REAL ESTATE ALLOTTEE , CLASS ACTION & IBC: 2020 AMENDMENT UPHELD
REAL ESTATE ALLOTTEE , CLASS ACTION & IBC: 2020 AMENDMENT UPHELD
Shubham Budhiraja[1]
CONCLUSION
1. Scheme
of IBC is to balancing the Interest of all stakeholders and therefore there was
very much in need of preventing abuse of code
2. Sub
class within a class is allowed and the allottee have various distinct features
which make them apart from other financial creditors.
3. The
class action suit is not something new to the law makers. Also, the concept of
Order 8 Rule 1 may seem attractive but practically it does not support the
result of fulfilling the objective of code
4. The
vested right under Section 7 accrued as soon as filling of application and not
on order of admission u/s 7(5). However it is settled law that vested right can
be take away even by retrospective operation of law.
5. The
definition of allottee under RERA has to refer at time of filling application
by allottee under Section 7
6. The
alllottee stand on very different footing than operational creditors
7. Estoppel
does not operate against law maker and also Malice may be a ground to challenge
the administrative action but not to challenge the vires of an enactment
8. The
Immunity granted under Section 32A is conditional and very much supporting the
object of law.
9. The
scope of Explanation is not just to clarify but also to remove the mischief.
10. Scheme
of RERA & IBC Discussed
11. Grounds
available to challenge any law- Competence, Fundamental rights, Vagueness,
Overall Constitutional scheme.
12. There is limited judicial review available
against economic laws because court cannot substitute wisdom of policy making.
SCHEME OF IBC
The Code was enacted in the year
2016. It is one of the most important economic measures contemplated by the
State to prevent
insolvency, to provide last mile funding to revive ailing businesses, maximize
value of assets of the entrepreneurs, balance the interest of all the
stakeholders and even to alter the order of priority of payment of Government
dues.
The Code is divided into five parts. The first part is shortest portion.
Part II deals with what we are concerned with in these cases and it purports to
deal with insolvency resolution and liquidation for corporate persons. Section
3(8) defines ‘corporate debtor
Chapter
II of Part II which consists of Sections 6 to 32 deal with the corporate insolvency resolution
process. Chapter III deals with ordinary liquidation process in regard to corporate person. Chapter IV of Part II consisting of four sections deal with fast-track insolvency resolution process. Chapter V which consists of Section 59 only deals with
voluntary liquidation of corporate person. Chapter
VI deals with miscellaneous aspects. Chapter VII Part II deals with Penalties
Part
III deals with insolvency resolution and bankruptcy code for individuals and
partnership firms. It may be noticed at once that partnership firms
with limited liability as defined in the Limited Liability Partnership Act,
2008 fall within the definition of the word ‘Corporate person’ and insolvency
and liquidation process in regard to the same is found in Part II of the Code.
It is in regard to Insolvency resolution and bankruptcy for the other
partnership firms which one has to look to the provisions of Part III. Part III
begins with Section 78 and ends with Section 187.
HISTORY & OBJECT
OF IBC
A radical
departure was contemplated from the erstwhile regime, which was
essentially contained in The Sick Industrial Companies (Special Provisions)
Act, 1985, and which manifested a deep malaise, which impacted the economy
itself. To put it shortly, the procedures involved under
the Act, simply meant procrastination in matters, where speed and
dynamic decisions were the crying need of the hour. The value of the assets of
the Company in distress, was wasted away both by the inexorable and swift
passage of time and tardy rate at which the forums responded to the problem of
financial distress. The Code was an imperative need for the nation to try and
catch up with the rest of the world, be it in the matter of ease of doing
business, elevating the rate of recovery of loans, maximization of the assets
of ailing concerns and also, the balancing the interests of all stakeholders.
The Code purports to achieve the object of maximization of the assets of
corporate bodies, inter alia, which have slipped into insolvency. Present a
default, which, no doubt, is not barred by time (subject to the power of the
Authority under Section 5 of the Limitation Act), the Insolvency Resolution
Process can be triggered. It falls into two stages. In
the first stage or the calm period, every attempt is contemplated to rescue the
corporate debtor from falling into liquidation. No doubt the moratorium
under section 14 is inevitable. The most significant
feature of the Code is the seemingly inexorable time limit, which is fixed
under Section 12. On the application being admitted under Section
7(5), an Interim Resolution Professional makes his appearance. In him, vests
the powers to manage the affairs of the corporate debtor. He may be replaced by
a Resolution Professional or he may be appointed as a Resolution Professional.
The most striking feature of the Code is the constitution of the Committee of
Creditors and the role, which it plays. In short, the show is run by the Resolution
Professional, subject to the control of the Committee of Creditors. The
Resolution of Insolvency is essentially sought through the instrument of a
Resolution Plan to be submitted by a Resolution Applicant. Various restrictions
are cast, in regard to a Resolution Applicant, through the device of Section
29A of the Code. A Resolution Plan is intended to
resuscitate an ailing corporate debtor and keep it going as a going concern.
The importance of rescuing ailing businesses in the form of infusing new life
in such concerns, cannot be understated. Its significance lies in various
directions. There would be various categories of
creditors, of which, the legislative choice appears to show some degree of
preference for the financial creditors, particularly in the form of
banks and financial institutions. One of the chief goals of the Code is to
prevent the loss of the value of capital. If the recovery of the loan is
effected at the earliest, it translates into the availability of the recovered
capital for being lent to other entrepreneurs, and this is an aspect, which
goes to the root of the matter. With every passing
hour, not unnaturally, depreciation will claim its victim in the form of
diminution of value of the assets. Should insolvency pass into the stage
of liquidation, the loss is not only of the concerned businesses, but it also
would represent a loss for the Nation. This is, undoubtedly, apart from the
impairment of the interests of all stakeholders. The
stakeholders would include the financial creditors and the operational
creditors, as well. Employees of the failed business, would take a
direct hit. Therefore, the Code accords the highest
importance to speed in the matter of undergoing the process of insolvency.
