DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

REAL ESTATE LAW

IBC Ordinance on Impleadment of Allottees and
situation after Covid-19

Submitted to: Submitted

By:

Mr. Malay Pandey Ankana Mukherjee

Assistant Professor Enrollment No.18 Sem X

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Contents
IBC Ordinance, 2019: Impleadment of Allottees in a Pending Application..............................3

Coronavirus outbreak: IBC suspension! Creditors to take financial blow, but breather for

many businesses.........................................................................................................................8

Suspension of the IBC for a period of 6 months shall further disable the creditors from

initiating insolvency resolution proceedings against the corporate debtors, thereby further

blocking the mechanism to resolve the debt and recover the credit......................................8

Will the IBC be suspended?.......................................................................................................8

The Force Majeure difficulty.....................................................................................................9

RBI's COVID-19 Regulatory Package.....................................................................................10

How will a suspension be brought about?................................................................................10

Will a temporary suspension be useful?...................................................................................10

Conclusion................................................................................................................................12

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IBC Ordinance, 2019: Impleadment of Allottees in a Pending Application

The President of India on 28 December 2019 promulgated the Insolvency and Bankruptcy

Amendment (Ordinance) Act, 2019 (the “Ordinance”) to amend several provisions of
the Insolvency and Bankruptcy Code, 2016 (the “Code”). Pertinently, section 3 of the
Ordinance 1amended section 7 of the Code by adding three provisos to it. The provisos have
limited the right of two classes of financial creditors to file an application for initiation of the
corporate insolvency resolution process (“CIRP”) before the National Company Law
Tribunal (the “Tribunal”). One, the first proviso has limited the right of the financial creditor
specified in clauses (a) and (b) of sub-section 6A of section 21 to approach the Tribunal.
Such a financial creditor is now mandated to file an application for initiating the CIRP jointly
with 100 or 10%, whichever is less, of the total financial creditors of the same class of
creditors. Similarly, two, the second proviso has limited the right of an allottee in a real estate
project to file an application for initiating the CIRP against a corporate debtor such as a
developer. The amendment has mandated the allottees approaching the Tribunal to be 100 or
10%, whichever is less, of the total number of allottees of the “same real estate project”.

The present post, however, seeks to explore an anomaly in the third proviso of section 3 of
the Ordinance. It directs that the application filed (but pending admission) by a financial
creditor(s) referred to clauses (a) and (b) of sub-section (6A) of section 21 in first proviso or
allottee(s) referred in the second proviso shall be “modified” to comply with the aforesaid
requirement within a period of one month. If such an applicant fails to modify within one
month, the application shall be deemed to be withdrawn before admission. However, the
legislature has not explained the word “modified” and, thus, it raises a question concerning
nature of modifications that are to be made in pending applications. Does it mean that the
applications of an allottee have to be modified in terms of the averment of a fact that allottee
meets the requisite numbers along with a list of allottees annexed against whom default has
been made by the corporate debtor? Or does it mean that all such allottees of the “same real
estate project” shall be impleaded in one umbrella application pending before the Tribunal
and thereafter the Tribunal shall proceed collectively if found satisfying the requisite
numbers?

1
Insolvency and Bankruptcy Amendment (Ordinance) Act, 2019.

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Recently, in Sudarshan Goel v. M/s Assotech Moonshine Urban Developers Pvt. Ltd. 2,
several allottees filed interlocutory applications for impleadment as a party under one
umbrella application pending before the Tribunal to comply with the above-said requirement.
The Tribunal rejected the application of impleadment and observed that “the Petitioners can
jointly file a Petition, but the scope of impleading themselves in another person’s Petition as
a Joint Petitioner cannot be done”. The author in the present post argues that such an
interpretation of the third proviso of section 3 is erroneous, and the impleadment of parties in
one pending application is not contrary to the legislative intent.

