The Supreme Court, in its judgement dated November 9, 2023, in the matter of Dilip B. Jiwrajka v. Union of India and Others [Writ Petition (Civil) No. 1281 of 2021] (decided along with multiple other similar tagged-along writ petitions on similar legal issue), has upheld the constitutional validity of provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) pertaining to insolvency resolution process of personal guarantors.

Facts

In the present case, the constitutional validity of Sections 95 (Application by creditor to initiate insolvency resolution process), 96 (Interim moratorium), 97 (Appointment of resolution professional), 98 (Replacement of resolution professional), 99 (Submission of report by resolution professional) and 100 (Admission or rejection of application) of IBC were challenged vide three hundred and eighty-four petitions under Article 32 (Remedies for enforcement of rights conferred by this Part) of the Constitution of India (“Constitution”). The Supreme Court did not reproduce the individual facts of each case as it was deciding the constitutionality of the said provisions of IBC.

Notably, by way of background, in the matter of Lalit Kumar Jain v. Union of India [(2021) 9 SCC 321], the Supreme Court has, inter alia, held that the liability of a guarantor is not discharged merely on the discharge of the Corporate Debtor.

For the purpose of reference herein, Mr. Dilip B. Jiwrajka shall be referred to as the “Petitioner” and Union of India shall be referred to as the “Respondent”.

Issue

Whether the provisions of Sections 95 to 100 of IBC are unconstitutional and violate the principles of natural justice.

Arguments

Contentions of the Petitioner:

It was submitted by the Petitioner that there must be determination of existence of debt by a judicial body before appointment of a resolution professional and an action initiated by the resolution professional.

Further, the Petitioner contended that an automatic interim moratorium should not commence upon filing of a petition under Section 95 of IBC.

Petitioner contended that the fundamental aspect as to whether the jurisdiction to entertain an application under Chapter III of Part III (Insolvency resolution and bankruptcy for individuals and partnership firms) of IBC exists, must be determined at the threshold by giving the debtor or personal guarantor an opportunity to be heard and that such jurisdictional question ought to be determined prior to appointment of resolution professional under Section 97(5) of IBC itself.

Further, Petitioner sought natural justice by a judicial body at the stage of Section 97(1) of IBC and it was contended that prior to the appointment of a resolution professional, without incorporating a requirement for a hearing before the adjudicating authority, Sections 95 to 100 of IBC would be arbitrary and violative of Article 14 (Equality before law) of the Constitution.

Contentions of the Respondent:

It was contended by the Respondent that adding an intermittent stage, as suggested by the Petitioner, for the adjudicating authority to decide a ‘jurisdictional question’ would result in the dislocation of the very scheme of IBC pertaining to observance of stringent timelines.

It was contended by the Respondent that the requirement of observing the principles of natural justice arises under Section 100 of IBC at the adjudicatory stage and not under Section 97 of IBC. Hence, the compliance pertaining to natural justice at a stage prior to Section 100 of IBC would result in dislocation of the entire scheme of IBC. Further, at the stage of an application under Sections 94 (Application by debtor to initiate insolvency resolution process) or 95 of IBC, no adjudication takes place. Additionally, no significant consequence on a debtor or personal guarantor takes place before the adjudication under Section 100 of IBC. Hence, there is no breach of natural justice under Chapter III of Part III of IBC.

Additionally, the Respondent submitted that the function of a resolution professional under Section 99 of IBC is not of adjudicatory nature as it does not bind the adjudicating authority. Rather the resolution professional’s purpose under Part III of IBC is merely to collate the facts and submit a report along with recommendations to the adjudicating authority.

It was submitted by the Respondent that the object of corporate insolvency resolution process (“CIRP”) under Part II (Insolvency resolution and liquidation for corporate persons) of IBC and in Chapter III of Part III of IBC is completely distinct as Part II of IBC deals with the resolution of corporate insolvency and Part III of IBC deals with the resolution and bankruptcy of individuals and partnership firms. Therefore, Chapter III of Part III of IBC has contemplated appointment of a resolution professional straightaway preceding the adjudicatory function by an adjudicatory body.

Respondent also submitted that a distinction exists between a moratorium under Section 14 (Moratorium) of IBC and an interim-moratorium under Section 96 of IBC as it is for the benefit of guarantor or debtor and does not impose embargo on alienation of assets, legal rights or beneficial interest of the debtor.

Respondent submitted that the constitutional validity of a statute which the Parliament is competent to enact cannot be challenged on the basis an alleged ground of misuse of a provision in a particular case.

Observations of the Supreme Court

The Supreme Court while rendering its judgement divided the judgement into parts which are as follows:

Part I: Comparative Analysis of Parts II and III of IBC:

It was observed by the Supreme Court that the object of CIRP under Part II and in Chapter III of Part III of IBC is completely distinct in nature as Part II of IBC deals with insolvency resolution and liquidation for corporate entities. On the other hand, Part III of IBC deals with insolvency resolution and bankruptcy for individuals and partnership firms. Further, it was observed by the Supreme Court that there exists considerable difference in the provisions of Parts II and III of IBC relating to the role and functions of a resolution professional, even though both use the expression ‘resolution professional’. Section 5(27) (Definitions) of IBC provides that a resolution professional, for the purposes of Part II, means an insolvency professional appointed to conduct the CIRP or the pre-packaged insolvency resolution process, as the case may be, and to include an interim resolution professional.

