Supreme Court: In a batch of 384 petitions under Article 32 of the Constitution, challenging the constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), the three-Judge Bench of Dr DY Chandrachud*, CJI., J B Pardiwala, and Manoj Misra, JJ. has held the following:
The resolution professional appointed under Section 97 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 Section 94 or Section 95. The report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application.
The submission that a hearing should be conducted by the adjudicatory authority for the purpose of determining ‘jurisdictional facts’ at stage when it appoints a resolution professional under Section 97(5) of the IBC is rejected. No such adjudicatory function is contemplated at that stage. To read in such a requirement at that stage would be to rewrite the statute, which is impermissible in the exercise of judicial review.
The resolution professional may exercise the powers vested under Section 99(4) of the IBC for the purpose of examining the application for insolvency resolution and to seek information on matters relevant to the application to facilitate the submission of the report recommending the acceptance or rejection of the application.
There is no violation of natural justice under Section 95 to Section 100 of the 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.
No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The report of the resolution professional is only recommendatory in nature and hence does not bind the adjudicatory authority when it exercises its jurisdiction under Section 100.
The adjudicatory authority must observe the principles of natural justice when it exercises jurisdiction under Section 100 for the purpose of determining whether to accept or reject the application.
The purpose of the interim moratorium under Section 96 is to protect the debtors from further legal proceedings.
I. Comparative Analysis of Part II and Part III of the IBC
The Court noted that Part II of the IBC provides for insolvency resolution and liquidation for corporate persons. Part III specifically deals with insolvency resolution and bankruptcy for individuals and partnership firms. Part III of the IBC deals with insolvency resolution and bankruptcy for individuals and partnership firms. Chapter III of Part III which is titled “Insolvency Resolution Process” (“IRP”) comprises of Sections 94 to 120. These provisions of the IBC apply to personal guarantors to corporate debtors.
Concerning the role which is ascribed to the resolution professional in Part II and Part III, the Court noted that while both the Parts use the expression “resolution professional”, notably, the provisions of Part II contain a material difference from those of Part III relating to the role and functions of a resolution professional. Section 5(27) 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 and to include an interim resolution professional.
Under Part III, the resolution professional is required, firstly, to examine the application within ten days of appointment. Secondly, they may require the debtor to prove that the repayment of the debt which is claimed to be unpaid by the creditor has taken place. The debtor may do so by evidence of an electronic transfer of the unpaid amount from a bank account of the debtor or produce evidence of the encashment of a cheque issued by a debtor or a signed acknowledgement by the creditor of the receipt of the dues.
The Court said that the resolution professional does not possess an adjudicatory function in terms of the provisions of Section 99. In Chapter III of Part III, the legislature has dealt with the resolution of individual or partnership insolvencies and bankruptcies. Therefore, the legislature considered it appropriate to interpose the resolution professional, before the adjudicatory function of the adjudicating authority commences under Section 100. The resolution professional does not have the kind of power which their counterpart has in Part II. No provision has been made in Part III 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 under Section 99 which is ascribed to the resolution professional 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.
Concerning the impact of a moratorium under Section 14 of Part II vis-a-vis interim moratorium under Section 96 of Chapter III of Part III, the Court said that the very submission of an application under Section 94 or Section 95 triggers the interim moratorium which then ceases to have effect on the date of the admission of the application under Section 100. The impact of the interim moratorium under Section 96 is that a legal action or proceeding pending in respect of any debt is deemed to have been stayed and the creditors or the debtors shall not initiate any legal action or proceedings in respect of any debt. The crucial words which are used both in clause (b)(i) and clause (b)(ii) of sub-section (1) of Section 96 are “in respect of any debt”. These words indicate that the interim moratorium which is intended to operate by the legislature is primarily in respect of a debt as opposed to a debtor. Clause (b) of sub-section (1) indicates that the purpose of the interim moratorium is to restrain the initiation or the continuation of legal action or proceedings against the debt.
Per Contra, the Court noted that Section 14 (1)(b) 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. Significantly, the moratorium under Section 14 operates on the order passed by an adjudicating authority. The purpose of the moratorium under Section 96 is protective. The object of the moratorium is to insulate the corporate debtor from the institution of legal actions or the continuation of legal actions or proceedings in respect of the debt.