It is a settled principle3 of statutory interpretation that the words used in a provision must
generally be construed in their natural and ordinary meaning. However, where ambiguities
exist, regard must be had to the context and object of the statute or amendment therein. The
Supreme Court of India in Poppatlal Shah v. The State Of Madras 4 aptly noted that “to
ascertain the legislative intent, all the constituent parts of a statute are to be taken together
and each word, phrase or sentence is to be considered in the light of the general purpose and
object of the Act itself”. However, where the amendment does not provide any specific object
behind the amendment in a provision, “the purpose or object of the legislation” is to be
construed in light of the “circumstances which prevailed at the time when the law was passed
and which necessitated the passing of that law”5.

Thus, first, considering the aforesaid legal position for interpretation of words used in a
provision, it is apposite to conclude that the legislature has directed the applicants whose
applications have not been yet been admitted by the Tribunal to be “modified” in terms of
providing the fact of meeting the pre-requisite numbers. They must thereafter also implead
such allottees together as a party in a pending application instead of separate application
afresh by such allottees either singly or jointly, provided they intend to be impleaded. The
Ordinance was introduced to contain multiple independent application by individual allottees
against the same corporate debtor. This burdened the corporate debtor in having to file
repetitive replies and unduly entangled such corporate debtor in litigation. Given the surge of
applications against real estate developers due to multiple applications, it is reasonable to

2
(IB)-63(ND)2020.
3
Gurudevdatta VKSSS Maryadit and others v. State of Maharashtra and others [2001 (4) SCC 534].
4
[1953]4SCR677.
5
Shashikant Laxman Kale v. Union of India (1990)4 SCC 366.

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conclude that the word “modified” under proviso 3 of section 3 of the Ordinance directs the
parties to “modify” it in terms of amending the pleadings and also impleadment of parties if
they intend to.

Second, the above said interpretation is fostered by the legislature providing that the requisite
number of allottees are to be of the “same real estate project”. This limitation facilitates the
impleadment of the numerous allottees under the single umbrella application.

Third, the above-said interpretation is also in consonance of the doctrine of necessary

implication. It means “an implication that is absolutely necessary and unavoidable”6. The
Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding
Ltd.7 held that “necessary implication of a provision has the same effect and relevance in law
as an expressed provision has, unless the relevance of what is necessarily applied is excluded
by the use of clear words”. Thus, considering the object of the legislature behind the
amendment, i.e., to check multifarious applications and collate multiple applications against
the same corporate debtor under one application, the modification of application must be
implied to mean the impleadment of the allottees of “same real estate project” in the single
pending application. Such a conclusion is a necessary implication of the amendment.

Fourth, it must be noted that once an application for initiation of the CIRP is admitted by the
Tribunal against a corporate debtor comes to a halt, other applications pending before the
Tribunal against a same corporate debtor for the same project becomes infructuous and
parties have to then file their claim before the interim resolution professional or resolution
professional. Herein, it is reasonable to conclude that a pending application in which the
impleadment can be made will be decided earlier than the applications that will be filed
afresh by such additional allottees. Thus, once a pending application is admitted, the exercise
of other applications will become a futile exercise. Moreover, it will bring about mischief by
financial creditors wherein despite the dismissal of pending application in respect of the same
project, the corporate debtor can be entangled in insolvency proceedings filed by individual
allottees repetitively.

Fifth, rule 11 of the National Company Law Tribunal Rules, 2016 provides inherent power to

6
The Gujarat University, Ahmedabad v. Krishna Ranganath Mudholkar, AIR1963 SC .703
7
(1981)3 SCC 333.

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the NCLT to pass interim orders to meet the ends of justice or to prevent abuse the process of
the Tribunal. Thus, it will be an appropriate circumstance to implead the parties in one
pending application instead of directing to file a fresh application by such fresh financial
creditors praying to be impleaded.

Lastly, section 7 of the Code already provides that a financial creditor can apply to the
Tribunal “either by itself or jointly”. The Tribunal, despite recognizing this legal position
in Sudarshan Goel, held to the contrary. This legal position instead corroborates the
implication as to impleadment. Class applications are not barred under the Code. There is
nothing in the language of the provision suggesting to the contrary.