OBJECT OF 2020
AMENDMENT
In the
Statement of Objects and Reasons to the Second Amendment Bill, 2019,
promulgated as an Ordinance, and thereafter, as the impugned Act, it was, inter
alia, stated that it was necessitated to
prevent potential abuse of the Code by
certain classes of financial creditors, inter alia. This was necessary to
prevent the derailing of the time-bound CIRP, which was designed to secure the
maximization of value of the assets. The provision only supplements the
protection under Sections 65 and 75 of the Code. The intelligible differentia is projected as
follows:
i. Numerosity;
ii. Heterogeneity;
iii. Lack of special expertise
and individuality in decision making. It is sought to be contrasted with
institutional decision-making which is associated with banks and financial
institutions;
iv. Typicality in determination
of default. In other words, in the case of banks and financial institutions,
records of public utilities, would show a default. In the case of allottees,
records must be accessed through data publicly available under RERA
SECTION 7 &
VESTED RIGHT & CLASS LEGISLATION
There
is no basis in the contention that the amendments go against the law laid down
in Pioneer (supra). The question involved in the said case was not
whether there can be a different treatment to the real estate allottees for the
purpose of initiating CIRP. Secondly, it is pointed out that the Legislature is free to make laws to deal with problems that
manifest with experience. The numerical threshold was felt necessary
with experience and recommendations of an Expert Committee. There has been a
manifold increase of claim petitions filed by single or handful of allottees
resulting in an already overburdened Adjudicating Authorities being flooded
with such petitions. The amendment is consistent with the Pioneer (supra)
judgment. The uniqueness of the allottees as a class of financial creditors,
has been recognized in Pioneer (supra). The fact that they constituted a
distinct and separate class of financial creditors meriting distinct treatment,
has been approved in Pioneer (supra). The minimum
threshold requirement is a procedural requirement. There is no
deviation from Pioneer (supra) in a manner which is irreconcilable with it. The legislation, being an economic measure, free play in the
joints, must be accorded to the Legislature. The impugned amendment
is reasonable, minimal and proportionate. The data gathered by the respondent
discloses that between June, 2016 and 5th June, 2018, there were 253 cases
filed by allottees in the N.C.L.T.. However, between 6th June, 2018 and 28th
December, 2019, as many as 2201 cases were filed by the allottees. Thereafter,
pursuant to the Ordinance between December 29th, 2019 and August 26th, 2020,
there is a sharp fall, as, nearly in eight months, only 130 cases were filed.
It is pointed out that the argument, based on estoppel and malice against the
Legislature, is untenable. There can be no estoppel
against the Legislature . The concept of
transferred malice is alien in the field of legislation.
The
right to file an application under Section 7 is a statutory right and it can be conditioned. There is no inherent or
absolute right to file an application under Section 7 of the Code. The Legislature is well within its power to impose conditions
for the exercise of such statutory rights. Mere right to take
advantage of a statute is not a vested right.
In Garikapati Veeraya(supra), it is contended that even a vested right can be taken away by the Legislature, if a subsequent enactment so expressly provides or if
it so by necessary implication. A minimum threshold requirement is a common
feature of class action litigation. There are
several legislations which provide for a minimum threshold in order to initiate
class action. Section 245 of the Companies Act, 2013 and 241 of the
said Act are relied upon. Sections 397 and 398 of the Companies Act, 1956, read
with Section 399, contemplated a minimum threshold requirement for seeking
relief under Sections 397 and 398. Reference is placed on the Bhabha Committee Report (Company
Law Committee) in 1952. Under the Consumer Protection Act, this Court, rendered
the judgment in Anjum Hussain and others v. Intellicity Business Park Private
Limited and others37. A minimum threshold adds,
authenticity and weightage to the claim in a class action, proving
it to be a common grievance and not a mere obstruction in the work of the
opposite party. Reference is made to Rule 23 of Federal Rules of Civil
Procedure in the United States, which provide for class action suits. The said
Rules contemplate numerosity, commonality, typicality and adequacy of
representation. It is pointed out that joint filing was not
only not alien to Section 7 but it was interwoven into its very DNA.
Even as originally enacted, Section 7 contemplated joint filing by financial
creditors. Uniqueness of the Code lies in the fact that the financial creditors
may file an application based on a default that occurred in respect of the
third-party financial creditor, who may choose not to file an application
itself. At the triggering stage, an application
under Section 7 partakes the character of an application in rem proceeding
rather than in personam one. The impugned amendment merely
extends the same rationale
GROUNDS OF
CHALLENGING THE LAW
Three grounds which render legislation vulnerable. A law can be
successfully challenged if contrary to the division
of powers, either the Parliament or the State Legislature usurps
power that does not fall within its domain thus, rendering it incompetent to
make such law.
Secondly, a law made contravening Fundamental Rights guaranteed
under Part III of the Constitution of India would be visited with unconstitutionality
and declared void to the extent of its contravention. Needless to say, a law
within the meaning of Article 19 of the Constitution would remain valid qua a
non-citizen
Thirdly, apart from Fundamental Rights, the supremacy of the Constitution vis-a-vis the
ordinary legislation, even when the law is plenary legislation, is preserved
with a view that legislation must be in conformity with the other provisions of
the Constitution.
In other words, a law, if it manifested reasonable classification for treating
different persons or things differently, the law would pass muster.
Interestingly, even while the theory of reasonable classification had come to
be proclaimed in the first year of the Republic, In State of West-Bengal v. Anwar Ali
Let us take an imaginary cases in which
a State legislature considers that all accused
persons whose skull measurements are below a certain standard, or who cannot
pass a given series of intelligence tests, shall be tried summarily whatever
the offence on the ground that the less complicated the trial the fairer it is
to their sub-standard of intelligence. Here is classification. It is scientific
and systematic. The intention and motive are good. There is no question of
favouritism, and yet I can hardly believe that such a law would be allowed to
stand. But what would be the true basis of the decision?
Surely simply this that the judges would not consider that fair and proper. However much the
real ground of decision may be hidden behind a screen of words like
'reasonable', 'substantial', 'rational' and 'arbitrary' the fact would remain that judges are substituting
their own judgment of what is right and proper and reasonable and just for that
of the legislature; and up to a point that, I think, is inevitable when a judge
is called upon to crystallise a vague generality like article 14 into a
concrete concept. Even in England, where Parliament is supreme, that is
inevitable, for, as Dicey tells us in his Law of the Constitution: "Parliament
is the supreme legislator, but from, the moment Parliament has uttered its will
as law-giver, that will becomes subject to the interpretation put upon it by
the judges of the land, and the judges, who are influenced by the feelings of
magistrates no less than by the general spirit of the common law, are disposed
to construe statutory exceptions to common law principles in a mode which would
not commend itself either to a body of officials, or the Houses of Parliament,
if the Houses were called upon to interpret their own enactments.”
But the following caveat by the learned Judge is worth noticing:
“83. This, however, does not mean that
judges are to determine what is for the good of the people and substitute their
individual and personal opinions for that of the government of the day, or that
they may usurp the functions of the legislature.
The seed of this idea had a muted growth. It was in the
decision of this Court in E.P. Royappa
v. State of Tamil Nadu and Another that this Court laid bare a new
dimension in the majestic provisions of Article 14. This Court took the view that arbitrariness and fairness are sworn enemies.
The guarantee of Article 14 is not confined in other words to it being a
prohibition against equals being discriminated against or unequals being
treated alike. State action must be fair and not arbitrary if it is to be pass
muster in a court of law. It is essentially following the dicta laid down as
aforesaid that this Court in the case of Shayara
Bano v. Union of India, wherein one of us (Justice Rohinton F.
Nariman), speaking for the majority, held as follows:
“101. It will be noticed that a Constitution Bench of this Court in
Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express
Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC
(Tax) 121] stated that it was settled law that subordinate
legislation can be challenged on any of the grounds available for challenge
against plenary legislation. This being
the case, there is no rational distinction between the two types of legislation
when it comes to this ground of challenge under Article 14. The test of
manifest arbitrariness, therefore, as laid down in the aforesaid judgments
would apply to invalidate legislation as well as subordinate legislation under
Article 14. Manifest arbitrariness, therefore, must be something done by the
legislature capriciously, irrationally and/or without adequate determining
principle. Also, when something is done which is excessive
and disproportionate, such legislation would be manifestly arbitrary. We are,
therefore, of the view that arbitrariness in the sense of manifest
arbitrariness as pointed out by us
above would apply to negate legislation as well under Article 14.”