The role of Adjudicating Authority:

The Supreme Court was of the view that the resolution professional does not possess an adjudicatory function in terms of the provisions of Section 99 of IBC and there has been no provision made in Part III of IBC empowering the resolution professional to take over the assets or the business which is being carried on by the individual or the partnership. The role of resolution professional under Section 99 of IBC is that of a facilitator. The role of the resolution professional is purely recommendatory in nature and cannot bind the creditor, the debtor or the adjudicating authority.

The Supreme Court also noted that Section 14(1)(b) of IBC empowers the adjudicating authority to declare a moratorium restraining the transfer, encumbrance, alienation or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein. Further, the moratorium under Section 14 of IBC operates on the order passed by an adjudicating authority whereas the purpose of the moratorium under Section 96 of IBC is protective in nature.

The Supreme Court in respect to the role of the adjudicating authority, held that after the submission of a recommendatory report by the resolution professional, the adjudicating authority’s adjudicatory functions begins. Hence, the Supreme Court provided its observation pertaining to the role of the resolution professional, the imposition of the moratorium as well as the stage at which the function of the adjudicating authority comes into play, under Parts II and III of IBC.

Part II: Applicability of the principles of natural justice:

The Supreme Court analysed the ambit of Section 99(4) of IBC which is prefaced by the words “for the purposes of examining an application”. It implies that when the resolution professional is empowered to seek information or explanation in connection with the application, such information or explanation must be relevant to and bearing a connection with the nature of the application itself. Such power to seek any information or any explanation is concerned with the nature of the application submitted under Sections 94 or 95 of IBC.

The right for filing such representation is sufficient compliance of the principles of natural justice which postulates the concept of audi alterum partem, that is, an opportunity of being heard to a person who is liable to be affected by an investigation, enquiry, proceeding or action. Therefore, the Supreme Court observed that the assertion by the Petitioner in relation to the violation of natural justice principle holds no merit.

Part III: Challenge to the constitutional validity of the provisions of IBC:

While interpreting Part II of IBC, the Supreme Court has drawn inference of the requirement for granting an opportunity to a debtor before initiating the insolvency resolution process against them. It was observed by the Supreme Court that Section 100 of IBC does not explicitly mention a hearing for a debtor. However, the requirement of a hearing for a debtor must be read into Section 100 of IBC. To support this observation, the Supreme Court held that in legal interpretation, when a statute is silent on a specific aspect, such as hearing, for which there is no explicit prohibition, the Supreme Court may imply or read in such a requirement. Therefore, the lack of explicit mention of a hearing in a provision does not automatically make it unconstitutional because such a requirement can be read into the statute.

The resolution professional in exercise of his duty under Section 99 of IBC may not embark on a roving enquiry into the affairs of the debtor or personal guarantor. The information sought by the resolution professional from the creditor, debtor, or third parties must be relevant to the examination of the application of insolvency resolution process. The Supreme Court observed that the proportionality test devised for privacy under Article 21 (Protection of life and personal liberty) of the Constitution is met by the virtue of vesting such powers in the resolution professional along with his duty to keep such information confidential. Additionally, the nature of the role of resolution professional, the powers of resolution professional, as well as its nexus with the legislation’s legitimate aim also leads to the conclusion that the provisions of Sections 95 to 100 of IBC are compliant with Article 14 of the Constitution. Therefore, an adjudicatory decision-making process of the nature which has been suggested by the Petitioner would not be implicated under Section 97(5) of IBC, since to accept the submission of the Petitioner would render the provisions of Sections 99 and 100 of IBC otiose.

Decision of the Supreme Court

The Supreme Court held that at the stages envisaged under Sections 95 to 99 of IBC, there is no involvement of judicial adjudication. The resolution professional appointed under Section 97 of IBC serves a facilitative role of collating all the facts relevant to the examination of the application for the commencement of the insolvency resolution process which has been preferred under Sections 94 or 95 of IBC. Additionally, the report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application.

The Supreme Court held that there is no violation of natural justice under Sections 95 to 100 of IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional. The Supreme Court also held that until the adjudicating authority decides under Section 100 of IBC whether to accept or reject the application, no judicial determination takes place and the adjudicatory authority must observe the principles of natural justice while exercising its jurisdiction under Section 100 of IBC for the purpose of determining whether to accept or reject the application. The Supreme Court held that the purpose of interim-moratorium under Section 96 of IBC is to protect the debtor from further legal proceedings.

It was held by the Supreme Court that the provisions of Sections 95 to 100 of IBC are not unconstitutional as they do not violate Articles 14 and 21 of the Constitution.

VA View:

In the present case, the Supreme Court highlights the underlying spirit of IBC which is concerned with observance of stringent time lines under IBC as time bound resolution of insolvency constitutes the heart and soul of the provisions of IBC. The Supreme Court in this case has analyzed the scheme of IBC in-depth in light of the constitutional validity of the provisions of IBC and with the backdrop of the principle of natural justice.

The Supreme Court has rightly highlighted the role and functions of an adjudicating authority and the purpose of the interim-moratorium under Section 96 of IBC. This judgement ultimately settles and puts an end to the questions being raised pertaining to the similar set of issues and challenging the constitutional validity of certain provisions of IBC.

Further, on account of the present batch of writ petitions being sub-judice before the Supreme Court and status quo order of the Supreme Court in some of these writ petitions, the Adjudicating Authority was not in a position to proceed further and admit the personal guarantors in insolvency. However, pursuant to pronouncement of this judgment, the cases and mechanism of personal insolvency as envisaged under IBC will be proceeded expeditiously and the personal guarantors will no longer take shelter of pendency of constitutional challenge before the Supreme Court to evade the process of law.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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