Introduction
The Hon’ble Supreme Court of India (‘SC’) recently delivered a landmark judgment in the case of Dilip B Jiwrajka v. Union of India[i], where the SC addressed the constitutionality of specific provisions within the Insolvency and Bankruptcy Code, 2016 (‘IBC’) related to personal guarantor’s insolvency resolution. This judgment is important as it addresses the constitutional validity of amendments introduced in 2019, particularly ss. 95 to 100 of the IBC, SC clarified that the sections that dealt with the insolvency resolution process do not violate the principles of natural justice.
Brief Facts
The current case is about the challenges to ss. 95 to 100 of the IBC. These provisions primarily focus on the initiation of insolvency proceedings. The summary of these sections of the IBC are as follows:
S. 95: Allows creditors to file an application for insolvency resolution against debtors, providing necessary information about debts and defaults.
S. 96: Triggers an interim moratorium upon filing an Insolvency Application, staying legal actions related to debts.
Ss. 97 and 98: Deal with appointing and replacing resolution professionals (‘RPs’).
S. 99: Requires the RP to examine the application, seek evidence of debt repayment, and recommend admission or rejection.
S. 100: The adjudicating authority decides whether to admit or reject the Insolvency Application.
Challenges Raised
The constitutionality of the above provisions has been challenged based on the following grounds:
Debtors are given a hearing only when the adjudicating authority examines the RP Report. Prior steps like imposing the moratorium do not allow the debtor to be heard, contravening principles of natural justice.
Ss. 97 and 98 confer wide powers on RPs without adequate safeguards. Such arbitrary powers violate a. 14 of the Constitution of India (‘Constitution’).
The appointment of an RP affects the debtor’s creditworthiness and triggers collateral defaults. These consequences are often irreversible. Denying access to remedies violates fundamental rights.
Corporate debtors have the right to be heard at various stages. Similarly, individual debtors should also have an opportunity to present their case before the appointment of an RP.
The above provisions allow actions (such as imposing an interim moratorium and appointing an RP) even before a judicial determination of debt and default. This raises serious concerns about due process.
Observation/ Held by SC
The SC dismissed the contentions of the Petitioners and upheld the constitutionality of the above provisions on the following grounds:
The RP only performs the task of collating information; judicial analysis of the existence of debts and default is not required at this stage. The role of an RP varies based on whether it is corporate or individual insolvency. When appointed under s. 97 of the IBC, the RP’s primary task is to collate relevant information and make a non-binding recommendation to the adjudicating authority on whether to admit the Insolvency Application. In corporate insolvency, the RP takes over management and control of the corporate debtor’s assets, while in individual insolvency, the RP’s role is limited to information collation and facilitation. The ultimate adjudication lies with the authority, which reviews the RP’s report to decide on admitting or rejecting the insolvency application.
The SC has affirmed that the principles of natural justice must be adhered to in all actions, including administrative ones, that could negatively affect an individual or entity. Specifically, under Part III of the IBC, an RP is tasked with gathering facts and making recommendations regarding an Insolvency Application but does not label someone as a ‘debtor’ solely based on the application. The RP’s role is to facilitate the process without making binding decisions, ensuring the debtor has a chance to present their case. Ultimately, the adjudicating authority retains the exclusive power to make judicial determinations based on the RP’s report and must provide the debtor with a hearing, even if s. 100 of the IBC does not explicitly state this requirement, as implied by the principles of natural justice.
The powers of RP in terms of the above provisions do not contravene the provisions of as. 14 and 21 of the Constitution: The SC, referencing the landmark case of K.S. Puttaswamy v Union of India, has upheld that the powers granted to RP under the IBC do not violate as. 14 and 21 of the Constitution. It asserts that the right to privacy is protected through the requirement of a law, a legitimate aim, and proportionality, all of which are met by the IBC’s provisions. The RP’s role is strictly to gather information for assessing insolvency applications, and they are bound by confidentiality regulations. This ensures a balance between individual privacy rights and the state’s interest in an effective insolvency resolution process, thereby satisfying the constitutional mandates of proportionality and equality.
The SC clarified that the interim moratorium under s. 96 of the IBC is designed to protect debtors from coercive recovery actions by creditors and is not prejudicial. It differs from s. 14 of the IBC’s moratorium, which is against the debtor, as it pertains only to the debt. During this period, creditors cannot initiate recovery actions, but debtors are not restricted from transferring assets. This protection activates upon filing an insolvency application. It aligns with the IBC’s aim to provide a respite for the debtor, ensuring the moratorium’s alignment with the intended legislative purpose.
In view of the above observations, the SC dismissed the writ petitions and upheld the constitutionality of the above-mentioned provisions.
Conclusion
The SC rightly held that the above-mentioned provisions of the IBC, particularly ss. 95 to 100 are constitutional and do not violate principles of natural justice or fundamental rights. By affirming that the role of the RP is limited to information collation and does not involve making binding decisions, the SC ensured that debtors are afforded due process and a fair opportunity to be heard before any adverse judicial determination.
End Note
[i] Writ Petition (Civil) No 1281 of 2021
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.