Another ground recognised by this Court is that a law, be it the
offspring of a Legislature, it falls foul of Article 14 if it is found to be vague Shreya Singhal v. Union of India
MALICE AS GROUND
NOT AVAILABLE TO CHALLENGE THE LAW
Questioning the law of the Legislature based
on malice. A law is made by a body of elected representatives of
the people. When they act in their legislative capacity, what is being rolled
out is ordinary law. Should the same legislators sit to amend the Constitution,
they would be acting as members of the Constituent Assembly. Whether it is
ordinary legislation or an amendment to the Constitution, the activity is one
of making the law. While
malice may furnish a ground in an appropriate case to veto administrative
action it is trite that malice does not furnish a ground to attack a plenary
law (See in this regard K. Nagaraj and others v. State of Andhra Pradesh
and another47 and State of Himachal Pradesh v. Narain Singh)
ESTOPPEL AGAINST
LEGISLATOR BY JUDGMENT OF COURT NOT AVAILABLE
A
supreme legislature cannot be cribbed, cabined or confined by the
doctrine of promissory estoppel or estoppel. It acts as a sovereign body. The theory of promissory estoppel, on the one
hand, has witnessed an incredible trajectory of growth but it is incontestable
that it serves as an effective deterrent to prevent injustice from a Government
or its agencies which seek to resile from a representation made by them,
without just cause Union of India and
others v. Godfrey Philips India Ltd.49 – Paragraph-13
WORKING OF IBC
Section
3(26) defines the word `prescribed’ as
meaning prescribed by rules made by the Central Government. Section 239, inter
alia, confers power on the Central Government to
make rules for carrying out the provisions of the Code. Accordingly,
the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,
2016 came to be made and were enforced from 1.12.2016.
Rule 4
application by financial creditor, Rule 8 contemplates withdrawal of
application. It must be noticed that Rules 6 and 7 deal with applications by
operational creditors and corporate applicants respectively.
The
schedule prescribes the fees which
are contemplated under Rule 10(3). It,
inter alia, provides that for an application by a financial creditor (whether
solely or jointly a sum of Rupees Twenty-five
thousand).
Section
3(32) defines ‘specified’ as meaning specified by regulations made
by the Board and the term ‘specify’ is to be construed accordingly.
Section
5(27) defines the word ‘Resolution Professional’ for the purpose of
Part II to mean an insolvency professional appointed to conduct the CIRP and
includes an interim resolution professional.
Section
7(3) (b) requires the financial creditor who
makes the application to furnish the name of the
Resolution Professional proposed as an Interim Resolution
Professional
Section
3(21) defines `Information utility’ as
a person who is registered with the Board as information utility under Section
210.
The
word ‘Board’ has been defined in Section 3(1) to be the ‘Insolvency and Bankruptcy Board of India’ which is
established under sub-Section (1) of Section 188
Section
7(6) declares that the CIRP shall commence from the date of admission of the application under sub-section (5).
CIRP
is to be completed within 180 days from
the date of admission of the application to initiate the process. As far as an
application by a financial creditor is concerned, the date of admission is the date of the order admitting the
application. Under sub-Section (2) however if the Committee of creditors by a vote of 66 per cent of the
voting share instructs the RP to extend the period of CIRP beyond 180 days, the
RP is bound to file an application. The adjudicating authority on
receipt of the application can extend the period of 180 days for a maximum period of 90 days. Such extension can be granted only once. With effect from 16.8.2019, two provisos have been inserted. The provisos were
added in fact as noted in paragraph-74 of the Essar Steel(supra)to overcome
what was laid down in (2019) 2 SCC 1 decided by this Court. In the latter
decision in Arcellormittal(supra), this Court purported to hold that the time taken in legal proceedings must be excluded.
Under the first proviso, the CIRP has to be mandatorily completed within a
period of 330 days from the insolvency commencement date. This period of 330
days is to include any extension granted under sub-Section (3) by
the Adjudicating Authority and also the time taken in legal proceedings in
relation to the resolution process of the corporate debtor. However, in
Committee Creditors of Essar Steel (supra), this Court struck down the
word ‘mandatorily’ as being
manifestly arbitrary and in violation of Article 19 (1)(g).
Scheme appears to be that the name of the RP to act as the IRP is to be indicated in the
application. While admitting the application under Section 7(5), the
adjudicating authority is to appoint the proposed resolution professional. In fact,
Section 16(2) of the Code contemplates such
appointment.
Definition of the words ‘insolvency commencement date’ as the date of admission.
Section 13 contemplates steps to be taken upon admission under Section 7
Section
6 read with Section 7 contemplates
that a financial creditor may move the application individually, he may also
move the application jointly with other financial creditors. Even if a single
financial creditor was to be the applicant, after the appointment of the interim resolution
professional, the applicant ceases to be in seisin of the lis
Section
17 contemplates that the management of the affairs of the corporate debtor will
vest with the IRP. This takes effect from the date of the
appointment of the interim resolution professional. Furthermore, the powers of
the Board of Directors who are partners of the corporate debtors shall stand
suspended.
Virtually, the entire control of the management including all the
acts and authority indicated in sub-section 2 is to be carried out by interim
resolution professional and authority exercised by him. Section 18 details the duties of the IRP
Amongst his duties, is the duty to constitute a Committee of Creditors. The
constitution of the committee of creditors and the method of voting and the
extent of the same are found detailed inter alia in Section 21
Section
24 deals with the meeting of committee of creditors. Now that
resolution professional has been appointed, as contemplated under Section 22, Section 24(2) declares that all the meetings of the committee
of creditors shall be convened by resolution professional. Section
25 speaks about the duties of the resolution professional
Section
27 contemplates that a committee of creditors may at any time during
the CIRP replace the resolution professional
as provided in the section. Section 28, no doubt,
constrains the resolution professional in regard to the matters provided
therein. The approval of the committee of creditors is required in such
matters. It includes making any change in the management of corporate debtor
and its subsidiary (Section 28(j)). Section 30
contemplates that resolution applicant may submit a resolution plan.
The ‘resolution applicant’ has been defined in sub-section 25 of Section 5
The resolution
plan has been defined in Section 5 (26).
The
resolution professional has to examine each resolution plan received by him on the basis of the invitation made
by the resolution professional under Section 25(h) and ascertain whether the plan is in conformity with the various
criteria mentioned in Section 30(2) of the Code. The matter is
thereafter put up by the resolution professional before the committee of
creditors. All resolution plans which conform with the conditions in
sub-section (2) of Section 30 are, in fact, to be placed before the committee
of creditors. The committee of creditors may approve
the resolution plan after considering
its feasibility and viability, the manner of distribution proposed, which may
take into account the hurdles, priority amongst creditors as laid down in sub-section(1)
of Section 53 including the priority and the value of security interest of
secured creditors and such other requirements as may be specified by the Board.
