# MANISH KUMAR v. UNION OF INDIA AND ANOTHER

- **Citation:** [2021] 14 S.C.R. 895
- **Court:** Supreme Court of India
- **Decided:** 2021-01-19
- **Bench:** Rohinton Fali Nariman, Navin Sinha, K. M. Joseph
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/manish-kumar-v-union-of-india-and-another-35373
- **Pages:** 266

## Headnote

Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.3 -s.3 of the impugned amendment, amended s.7(1) of the
Insolvency and Bankruptcy Code, 2016, incorporating three
provisos to s.7(1) - Under the second proviso, a new threshold was
declared for an allottee to move an application u/s.7 for trigerring
the insolvency resolution process under the Code - The second
proviso provided that for financial creditors who were allottees
under a real estate project, an application for initiating corporate
insolvency resolution process against the corporate debtor was to
be filed jointly by not less than one hundred of such allottees under
the same real estate project or not less than ten per cent of the total
number of such allottees under the same real estate project,
whichever is less - Challenge to the second proviso to s.7(1) - Held:
Not tenable - The object of the Statute, admittedly, is to ensure that
there is a critical mass of persons (allottees), who agree that the
time is ripe to invoke the Code and to submit to the inexorable
processes under the Code, with all its attendant perils - The rationale
behind, confining allottees to the same real estate project, is to
promote the object of the Code - Once the threshold requirement
can pass muster when tested in the anvil of a challenge based on
Arts. 14, 19 and 21, then, there is both logic and reason behind the
legislative value judgment that the allottees, who must join the
application under the impugned provisos, must be related to the
same real estate project - Allottees under real estate projects are
financial creditors, but they possess certain characteristics, which
set them apart from generality of the financial creditors, such as
numerosity; heterogeneity; and individuality in decision making -
If a single allottee, as a financial creditor, is allowed to move an
application u/s.7, the interests of all the other allottees may be put
in peril - In the circumstances, if the Legislature, taking into
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consideration, the sheer numbers of a group of creditors, viz., the
allottees of real estate projects, finds this to be an intelligible
differentia, which distinguishes the allottees from the other financial
creditors, who are not found to possess the characteristics of
numerosity, then, it is not for this Court to sit in judgment over the
wisdom of such a measure - The allottee continues to be a financial
creditor - All that is envisaged is the legislative value judgment that
a critical mass is indispensable for allottees to be present before
the Code, can be activised - The purport of the critical mass of
applicants would ensure that a reasonable number of persons
similarly circumstanced, form the view that despite the remedies
available under the RERA or the Consumer Protection Act or a civil
suit, the invoking of the Code is the only way out, in a particular
case - 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 u/s.7, certainly, it cannot suffer a constitutional
veto at the hands of Court exercising judicial review of legislation
- This is not a case where the right of the allottee is completely
taken away - All that has happened is a half-way house is built
between extreme positions, viz., denying the right altogether to the
allottee to move the application u/s.7 of the Code and giving an
unbridled license to a single person to hold the real estate project
and all the stakeholders thereunder hostage to a proceeding under
the Code -Insolvency and Bankruptcy Code, 2016 - s.7.
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.3 - s.3 of the impugned amendment, amended s.7(1) of the
Insolvency and Bankruptcy Code, 2016, incorporating three
provisos to s.7(1) - The first proviso provided that for financial
creditors, referred

## Text

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MANISH KUMAR
v.
UNION OF INDIA AND ANOTHER
(Writ Petition (C) No.26 of 2020)
