Supreme Court Upholds Constitutionality Of IBC Provisions Relating To Personal Guarantors; Says Adjudicatory Role Can't Be Read Into Sec 97
In a significant judgment, the Supreme Court on Thursday (November 9) upheld the constitutionality of the provisions of the Insolvency and Bankruptcy Code (IBC) relating to Personal Guarantors' Insolvency Resolution, which were introduced through the amendments made in 2019.The Court held that these provisions (Section 95 to 100 IBC) cannot be held as unconstitutional for not affording...
In a significant judgment, the Supreme Court on Thursday (November 9) upheld the constitutionality of the provisions of the Insolvency and Bankruptcy Code (IBC) relating to Personal Guarantors' Insolvency Resolution, which were introduced through the amendments made in 2019.
The Court held that these provisions (Section 95 to 100 IBC) cannot be held as unconstitutional for not affording an opportunity of hearing to the personal guarantors before the insolvency petition filed by creditors is admitted against them and the moratorium is automatically applied against them as soon as the insolvency petition is filed.
"The statute (IBC) does not suffer from any manifest arbitrariness to violate Art 14 of the Constitution," declared a bench led by Chief Justice of India DY Chandrachud. The Court refused to read the opportunity of hearing into these provisions by saying that it cannot rewrite the legislative wordings.
The bench, also comprising Justices JB Pardiwala and Manoj Misra, held that it cannot read an adjudicatory role into these provisions and that the entire process of timelines would be rendered negatory if the role of adjudicator is changed. For the Court to change the adjudicatory role envisaged under these provisions would amount to "rewriting the legislative functions", the Court said.
The Court said the Resolution Profession is just making a recommendatory report and it is not binding and noted that the true adjudicating function commences at Section 100 after the submission of the report. Accepting the petitioners' submissions will render Sections 99 and 100 otiose, held the Court.
"..the role of adjudicating authority commences under Part III after the submission of the recommendation report of RP. This is based on intelligible differentia of insolvency of corporates and insolvency of individuals and partnership firms....Though the ultimate report of RP is only recommendatory, the legislature has ensured that the recommendation is made after taking into account the information and explanation by the debtor...", the CJI pronounced.
Other key takeaways from the judgment :
1. Principles of natural justice principles cannot be applied in a strait-jacket manner, their application could vary depending on the situation.
2. The statute has sufficient safeguards regarding the functioning of the Resolution Professional. Legislature has ensured that the recommendation is made after taking into account the information and explanation by the debtor.
3. Resolution professional is not intended to perform an adjudicatory function. Petitioners are wrong in contending that RP has been conferred with adjudicatory powers. The role under Section 99 which is ascribed to the resolution professional is that of a facilitator who has to gather relevant information and recommend acceptance or rejection of application.
4. The moratorium is primarily in respect of a debt as opposed to a debtor. .The purpose of moratorium under Section 96 is protective and Solicitor General is correct in submitting that the moratorium was to insulate the corporate debtor from the legal actions arising out of the debt.
5. Provisions are based on intelligible differentia between the individual debtors, partnerships and corporate debtors,
The bench had commenced the hearing on the batch of petitions on Tuesday (November 7). After completing the hearing, Chief Justice of India started the dictation of the judgment yesterday afternoon and it was completed today in the open court.
The central contention raised by the petitioners challenging Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the Code was the alleged absence of due process in the application of these provisions. The petitioners argued that the primary issue was that the personal guarantor was not provided any opportunity to present his case or dispute the initiation of insolvency resolution process or appointment of the resolution professional as per the code.
Overview of the Provisions
In 2019, the IBC introduced the process for personal guarantors' insolvency resolution. Prior to this, an insolvency resolution process was limited to corporates.
Section 95 of the IBC allows creditors to initiate insolvency proceedings against personal guarantors. Creditors can do this individually, jointly with others, or through a resolution professional, whom they choose. If there are no disciplinary issues with the selected resolution professional, the Adjudicating Authority will appoint them to oversee the insolvency resolution process for the personal guarantor. It may be noted that the personal guarantor doesn't have the opportunity to present their case or challenge the initiation of insolvency proceedings or the appointment of the resolution professional. While Section 95(2) allows the resolution professional to potentially request the debtor to provide evidence of repayment for the debt claimed by the creditor, this is discretionary.
Additionally, when an application for the initiation of the resolution process is filed, Section 96 of the IBC imposes an interim moratorium on the personal guarantor.
Under Section 99 of the IBC, the resolution professional must review the application filed under Sections 94 or 95 within ten days of their appointment and submit a report to the Adjudicating Authority, recommending either the approval or rejection of the application.
In line with Section 100 of the IBC, the Adjudicating Authority must make a decision within fourteen days from the submission of the report under Section 99. If the application is admitted under Section 100 of the IBC, Section 101 imposes a moratorium. This moratorium includes prohibiting the continuation or initiation of legal proceedings against the personal guarantor for any debt and restricting the personal guarantor from transferring, encumbering, or disposing of their assets, legal rights, or beneficial interests.
Case Title: Dilip B Jiwrajka v. Union of India and others, Surendra B. Jiwrajika and Anr. vs. Omkara Assets Reconstruction Private Limited SLP(C) No. 016464/2021 + connected matters
Citation : 2023 LiveLaw (SC) 1010