Supreme Court seeks govt response on plea challenging IBC Act validity

By: |
June 18, 2020 2:30 AM

The apex court also asked parties to maintain a status quo with regard to the pending applications filed by homebuyers with the NCLT for initiating insolvency proceedings against developers.

Rather than strengthening the IBC, it acts contrary to the objective behind enactment as it weakens the rights of every lender other than financial institutions and banks.Rather than strengthening the IBC, it acts contrary to the objective behind enactment as it weakens the rights of every lender other than financial institutions and banks.

The Supreme Court has sought response from the government on a petition challenging the validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 that introduced a threshold of at least 10% of homebuyers in a project or 100 of the total allottees for initiating insolvency proceedings against the real estate developer.

A Bench led by Justice RF Nariman issued notice to the ministries of finance, law and corporate affairs on a petition filed by the Association of Karvy Investors, challenging the recent Insolvency and Bankruptcy Code (Amendment) Act, 2020 on the ground that it is “manifestly arbitrary and violative of Article 14 of the Constitution”.

The apex court also asked parties to maintain a status quo with regard to the pending applications filed by homebuyers with the NCLT for initiating insolvency proceedings against developers.

The new law says that homebuyers looking to take a developer to an insolvency court will have to ensure that a minimum of 100 or 10% of the total allottees of a project were part of a joint petition seeking initiation of insolvency proceedings against the builder.

Challenging Sections 3 & 10 of the Act, counsel Srijan Sinha argued said that the new law was in violation of Articles 14 (equality before law) of the Constitution as it had rendered buyers, who are financial creditors, remediless and also subjected them to discrimination by putting a pre-condition in the form of a minimum number of allottees of a particular project required for filing an application under Section 7 of the IBC for initiation of the IRP.

“That a conjoint reading of the Section 3 of the ordinance, along with the other IBC provisions, makes it clear that even though no difference exists between different classes of financial creditors, the Act seeks to differentiate between the creditors… without any substantial difference existing in law,” counsel Ashwarya Sinha, who filed the petition for the association, stated.

He said the differentiation so created has no rational nexus with the objective of the insolvency Act. Rather than strengthening the IBC, it acts contrary to the objective behind enactment as it weakens the rights of every lender other than financial institutions and banks. The effect is that in cases wherein the corporate debtor has availed loans only from individuals, till the time the creditors do not prefer an application jointly, the management of the defaulting company will continue to be in control even after repeated defaults, which is completely contrary to the object of the IBC, Sinha said.

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