JANUARY 19, 2021
[ROHINTON FALI NARIMAN, NAVIN SINHA AND
K. M. JOSEPH, JJ.]
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.3 -s.3 of the impugned amendment, amended s.7(1) of the
Insolvency and Bankruptcy Code, 2016, incorporating three
provisos to s.7(1) - Under the second proviso, a new threshold was
declared for an allottee to move an application u/s.7 for trigerring
the insolvency resolution process under the Code - The second
proviso provided that for financial creditors who were allottees
under a real estate project, an application for initiating corporate
insolvency resolution process against the corporate debtor was to
be filed jointly by not less than one hundred of such allottees under
the same real estate project or not less than ten per cent of the total
number of such allottees under the same real estate project,
whichever is less - Challenge to the second proviso to s.7(1) - Held:
Not tenable - The object of the Statute, admittedly, is to ensure that
there is a critical mass of persons (allottees), who agree that the
time is ripe to invoke the Code and to submit to the inexorable
processes under the Code, with all its attendant perils - The rationale
behind, confining allottees to the same real estate project, is to
promote the object of the Code - Once the threshold requirement
can pass muster when tested in the anvil of a challenge based on
Arts. 14, 19 and 21, then, there is both logic and reason behind the
legislative value judgment that the allottees, who must join the
application under the impugned provisos, must be related to the
same real estate project - Allottees under real estate projects are
financial creditors, but they possess certain characteristics, which
set them apart from generality of the financial creditors, such as
numerosity; heterogeneity; and individuality in decision making -
If a single allottee, as a financial creditor, is allowed to move an
application u/s.7, the interests of all the other allottees may be put
in peril - In the circumstances, if the Legislature, taking into
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consideration, the sheer numbers of a group of creditors, viz., the
allottees of real estate projects, finds this to be an intelligible
differentia, which distinguishes the allottees from the other financial
creditors, who are not found to possess the characteristics of
numerosity, then, it is not for this Court to sit in judgment over the
wisdom of such a measure - The allottee continues to be a financial
creditor - All that is envisaged is the legislative value judgment that
a critical mass is indispensable for allottees to be present before
the Code, can be activised - The purport of the critical mass of
applicants would ensure that a reasonable number of persons
similarly circumstanced, form the view that despite the remedies
available under the RERA or the Consumer Protection Act or a civil
suit, the invoking of the Code is the only way out, in a particular
case - 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 u/s.7, certainly, it cannot suffer a constitutional
veto at the hands of Court exercising judicial review of legislation
- This is not a case where the right of the allottee is completely
taken away - All that has happened is a half-way house is built
between extreme positions, viz., denying the right altogether to the
allottee to move the application u/s.7 of the Code and giving an
unbridled license to a single person to hold the real estate project
and all the stakeholders thereunder hostage to a proceeding under
the Code -Insolvency and Bankruptcy Code, 2016 - s.7.
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.3 - s.3 of the impugned amendment, amended s.7(1) of the
Insolvency and Bankruptcy Code, 2016, incorporating three
provisos to s.7(1) - The first proviso provided that for financial
creditors, referred to in clauses (a) and (b) of sub-section (6A) of
s.21, an application for initiating corporate insolvency resolution
process against the corporate debtor shall be filed jointly by not
less than one hundred of such creditors in the same class or not less
than ten per cent of the total number of such creditors in the same
class, whichever is less - Challenge to - Held: The first proviso is
invulnerable - The legislative understanding is clear that in regard
to such creditors bearing the hallmark of large numbers they are
required to be treated differently - If they are not treated differently
it would spell chaos and the objects of the Code would not be fulfilled
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- It is an extension of this basic principle which has led to the
insertion of the impugned proviso - Insisting on a threshold in regard
to these categories of creditors would lead to the halt to
indiscriminate litigation which would result in an uncontrollable
docket explosion as far as the authorities which work the Code are
concerned - The debtor who is apparently stressed is relieved of
the last straw on the camel's back, as it were, by halting individual
creditors whose views are not shared even by a reasonable number
of its peers rushing in with applications - Again, as in the case of
the allottees, this is not a situation where while treating them as
financial creditors they are totally deprived of the right to apply
under s.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 -
All that the amendment is likely to ensure is that the filing of the
application is preceded by a consensus at least by a minuscule
percentage of similarly placed creditors that 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 - Insolvency and
Bankruptcy Code, 2016 - s.7.
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.4 - s.4 of the impugned amendment, incorporated an additional
Explanation in s.11 of the Code - While s.11 is about persons not
entitled to make application for initiating corporate insolvency
resolution process, the additional Explanation provided that nothing
in section 11 prevented a corporate debtor from initiating corporate
insolvency resolution process against another corporate debtor -
Held: The provisions of the impugned Explanation clearly amount
to a clarificatory amendment - A clarificatory amendment 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
ss.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
- The intention of the Legislature was always to target the corporate
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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 s.11, from maximizing its assets by
trying to recover the liabilities due to it from others - Not only does
it go against the basic commonsense 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 - Insolvency and Bankruptcy Code, 2016 - s.11,
Explanation II.