There are other details with which we are not concerned in Section 30. Section 31 requires approval of the resolution plan by the
adjudicating authority.
Section
31(2) enables the adjudicating authority to reject the resolution plan.
Section 31 (3) contemplates that after the approval of the resolution plan that
the moratorium order passed by the adjudicating authority under Section 14
shall cease to have effect
Section
33, which is in Chapter III in Part II, compels announcing the death
knell of the corporate debtor. That is if, before the expiry of insolvency
resolution process period or the maximum period
permitted which is CIRP under Section 12, inter alia, a resolution plan is not
received or though received is rejected by the adjudicating
authority, then under Section 33, order is to be passed. The curtains are wrung
down on the insolvency resolution process. The
corporate debtor goes into liquidation. The adjudicating authority
is bound to pass an order requiring corporate debtor to be liquidated as
provided in chapter III Part II. Section 33(2) contemplates that before the
confirmation of the resolution plan if the committee of creditors so approved
by not less than 66% of the voting decides to liquidate the corporate debtor, the adjudicating authority is to pass the liquidation order.
SCHEME OF RERA
Section
2(b) defines ‘advertisement, Section 2(c) defines ‘agreement for
sale’, Section 2(d), which is at the centerstage of the controversy, defines
the word ‘allottee. The word ‘allottee’ includes, plot, apartment or building.
The words ‘apartment’ and ‘building’ are defined. Section 2(e) defines the word
‘apartment. Section 2(j) defines the word ‘building. Section 2(s) defines ‘development. ‘Development works’ is
defined in Section 2(t). The word ‘promoter’ is
defined in 2(zk), Section 2(zn)
defines ‘real estate project’,
Section
3 prohibits any promoter from advertising, marketing, etc. or even
inviting persons to purchase any plot, apartment or building in any real estate
project or part of it without there being
registration. Sub-Section (2), however, exempts certain projects
from the requirement of registration.
Section
7 contemplates revocation of registration, Section 11 deals with the
functions and duties of a promoter
Section
14 declares that the proposed project shall be developed and completed by the promoter in accordance with the sanctioned plans, layout plans and specifications,
as approved by the Competent Authorities.
Similar Explanation, as found in
Section 14, regarding what the word allottee means for the purpose of section
15 is found in Section 15. Section 15 deals with
obligations of promoter in the case of transfer of a real estate project to a
third party
Section
18 deals with the right of the allottee to
obtain the amount given by the allottee and even compensation & finally, Section 19 deals with the rights and obligations of an
allottee
The Act contemplates setting-up
of a Real Estate Regulatory Authority, a Central Advisory Council and the Real
Estate Appellate Tribunal. Offences and penalties are provided for to give
teeth to the Act. Section 71 gives the power of
adjudication of compensation. Section 72 provides for the factors to
be taken into consideration for adjudging the quantum of compensation or
interest under Section 71. Section 79 enacts a bar
of jurisdiction of the civil court in
regard to any matter in which the Authority, the Adjudicating Officer or the
Appellate Tribunal is empowered by the Act to determine. An injunction cannot be issued by any court or other
Authority in respect of any action taken or to be taken in pursuance
of the power conferred by or under the Act under the RERA
Section 85 deals with the power
to make regulations
A
perusal of Section 88 reveals, on the
one hand, that the provisions of the RERA, are in
addition to and not in derogation of the provisions of any other law
for the time being in force. At the same time, Section
89 provides that the RERA will prevail over any other inconsistent law.
The result is that while all cognate laws, which are not inconsistent with RERA
will continue to operate within their own sphere, the provisions, which are, however, inconsistent with RERA, will not survive after RERA
has come into force
Delhi Apartment Ownership Act, 1986 Section 3(c) defines apartment Section 3(e) defines ‘apartment
owner Section 5 provides that subject to the provisions of Section 6, the
apartment owner may transfer his apartment and his right is heritable, Section
14 provides for registration for the deed of apartment, which is to be executed
under Section 13, Section 15 declares that there
shall be an association of apartment owners in relation to the
apartment and property pertaining thereto and for the management of common
areas and facilities. Model byelaws are to be framed
by the Administrator and the Association of Apartment Owners can
make departure from the model byelaws only with the prior approval of the
Administrator.
Real
estate project may relate to plots,
apartments, or buildings or plots/apartments and plots/buildings. As far as the
expression ‘allottee’ is concerned, since the Code in the Explanation to Section 5(8)(f), incorporates the definition of the word
‘allottee’ in RERA, for the purpose of the provisos in question, we
must necessarily seek light only from the expression ‘allottee’ defined in Section 2(d) of
RERA. Section 2(d), it yields the following component parts:
i. An
allottee may be an allottee of a plot or an apartment or a building.
A real estate project may relate to plots or apartments or buildings; or
plots/buildings or plots/apartments.
ii. An
allottee, in the case of an apartment, which expression includes
flats, among other structures, would include the following categories of
persons. It would include a person to whom the apartment is allotted. It would
also include a person to whom the apartment is sold, whether as freehold or
leasehold.
iii. Thirdly, it would include a person to whom the promoter has transferred the apartment,
otherwise than by way of a sale;
iv. Lastly, it would include
persons who have acquired the allotment through
sale, transfer or otherwise, with the caveat that it will not include a person
to whom the apartment is given on rent. Whatever we have mentioned
about apartments, is equally true qua allotment of
plots or buildings.
DEFAULT CAN BE
EVEN OF ONE PERSON & ALL THAT REQUIRE IS ENDORSEMENT OF 100 PEOPLE
It is indisputable that in order
to successfully move an application under Section 7 that there must be a
default which must be in a sum of Rs.1 crore. It is
equally clear that the amount of Rs.1 crore need not be owed by the corporate
debtor in favour of the applicant. It must be noted that the
Explanation existed even prior to the provisos being inserted. It is open to a financial creditor, to move an application in
the company of another financial creditor or more than one other financial
creditor. In fact, a perusal of the Rules, which we have already
extracted, would indicate that irrespective of the number of applicants the
Court Fee would remain Rs. 25,000/-. This answers the alleged vagueness about
court fees where the provisos are given effect to.
The
change that is brought about is only
that apart from establishing the factum of default, he must
present the application endorsed by the requisite number introduced
by the proviso. Since, default can be qua any of the
applicants, and even a person, who is not an applicant, and the action is, one
which is understood to be in rem, in that, the procedures, under the Code,
would bind the entire set of stakeholders, including the whole of
the allottees, we can see no merit in the contention of the petitioner based on
the theory of default, rendering the provisions unworkable and arbitrary.
ALLOTTE TO BE FROM
SAME REAL ESTATE PROJECT
We have referred to the
definition of the word ‘allotee’ in Section 2(d) of the RERA. In regard to a
real estate project, all persons, who are treated as
allottees, as per the definition of allottee would be entitled to be
treated as allottees, for the purpose of Section 5(8)(f) (Explanation) and
also, for the purpose of the impugned provisos. All that is required is that
the allottees must relate to same real estate project.
In other words, if a Promoter has a different real estate project, be it in
relation to apartments, in the case an application under Section7, those would
not be reckoned in computing one-tenth as well as the total allotments.