Thus, allottees can be impleaded under one application as an umbrella application. This will
optimally tap the ills against the corporate debtor. The Tribunal can, after the impleadment,
determine the application(s) singly or collectively depending on the facts and circumstances
of the case at the time of hearings for admission of the applications.

The only pertinent reason for not allowing impleadment can be court fees, as impleadment
will allow the party to take service of the Tribunal without payment of any court fee. Thus, it
needs to be considered whether such an impleaded party isobliged to pay a court fee of Rs.
25000 on impleadment and, if no, whether it a sufficient ground for non-impleadment of a
party.

The issue can be appreciated in light of the Court Fee Act, 1870, which prescribes court fee
to be paid in different suits. The Court Fees Act, 1870 provides numerous ground for
calculation of court fee depending on the nature of relief, the nature of the property involved
or the amount of consideration. For example, Section 7(i) provides as under:

“for money.-(i) In suits for money (including suits for damages or compensation, or arrears
of maintenance, of annuities, or of other sums payable periodically) – according to the
amount claimed;”.

However, the Court Fee Act, 1870 does not prescribe or vary the court fee depending on the
number of applicants or plaintiffs. For example, if a suit by one party for the recovery of
money bears Rs. 1000 as court fee, a prayer for the same relief by five persons does not make
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the court fee Rs. 5000. It solely depends on the amount claimed. Similarly, in a class action
or representative suit, the court fee is not determined based on the number of parties praying
for relief but it depends on the nature of suit or relief. Likewise, while registering a sale deed,
stamp duty is paid on the value of the property and not the number of persons who are party
to a sale deed. It is for the parties to divide the amount inter-se and pay the requisite court fee
or stamp duty. Each party does not pay the requisite stamp duty on a sale deed.

Thus, similarly, under the Code too, a financial creditor, while applying to initiate the CIRP,
is liable to pay a court fee which is determined by the legislature and not depending on the
number of financial creditors who file the application. The Schedule to the Insolvency and
Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides as follows:

SCHEDULE

[See sub-rule (3) of rule 10]

S. No. Applicant Fee payable (in ₹)

1. Application by financial creditor (whether solely or jointly) 25000

Note that the Schedule does not provide that, where the financial creditors file an application
to initiate the CIRP jointly, they need to pay court fee multiplied by the number of financial
creditors. Had this been the legislative intent, the legislature would have expressly provided
so. Thus, an interlocutory application by allottees or other financial creditors shall not be
refused on the ground that a party is trying to avoid payment of court fee or will not be
obliged to pay court fee if impleaded.

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Coronavirus outbreak: IBC suspension! Creditors to take financial blow, but breather
for many businesses

Suspension of the IBC for a period of 6 months shall further disable the creditors from
initiating insolvency resolution proceedings against the corporate debtors, thereby further
blocking the mechanism to resolve the debt and recover the credit

In order to prevent community transmission of COVID-19, the government has extended the
pan India lockdown. India's Lockdown 2.0 commenced on April 15, 2020, and shall continue
until May 3, 2020. The total count takes it to 40 days since the first phase of the lockdown.8

The lockdown has brought India Inc to a standstill, although considering the need to bring the
economy back into motion, certain activities in the essential goods and services sector have
been allowed, subject to conditions, with effect from April 20, 2020.

The Insolvency Bankruptcy IBC, 2016 (IBC) was enacted in order to provide a solution to
creditors, resolve the insolvency of corporate debtors and very importantly, provide a time-
bound mechanism to the creditors for debt resolution. Amid COVID-19 outbreak, the
government has taken several necessary yet difficult measures such as lockdown, which may
render resolution of debts by corporate debtors, strenuous.

Will the IBC be suspended?