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.10 - s.10 of the impugned amendment inserts s.32A in the Code -
It was contended that but for s.32A, the properties which are
acquired could be attached but that is pre-empted by s.32A - The
petitioners contend that immunity granted to the corporate debtors
and its assets acquired from the proceeds of crimes and any criminal
liability arising from the offences of the erstwhile management for
the offences committed prior to initiation of CIRP and approval of
the resolution plan by the adjudicating authority further jeopardizes
the interest of the allottees/creditors - Held: No case whatsoever is
made out to seek invalidation of s.32A - The boundaries of this
Court's jurisdiction are clear - The wisdom of the legislation is not
open to judicial review - Having regard to the object of the Code,
the experience of the working of the code, the interests of all
stakeholders including most importantly the imperative need to
attract resolution applicants who would not shy away from offering
reasonable and fair value as part of the resolution plan if the
legislature thought that immunity be granted to the corporate debtor
as also its property, it hardly furnishes a ground for this Court to
interfere - The provision is carefully thought out - It is not as if the
wrongdoers are allowed to get away - They remain liable - The
extinguishment of the criminal liability of the corporate debtor is
apparently important to the new management to make a clean break
with the past and start on a clean slate - 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
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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 - Attaining public welfare very often needs delicate
balancing of conflicting interests - As to what priority must be
accorded to which interest must remain a legislative value judgement
and if seemingly the legislature in its pursuit of the greater good
appears to jettison the interests of some it cannot unless it strikingly
ill squares with some constitutional mandate suffer invalidation -
There is no basis at all to impugn the Section on the ground that it
violates Articles 19, 21 or 300A - Insolvency and Bankruptcy Code,
2016 - s.32A.
Insolvency and Bankruptcy Code (Amendment) Act, 2020 -
s.3 -s.3 of the impugned amendment, amended s.7(1) of the
Insolvency and Bankruptcy Code, 2016 - Amendment by s.3 of the
impugned amendment incorporated three provisos to s.7(1) - The
third proviso provided that where an application for initiating the
corporate insolvency resolution process against a corporate debtor
has been filed by a financial creditor referred to in the first and
second provisos and has not been admitted by the Adjudicating
Authority before the commencement of the Insolvency and
Bankruptcy Code (Amendment) Act, 2020, such application shall
be modified to comply with the requirements of the first or second
proviso within thirty days of the commencement of the said Act,
failing which the application shall be deemed to be withdrawn before
its admission - Held: The third proviso is a one-time affair - It is
intended only to deal with those applications, u/s.7, which were
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filed prior to 28.12.2019, when, by way of the impugned Ordinance,
initially, the threshold requirements came to be introduced by the
first and the second impugned provisos - In other words, the
legislative intention was to ensure that no application u/s.7 could
be filed after 28.12.2019, except upon complying with the
requirements in the first and second provisos - The Legislature did
not stop there - It has clearly intended that the threshold requirement
it imposed, will apply to all those applications, which were filed,
prior to 28.12.2019 as well, subject to the exception that the
applications, so filed, had not been admitted, u/s.7(5) - In other
words, the Legislature intended that in every application, filed under
s.7, by the creditors covered by the first proviso and by the allottees
governed by the second proviso, should also be embraced by the
newly imposed threshold requirement for which, it was intended,
should be complied within 30 days from the date of the Ordinance -
However, this restriction was not to apply to those applications which
stood admitted as on the date of the Ordinance - It is also clear that
the consequence of failure to comply with the threshold requirement,
in regard to applications, which have been filed earlier, was that
they would stand withdrawn - When applications were filed under
the unamended provisions of s.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 - No doubt, there may not be a
vested right as regard mere procedure and while limitation,
ordinarily, belongs to the domain of procedure, should new law
shorten the existing period of limitation, such a law would not
operate in regard to the right of action which is vested - Every
sovereign Legislature is clothed with competence to make
retrospective laws - It is open to the Legislature, while making
retrospective law, to take away vested rights - If a vested right can
be taken away by a retrospective law, there can be no reason why
the Legislature cannot modify the vested rights - The imposition of
a threshold requirement being a mandatory and irreducible minimum
even, if it is to be achieved as and after the date of the amendment,
constitutes an intrusion into the substantive right of action vested
in the individual creditor - The action of the creditor was not a
completed transaction - As regards his conduct in the past, viz.,
moving u/s.7, it is incomplete but the action was commenced - But
the law (the 3rd proviso) impairs the past action qua the future -
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Imposing the threshold requirement under the 3rd proviso, is not a
mere matter of procedure - It impairs vested rights - Prescribing a
time limit in regard to pending applications, cannot be, per se,
described as arbitrary, as otherwise, it would be an endless and
uncertain procedure - The applications would remain part of the
docket and also become a Damocles Sword overhanging the debtor
and the other stakeholders with deleterious consequences also qua
the objects of the Code - Insolvency and Bankruptcy Code, 2016 -
s.7.
