Supreme Court upholds validity of key provisions of Insolvency and Bankruptcy Code

The Supreme Court on Thursday upheld key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), which had been challenged on various grounds including alleged absence of due process and a violation of natural justice principles. .A bench of Chief Justice of India (CJI) DY Chandrachud with Justices JB Pardiwala and Manoj Misra pronounced the judgment in a batch of over 200 petitions challenging Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the IBC. .The Court today rejected the challenge and reasserted that the IBC was constitutionally valid and that its provisions did not suffer from arbitrariness as contended by the petitioners. "IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution. Thus we hold that the statute does not suffer from the vices of manifest arbitrariness," the Court ruled. .Pertinently, the Court rejected prayers that there should be some form of an adjudicatory process (whether the corporate debtor is also heard) before the appointment of a resolution professional (RP) under Section 97 of the IBC."We are of the view that the argument that an adjudicatory role be imposed before Section 97 cannot be accepted ... We have come to the conclusion that reading an adjudicatory role in section 97 will render Section 99 and Section 100 of the IBC otiose," the Court held. .The bench opined that it would be impermissible for the Court to accept an argument there is an element of adjudication at the stage of appointment of an RP by the adjudicating authority. True adjudication only begins at the stage of Section 100 (admission or rejection of application) of the IBC, the Supreme Court explained. ."(For the) Court to enter here will be to rewrite the statute. What is described as a jurisdiction question is not a simple matter of law to be decided as urged by the petitioner," the Court's judgment added..The Court further observed that the timelines made part of the Code will be rendered nugatory if any adjudicatory role is read into Section 97 of IBC. .Other key findings include the following.1. The Court opined that the application of natural justice principles cannot be viewed in a straightjacket manner, and that its application could vary depending on the situation. "In one case, it can be full fledged evidentiary hearing and in some, a bare minimum is given to explain the nature of allegations," the Court explained..2. The Court held that sufficient safeguards have been read into the manner in which a resolution professional functions in the course of an insolvency process. "Parliament has not contemplated a roving enquiry by the resolution professional, but an enquiry for recommendation. The resolution professional, after carrying out process, is required to make an ascertainment in terms of clause (6). The process which takes place before the resolution professional is not ex parte and the legislature has ensured that even for a recommendation made, there is explanation taken from the debtor for the purpose," the Court said..3. The Court also disagreed with arguments by the petitioners that the provisions under challenge conferred "adjudicatory" powers on resolution professionals appointed under the IBC."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. (It) leaves no manner of doubt that resolution professional is not intended to perform an adjudicatory function or to arrive at binding decisions on facts and it is only a recommendation which has no binding force," the Court said. .4. The Court agreed with submissions made by Solicitor General Tushar Mehta on behalf the Central government that the IBC provisions imposing a stay on other legal proceedings against corporate debtors was for the benefit of the debtors. "The moratorium is primarily in respect of a debt as opposed to a debtor ... Purpose of moratorium under Section 96 is protective and Solicitor General was correct that moratorium was to insulate the corporate debtor from the legal action of the debt," the Court said. .5. The Court went on to acknowledge that there were differences with respect to when the resolution professional and the adjudicating authority steps in, and when a moratorium on other legal proceedings is imposed under Parts II (corporate insolvency) and III (insolvency of individuals and partnerships) of the IBC. However, the Court opined that such differential treatment is justified and based on intelligible differentia. "The legislature has carefully calibrated the role of resolution professional, imposition of moratorium and the stage at which adjudicating authority steps in Part II and Part III and this is based on intelligible differentia between the individual debtors, partnerships and corporate debtors," the Court said. .Background.The petitioners, which included Reliance ADA Group chairman Anil Ambani, argued that the IBC was in the teeth of the cardinal principle of natural justice and was thus, arbitrary and violative of the petitioner's fundamental rights under Article 14 of the Constitution of India.The business tycoon's plea challenged Sections 95 (application by creditor to initiate insolvency resolution process), 96 (interim-moratorium), 97 (appointment of resolution professional), 99 (submission of report by resolution professional), 100 (admission or rejection of application) of the Code.That petition contended that the provisions are manifestly arbitrary, unconstitutional, and violative of fundamental rights. It was submitted that they arbitrarily vest unfettered powers in the resolution professional to be a judge in his own cause.Additionally, it was stated that a personal guarantor is left remediless and at the resolution professional's mercy. Notably, in May 2021, the top court had upheld the provisions of the Insolvency and Bankruptcy Code relating to insolvency of personal guarantors, that were brought into force in 2019..Meanwhile, the Central government defended the IBC provisions, contending that proceedings under Sections 95-99 cause no real prejudice to personal guarantors.Further, the role of the resolution professional is a limited one under Section 99, only being required to place evidence before the Adjudicating Authority. Nothing gives the former any authority to control or own the assets of the debtor during the interim moratorium, the Central government had stressed.The professional, thus, does not have unfettered powers, as the personal guarantor can always seek a copy of the report submitted by them to the adjudicating authority (National Company Law Tribunals), it was pointed out. A resolution professional's recommendation was also not binding on the adjudicating authority, it was submitted. The Central government further contended that the intent of Section 96 was to protect the interests of the personal guarantor by preserving their assets, to alleviate them from short-term financial hardship.In its counter-affidavit, the Central government had also submitted that there was no duplication of recovery proceedings against the personal guarantor under the provisions of the Recovery Of Debts And Bankruptcy Act, 1993 and the SARFAESI Act. .[Read Judgment].Read our live account of the two-day hearing, here and here..[Follow our live-coverage of today's pronouncement of judgment]