Supreme Court Upholds Constitutionality of Sections 95-100 of IBC: Dilip B Jiwrajka vs. Union of India (2023)

Date of the Judgment: 9 November 2023
Citation: 2023 INSC 1018
Judges: Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala, J, Manoj Misra, J
Can the appointment of a resolution professional for personal guarantors under the Insolvency and Bankruptcy Code (IBC) be deemed unconstitutional? The Supreme Court of India recently addressed this critical question, examining the validity of Sections 95 to 100 of the IBC. These sections outline the process for initiating insolvency resolution for personal guarantors to corporate debtors. The court’s decision clarifies the role of resolution professionals and the extent of judicial intervention required at various stages of the insolvency process. The judgment was authored by Dr. Dhananjaya Y Chandrachud, CJI.

Case Background

The case involves a batch of 384 writ petitions filed under Article 32 of the Constitution of India. The petitioners challenged the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016 (IBC). These sections deal with the process of initiating insolvency resolution for individuals and partnership firms, particularly personal guarantors to corporate debtors. The petitioners argued that the provisions are arbitrary and violate the principles of natural justice. The core contention was that the process allows for the appointment of a resolution professional and the imposition of an interim moratorium without adequate judicial oversight, thereby infringing on the rights of the debtors.

Timeline

Course of Proceedings

The petitioners, primarily personal guarantors, challenged the validity of Sections 95-100 of the IBC, arguing that these provisions allow for the initiation of insolvency proceedings against them without adequate judicial oversight. They contended that the appointment of a resolution professional and the imposition of an interim moratorium should not occur automatically upon filing of an application but only after a judicial determination of the debt’s existence. The respondents, including the Union of India and the State Bank of India, defended the provisions, asserting that the process is necessary for the timely resolution of insolvencies and that sufficient safeguards are in place to protect the interests of the debtors. The Supreme Court, after hearing extensive arguments, analyzed the scheme of the IBC and the role of resolution professionals and adjudicating authorities.

Legal Framework

The judgment primarily revolves around the interpretation and application of several key sections of the Insolvency and Bankruptcy Code, 2016:
✓ Section 2(e) of the IBC, as amended, defines the applicability of the code to personal guarantors of corporate debtors.
✓ Section 60 of the IBC, as amended, provides the jurisdiction of the National Company Law Tribunal (NCLT) in matters involving the bankruptcy of a corporate guarantor or personal guarantor.
✓ Part III of the IBC deals with insolvency resolution and bankruptcy for individuals and partnership firms. Chapter III of Part III, comprising Sections 94 to 120, specifically addresses the Insolvency Resolution Process (IRP).
✓ Section 94 of the IBC allows a debtor to apply for initiating the IRP.
✓ Section 95 of the IBC enables a creditor to apply for initiating the IRP against a debtor, either individually or jointly with other creditors, or through a resolution professional.
✓ Section 96 of the IBC provides for an interim moratorium upon filing an application under Sections 94 or 95. It states:

“96. Interim moratorium. —(1) When an application is filed under section 94 or section 95—
(a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and
(b) during the interim-moratorium period—
(i) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and
(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.”
✓ Section 97 of the IBC deals with the appointment of a resolution professional by the adjudicating authority.
✓ Section 99 of the IBC outlines the process for the resolution professional to examine the application and submit a report to the adjudicating authority. It states:

“99. Submission of report by resolution professional. —(1) The resolution professional shall examine the application referred to in section 94 or section 95, as the case may be, within ten days of his appointment, and submit a report to the Adjudicating Authority recommending for approval or rejection of the application.”
✓ Section 100 of the IBC empowers the adjudicating authority to either admit or reject the application for IRP within fourteen days of receiving the resolution professional’s report.
✓ Section 101 of the IBC provides for a statutory moratorium upon the admission of an application under Section 100.

Arguments

The arguments presented by both sides are summarized below:

Submissions on behalf of the Petitioners

• The IBC is an invasive in rem proceeding that is highly prejudicial against the respondent.
• Before initiating insolvency proceedings and appointing a resolution professional, a judicial body must determine the existence of a debt.
• The following should not occur automatically after filing an application under Section 95 without judicial intervention:
  • An automatic interim moratorium.
  • Automatic appointment of a resolution professional.
  • The resolution professional seeking information from the guarantor.
  • The resolution professional examining information and submitting a report.
• None of the above steps are reversible under Section 100, which is the first stage of judicial adjudication and where the guarantor is given a hearing.
• The power to seek information from the guarantor and third parties is untrammelled.
• Common law consistently provides natural justice unless explicitly prohibited by statute.
• The petitioners seek natural justice by a judicial body at the stage of Section 97(1), similar to the process under Sections 7 or 9 of the IBC.
• The IBC follows the same model as sought by the petitioners under Sections 7 and 9, and no reasonable distinction exists for denying a right to an adjudicatory hearing to a guarantor under Section 95.
• The determination of the jurisdictional question of whether the debt exists must take place before the appointment of the resolution professional under Section 97(5).
• The adjudicating authority must determine at the threshold whether a debt exists and whether the debt has been effaced.
• The appointment of a resolution professional under Section 97(5) grants wide-ranging powers under Section 99(4), and the debtor is excluded from remedies of an adjudicatory nature.
• Natural justice involving an adjudicatory body must be read into the provisions at the stage of Section 99.

