Hon'ble Supreme Court Upholds Constitutionality Of Section 95 To Section 100 Of The Ibc Relating To Personal Guarantors - Insolvency/Bankruptcy

1. INTRODUCTION

On 9 November 2023, a three-judge bench of the Hon'ble Supreme Court comprising of the Hon'ble Chief Justice of India DY Chandrachud, Justice JB Pardiwala and Justice Manoj Misra, while disposing off over 350 writ petitions, in Dilip B. Jiwarajka v. Union of India and Ors.¹, upheld the constitutional validity of several key provisions [Section 95 to Section 100] of the Insolvency and Bankruptcy Code, 2016 (Code) pertaining to the insolvency resolution process for individuals and partnership firms.

2. BACKGROUND

Part III of the Code deals with insolvency resolution and bankruptcy for individuals and partnership firms. Specifically, Chapter III of Part III deals with the Insolvency Resolution Process. Under this scheme, an insolvency resolution process can be initiated either by a debtor (under Section 94) or a creditor (under Section 95). When such an application is filed under Section 94 or Section 95 of the Code, an interimmoratorium commences from the date of such application in relation to all debts, and all legal actions or proceedings with respect to the debt shall be stayed. Subsequently, a Resolution Professional (RP) is appointed under Section 97 of the Code, who is required to examine the application and submit a report to the Adjudicating Authority (AA) recommending either the acceptance or rejection of the application. During this process, the RP may call upon the debtor to provide him with information/explanation relating to the debt. Thereafter, the AA, under Section 100 of the Code, shall pass an order either admitting or rejecting such application.

Petitioners' Contentions

The above provisions were the bone of contention in the writ petitions, wherein it was, inter alia, alleged that this procedure for automatic imposition of interim-moratorium and the appointment of an RP, merely based on an application filed under Section 94 and Section 95 of the Code, without granting any opportunity of a personal hearing to the debtor, is violative of the principles of natural justice and manifestly arbitrary. It was vehemently contended that such actions run afoul of Article 14 of the Constitution of India, 1950 (Constitution). Hence, the Petitioners sought that the principles of natural justice must be read at the threshold stage prior to the imposition of interim-moratorium and the appointment of RP.

The Petitioners further contended that, the scheme ought to provide for the determination of jurisdictional questions, such as whether the debt is subsisting and/or payable before an RP is appointed for performing the tasks provided under Section 99 of the Code. To substantiate the same, the Petitioners sought to contrast the scheme provided under Part III of the Code to the process adopted under Part II of the Code (for corporate debtors); wherein, the imposition of moratorium under Section 14 and the appointment of the interim RP takes place after judicial adjudication under Section 7 or Section 9 of the Code. Thereby the Petitioners submitted that this discriminative treatment between Part II and Part III of the Code is manifestly arbitrary and violative of Article 14 of the Constitution.

Further, the Petitioners contended that the powers conferred upon the RP to “seek such further information or explanation in connection with the application as may be required from the debtor or the creditor or any other person” is untrammelled and uncircumscribed. Such power to compel information from even third parties is a very wide and unfettered power, that ought not be granted to the RP without granting a prior opportunity of personal hearing to the debtors.

Furthermore, the Petitioners also argued about the practical implications of such automatic moratorium under Section 96 of the Code. It was vehemently contended that such moratorium entails concerns vis-àvis reputation and creditworthiness of a debtor, apart from attaching a stigma that adversely affects the fundamental rights of the debtor to carry on a trade or a business, which is guaranteed under Article 19(1)(g) of the Constitution. Additionally, several lending documents contain clauses that trigger defaults upon the receipt of an insolvency notice, as a consequence of which, collateral or independent debts may become invocable by a lending agency. Hence, this also results in significant legal and financial repercussions for the individual person.

Respondents' Contentions

The Respondents focused their argument in the context of the time bound resolution of insolvency being the “heart and soul of the Code”. In this context, the Respondents argued that the insertion of personal hearings at any stage prior to Section 100 of the Code, especially a decision on jurisdictional questions, would have a cascading effect on the timelines envisaged for resolution under Chapter III of Part III of the Code.