As a protectionist move for corporate debtors under the IBC, on March 24, 2020, the Union
Finance Minister Nirmala Sitharaman, for the first time, had announced the intention of
suspending Sections 7, 9 and 10 of the IBC, in case the difficulties faced by the corporates
continue beyond April 30, 2020, amidst the lockdown.9

Now that the lockdown has been extended, the government is mulling on promulgation of an
ordinance for suspension of the said sections of the IBC. The suspension shall not allow
financial and operational creditors as well as corporate debtors themselves from initiating
insolvency proceedings.

8
https://www.businesstoday.in/opinion/columns/coronavirus-outbreak-ibc-suspension-creditors-to-hit-hard-
businesses-corporate-debtors-lockdown/story/401333.html
9
https://www.bloombergquint.com/opinion/coronavirus-fallout-dont-suspend-ibc-try-this-instead

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This is primarily aimed at protecting the medium and small enterprises, which are hit the
hardest due to the COVID-19 pandemic, because of disruption of supply chains and
disabilities caused by lockdown in carrying out the businesses and generating revenue.

However, a blanket ban on initiation of insolvency proceedings may have been uncalled for
as it is likely to have adverse repercussions for certain sections e.g. the creditors. But, the
situation may well be unavoidable since the initiation of insolvency proceedings during these
times are likely to severely clog the courts and therefore, the government may well press the
suspension button, albeit for a temporary period.

We have already seen various measures under the IBC being taken since the last few months
including the threshold of minimum default under the IBC being increased ten times from Rs.
1 lakh to Rs. 1 crore thereby swiping off a large number of operational creditors from filing
applications for recovery and leaving them toothless under the IBC.

The Force Majeure difficulty

Force majeure is basically a clause which provides an ability to contracting parties to not
perform their obligations without being held responsible for it, due to the happening of
extraordinary events that were not in their control. Importantly, force majeure is generally not
seen in loan agreements. However, business contracts that contain such clauses are likely to
see parties invoking it, thereby rendering the performance of contract for the time period,
impossible, which means that a corporate debtor, owing to zero or substantially lowered
revenues during the lockdown is likely to default on its pay-outs to financial creditors as well
as operational creditors. Worse, force majeure clauses in certain contracts may well be
drafted in a manner which may not allow an interpretation to be taken such that a pandemic
of this nature does not get covered.

If the IBC is suspended, without a doubt, creditors, especially the operational creditors shall
be hit hard. Operational creditors, unlike financial creditors are engaged in the supply chain
of the corporate debtor and if they are not paid due to invocation of force majeure, this shall
further impact their ability to repay their creditors, thereby showcasing a devastating ripple
effect on the economy.10

10
https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-
know-during-covid-19-crisis/articleshow/75152196.cms

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RBI's COVID-19 Regulatory Package

The Reserve Bank of India has allowed financial creditors, i.e., all banks and financial
institutions (including NBFCs) to grant a moratorium of 3 months on payment of all term
loan installments (including agricultural, retail and crop loans) and interest on working
capital loans (such as overdraft facilities), which are due between March 1, 2020, and May
31, 2020.11

This not being mandatory in nature, poised a difficult question for borrowers and lenders
alike, until India's largest public sector bank, State Bank of India, opened this line of
moratorium and others followed suit. Such moratorium has already made it easy for the
debtors to repay their loans and interest after the end of the moratorium.

However, this moratorium shall restrict the liquidity of the creditors and pose difficulty in
extending credit to potential borrowers. Even if the credit is extended to potential borrowers
considering the hiatus in business activities created by the novel coronavirus pandemic, such
borrowers shall be in limited or no capacity to repay at this juncture, which shall only further
dry up the liquidity of the creditors. If creditors run out of liquidity, since the Indian banking
sector is already exposed to several NPAs, businesses shall be hampered, as a substantial
majority run on credit.12

How will a suspension be brought about?

The central government may exercise its powers under Section 242 and other provisions of
the IBC to issue a notification suspending Sections 7, 9 and 10 of the IBC, in order to prevent
the companies at large from being forced into insolvency proceedings. Section 242 empowers
the central government to make such provisions not inconsistent with the provisions of the
IBC in order to remove any difficulty.

Will a temporary suspension be useful?

