustee can file such an application. In the case of debenture holders, there may be a representative, a debenture trustee, at the first instance also. In case of home buyers, you can't have a trustee at the outset itself- 10% or 100 are needed- though you may appoint an authorized representative later.”

She added that "Joint filing is needed as this is an in-rem concept. A single person can file an application even on the basis of somebody else's debt, even if it is not your own. That is why it is an in-rem concept...the 10% or the 100 can also file for a third party, say, a bank. So the concept of in-rem is sown deep...it is superficial to say that such an in-rem concept can be brought in only at the stage of the COC and not at the initiation. The Legislature can enforce the 10% requirement at even the initiation, particularly when the process which is triggered is unstoppable. It may be for resolution but it may go out of the control of the individuals...so it is necessary to apply your mind and get at least some people on board for the sake of your own compatriots...we cannot allow a lone-ranger, on a frolic of his own, to set in motion an unstoppable process...where a single home buyer wants to move the NCLT, there may be a 100 others who want to go to RERA, they want that builder! So it is important to put your heads together a little bit, get at least the minimum number of people together in the interest of your brethren and then go ahead, as otherwise there is a moratorium...and 10% is not logistically difficult. It is important for balancing the interests of the small home-buyers and the debenture-holders.”

Further, she explained the intelligible differentia linked to the larger object of the code that is the characteristics of the classes for whom these conditions have been introduced. She said that “The numerosity- the sheer number of these persons; the heterogeneity; and the individual decisions...Pioneer also said that these home-buyers are not experts. We are guided by robust common sense, that these people either want their flat or compensation...but here, there is an individuality involved rather than institutional decision-making as in the case of banks. You are not in the domain of a public utility so the approach of the adjudicating authority is different.”

She submitted that “So, one, there is a need to balance the interests of the stake-holders, the other debenture-holders, the home-buyers, the banks and financial institutions, and the other operational creditors, and two, maximize the value of assets...in Standard Chartered, your Lordships recognized that the passage of time is inversely proportional to the value of assets...the Sick Industries Act was a miserable failure because it allowed the promoters to continue in the management, the debtors to continue possessing the assets. The matter used to go on for years before the BIFR and there was absolutely nothing but deadwood that remained at the end...so time is absolute of the essence in such proceedings, and hence, we needed a tight schedule and a concerted, solid plan for getting the company running or even in liquidation, to keep intact the value of assets. Even liquidation is not bad, at least the stake-holders get something.”

“Your Lordships had ruled that 51% is 100, as you noted that creditors tend to haggle, some may not even show up, and hence, a lot of time would otherwise go. Similarly here, there may be 100 people who want to go to the NCLT, and when the first is admitted, the rest is taken care of. But for that one to be admitted, the 100 need to be listed time and again- there are replies, rejoinders, there may be adjournments. Your Lordships had even said that the 14 day period in section 7 is a directory and not mandatory...even for a matter against one company, you are choking up the docket not only for that company but also for the others as the same NCLT is to also decide the other matters...for the small home-buyers, it is better and cost-effective to have their matter so coordinated. Also, the corporate debtor is being dragged in because of a default- if they had to defend 100 proceedings, file 100 replies, with the money-clock ticking, the corporate debtor would bleed further. So it is also in his interest to have one consolidated petition rather than 100 different.”

She made the bench believe that the government is also working towards augmenting the infrastructure at the NCLTs and the NCLAT- "the number of members has been increased. I have the numbers and will file the affidavit in the Pioneer matter pending before Your Lordships. We are working on that front too...but we are trying to declutter the process, considering the number and the types of claims involved"

Justice Nariman asked on this that "What if the claims are not all the same? What if, out of 100, 50 are barred by limitation?"

She replied "All the 100 don't need to show default in each case. It need not even be their own claim, they may even come for someone else. Just one case of default is needed, which is genuine and not time-barred...even the threshold of one crore was introduced so that companies are not destabilized for no fault of their own amidst the pandemic.”

Then Justice Joseph asked "Part III of the code deals with individuals and firms without limited liability...In Part III, if a creditor in the shoes of a home-buyer file such an application against a real-estate firm, he doesn't need 100 persons..there are no such restrictions in Part III for individuals and firms without limited liability"

She replied, "That portion has not been brought into force yet.”

Further Justice Joseph asked, "Even then, there was no constitutional embargo on making the law?"