Further, the Respondents argued that the nature of moratorium imposed under Section 96 of the Code is significantly different from the moratorium imposed under Section 14 or Section 101 of the Code. To further substantiate this argument, the Respondents emphasized upon various provisions of the Code, including those for public announcement [Section 13(2)], and those for management of affairs of corporate debtor [Section 17], among other implications that are attached with the imposition of moratorium under Section 14. It was argued that no such implications are attracted with Section 96. In contrast, the interimmoratorium under Section 96 is to the benefit of the guarantors as it insulates them and protects them from any other legal proceedings, and the said moratorium is only imposed on the “debt” and not on the individual. At this stage, there is no embargo on alienation of assets, legal rights or the beneficial interests of the debtor (as opposed to Part II, where the corporate debtor is barred from alienating their assets). Hence, no adverse proceedings are attracted at this stage. Furthermore, the opportunity of being heard is given to the debtor before the AA under Section 101(2) of the Code, during the stage of consideration of the report of the RP.

With regard to the role played by the RP at the interim stage, it was argued that the same is merely facilitative in nature, wherein he compiles the information and prepares the report along with his recommendations under Section 99 of the Code. This is evident from the use of phrases such as ‘examine', ‘ascertain', and ‘satisfies' in Section 99(6) of the Code, to qualify the RP's duties. The Respondents clarified that the AA is not bound by the recommendations of the RP and hence, the role played by the RP is not adjudicatory in nature.

Further, since the scope of inquiry undertaken by the RP is restricted by the phrase “in connection with the application” under Section 99(4) of the Code, the same cannot be considered invasive or akin to a fishing and roving inquiry. To further illustrate, the Respondents submitted that these questions are guided by the Form provided under Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 and are generally sought in commercial transactions of this nature.

3. DECISION AND ANALYSIS OF THE COURT

The Hon'ble Supreme Court finally held Sections 95 to 100 of the Code to be constitutionally sound and devoid of any arbitrariness, thus not being violative of Article 14 of the Constitution. In coming to this conclusion, the Court noted that, at the stage of Section 97 of the Code, the power conferred upon the AA is limited to the appointment of the RP. The role of the RP, at this stage, is limited to ascertaining the details regarding the debt and preparing a report based on the information gathered, under Section 99 of the Code. Hence, the Court noted that the adjudicatory function of the AA only commences at the stage of Section 100 of the Code.

Further, the Court noted that the opportunity to raise jurisdictional questions including ones relating to the existence of the debt, at a stage prior to Section 100 would significantly disrupt the timelines contemplated under the Code. Furthermore, the Court also noted that reading in a personal hearing at a prior stage would render Sections 99 and 100 of the Code otiose.

In this regard, the Court laid emphasis on the role played by the RP prior to the stage of Section 100 of the Code and noted that the role is of a mere facilitative nature, wherein he compiles the information furnished in the application and seeks further information in relation to the application, if required. During this process, the legislature also envisages interaction between the debtor and the RP in the preparation of the report under Section 99(2) of the Code. Since Section 99(2) of the Code leaves no doubt that the process envisaged is not ex-parte in nature, and even the recommendatory report takes into account the explanations of the debtor, thus, the Court concluded that the right to representation has been provided even at this stage.

The Court further noted that another reason militating against accepting the Petitioners' submissions is that Section 99 of the Code does not entail any adverse consequences, especially if they are read in the manner in which the Court seeks to elucidate. The Court clarified that the information sought from parties, especially third parties, must have a nexus with the application filed under Section 94 or Section 95 of the Code. As contemplated by the Parliament, it must be an inquiry with regard to the application and cannot be a fishing and roving inquiry. The Court also clarified that the judicial adjudication under Section 100 of the Code must fully comply with the duty to give personal hearing and observe principles of natural justice.

In essence, the Court agreed with the Respondents' submission that the timelines under the Code are of paramount importance and there are differential schematic structures envisaged for corporate persons under Part II of the Code, vis-a-vis for individuals and partnership firms under Part III of the Code. The Court also clarified that the interim-moratorium under Section 96 of the Code only applies to the ‘debt' and is for the benefit of the debtor. Hence, the Court specifically observed that the legislature has carefully calibrated the role of the RP and the nature of moratorium under Part II and Part III of the Code keeping in mind the intelligible differentia between corporate entities and individual guarantors.

4. INDUSLAW VIEW

This decision by the Hon'ble Supreme Court endorses the meticulously designed framework for insolvency resolution concerning individuals and partnership firms under Part III of the Code. The decision not only reflects a judicious deference to the legislative intent but also adeptly maintains a crucial equilibrium between safeguarding the interests of debtors, on one hand, and upholding the timelines prescribed under the Code, on the other hand. At the same time, this decision also thwarts the potential fishing and roving inquiry that may have been attempted by the RPs and precisely delineates the boundaries of inquiry under Section 99 of the Code – which were a matter of concern for the creditors. Thus, this decision reinforces the integrity of the legislative vision behind the framework and emphasizes the importance of a judicious and balanced application of the law, thereby fostering a fair and efficient resolution process.

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