Having regard to the salutary
object and the distinguishing features, which clearly
distinguish the allottees and also the creditors falling in the first proviso
from the other creditors, both financial and operational,. It is
another matter that we may entertain the belief that it would have been more
wise on the part of the Legislature to have incorporated a safety valve to
provide for situations where without complying with threshold requirement, a
single allottee could move the application.
ORDER 1 RULE 8 CPC
Order I Rule 8 of the CPC, where there are numerous persons having the same interest in
one suit, one or more such persons can, with the permission of the court, sue
or be sued or may defend such suit on behalf of or for the benefit of all
persons so interested, at the instance of a single person with whom
numerous persons share the same interest. The court, after giving permission,
is to give notice of the institution of the suit as provided. Thereupon, any person, on whose behalf or for whose benefit the suit is
instituted or defended, can apply to the court, to be made a party.
Finally, Sub-Rule (6) of Order I Rule 8 declares that the Decree passed in the
suit under Order I Rule 8, shall be binding on all persons, on whose behalf or
for whose benefit, the suit is instituted or defended, as the case may be.
It is
true that once Order I Rule 8 is made applicable, a single plaintiff or a
consumer, in a civil suit or a consumer complaint respectively, can set the
ball rolling. All the persons, having the same interest, are free to
join in the proceedings. Irrespective of whether they join or not, a Decree or
order, which is pronounced, will bind all the persons having the same interest.
The procedure, under Order I Rule 8, if it had been
made applicable in regard to an application by the allottee of a real estate
project, would indeed have made it very easy for a single allottee to invoke
Section 7 of the Code and it would
also have countenanced the participation of the other allottees, should they
wished to be made parties upon the publication of the Notice contemplated in
Order I Rule 8(2).
The
other side of the story and that is the object of the Code and the scheme of the
Code. Under the Code, once an application is moved and is admitted
under Section 7, the stage is set for resolving the insolvency. The Resolution
of the Insolvency may be attained by replacing the existing management. The Law
Giver has contemplated last mile funding. It has, however, fixed a time limit,
as contemplated in Section 12 of the Code, no doubt as explained by this Court.
Once, the application is admitted under Section 7(5), initially, the Interim
Resolution Profession (IRP) would supplant the very management by virtue of the
suspension of the powers of the management, as contemplated in the Code. The
IRP may or may not continue as the Resolution Professional (RP) but a RP is,
undoubtedly, to be appointed under the scheme of the Code. The management
passes into the hands of the RP. Thereafter, depending upon the receipt of the
Resolution Plan and its acceptability to the Committee of Creditors and finally
the approval by the Adjudicating Authority of the Resolution Plan, which is
approved by the Committee of Creditors, depends the Resolution of the
Insolvency. All of this is to be completed within a period of 330 days again
subject to the limit not being ‘mandatory’ as explained by this Court in Essar
Steel(supra). Should this not happen, the Adjudicating Authority is obliged,
under Section 33, to pass an Order for winding up of the Corporate Debtor. Section 53 provides for the priority in the matter of payment
of the amounts which are collected by way of liquidation value. The allottees would rank as unsecured creditors. The
inevitable conclusion is that unlike in an ordinary civil suit or in a consumer
complaint, the drastic consequences, as the inexorable liquidation of the
corporate debtor, contemplated under the Code, is the inevitable consequence,
of the application reaching the stage of Section 33 of the Code. Liquidation
could take place even earlier under Section 33(4). As to whether the procedure
contemplated in Order I Rule 8 is suitable, more appropriate and even more
fair, is a matter, entirely in the realm of legislative choice and policy.
Having regard to the scheme of the Code, which we have detailed above, there
cannot be scintilla of doubt that what the petitioners are seeking to persuade
us to hold, is to make a foray into the forbidden territory of legislative
value judgment. This is all the more so, when the dangers lurking
behind full play to Order I Rule 8 being given appear to be fairly clear.
We have, therefore, no hesitation in rejecting this contention, which no doubt,
at first blush, may appear attractive. We only need add that invalidating a law
made by a competent Legislature, on the basis of what the Court may be induced
to conclude, as a better arrangement or a more wise and even fairer system, is
constitutionally impermissible. If, the impugned provisions are otherwise not
infirm, they must pass muster.
i.The Code is a Legislation which
deals with economic matters and, therefore, the Legislature must be given free
play in the joints;
ii. The legislative judgment in
economic choices must be given a certain degree of deference by the Courts;
iii. The amendment by which the
explanation was inserted in Section 5(8) was clarificatory in nature and
allottees/home buyers were included in the main provision, i.e., Section
5(8)(f) from the inception of the Code;
iv. The amending Act did not
infringe Articles 14, 19(1)(g) read with Article 19(6) or 300A of the
Constitution of India;
v. RERA and the Code must be held
to co-exist, and in the event of a clash, RERA must give way to the Code. The
Code and RERA operate in completely different spheres.
ix. This Court also held that the
erstwhile Management is free to offer a resolution plan in the event of an
Application under Section 7, being admitted in favour of an allottee, subject, no
doubt, to Section 29 (A) of the Code, which may be accepted.
SUB-CLASS WITHIN
THE CLASS
In Ameerunnissa Begum (supra) involve challenge to law made
by the Nizam as Raj Pramukh of the former State of Hyderabad
The nature and scope of the guarantee that is
implied in the equal protection clause of the Constitution have been
explained and discussed in more than one decision of this court and do not
require repetition. It is well settled that a legislature
which has to deal with diverse problems arising out of an infinite variety of
human relations must, of necessity, have the power of making special laws to
attain particulars objects; and for that purpose it must have large powers of
selection or classification of persons and things upon which such laws are to
operate. Mere differentiation or inequality of treatment
does not per se amount to discrimination within the inhibition of the equal
protection clause. To attract the operation of the clause it is
necessary to show that the selection or differentiation is unreasonable
arbitrary; that it does not rest on any rational basis having regard to the
objects which the legislature has in view.
Nagpur Improvement Trust (supra)
The object itself cannot be discriminatory,
for otherwise, for instance, if the object is to discriminate against one
section of the minority the discrimination cannot be justified on the ground
that there is a reasonable classification because it has rational relation to
the object sought to be achieved. Article 14 confers an
individual right and in order to justify a classification there should
be something which justifies a different treatment to this individual right
This decision has come to be
relied upon by this Court recently in Union
of India vs. Tarsem Singh
Triloki Nath Khosa(supra)
Classification, therefore, must be truly
founded on substantial differences which distinguish persons grouped
together from those left out of the group and such differential attributes must
bear a just and rational relation to the object sought to be achieved.
Mini-classifications based on
micro-distinctions are false to our egalitarian faith and only
substantial and straightforward classifications plainly promoting relevant
goals can have constitutional validity. To overdo classification is to undo equality
Murthy Match Works (supra)
In short, unconstitutionality and not unwisdom
of a legislation is the narrow area of judicial review. Every
differentiation is not a discrimination. But classification can be sustained
only it is founded on pertinent and real differences as distinguished from
irrelevant and artificial ones. If it rests on a difference which bears a fair
and just relation to the object for which it is proposed, it is constitutional.