Suspension of the IBC for a period of 6 months shall further disable the creditors from
initiating insolvency resolution proceedings against the corporate debtors, thereby further
blocking the mechanism to resolve the debt and recover the credit.

11
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11872&Mode=0
12
COVID19 Regulatory Package - Asset Classification and Provisioning, RBI/2019-20/220
DOR.No.BP.BC.63/21.04.048/2019-20 dated, April 17, 2020.

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In light of the aforementioned measures already taken by the government to ensure the
corporate debtors to sail through this period of financial stress, suspension of IBC maybe a
little too much of an overprotection of the corporate debtors.

Certainly, this suspension will put the creditors in dire financial crisis, as despite the end of
the second phase of the lockdown, they will have to remain remediless for at least a period of
6 months, only after which they may seek redressal under the IBC, which shall further take a
period of 330 days to recover the loan from the corporate debtors.

This is a long period to throw a lot of creditors, especially the operational creditors out of
business. Also, during this extended time, the quality of the asset is most likely going to
further decrease.

It is imperative to question whether the period of 6 months would be enough for the corporate
debtors in regaining the same financial position, as was before the first phase of the lockdown
so that repayment towards the loans can be made?

Especially since no economy in the world knows the end date for the current pandemic.
Despite that, optimistic economists predict the economic recovery to take at least a span of 9-
12 months.

During the IBC's temporary suspension, corporate debtors may not be reinstated into the pink
of their financial conditions, so as to repay their loans. The feeble repayment capacity of the
borrowers is evident from various circulars released by RBI upon requests of various
stakeholders amid COVID-19.13

For instance, the RBI released a circular upon requests of exporters, seeking relaxation in the
timeline for realisation and repatriation of funds to India from 9 months to 15 months.

Hence, unless the proceeds are realised, payment of borrowings made by the exporters is only
a dream for creditors not coming true anytime soon, even after the period of 6 months for
suspension of the IBC is over. This implies that the period of six months may not be enough
for the borrowers to regain their repayment capacity, hence the suspension of the IBC may
not render envisaged outcomes.

13
https://www.thehindubusinessline.com/opinion/rbis-covid-relief-package-needs-a-relook/article31358528.ece

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Conclusion

Thus, for the above-mentioned reasons, it is reasonable to conclude that the allottees of
“same real estate project” can be impleaded as a party in an already pending application of
another financial creditor, unless the court finds it unduly burdensome in any particular case
and the parties agree inter-se. Initiation of the insolvency proceedings for default in same real
estate project buttresses the process impleadment and hassles of collective hearing.  Lastly,
the non-collection of court fee by such impleaded allottees cannot be a ground for non-
impleadment of a party unless specifically provided by the legislature. It can instead be paid
to the applicant of pending application in which such allottees have been impleaded as a
party. Moreover, given the fact of multiple applications are pending against the same
corporate debtor, the parties will predominantly be those who have already paid the
prescribed court fee. It will only be allottees who are completely afresh to the insolvency
proceedings who will not be liable to pay a court fee. This, in itself, is not a sufficient ground
in view of the author to refuse impleadment of these allottees in one pending umbrella
application to comply with the amendment through the Ordinance.

How necessary is suspension of IBC?

However, the suspension of IBC appears to be the last resort before the government to
prevent the initiation of mass insolvency proceedings against the companies that may have
defaulted during the COVID-19 pandemic impacted period.

Mass insolvency proceedings may cause retardation of economic growth, as vital activities to
keep the businesses going are carried out during the insolvency proceedings. Additionally,
the already overburdened National Company Law Tribunals (NCLT) shall become further
burdened.

Strangely, this time, the debate on whether or not a suspension will be imposed may lie on
different pedestals which may not have been why the IBC was brought about in the first
place. Unfortunately for the government, India Inc's engines are corporates themselves and
the burden of keeping this engine running may push the government to once again require the
banks and financial institutions to shoulder this responsibility. In turn, the government may
infuse funding into these banks for sustenance.

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