Supreme Court Commences Hearing Of Pleas Challenging IBC Provisions On Personal Guarantor's Insolvency Resolution

The Supreme Court today (07.11.2023) commenced its hearings in a batch of petitions challenging the constitutionality of various provisions of the Insolvency and Bankruptcy Code (IBC) relating to Personal Guarantors Insolvency Resolution Process. 

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 before a bench comprising CJI DY Chandrachud, Justice JB Pardiwala, and Justice Manoj Misra 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.  

Arguments Before The Court 

Senior Advocate AM Singhvi, appearing for the petitioners in the matter, highlighted the lack of due process and the potential implications of these provisions. Singhvi pointed out that Section 95 of the IBC, which addresses the existence of debt, lacked a formal hearing and initiated the appointment of a Resolution Professional (RP) without allowing the alleged guarantor to present their case. He emphasized the need to incorporate the principles of natural justice into this section. Singhvi also clarified that Resolution Professionals primarily handle organizational aspects and their intrusive questioning regarding personal information raised concerns about individual privacy and rights. He asserted IBC, considered an "in rem" proceeding, was problematic for its automatic initiation of interim moratorium and RP appointment upon filing a Section 95 application. Singhvi argued for judicial scrutiny before taking such actions, which should not be triggered automatically. He stated that none of the aforementioned steps were reversible under Section 100 which provided for the stage where, for the first time, a judicial body adjudicates and hears the guarantor's side. 

Advocate Masoom Shah, counsel for an intervenor in the matter, pointed out that the IBC could be interpreted as causing a "civil death" of a person, effectively infringing upon Article 21 of the Indian Constitution. Another counsel raised concerns about potential misuse by both creditors and debtors, emphasizing the disruptive impact on other legal proceedings, such as those under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, which could have adverse consequences for the parties involved. 

Per contra, Solicitor General Tushar Mehta, appearing for the Centre, argued that the key consideration in the matter was when natural justice principles should come into play. SG Mehta emphasized the necessity for innovative legislation to address financial sector issues and the significance of time-bound processes in the IBC, as indicated in the Act's introduction. He pointed out that Section 7 of the IBC exclusively pertains to corporate entities, and no adjudicatory proceedings or adverse consequences transpire at the initial stage of Section 95.

Arguments Raised In The Petitions

The petitions before the Supreme Court challenge the constitutional validity of Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the Code, which as mentioned above, pertain to various stages of insolvency proceedings against defaulting firms or individuals.

The petitioners argue that these provisions infringe upon the principles of natural justice and undermine fundamental rights, such as the right to livelihood, the right to trade and profession, the right to equality, and the right to life as enshrined under Articles 21, 19(1)(g), and 14 of the Indian Constitution.

One of the central contentions raised in the petitions is the absence of due process in the application of the IBC. Section 96(1) of the IBC imposes a moratorium on alleged guarantors automatically, without any requirement of prior notice, upon the mere filing of an application under Section 95 of the Code. This is seen as a clear violation of the principles of natural justice, as it restricts the liberties of individuals, including their ability to discharge debt, without affording them any opportunity for a fair hearing.

The petitioners argue that the Impugned Provisions not only fail to uphold the principles of natural justice but also infringe upon several fundamental rights guaranteed by the Indian Constitution. These include:

- Right to Life (Article 21): The Impugned Provisions, according to the petitions, impede the right to livelihood and life by imposing moratoriums and insolvency proceedings without a fair opportunity to be heard.

- Right to Practice Any Profession (Article 19(1)(g)): The IBC's provisions are alleged to encroach on an individual's right to practice any profession, as they restrict economic activities and livelihood without due process.

- Right to Equality (Article 14): The Impugned Provisions, as per the petitions, discriminate against individuals by imposing restrictions on their economic and professional activities without reasonable grounds or a fair hearing, thus violating the right to equality.

Further, the petitioners contend that the IBC's Section 97(5) does not provide for any alternative to the appointment of a Resolution Professional, which further restricts the rights and options of the alleged guarantors.

The arguments in the matter will continue tomorrow.

Case Title: Surendra B. Jiwrajika and Anr. vs. Omkara Assets Reconstruction Private Limited SLP(C) No. 016464/2021 + connected matters