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

[Pareekshit Bishnoi is an advocate based in Delhi]

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 amended 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 If such an applicant fails to modify within one month, the application shall be deemed to be withdrawn before admission.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?

Recently, in Sudarshan Goel v. M/s Assotech Moonshine Urban Developers Pvt. Ltd., 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 principle 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 Madrasaptly 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”[Shashikant Laxman Kale v. Union of India].

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 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” [The Gujarat University, Ahmedabad v. Krishna Ranganath Mudholkar]. The Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. 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 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 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 theInsolvency 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.

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.

Pareekshit Bishnoi

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