Manish Kumar v. Union of India (2021)

Pioneer Urban made allottees financial creditors. Parliament then imposed a numerical threshold on them: an application by allottees must be filed jointly by at least one hundred of them under the same real estate project, or ten per cent. of the total number of such allottees under that project, whichever is less. Manish Kumar is the challenge to that threshold, and it settles two questions the threshold raises: who counts as an allottee for making up the number, and whether the applicants must themselves be owed the default. It also resolves a long-running puzzle in s. 11 about who is barred from applying, which is a favourite short-note topic in Unit 1.

Allottees and other financial creditors challenged the amendment introducing the joint-application thresholds in the provisos to s. 7, on the footing that it deprived individual creditors of access to the Code. Because the challenge was to the provision itself, the material facts are the terms of the provisos and the classes they affect.

On the meaning of allotment. The term allotment under the second proviso to s. 7 means allotment in the sense of a documented booking, as contemplated by the real estate legislation. A person to whom allotment of a plot, apartment or building has been made is an allottee. The allottee also includes a person who acquires the allotment either through sale, transfer or otherwise. What is required is allotment in respect of apartments, and not promised flats as per a brochure.

On whose default it must be. The default under s. 7 need not be in respect of the applicant or applicants. Any number of applicants, without any amount being due to them, could move an application under s. 7 if they satisfy the statutory requirements.

On s. 11. The intention of the legislature was always to target the corporate debtor only insofar as the provision purported to prohibit an application by the corporate debtor against itself, so as to prevent abuse of the Code. It could never have been the intention to create an obstacle in the path of the corporate debtor, in any of the circumstances contained in s. 11, from maximising its assets by trying to recover the liabilities due to it from others. Reading the section, it does not follow that until a liquidation order has been made against the corporate debtor an insolvency application may be filed under s. 7 or s. 9 against it.

Both holdings are exercises in reading a provision against its purpose.

The threshold provisos exist to prevent a single disgruntled buyer from pushing an entire project into insolvency, while leaving a genuine body of aggrieved allottees a route in. If allotment were read loosely, to include anyone shown a brochure, the numerical safeguard would collapse; if it were read narrowly, to exclude a person who bought the allotment from the original allottee, the safeguard would become a trap for an assignee who is economically in the same position. Documented booking, extended to transferees, is the reading that serves the safeguard without defeating the remedy.

The point that the default need not be owed to the applicant follows from the nature of the proceeding. Corporate insolvency resolution is collective, not a recovery action. The applicant is a key that turns the lock; the proceeding, once opened, belongs to all creditors. If the applicant had to be personally owed the default, the threshold requirement of a hundred allottees would be unworkable, because a default is a default of the debtor, not a debt of each applicant.

Section 11 is read the same way. Its prohibitions are directed at abuse — preventing a debtor already in process, or already liquidated, from applying against itself again. They are not a general disability, and so do not stop a corporate debtor from pursuing what is owed to it, which increases the pool available to its own creditors.

1. On the threshold, state the second proviso, then give the Manish Kumar meaning of allotment: documented booking, transferees included, brochures excluded.
2. On standing, use the proposition that the default need not be qua the applicant; it is the cleanest way to show that you understand the collective character of the process.
3. On s. 11, distinguish the bar on an application by the corporate debtor against itself from a supposed bar on the corporate debtor recovering from others. This is the standard short-note trap.
4. What it does not decide. It does not decide whether the Adjudicating Authority may refuse admission where the threshold is met and a default is proved; that is a separate question.

Section 11 has since been amended in clause (ba) to cover the newly inserted Chapter IV-A, the creditor-initiated insolvency resolution process, alongside the pre-packaged process under Chapter III-A. Where a question turns on the precise reach of s. 11, check the current text of the clause as well as the reading given here.