To put it differently, the means must have nexus with
the ends. Even so, a large latitude is allowed to the State for
classification upon a reasonable basis and what is reasonable is a question of
practical details and a variety of factors which the Court will be reluctant
and perhaps ill-equipped to investigate. In this imperfect world perfection even in grouping is an ambition hardly ever
accomplished. In this context, we have to remember the relationship
between the legislative and judicial departments of Government in the
determination of the validity of classification. Of course, in the last
analysis Courts possess the power to pronounce on the constitutionality of the
acts of the other branches whether a classification is based upon substantial
differences or is arbitrary, fanciful and consequently illegal. At the same
time, the question of classification is primarily for
legislative judgment and ordinarily does not become a judicial question.
A power to classify being extremely broad and based on diverse considerations
of executive pragmatism, the Judicature cannot rush in where even the
Legislature warily treads
State of Gujarat and Another v. Shree Ambica Mills Ltd., under and over inclusive
A reasonable classification is one which
includes all who are similarly situated and none who are not. The
question then is: what does the phrase “similarly
situated” mean? The answer to the question is that we must look
beyond the classification to the purpose of the law. A reasonable
classification is one which includes all persons who are similarly situated
with respect to the purpose of the law. The purpose of a law may be either the
elimination of a public mischief or the achievement of some positive public
good. A classification is under-inclusive when all who
are included in the class are tainted with the mischief but there are others
also tainted whom the classification does not include. In other words, a
classification is bad as under-inclusive when a State benefits or burdens
persons in a manner that furthers a legitimate purpose but does not confer the
same benefit or place the same burden on others who are similarly situated. A classification is over-inclusive when it includes not only
those who are similarly situated with respect to the purpose but others who are
not so situated as well. In other words, this type of classification
imposes a burden upon a wider range of individuals than are included in the
class of those attended with mischief at which the law aims. Herod ordering the
death of all male children born on a particular day because one of them would some
day bring about his downfall employed such a classification. The piecemeal approach to a general problem permitted by
under-inclusive classifications, appears justified when it is considered that legislative
dealing with such problems is usually an experimental matter. It is
impossible to tell how successful a particular approach may be, what
dislocations might occur, what evasions might develop, what new evils might be
generated in the attempt. Administrative expedients must be forged and tested.
Legislators, recognising these factors, may wish to proceed cautiously, and
courts must allow them to do so. [ See Joseph Tussman and Jacobusten Brook The
Equal Protection of the Law, 37 California Rev 341] 62. In short, the problem
of legislative classification is a perennial one, admitting of no doctrinaire
definition. Evils in the same field may be of different dimensions and
proportions requiring different remedies. Or so the legislature may think (see
Tigner v. Texas). [310 US 141] 64. Laws regulating economic activity would be
viewed differently from laws which touch and concern freedom of speech and
religion, voting, procreation, rights with respect to criminal procedure, etc.
The prominence given to the equal protection clause in many modern opinions and
decisions in America all show that the Court feels less constrained to
give judicial deference to legislative judgment in the field of human and civil
rights than in that of economic regulation and that it is making a vigorous use
of the equal protection clause to strike down legislative action in the area of
fundamental human rights. [See “Developments Equal Protection”, 32
Harv, Law Rev 1065, 1127] 65. The question whether, under Article 14, a
classification is reasonable or unreasonable must, in the ultimate analysis
depend upon the judicial approach to the problem. The great divide in this area
lies in the difference between emphasising the actualities or the abstractions
of legislation. The
more complicated society becomes, the greater the diversity of its problems and
the more does legislation direct itself to the diversities. That the
legislation is directed to practical problems, that the economic mechanism is
highly sensitive and complex, that many problems are singular and contingent
that laws are not abstract propositions and do not relate to abstract units and
are not to be measured by abstract symmetry, that exact wisdom and nice
adaption of remedies cannot be required, that judgment is largely a prophecy
based on meagre and uninterpreted experience, should stand as reminder that in
this area the Court does not take the equal protection requirement in a
pedagogic manner [See “General theory of law and state” P-161].
Indira Sawney v. Union of India
“This merely sees goes to show that even among
backward classes, there can be sub-classification on a reasonable
basis.”
State of Kerala v. Aravind Ramakant Modawdakar and ors.
Once we hold that the contract carriages
covered by intra-State permits and inter-State permits can form two distinct
and separate classes within the larger class of contract carriages, we
find it difficult to hold that this classification is
either unreasonable or it lacks a nexus to the object or is violative of
Article 14.
State of West Bengal and ors. v. Rash Bihari Sarkar and ors
Equality means equality in similar circumstances between same class of
persons for same purpose and objective. It cannot operate amongst unequals.
Only likes can be treated alike. But even amongst likes the legislature or
executive may classify on distinction which are real. A
classification amongst groups performing shows for monetary gains and cultural
activities cannot be said to be arbitrary. May be that both the groups
carry out the legislative objective of promoting social and educational
activities and, therefore, they are likes but the distinction between the two
on monetary gains and otherwise is real and intelligible. So long the
classification is reasonable it cannot be struck down as arbitrary. Likes can be
treated differently for good and valid reasons. The State in
treating the group performing theatrical shows for advancement of social and
educational purpose, differently, on basis of profit-making from those formed
exclusively for cultural activities cannot be said to have acted in violation
of Article 14.
ALLOTTEE &
DEBENTURE HOLDER – CLASS WITHIN CLASS OF FINANCIAL CREDITOR
Allottees
are, indeed, financial creditors. They do possess certain characteristics, however, which appear to have
appealed to the Legislature as setting them apart from the generality of
financial creditors. These features are:
i. Numerosity;
ii. Heterogeneity;
iii. The individuality in
decision making.
Debenture
holders and security holders would be covered by 21(6A)(a). As far
as the allottees of a real estate project would be
governed by 21(6A)(b). Both these categories, have a common feature. The distinguishing hallmark which
separates them from the generality of the financial creditor is numerosity. In fact this aspect has been noticed by
this Court in Swiss Robbins (supra)(para 49). By the sheer numbers of these
creditors, they have come in for special treatment
under Section 21(6A). Another feature, which is to be noticed in this
regard in heterogeneity. Lastly, there is also
the aspect of individualized decision-making. Authorized representatives are contemplated in regard to these
categories of financial creditors under Section 21(6A). The manner in which
these authorized representatives are to vote is also provided in Section 25A.
There is another aspect also to be noticed. Section 7
always contemplated the possibility of a joint application. The impugned
amendments incorporating the provisos 1 and 2 only builds upon the edifice
erected already by way of Section 21(6A) and 25A based on the experience of the
Legislature as also the Report of the Expert Body. This certainly is
a highly important input which persuades us further that the classification in
regard to these classes of financial creditors does not represent forbidden
classification
Difference in
individuality in decision-making process, attributed to the allottees.
This means that unlike a bank or a
financial institution, where the decision-making process is more
institutionalized, an individual allottee, left free to file an application
under Section 7, would exhibit a high-level of subjectivity.