Insolvency and Bankruptcy Code, 2016 - Need of - Held:
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.
Amendment - Clarificatory amendment - Is retrospective in
nature.
Legislation - Plenary Legislation - Challenge to - Grounds
- Discussed.
Legislation - Plenary Legislation - Challenge to - On ground
of malice - Held: While malice may furnish a ground in an
appropriate case to veto administrative action, malice does not
furnish a ground to attack a plenary law.
Dismissing the writ petitions and transferred case, the Court
HELD:1.1. The grounds on which plenary law can be
challenged are well established. 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
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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. [Para 47][955-C-F]
1.2. A plenary law if it is found to be manifestly arbitrary it
becomes vulnerable. [Para 50][958-C]
1.3. A law, be it the offspring of a Legislature, it falls foul of
Article 14 if it is found to be vague. [Para 51][958-E]
1.4. It has been urged that the law was created by way of
pandering to the real estate lobby and succumbing to their
pressure or by way of placating their vested interests. Such an
argument is nothing but a thinly disguised attempt at questioning
the law of the Legislature based on malice. 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. [Para 52][958-G; 959-A, B-C]
1.5. 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.
[Para 54][959-E-G]
1.6. A mere charge of either under inclusiveness or over
inclusiveness which is not difficult to make hardly suffices to
persuade the court to strike down a law. There is a wide latitude
allowed in the legislature in these matters. The examination
cannot be extended to find out whether there is mathematical
precision or wooden equality established. The working of the
statute may produce further issues, all of it may not be fully
perceived as which may not be wholly foreseen by the law giver.
The freedom to experiment must be conceded to the legislature,
particularly, in economic laws. If problems emerge in the working
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of law and which require legislative intervention, the court cannot
be oblivious to the power of the legislative to respond by stepping
in with necessary amendment. There is nothing like a perfect
law and as with all human institutions there are bound to be
imperfections. What is significant is however for the court ruling
on constitutionality, the law must present a clear departure from
constitutional limits. [Para 121][1005-E-H]
1.7. The mere difficulties in given cases, to comply with a
law can hardly furnish a ground to strike it down. As to what would
constitute the real estate project, it must depend on the terms &
conditions and scope of a particular real estate project in which
allottees are a part of. These are factual matters to be considered
in the facts of each case. [Para 124][1006-G-H]
2. The rationale behind, confining allottees to the same real
estate project, is to promote the object of the Code. Once the
threshold requirement can pass muster when tested in the anvil
of a challenge based on Articles 14, 19 and 21, then, there is both
logic and reason behind the legislative value judgment that the
allottees, who must join the application under the impugned
provisos, must be related to the same real estate project. The
connection with the same real estate project is crucial to the
determination of the critical mass, which Legislature has in mind,
as a part of its scheme, to streamline the working of the Code. If
it is to embrace the total number of allottees of all projects, which
a Promoter of a real estate project, may be having, in one sense,
it will make the task of the applicant himself, more cumbersome.