Submissions on behalf of the Respondents

• The time-bound resolution of insolvency is the core of the IBC.
• Part II (corporate insolvency) and Part III (individual insolvency) of the IBC contain distinct provisions.
• Under Sections 7 and 9, the admission of an application triggers the CIRP and a moratorium under Section 14, which has serious consequences for the corporate debtor, necessitating judicial involvement at that stage.
• The moratorium under Section 96 is for the benefit of the guarantor/debtor, and unlike Section 14, it does not impose an embargo on alienation of assets.
• The function of a resolution professional under Section 99 is not adjudicatory but to collate facts.
• Section 99 provides sufficient opportunity to the debtor, as the resolution professional may require the debtor to prove the payment of debt.
• The process under Section 99 results in a report with recommendations, which is not binding on the adjudicating authority.
• The principles of natural justice are implicated when the adjudicating authority exercises jurisdiction under Section 100, where a hearing is contemplated.
• The process followed by the resolution professional is for collating facts, and the statute provides sufficient engagement for the debtor.
• The moratorium under Section 96 is intended to insulate the debtor and is not prejudicial.
• It would be inappropriate to read compliance with natural justice before Section 100, as it would dislocate the IBC’s scheme.
• The concept of natural justice is flexible and must be tailored to the needs of the situation.
• The object of CIRP in Part II and Chapter III of Part III is distinct. Part II envisages the exclusion of existing management, a drastic moratorium, and liquidation. Chapter III of Part III seeks a repayment plan, preceded by an examination by the resolution professional.
• The appointment of a resolution professional precedes the adjudicatory function, given the limited role of the resolution professional to gather information.
• Section 99(3) applies only to the resolution professional’s examination and does not bar the adjudicating authority.
• Section 99(6) uses expressions like “examine,” “ascertain,” and “satisfies,” and Section 99(7) contemplates a recommendation by the resolution professional, involving the debtor at every stage.
• There is a valid classification between CIRP for corporate debtors and the insolvency resolution process for individuals, based on an intelligible differentia.
• There is no significant civil consequence on a debtor or personal guarantor before the stage of adjudication under Section 100, and therefore, no breach of natural justice.
• The procedure under Chapter III serves the purpose of rehabilitation, with liquidation or bankruptcy as a last resort.
• The interim moratorium under Section 96 operates on the debt and not on the debtor, and does not affect any right of the debtor.
• The insolvency resolution process under Part III can be initiated by either a creditor or a debtor, and the IBC gives equal protection to both.
• The role of the resolution professional is to act as a facilitator for compiling information under Part III, unlike the interim resolution professional in Part II.
• The resolution professional is entrusted with a duty to maintain confidentiality.
• An alleged ground of misuse of a provision cannot challenge the constitutional validity of a statute.
• The actual judicial adjudication takes place at the stage of Section 100 before the adjudicating authority.
• The framework of the IBC is based on stringent timelines, and adding an intermittent stage would dislocate the scheme of the IBC.
• There has been no challenge to the provisions of Section 94 of the IBC.
• The legislature provided details of documents to be provided to the resolution professional under Section 95(4).

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether the provisions of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016 are unconstitutional.
2. Whether the appointment of a resolution professional under Section 97(5) of the IBC requires a prior judicial determination of the existence of a debt.
3. Whether the process under Sections 95 to 100 of the IBC violates the principles of natural justice.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases Relied Upon

• Lalit Kumar Jain v Union of India (2021) 9 SCC 321 – Supreme Court of India: This case established that the liability of a guarantor is not discharged merely on the discharge of the corporate debtor.
• Ravi Ajit Kulkarni v. State Bank of India (2021) SCC OnLine NCLAT 641 – National Company Law Appellate Tribunal: This case emphasized that under Section 98 of the IBC, the debtor retains the option to replace the RP.
• Ujjam Bai v State of Uttar Pradesh AIR 1962 SC 1621 – Supreme Court of India: This case was cited by the petitioners to argue for a prior hearing, but the Court distinguished it.
• Swiss Ribbons Private Limited v Union of India (2019) 4 SCC 17 – Supreme Court of India: This case elucidated that the resolution professional’s functions are administrative, not adjudicatory.
• Essar Steel India Limited v Satish Kumar Gupta (2020) 8 SCC 531 – Supreme Court of India: This case underscores the non-adjudicatory nature of the resolution professional’s role.
• K.S. Puttaswamy (9 Judge Bench) v Union of India (2017) 10 SCC 1 – Supreme Court of India: This case laid down the threshold requirements to balance privacy with legitimate state interest.
• State Bank of India v Rajesh Agarwal (2023) SCC OnLine SC 342 – Supreme Court of India: This case established that exceptions to natural justice must be confined to the ‘narrowest possible limits.’
• Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664 – Supreme Court of India.
• Mangilal v. State of M.P., (2004) 2 SCC 447 – Supreme Court of India.
• Manohar v. State of Maharashtra, (2012) 13 SCC 14 – Supreme Court of India.