She on this said that "Real estate companies have multiple projects. If one is only a proprietor, he won't be destabilizing so many projects. The threshold requirement has been introduced so that the other home-buyers, creditors are not hurt and there is an application of mind by the critical mass of people is going ahead...the corporate debtor in such cases is a larger set-up than a proprietor or a firm.”

She continued by putting the point that after the Ordinance of 2019 the number of cases were 130 while before November there were 2200 cases. She said “So the huge spurt in cases has been controlled by this amendment. It is important for the economy and for the working of the code that small investors feel confident in the market. For doing business, we can't have the NCLT choked up with cases and matters stuck before the COC.”

"What percentage of the GDP is spent on the judiciary?", asked Justice Nariman.

She replied that she is not aware, then Justice Nariman told her that it is less than 0.5%. She replied that "I cannot go into that. But as far as the NCLTs are concerned, there are 42 members now and several benches across India, even in smaller places...the NCLAT have also been augmented.”

Justice Nariman observed "The claims of all for justice must overwhelm your claims that you are stressed for funds. You have to find the funds. The needs of the home-buyers have to be met.”

She said "But this regime is also cost-effective for the home-buyers and the corporate debtor. 10% is very proportionate, it is only a foot in the door", 

INFORMATION SYMMETRY OF RERA

ASG made the bench to look into certain provisions of the RERA Act- section 4(1) requiring every promoter to make an application for registration of a real estate project; section 5(1) on the grant of registration; section 5(1)(a) requiring the creation of web-page and section 11 enumerating the information to be displayed on the website- the list, number and the type of apartments/plots booked.  

She explained that "This is to determine whether the requirement of 100 or 10% is met. You will immediately get to know.”

She then went onto section 11(3)(e) which places a mandate on the builder to enable the formation of an association/cooperative society of the allottees; section 19(9) on the rights and duties of the allottees, where a similar obligation is placed on them for the formation of an association.

She said, "So the identity of the allottees is also known, for one wanting to move the NCLT to be able to approach them.”

Justice Sinha observed that "In practicality, this doesn't work. No association is formed till the allotment is made, till the builder's hands the flat to them.”

She replied that "This is a new regime which places an obligation on the allottee to cooperate in the formation of an association. Even before, the associations were working informally.” 

"Where do you get the exact details of the allotment and the allottees?", asked Justice Nariman.

She answered that "Section 11(1)(b) (of the RERA Act) speaks of a quarterly up-to-date list of numbers and types of apartments or plots booked. 11(1)(b) gives you the number so you can calculate 10% or 100...the moment you become an allottee, it is your obligation to cooperate and form an association. The builder is also mandated to help in the formation.”

"But there are so many overseas people, people from all over the globe. If a person in India needs to file an application, how does he get the contact of persons whose identity he doesn't know?", asked Justice Nariman.

She replied that "One, you need to know the number of persons on board, as this is not a representative proceeding in the nature of Order 1 Rule 8 of the CPC. And two, you need to procure the contact details of these people. You can go to the association which always has a directory of the concerned persons. Even if the people are abroad, you can get in touch through WhatsApp chats. The builder has to help form the association, otherwise, there are strict liabilities on him.”

In a lighter vein, Justice Nariman said "WhatsApp chats are so dangerous...only if you are a judge, not an allottee.”

Then, Justice Nariman indicated section 7 of the RERA Act, on the revocation of registration for default on the part of the builder, and section 8(1) providing that Upon lapse of the registration or on the revocation of the registration, the RERA Authority, may consult the appropriate Government to take such action as it may deem fit including the carrying out of the remaining development works by a competent authority or by the association of allottees or in any other manner. He asked "How far, how frequently, how effectively are these being used? Is the same object as under the IBC being achieved under the RERA?”

She responded that "The authorities are set up by the states and the states have to file affidavits on how far the Act is being implemented. Now, it is on an All India basis and there are stringent penalties.”

"Does section 8(1) extend to the actual construction of the structure if it's incomplete? The terminology appears to be very wide", asked Justice Nariman.

She replied that "The Act was meant to be a deterrent to the builders, to demand liability, transparency, and accountability from them, to instill fear in them and to demand they pull up their socks, otherwise money was being funneled all over the place.”

Next, Justice Nariman indicated the Explanation appended to sections 14 and 15 of the Act- "the allottees, irrespective of the number of apartments or plots, as the case may be, booked by him or booked in the name of his family, or in the case of other persons such as companies or firms or any association of individuals, etc., by whatever name called, booked in its name or booked in the name of its associated entities or related enterprises, shall be considered as one allottee only." "As regards joint-holdings, the allottees are deemed as one, but only for the purpose of sections 14 and 15. So if a man with his family members satisfies the requirement of 10%, can they file an application under the IBC?", asked Justice Nariman.