It becomes a sword, which will cut both ways. This is for the
reason that the complaints, relating to different projects, may be
different. With regard to one project of a Promoter of real estate
project, maybe, in the advanced stage, the allottees in a particular
project, may not have much of a complaint. The complaint, in
relation to yet another project, may be more serious. If the
complaint in respect of the latter, attracts the attention of a critical
mass of allottees, and the proposed applicant is part of that project
in the said project, then, it may be easier for the allottees to fulfil
the statutory mantra in the impugned provisos, with the junction
of likeminded souls. If, on the other hand, the requirement was
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to make a search for allottees of different projects, as would be
the case, if the entirety of the allottees, under different projects,
were to be reckoned, the task would have been much more
cumbersome. The requirement of the allottees, being drawn from
the same project, stands to reason and also does not suffer from
any constitutional blemish. [Para 140][1013-H; 1014-A-E]
3. There can be no doubt that the requirement of a threshold
under the impugned proviso, in Section 7(1), must be fulfilled as
on the date of the filing of the application. [Para 141][1014-G-H]
4. In the matter of presentation of an application under
Section 7, if the threshold requirement, under the impugned
provisos, stands fulfilled, the requirement of the law must be
treated as fulfilled. The contention, relating to the ambiguity and
consequent unworkability and the resultant arbitrariness, is
clearly untenable. If an allottee is able to, in other words, satisfy
the requirements, as on the date of the presentation, the
requirement of the impugned law is fulfilled. [Para 143][1016-AB]
5. It does not matter whether a person has one or more
allotments in his name or in the name of his family members. As
long as there are independent allotments made to him or his family
members, all of them would qualify as separate allottees and they
would count both in the calculation of the total allotments, as also
in reckoning the figure of hundred allottees or one-tenth of the
allottees, whichever is less. [Para 146][1017-F-G]
6. The object of the Statute, admittedly, is to ensure that
there is a critical mass of persons (allottees), who agree that the
time is ripe to invoke the Code and to submit to the inexorable
processes under the Code, with all its attendant perils. The object
of maintaining speed in the CIRP and also the balancing of interest
of all the stakeholders, would be promoted by the view that as in
the case of the Companies Acts, 1956 and 2013, that for the
purpose of complying with the impugned provisos in Section 7(1),
while the allottee can be of any of the categories, fulfilling the
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description of an allottee in Section 2(d) of RERA, joint allottees
of a single apartment, will be treated as only one allottee. Any
other view can lead to clear abuse and defeating of the object of
the Code. If, for instance, a single apartment is taken in the name
of hundred persons, a single allottee, who in turn comprise of
relatives or family members or friends, can move an application,
even though the position ante would be restored, which means
that only the allottee qua one apartment, plot or building, is before
the Authority and it would not really represent a critical mass of
the allottees in the real estate project concerned. [Para 147][1018B-E]
7. The Central Government, having regard to the scheme
of Companies Act, is intricately interconnected with the
management of the companies. It had powers of investigation
into the affairs of the companies under Section 235 and Section
237. The purport of Sections 397 and 398 include the conduct of
the affairs of the company in any manner prejudicial to the public
interest or also, no doubt, prejudicial to member or members. In
such circumstances, clothing the Central Government with the
power to waive the requirement and permitting the application
to be presented by even a single member, is in sync with the
scheme of the Companies Act. The role of the Central Government
is different under the Code. In fact, the Central Government does
not have any role, as such under the Code. It acts only through
the designated Authorities under the Code. The Code is about
insolvency resolution and on failure liquidation. The scheme of
the Code is unique and its objects are vividly different from that
of the Companies Act. Consequently, if the Legislature felt that
threshold requirement representing a critical mass of allottees,
alone would satisfy the requirement of a valid institution of an
application under Section 7, it cannot be dubbed as either
discriminatory or arbitrary. [Para 151][1019-D-G]
8. 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 morewise and even fairer system, is
constitutionally impermissible. If, the impugned provisions are
otherwise not infirm, they must pass muster. [Para 157][1023-E]
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9. The law giver has created a mechanism, namely, the
association of allottees through which the allottees are expected
to gather information about the status of the allotments including
the names and addresses of the allottees. One cannot proceed
on the basis in a case which involves a challenge to a statute that
the information to be gathered under the statute will not be
available on the basis that the statute will not be worked as
contemplated by the law giver. [Para 163][1030-C-D]
10. The law does not interdict the creation of a class within
a class absolutely. Should there be a rational basis for creating a
sub-class within a class, then, it is not impermissible. A class
within a sub-class, is indeed not antithetical to the guarantee of
equality under Article 14. [Para 188][1046-G-H; 1047-B]
11. 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, which set them
apart, have been clearly indicated in the stand of the Union. They
are: (i) Numerosity; (ii) Heterogeneity; and (iii) The individuality
in decision making. [Para 189][1047-B-D]
12. In the case of the allottees of a real estate project, it is
the approach of the Legislature that in a real estate project there
would be large number of allottees. There can be hundreds or
even thousands of allottees in a project. If a single allottee, as a
financial creditor, is allowed to move an application under
Section 7, the interests of all the other allottees may be put in
peril. This is for the reason that as stakeholders in the real estate
