100 homebuyers' nod must for IBC against realtor, says Supreme Court

In a move that will safeguard real estate companies from frivolous litigation, the Supreme Court (SC) has upheld the constitutional validity of the Insolvency and Bankruptcy Code (IBC) amendment that requires at least 100 allottees, or 10 per cent of creditors, to invoke an insolvency petition against a company.

A Bench of Justices R F Nariman, Navin Sinha, and K M Joseph said in its 465-page order that insisting on a threshold with regard to these categories of creditors would lead to a halt in indiscriminate litigation which could result in uncontrollable docket explosion as far as the authorities who work with the Code are concerned.

“This is not a situation where while treating them as financial creditors they are totally deprived of the right to apply under Section 7 as part of the legislative scheme. The legislative policy reflects an attempt at shielding the corporate debtor from what it considers would be either for frivolous or avoidable applications,” the court said, while upholding the constitutional validity of Sections 3, 4, and 10 of the IBC (Amendment) Act, 2020.

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

The court backed the IBC amendment, saying it is likely to ensure the filing of the application is preceded by a consensus at least by a minuscule percentage of similarly placed creditors. “The time has come for undertaking a legal odyssey which is beset with perils for the applicants themselves, apart from others. As far as the percentage of applicants contemplated under the proviso, it is clear that it cannot be dubbed as an arbitrary or capricious figure.”

The top court also clarified that a company which is facing insolvency proceedings under the IBC can move an insolvency petition against other companies which owe it money.

“The clarification regarding a corporate debtor having the right to proceed against its debtors is only furthering the objective of the Code to ensure the distressed debtor is run as a going concern which inter alia would also include recovery of debt to improve its own financial health,” said Misha, partner at Shardul Amarchand Mangaldas & Co.

In a decision which will give impetus to a resolution plan, the SC has also upheld the inclusion of Section 32A to the Code that ensures a resolution applicant is not saddled with the burden of the actions of the erstwhile management.

“We cannot also lose sight of the fact that the legislature has the power to impair and take away vested rights,” the SC said in its order.

The IBC had taken a big step in providing a clean slate to buyers of stressed companies by barring criminal proceedings such as attachment, seizure, or retention of property of such companies for offences committed before the initiation of insolvency proceedings.