She replied, "If there are joint-owners, then common sense dictates that they would be deemed to be one allottee as the allotment is qua one apartment...but let the NCLT decide this when a case comes up.”

In positive humor, Justice Nariman remarked "Since when has common sense been the law? We've had common law, not common sense.”

CLASS ACTIONS

Ms. Diwan drew the bench's attention to the 1952 Bhabha committee report on Company Law. As regards Minority interests and the Court's powers in case of oppression by majority or gross mismanagement, she pointed out that the committee recommended a departure from the regular provision of the English Act: that the power to present petitions to the Court, which is given to a single shareholder under section 210 of the English Act, should, in the circumstances of this country, be given to a specified number or percentage of shareholders, ordinarily not less than fifty in number or those holding not less than one-tenth of the issued share capital of a company on which calls and other sums due have been paid or not less than one-fifth in the number of members in case of companies not having a share capital. These provisions were considered necessary to discourage the presentation of frivolous petitions by one or more disgruntled shareholders The difference between the prescribed members competent to commence proceedings under the proposed sections was deemed to be justified by the nature of the relief provided.

She submitted that "Minority action is an exception to corporate democracy. To prevent frivolous petitions at the instance of a lone-ranger, we have the threshold, which can be waived. But in our case, the consequences are much more unstoppable. The genie can't be put back into the bottle unless the petition is withdrawn and settled."

She further submitted that"We are not saying that the financial creditors can't file an application and take the company through the insolvency resolution process but they must be mindful of the interests of their own compatriots...here it is not just about frivolous litigation, but the multiplicity of litigation, pressure on infrastructure, added costs on the corporate debtor. What you do impacts others so there must be a check at the initiation stage itself.”

She argued that "The developers, in Pioneer, argued that if you allow one home-buyer to approach the NCLT, it will lead to a flood of litigation. Your Lordships said that one is not arbitrary. So, since single-person filing is not arbitrary, 10% or 100 cannot be said to be manifestly arbitrary!”

The bench asked if there are any similar provision other than the Companies Act, in any other statutes.

She said "The Consumer Protection Act...In Pioneer also it was argued that if home-buyers are recognized as financial creditors, a condition of 25% be imposed for approaching the NCLT...we were privy to all arguments and considered 10% to be perfectly reasonable.”

She indicated the findings of the committee report in this context- "undue pressure on the corporate debtor...potential to jeopardize interests of the class not in favor of moving the NCLT...pressure on the adjudicating authority to hear the objections...antithetical to the value of a time-bound procedure"

Justice Nariman asked "Suppose there are 100 allotments, then 10% comes to 10. The threshold is 1 crore. Now, if 2 have an agreement of 2020, and the others are of 2021, then? What if the dates of agreements are different? Is it sufficient if 2 or 3 comply with the requirement of 1 crore but not the others because the default in their case is to be in the future?”

She responded that "There has to be just one default and it has to be of 1 crore. It is not even necessary that it should in the case of the applicants. Only numerical strength is needed. For the monetary threshold, it may be of somebody else also. That is the beauty of section 7", 

Further Justice Nariman asked that "To achieve the numerical strength, someone who is not immediately prejudiced because the default is to happen in the future can also be included?”

She replied that "Section 7 says that a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor...I just need to show that I am not a busy body but a financial creditor of the company...of course, it will be harder to prove default in case of a third party...I may be a home-buyer, but if there is a bank from which a loan taken by the corporate debtor has now defaulted, I can maintain my petition. I just need the numbers.”

Justice Nariman put forth another question that "You say they (the applicants) can come back after mustering the requisite number? What about limitation then?"

She then replied that “as of now there is a stay by the Supreme Court on account of the pandemic situation, so the provisions operate in the applicant's favor and the period is excluded. But section 14 of the Limitation Act would apply to them.”

Finally, she concluded by saying that "The IBC has had fantastic results in enhancing the ease of doing business. We are also learning and becoming wiser with the process, Your Lordships have also pushed this process...Your Lordships said the petitioner must come with a clean slate. It is a new person who is coming into the company in distress...for the code to work, he must know what he is getting into.it can't be a shot into the darkness...the property must remain within the company for the stakeholders...there are already banks, financial institutions, and other creditors...if there is clambering criminal liability, sprouting like hydrae heads all over the place, there will not be many takers.”


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