Introduction

In the landmark judgment of Manish Kumar Petitioner(S) v. Union Of India And Another (S). (2021 INSC 28), the Supreme Court of India deliberated on challenges brought forth against specific amendments to the Insolvency and Bankruptcy Code (IBC), 2016, enacted by the Insolvency and Bankruptcy Code (Amendment) Act, 2020. The core of the dispute revolved around Sections 3, 4, 10, and the newly inserted Section 32-A of the IBC, which introduced three provisos under Section 7(1). These amendments primarily aimed to regulate the initiation of the Corporate Insolvency Resolution Process (CIRP) by imposing threshold requirements on certain classes of financial creditors, notably allottees in real estate projects and security holders.

Petitioners, comprising predominantly of real estate allottees and moneylenders, contended that these amendments violated constitutional provisions, specifically Articles 14, 19(1)(g), 21, and 300-A of the Constitution of India, by engendering discrimination and arbitrariness. They further argued that the amendments were vague and imposed undue burdens, thereby infringing upon their vested rights.

Summary of the Judgment

The Supreme Court, presided over by Justice K.M. Joseph, extensively analyzed the constitutional validity of the challenged sections of the IBC. The primary focus was on the three provisos introduced under Section 7(1), which stipulated that:

• For financial creditors under specific categories, an application to initiate CIRP must be filed jointly by at least one hundred such creditors or ten percent of the total number of such creditors, whichever is less.
• For financial creditors who are allottees under real estate projects, the same threshold applies, emphasizing the need for collective action to prevent frivolous applications.
• Applications filed before the commencement of the amendment Act and not admitted by the adjudicating authority must comply with the new threshold within thirty days, failing which they are deemed withdrawn.

Additionally, Section 32-A was introduced to provide immunity to corporate debtors for offences committed prior to the initiation of CIRP, contingent upon the change in management to individuals not associated with the offence.

After thorough examination, the Court upheld the amendments, asserting their alignment with constitutional mandates and public policy objectives. The Court emphasized that the distinctions made between various classes of financial creditors were rational, serving the overarching goal of ensuring an efficient and effective insolvency resolution process.

Analysis

Precedents Cited

The Court referenced multiple precedents to substantiate its judgment:

• Abbot v. Minister for Lands (1895): Established that merely having the right to take advantage of an enactment does not constitute a vested right.
• State Bank's Staff Union v. Union of India (2005): Emphasized that statutes are presumed not to be retrospective unless expressly stated.
• J.P. Srivastava & Sons (2005): Reinforced that legislative amendments cannot arbitrarily infringe upon vested rights.
• Dassence Jacobs Chand v. C.I.T. (2007): Highlighted the importance of not overstepping legislative boundaries under constitutional mandates.
• Pioneer Urban Land & Infrastructure Ltd. v. Union of India (2019): Discussed the nuanced interplay between IBC and RERA, reinforcing the classification within the IBC.

Legal Reasoning

The Court's legal reasoning was multifaceted:

• Justification of Classification: The amendments introduced clear and rational classifications among financial creditors, distinguishing allottees and security holders from other financial and operational creditors based on criteria such as numerosity and heterogeneity.
• Public Policy Alignment: The amendments were deemed essential to prevent the misuse of the insolvency process, ensuring that only genuine and sizeable creditor claims could initiate CIRP, thereby preserving the integrity and efficiency of the IBC.
• Doctrine of Manifest Arbitrariness: The Court found no evidence of arbitrariness or lack of rational basis in the amendments, as they were in line with legislative intent and the public interest.
• Vested Rights Consideration: While recognizing the importance of vested rights, the Court concluded that the amendments did not infringe upon vested rights as defined in constitutional jurisprudence, given the safeguards and conditions embedded within the provisos.
• Retrospective Operation: The Court noted that while some aspects of the amendments had retrospective implications, they were not constitutionally impermissible as they served a compelling state interest and adhered to the principles of fairness and equality.

Impact

The implications of this judgment are profound:

• Strengthened IBC Mechanism: By upholding the threshold requirements, the Court reinforced the IBC's objective of streamlining the insolvency process, reducing frivolous applications, and ensuring that only collective and substantial creditor actions could trigger CIRP.
• Protection of Resolution Applicants: Section 32-A's immunity provisions protect new management from past offences, promoting confidence among resolution applicants and facilitating smoother transitions during insolvency proceedings.
• Jurisprudential Clarity: The judgment provides clarity on the interpretation of vested rights, retrospective legislation, and the balance between individual rights and public policy, thereby serving as a guide for future legal challenges.
• Enhanced Scrutiny of Statutory Amendments: The decision underscores the necessity for clear and rational legislative intent in statutory amendments, particularly those with retrospective effects, ensuring they align with constitutional principles.

Complex Concepts Simplified

Vested Rights: A vested right refers to a legal entitlement that is fixed and has crystallized, meaning it is not contingent upon any condition. In the context of the IBC, when a financial creditor files an application under Section 7, a vested right of action to initiate CIRP arises.

Retrospective Legislation: This pertains to laws that apply to events or transactions that occurred before the enactment of the law. The Court distinguishes between "true retroactivity" (applying new rules to past actions) and "quasi-retroactivity" (applying new rules to ongoing actions).

Doctrine of Manifest Arbitrariness: This legal principle evaluates whether a statute is so unreasonable, without any rational basis, that it violates constitutional principles. For a law to be upheld, it must not be arbitrary and must serve a legitimate public interest.

Section 32-A Immunity: This section provides that once a corporate debtor's resolution plan is approved and management is transferred to new, unrelated parties, the debtor is immune from prosecution for pre-existing offences, provided the new management wasn't involved in those offences.

Conclusion

The Supreme Court's judgment in Manish Kumar Petitioner(S) v. Union Of India And Another (S). (2021 INSC 28) reaffirms the constitutional validity of crucial amendments to the IBC, particularly the introduction of threshold requirements under Section 7(1). By distinguishing various classes of financial creditors and imposing rational conditions to prevent misuse, the Court underscored the necessity of such reforms in enhancing the efficacy of India's insolvency resolution framework. Additionally, the upholding of Section 32-A's immunity provisions safeguards resolution applicants, fostering a conducive environment for the revival of distressed corporate entities. This judgment not only strengthens the IBC but also provides a nuanced interpretation of constitutional principles related to vested rights and retrospective legislation, ensuring a balanced approach between individual entitlements and overarching public policy objectives.