Legal Provisions Considered

• Section 2(e) of the IBC: Defines the applicability of the code to personal guarantors of corporate debtors.
• Section 60 of the IBC: Provides the jurisdiction of the NCLT in matters involving the bankruptcy of a corporate guarantor or personal guarantor.
• Part III of the IBC: Deals with insolvency resolution and bankruptcy for individuals and partnership firms.
• Chapter III of Part III of the IBC: Comprises Sections 94 to 120 and specifically addresses the Insolvency Resolution Process (IRP).
• Section 94 of the IBC: Allows a debtor to apply for initiating the IRP.
• Section 95 of the IBC: Enables a creditor to apply for initiating the IRP against a debtor.
• Section 96 of the IBC: Provides for an interim moratorium upon filing an application under Sections 94 or 95.
• Section 97 of the IBC: Deals with the appointment of a resolution professional by the adjudicating authority.
• Section 99 of the IBC: Outlines the process for the resolution professional to examine the application and submit a report to the adjudicating authority.
• Section 100 of the IBC: Empowers the adjudicating authority to either admit or reject the application for IRP.
• Section 101 of the IBC: Provides for a statutory moratorium upon the admission of an application under Section 100.
• Section 239 of the IBC: Empowers the Central Government to make rules.

Judgment

The Supreme Court dismissed the writ petitions and upheld the constitutional validity of Sections 95 to 100 of the IBC. The Court held that the process outlined in these sections is not arbitrary, does not violate the principles of natural justice, and is necessary for the effective implementation of the insolvency resolution process for personal guarantors. The Court reasoned that the role of the resolution professional is primarily to collate information and facilitate the process, not to adjudicate. The adjudicatory function rests with the adjudicating authority under Section 100, where the debtor is given a hearing. The Court also emphasized that the interim moratorium under Section 96 is for the benefit of the debtor, and the process is designed to be rehabilitative, with liquidation as a last resort.

Ratio Decidendi

The ratio decidendi of the judgment is that Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016, are constitutionally valid. The Court held that the process of initiating insolvency resolution for personal guarantors, including the appointment of a resolution professional and the imposition of an interim moratorium, does not violate the principles of natural justice. The Court emphasized that the role of the resolution professional is facilitative, not adjudicatory, and the adjudicatory function is performed by the adjudicating authority under Section 100, where the debtor is given a hearing. The Court found that the scheme of the IBC is designed to be rehabilitative, and the interim moratorium under Section 96 is for the benefit of the debtor.

Obiter Dicta

The Supreme Court made several observations in its judgment that can be considered as obiter dicta:

• The Court emphasized the importance of maintaining the timelines prescribed in the IBC to ensure timely resolution of insolvencies.
• The Court highlighted the distinction between the corporate insolvency resolution process under Part II of the IBC and the insolvency resolution process for individuals under Part III, noting that these processes serve different objectives.
• The Court observed that the interim moratorium under Section 96 operates on the debt and not on the debtor’s assets, and does not affect any right of the debtor.
• The Court noted that the insolvency resolution process under Part III can be initiated by either a creditor or a debtor, and the IBC gives equal protection to both.
• The Court clarified that the role of the resolution professional is to act as a facilitator for compiling information under Part III, unlike the interim resolution professional in Part II.
• The Court observed that the resolution professional is entrusted with a duty to maintain confidentiality.
• The Court stated that an alleged ground of misuse of a provision cannot challenge the constitutional validity of a statute.

Flowchart of the Process

Conclusion

The Supreme Court’s judgment in Dilip B Jiwrajka vs. Union of India is a significant ruling that upholds the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016. The Court clarified that the process for initiating insolvency resolution for personal guarantors is not arbitrary or in violation of the principles of natural justice. The Court emphasized the facilitative role of the resolution professional and the adjudicatory role of the adjudicating authority. The judgment provides clarity on the process and ensures that the IBC provisions for personal guarantors are implemented effectively while protecting the interests of all stakeholders. The judgment underscores the importance of timely resolution of insolvencies and the rehabilitative nature of the insolvency process under the IBC.