project, having invested money and time and looking forward to
obtaining possession of the flat or apartment and faced with the
same state of affairs as the allottee, who moves the application
under Section 7 of the Code, the other allottees may have a
different take of the whole scenario. Some of them may approach
the Authority under the RERA. Others may, instead, resort to
the For a under the Consumer Protection Act, though, the remedy
of a civil suit is, no doubt, not ruled out. Ordinarily, the allottee
would have the remedies available under RERA or the Consumer
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Protection Act, as the more effective option. In such
circumstances, if the Legislature, taking into consideration, the
sheer numbers of a group of creditors, viz., the allottees of real
estate projects, finds this to be an intelligible differentia, which
distinguishes the allottees from the other financial creditors, who
are not found to possess the characteristics of numerosity, then,
it is not for this Court to sit in judgment over the wisdom of such
a measure. [Para 192][1049-B-E]
13. The enquiry must not end with finding that there is an
intelligible differentia, to be found in the numerosity, heterogeneity
and individuality in decision-making of the allottees. The law
further requires that the differentia must have bear a rational
nexus with the object of the law. [Para 193][1049-F]
14. The object of the law is clear. 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. [Para
194][1049-G-H; 1050-A-C]
15. A Resolution Plan is intended to resuscitate an ailing
corporate debtor and keep it going as a going concern. The
MANISH KUMAR v. UNION OF INDIA AND ANOTHER
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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. [Para
194][1050-F-H; 1051-A-B]
16. The speed, with which the processes can be conducted
and completed, is based on the volume of the litigation. The
Adjudicating Authorities and the Appellate Bodies, viz.,
N.C.L.A.T., are authorities under other enactments, as well. They
are hard-pressed for time. The matters, which are covered by
the Code, may present convoluted facts. The issues may bristle
with complications, both in points of law and also facts. If, out of a
large body of financial creditors belonging to a sub-group, as for
instance allottees of a real estate project, were to be given the
freedom to activise the Code, then, the possibility of multiple
individual actions, is a spectre, which the Legislature, must be
presumed to be aware of. In other words, the Legislature became
alive to the peril of entire object of the Code, being derailed by
permitting the individual players crowding the docket of the
Authorities under the Code, and resultantly, reviving the very
state of affairs, which compelled the Legislature to script a new
dawn in this area of law. Instead, having regard to the numerosity,
the Legislature has thought it fit to adopt a balanced approach by
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not taking the allottee out of the fold of the financial creditors
altogether. The allottee continues to be a financial creditor. All
that is envisaged is the legislative value judgment that a critical
mass is indispensable for allottees to be present before the Code,
can be activised. The purport of the critical mass of applicants
would ensure that a reasonable number of persons similarly
circumstanced, form the view that despite the remedies available
under the RERA or the Consumer Protection Act or a civil suit,
the invoking of the Code is the only way out, in a particular case.
[Para 196][1051-D-H; 1052-A-B]
17. One of the objects is the balancing of the interests of
all stakeholders. By imposing a threshold limit of either hundred
allottees or if the number of allottees going by the criteria of
one-tenth of the allottees is, even less than hundred, then, the
said number of allottees must agree to invoke the Code. This is
again, based on the intelligible differentia of heterogeneity. By
heterogeneity, is meant, differences between a seemingly
homogenous group. All allottees of a real estate project form a
class. All of them have stakes in the prompt and effective
completion of the real estate project. There is a plurality of
remedies, which the law provides. More importantly, the outcome
of activising the Code, is almost like an uncertain wager. The
outcome of invoking the Code by individual allottees would be
apart from clogging the dockets of the Adjudicating Authorities
with even more voluminous files leading to greater delay, that at
the instance of such individual allottees, what would be perceived
as an avoidable calamity, is perpetuated. In other words, while a
vast majority of allottees may see reason in either giving time
and reposing faith in existing management of real estate project
or successfully invoking the other remedies available to them,
an individual allottee, out of the heterogenous group, would throw
the spanner in the works and bring the entire real estate project
itself to a possible doom. [Para 196][1052-D-H; 1053-A-B]
18. 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.
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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. [Para 197][1053-E-G]
19. The law under scrutiny is an economic measure. In
dealing with the challenge on the anvil of Article 14, the Court
will not adopt a doctrinaire approach. A law cannot operate in a
vacuum. In the concrete world, when the law is put into motion in
practical experiences, bottlenecks that would flow from its
application, are best envisaged by the Law Givers. Solutions to
vexed problems made manifest through experience, would indeed
require a good deal of experimentation, as long as it passes
muster in law. It is no part of a court's function to probe into what
it considers to be more wise or a better way to deal with a problem.
In economic matters, the wider latitude given to the Law Giver
is based on sound principle and tested logic over time. [Para
199][1054-G-H; 1055-A-B]
20. 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 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
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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, there is no consideration for the time value of money in
the operational debt. This is not so in the case of an allottee.
[Para 212][1065-F-H; 1066-A-C]
21. 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. 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 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.