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SC Dismisses Challenge to Constitutional Validity of IBC Provisions

In a recent judgment, the Supreme Court dismissed the writ petitions challenging the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016.[1] The said Sections are contained in Chapter III of Part III of the Code which deals with the insolvency resolution process applicable to individuals and partnership firms.

In the present case, a total of 384 writ petitions were filed before the Supreme Court, wherein, the petitioners asserted that judicial intervention was necessary before the provisions regarding interim moratorium, the appointment of the resolution professional (RP) after filing of application by creditor for initiating insolvency resolution process under Section 95, the requisitioning of information by the RP from guarantors and the subsequent examination of information and submission of report by the RP, could take effect.

Laying stress on the need to decide whether a debt (and the relationship of debtor and creditor) existed in the initial stage itself, the petitioners maintained that the jurisdiction to entertain the application must be determined at the very outset by giving an opportunity of being heard, to the debtor or personal guarantor. Not holding such a hearing before the appointment of RP, the petitioners contended, would be violative of Article 14 of the Constitution, especially in light of the wide-ranging powers conferred on the RP.

In response to these submissions, the respondents averred that the process followed by the RP was for collating facts and submitting a report which was recommendatory in nature and not binding on the adjudicating authority. The need to comply with the principles of natural justice arose at the adjudicatory stage, i.e., when the matter came up before the adjudicating authority for determining whether the application had to be admitted or rejected under Section 100. It was added that the commencement of interim moratorium under Section 96 was not prejudicial to the debtor, unlike the moratorium applicable under Sections 14 and 101.

After hearing the parties, the Court highlighted the vast differences between the functions of the interim resolution professional (IRP) and the RP under Part II of the Code (which relates to insolvency resolution and liquidation process for corporate persons) and those of the RP under Part III. The Court pointed out that the legislature intentionally provided for the intermediate stage before the matter could reach the adjudicatory authority. Not just when it comes to the RP’s role, but also with respect to the moratorium and adjudicatory stage, the provisions were held to be based on an “intelligible differentia between the nature of the insolvency resolution process in the case of a corporate debtor, on one hand, and individuals or partnerships, on the other”.

Considering that the RP’s report is submitted after explanation (regarding debt repayment) and information is obtained from the debtor under Section 99(2) and (4), the Court rejected assertions as to violation of principles of natural justice. With respect to privacy concerns associated with information sought from personal guarantors, the Court emphasised that only information relevant to the application’s examination may be requested for by the RP who is also obligated to maintain confidentiality as per IBBI regulations.

[1] Dilip B Jiwrajka vs. Union of India & Ors. [WP(C) No.1281 of 2021] and other cases