The individual allottee, with a
high-level of subjectivity in decision-making, may take a plunge at invoking
the Code, without having a more global view of the consequences, which will
follow. Any such attempt would only be dubbed as
frivolous. This attempt by individual allottees would have the
following consequences:
i. It would crowd an already heavy docket;
ii. It would consequently slow down the processes under the Code, even with
respect to matters, which may be more genuine and require greater and more
timely attention;
iii. It will defeat the object of the balancing the interests of all
stakeholders.
REAL ESTATE ALLOTTEE
v. OPERATIONAL CREDITOR
While it may be true that the allottee is not a secured creditor and he is not in the
position of a bank or the financial institution, the contentions of the
petitioners that there is hostile discrimination forbidden Article 14 is
untenable. There cannot be any doubt that intrinsically
a financial creditor and an operational creditor are distinct. An
operational creditor is one to whom money is due on account of goods or
services supplied to the debtor. The financial creditor on the other hand, is
so described, on account of there being the element of borrowing. This
distinction is indisputable.
What is
unique to the real estate developer vis-a-vis operational debts is that the
developer is the debtor as an allottee funds his own apartment by paying
amounts in advance. On the other hand, in case of operational debt, the
person who has supplied the goods and services, becomes the creditor and the
corporate debtor is one who has availed such services. Another distinction
noticed is that an operational creditor has no interest
or stake in the corporate debtor. The allottee is, on the other hand, vitally
concerned with the financial health of the corporate debtor. Should
financial ruin occur, the real estate project will come to a nought. Should
such an event take place also, the allottee would not be in a position to
either claim or get compensation or even refund with interest. Thirdly, as
again noticed by this Court, there is no consideration for the time value of
money in the operational debt. This is not so in the case of an allottee. The non-availability of documentary evidence in respect of
operational debts as against information available under the RERA qua real
estate developers is yet another feature which was noticed in Pioneer
(supra) dealing with the differences between an operational debtor and an
allottee. The operational debtor, is concerned with the payment of the amount
due to it for the goods and services supplied. When an
allottee invests money in a real estate project, his primary and principal
concern is that the project is completed and he gets possession of the
apartment or the flat. The problem really arises as there are many
stakeholders whose interests are affected. It cannot be in dispute that under
the law, an allottee can seek remedies under the RERA. An allottee can also seek
remedies under the Consumer Protection Act or even file a suit. No doubt,
Section 71 of the RERA permits a person who has filed a complaint in respect of
matters governed by Sections 12, 14, 18 and 19 of RERA to withdraw the
complaint and file the same before the Adjudicating Officer under RERA. There are large number of cases where allottee seek refuge either under
the RERA or under the Consumer Protection Act. An
action under the Code by way of an application under Section 7 is an action in
rem. The recovery of the
amounts paid is not what is primarily contemplated under the Code. In
paragraph-41 of judgment of this Court in Pioneer (supra), this Court has
painted the rather dismal but realistic picture of the fruits of litigation
launched under Section 7 by an allottee of a real estate project. This Court
has gone on to hold that only such allottee who has completely lost faith in management would
come under Section 7 in hope that some other developer will take over and
complete the project. At the same time, this Court noticed that such an
adventure would be in the teeth of an impending peril, that should things do
not go as planned, corporate demise follows and the allottee would stand
reduced to receiving whatever little may remain and found on the basis that he
is a mere unsecured creditor in the order of priority prescribed under Section
53 of the Code. This Court has painted a more rosy picture for an
allottee approaching under the RERA, as there is a great likelihood, it is
noted that the project could be completed or the full amount of refund together
with penalty is awarded. Thus, the vires of the impugned provisions
must be judged without turning a blind eye to the distinction between the
wisdom and the legislative value judgment behind the Statute being immune from
judicial scrutiny on the one hand and a hostile discrimination falling foul of
the mandate of equality under Article 14, being fatal to the Statute. In this
case, while it may be true that the allottees are unsecured creditors and in that
regard, they are similar to the operational creditors and it also may be true
that many contracts under real estate projects, may not involve large sums as
the subject matter of advances by banks and other financial institutions, the
similarity between the two ends there. What is of greater importance is the
distinctions which we have already noted and the most vital point which sets
them apart, in the matter of pronouncing on the vires of the provisos under
Section 7 is the numerosity of the allottees, and what is more not being
homogeneous in what they want in a particular situation, since the law has
indeed endowed the allottees with different remedies, having different
implications, be it under the Consumer Protection Act or under RERA. If the
Legislature felt that having regard to the consequences of an application under
the Code, when such a large group of persons, pull at each other, an additional
threshold be erected for exercising the right under Section 7, certainly, it
cannot suffer a constitutional veto at the hands of Court exercising judicial
review of legislation. In fact, this Court in Pioneer was invited to hold that
the allottees were more like operational creditors than financial creditors and
many aspects were pointed out and this Court after referring to the differences
pointed out to it in a tabular form in [para 48], rejected the contentions. The
rejection is supported with reference to the findings in Swiss Robbin (supra)
which is alluded to in para 32 of Pioneer (supra).
SCOPE OF EXPLANATION
S. Sundaram Pillai (supra)
The
Explanation must be read so as to harmonise with and clear up any
ambiguity in the main section. It should not be so construed as to widen the
ambit of the section.”
“It is true that the orthodox function of an Explanation is to explain the meaning
and effect of the main provision to which it is an Explanation and to
clear up any doubt or ambiguity in it.... Therefore, even though the provision
in question has been called an Explanation, we must construe it according to
its plain language and not on any a priori considerations.”
object
of an Explanation to a statutory
provision is—
(a) to explain
the meaning and intendment of the Act itself,
(b) where there is any obscurity
or vagueness in the main enactment, to clarify the same
so as to make it consistent with the dominant object which it seems to
subserve,
(c) to provide an additional
support to the dominant object of the Act in order to make it meaningful
and purposeful,
(d) an Explanation cannot in any
way interfere with or change the enactment or any part thereof but where some
gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it
can help or assist the Court in interpreting the true purport and intendment of
the enactment, and
(e) it
cannot, however, take away a statutory right with which any person under
a statute has been clothed or set at naught the working of an Act by becoming
an hindrance in the interpretation of the same.”
The impugned
Explanation came to be inserted by the impugned amendment.
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.
SECTION
32A-IMMUNITY VALID
Section
32A has been divided into three parts consisting of sub-Sections (1) to
(3). Under sub-Section (1), notwithstanding anything contained, either in the
Code or in any other law, liability of a corporate debtor, for an offence committed prior to the commencement of the CIRP,
shall cease. Further, the corporate debtor shall not be
liable to be prosecuted for such an offence. Both, these immunities are
subject to the following conditions:
i. A
Resolution Plan, in regard to the corporate debtor, must be approved by the Adjudicating Authority under Section
31 of the Code;
ii. The Resolution
Plan, so approved, must result in the change in the management or
control of the corporate debtor;
iii. The change
in the management or control, under the approved Resolution Plan, must not be
in favour of a person, who was a promoter, or in the management and
control of the corporate debtor, or in favour of a related party of the
corporate debtor;
iv. The
change in the management or control of the corporate debtor must not be in
favour of a person, with regard to whom the relevant Investigating Authority
has material which leads it to entertain the reason to believe that he had
abetted or conspired for the commission of the offence and has submitted or
filed a Report before the relevant Authority or the Court. This last
limb may require a little more demystification.
