SC protects new owners from liability of prior offences of erstwhile management of corporate debtors

  • Corporate Law
  • supreme court

In this landmark ruling, the Supreme Court upheld sections 3, 4, and 10 of the IBC (Amendment) Act, 2020. Section 3 of the Amendment Act amended section 7(1) of the IBC requiring a minimum threshold of 100 allottees under real estate project or not less than10% of the total number of such allottees, whichever is less, to be eligible to file a request to initiate lawsuits (class action) against real estate developer.  

The amendment also said Section 3 of the Amendment Act is retrospective, affecting pending applications. Section 4 of Amendment Act incorporated clarificatory Explanation II in Section 11 of IBC (Persons not entitled to make an application) that came into force on 28.12.2019, And section 10 of Amendment Act inserted section 32A in IBC establishing liability for prior offenses of first-time management of corporate debtor and requiring minimum number for initiating CIRP. 

The petitioners challenged the conditions imposed on homebuyers as "arbitrary and discriminatory" amounting to "illegal classification". 

Supreme Court’s ruling 

Minimum threshold on homebuyers’ application for CIRP upheld, Upholding Section 3 of the IBC Amendment Act 2020, which introduced the threshold limit for homebuyers' application for insolvency, the Apex Court observed: 

Demanding an edge with respect to these classes of lenders would prompt a stop to aimless suit which would bring about a wild agenda blast similarly as the specialists who work on the Code are concerned.  

The debt holder who has all the earmarks of being focused on is soothed of the last bit of excess that will be tolerated on the camel's back, as it might have been, by halting individual leasers whose perspectives are not shared even by a sensible number of its companions hurrying in with applications. 

Again, as in the case of the appropriations, this is not a situation where while treating them as financial creditors they are totally deprived of the right to apply under Section 7 as part of the legislative scheme.  

The legislative policy reflects an attempt to shield the corporate debtor from what it sees as a whole offense or avoidable 

Insertion of clarification II to section 11 upheld 

The Court upheld Section 4 of the Amendment Act, 2020 which inserted Explanation II to Section 11 as a "clarificatory amendment", the Court observed that: The Explanation merely makes the intention of the Legislature clear beyond the pale of doubt.  

In this way, regarding applications recorded under Sections 7, 9, or 10, it won't have any bearing, can't be acknowledged. The facts of these cases are clearly clarificatory and will certainly apply to all pending applications. 


Section 32A of IBC was upheld 

About section 32A the Apex Court observed that “We are of the clear view that no case whatsoever is made out to seek invalidation of Section 32A.  

The boundaries of this Court’s jurisdiction are clear. The wisdom of the law is not open to judicial review.  

Having respect to the object of the Code, the experience of the working of the Code, the interests of all partners including above all the basic require pulling in goal candidates who might not avoid offering a sensible and reasonable incentive as a component of the goal plan if the assembly believed that invulnerability is conceded to the corporate borrower as likewise its property, it barely outfits a ground for this Court to meddle. 

The provision is carefully thought out. It is not as if the wrongdoers can get away. They are still held responsible. The extinguishing of the corporate debtor's criminal responsibility appears to be important for the new management to make a clean break with the past and begin on a clean slate.  

We must also not overlook the principle that the proposed provision is part of an economic measure. The reverence courts justifiably hold such laws in the instant case.  

The provision relates to offenses committed prior to the commencement of the CIRP. With the approval of the application, the management of the corporate debtor goes into the hands of the Interim Resolution Professional  

And thereafter in the hands of the Resolution Professional Topic to the control by the Committee of Creditors. As far as the protection afforded to the property is concerned there is clearly a rationale behind it. Having regard to the purpose of the statute we hardly see any clear arbitrariness in the provision.