The person, who comes to acquire
the management and control of the corporate person, must not be a person who
has abetted or conspired for the commission of the offence committed by the
corporate debtor prior to the commencement of the CIRP. Therefore, abetting or conspiracy by the person, who acquires
management and control of the corporate debtor, under a Resolution Plan, which
is approved under Section 31 of the Code and the filing of the report, would
remove the protective umbrella or immunity erected by Section 32A in
regard to an offence committed by the corporate debtor before the commencement
of the CIRP. To make it even more clear, if either of the conditions, namely
abetting or conspiring followed by the report, which have been mentioned as
aforesaid, are present, then, the liability of the corporate debtor, for an
offence committed prior to the commencement of the CIRP, will remain
unaffected.
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. The corporate debtor and its
property in the context of the scheme of the code constitute a distinct subject
matter justifying the special treatment accorded to them. Creation of a
criminal offence as also abolishing criminal liability must ordinarily be left
to the judgement of the legislature. Erecting a bar
against action against the property of the corporate debtor when viewed in the
larger context of the objectives sought to be achieved at the forefront of which
is maximisation of the value of the assets which again is to be achieved
at the earliest point of time cannot become the subject of judicial veto on the
ground of violation of Article 14.
VESTED RIGHT &
SECTION 7 + RETROSPECTIVE OPERATION
In Salmond
on Jurisprudence, the following characteristics have been found
indispensable to constitute a right:
Every
legal right has the five following characteristics: -
(1) It is vested in a person who may be distinguished as the owner of the
right, the subject of it, the person entitled, or the person of inherence.
(2) It avails
against a person, upon whom lies the correlative duty. He may be
distinguished as the person bound, or as the subject of the duty, or as the
person of incidence.
(3) It obliges
the person bound to an act or omission in favour of the person entitled.
This may be termed the content of the right.
(4) The act
or omission relates to some thing (in the widest sense of that word),
which may be termed the object or subject-matter of the right.
(5) Every
legal right has a title, that is to say, certain facts or event by
reason of which the right has become vested in its owner.”
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.
Powers
and liabilities. Yet another class of legal rights consists of those
which are termed powers. Examples of such are the following: the right to make
a will, or to alienate property; the power of sale vested in a mortgagee; a
landlord’s right of re-entry; the right to marry one’s
deceased wife’s sister; the power to sue and to prosecute; the right to rescind
a contract for fraud; a power of appointment; a power of appointment; the right
of issuing execution on a judgment; the various powers vested in judges
and other officials for the due fulfilment of their functions. All these are
legal rights-they are legally recognized interests-they are advantages
conferred by the law-but they are rights of a different species from the two
classes which we have already considered. …… My right to make a will
corresponds to no duty in any one else. A mortgagee’s
power of sale is not the correlative of any duty imposed upon the mortgagor;
A power
may be defined as ability conferred upon a person by law to alter, by his own
will directed to that end, the rights, duties, liabilities or other
legal relations, either of himself or of other persons. …”
The distinct kind of legal rights
are concerned, in the classification made by Salmond which counts nine distinct
legal classifications of legal rights, between vested and
contingent rights A right vests when all the
facts have occurred which must by law occur in order for the person in question
to have the right. A right is contingent when some but not all of the
vestive facts, as they are termed, have occurred. A grant of land to A in fee
simple will give A a vested right of ownership. A grant to A for life and then
to B in fee simple if he survives A, gives B a contingent right. It is
contingent because some of the vestive facts have not yet taken place, and
indeed may neve do so: B may not survive A. if he does, his formerly contingent
right now becomes vested. A contingent right then is a right that is
incomplete. A contingent right is different, however
from a mere hope of spes. If A leaves B a legacy in his will, B has no
right to this during A’s lifetime. He has no more than a hope that he will
obtain a legacy; he certainly does not have an incomplete right, since it is
open to A at any time to alter his will.”
Right to appeal is
vested right which accrued on filling on suit. 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
They think that the mere right (assuming it to be properly so called existing in
the members of the community or any class of them to take advantage of an
enactment, without any act done by an individual towards availing himself of
that right, cannot properly be deemed a “right accrued” within the
meaning of the enactment.
What about a right
to sue? In the case of a right to file a civil suit, equally there
is a vested right to file a suit but the question would be as to when does it
arise
The
plaintiff has a vested right, depending on whether there is a cause of action
and a period of limitation, which has begun to run, which necessarily
involves, the existence of a vested right. In the case of an application under
Section 7 of the Code, we may notice that it is a valuable right, no doubt,
statutory in nature. It cannot be the law that a Statute cannot create vested
rights. Should the ingredients which the Legislature contemplate exist in
favour of a person as an action in law, it can also be described as a vested
right. The application, under Section 7, is an
application, which attracts the period of limitation, which has already been
noticed. It commences from the time when the right to sue accrues. In
every case, where the period of limitation began to run, in respect of debt
prior to the Code coming into being, the right to sue would have arisen
earlier.
The very
act of filing the application, even satisfies the apparent test
propounded by the Additional Solicitor General, that the right under Section 7
is only one to take advantage of the statute and unless advantage is actually
availed it does not create an accrued right. When
applications were filed under the unamended provisions of Section 7, at any
rate it would transform into a vested right. The vested right is to
proceed with the action till its logical and legal conclusion. 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.
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.
They had
undoubtedly a vested right to have their actions carried to its logical and
legal end. No doubt, the question of admission of the application arises
under Section 7(5) of the Code. 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
Declaratory,
clarificatory or curative Statutes are allowed to hold sway in the
past. The very nature of the said laws involve the aspect of public interest
which requires sovereign Legislature to remove defects, clarify aspects which
create doubt. The declaratory law again has the effect of the legislative
intention being made clear. It may not be apposite in the case of these
Statutes to paint them with the taint of retrospectively.
What then is
retrospectivity? It is ordinarily the new law being applied to cases
or facts, which came into existence prior to the enacting of the law. A retrospective law, in other words, either supplants an
existing law or creates a new one and the Legislature contemplates that
the new law would apply in respect of a completed transaction. It may amount to
reopening, in other words, what is accomplished under the earlier law, if there
was one, or creating a new law, which applies to a past transaction.
A
Statute is to be deemed to be retrospective, which takes away or impairs any
vested right acquired under any
existing laws or creates a new obligation or imposes a new duty or attaches a
new disability in respect to transactions or considerations already passed
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.
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.
A vested right
under a statute can be taken away by a retrospective law. A right given
under a statute can be taken away by another statute. We cannot ignore the fact
that there was considerable public interest behind such a law.
The sheer numbers, in which applications proliferated, combined with the
results it could produce, cannot be brushed aside as an irrational or
capricious aspect to have been guided by in making the law. Being an economic measure, the wider latitude available to
the Law Giver, cannot be lost sight of
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