On the role of the adjudicating authority, the Court said that the adjudicatory function of the adjudicating authority commences, under Part III, after the submission of a recommendatory report by the resolution professional.
Thus, the Court said that the legislature has carefully calibrated the role of the resolution professional; the imposition of the moratorium; and the stage at which the adjudicating authority steps in, under Part II and Part III.
II. Applicability of the Principles of Natural Justice
The Court reiterated the principles of natural justice and said that the requirement to observe the principles of natural justice arises both in the context of purely judicial or quasi-judicial action as well as administrative action which has an adverse impact on the individual or entity against which action is initiated.
Further, it noted that these principles are not to be construed in a straitjacket. The nature of natural justice is liable to vary with the exigencies of the situation. In each situation, it may extend to a fully-fledged evidentiary hearing while, on the other hand, the principles of natural justice may require that a bare minimum opportunity should be given to an individual who is liable to be affected by an action, to furnish an explanation to the allegations or the nature of the enquiry.
Concerning the role of the Resolution Professional as a facilitator, the Court viewed that the resolution professional, operating under the regulatory oversight of the Board, plays a vital role in the effective functioning of the insolvency process and contributes significantly to its efficiency. Firstly, the resolution professional is only entitled to seek information which is strictly relevant to the examination of the application for IRP; and secondly, regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 read with para 21 of the First Schedule, casts an obligation on the resolution professional to ensure confidentiality of all information relating to the insolvency process. The Bankruptcy Law Reforms Committee (‘BLRC’) also acknowledges the information imbalance between debtors and creditors, necessitating the resolution professional’s investigative role in individual insolvency. Therefore, Section 99 empowers the resolution professional to seek information.
Further, the Bench viewed that the submission that an adjudicatory role should be interposed at the stage of Section 97(5) cannot be accepted, as the power which is conferred on the adjudicating authority at the stage of filing of an application is to appoint a resolution professional. The appointment of a resolution professional is for the purpose of a facilitative exercise which is contemplated by Section 99 which eventually ends in a report either recommending the acceptance or rejection of the application. Thus, the Court did not allow for the adjudicatory intervention of the adjudicating authority in adjudicating what is described as a jurisdictional question at the stage of Section 97(5).
Further, the Court said that it is necessary to clarify the ambit of Section 99(4). It is prefaced by the words “for the purposes of examining an application”. Thus, the power to seek information or to seek an explanation is related to the nature of the application which has been submitted under Section 94 or Section 95. The right to file such representation is sufficient compliance of audi alterum partem requirements. Hence, as per the Court, the petitioners’ assertion that the statutory framework, as interpreted and applied by the adjudicating authority, results in a violation of natural justice lacks merit.
III. Challenge to the constitutional validity
The Court said that 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 legislature has evidently made provisions in Section 99, to allow for the engagement of the debtor with the resolution professional before a report is submitted to the adjudicating authority.
Further, it said that the resolution professional in exercise of their duty under Section 99 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 debtor, the creditor, or third parties must be relevant to the examination of the application of IRP. In this process, the debtor would inevitably be furnished with a fair opportunity by the resolution professional. Further, the aim of vesting such powers in the resolution professional combined with his duty to keep such information confidential meets the proportionality test devised for privacy under Article 21 of the Constitution.
Further, the nature of the resolution professional’s role, the powers, and its nexus with the legitimate aim of the legislation also lead the Court to conclude that the impugned provisions are compliant with Article 14 of the Constitution. Therefore, it held that Sections 95 to 100 of the IBC are not unconstitutional. Thus, an adjudicatory decision-making process of the nature which has been suggested by the petitioners would not be implicated under Section 97(5), as to accept the submission of the petitioners would render the provisions of Sections 99 and 100 otiose.
Moreover, the Bench denied that Section 95(2) indicates that an application under sub-section (1) can be initiated only in respect of a partnership debt which is owed to the creditor. The provisions of sub-section (2) cannot control the ambit of subsection (1) of Section 95.
Concerning that the provisions of Sections 95 to 100 are retroactive in nature, the Court said that a law is not retrospective in nature merely because some parts of the cause of action on which the law operates has arisen in the past. Prior to the commencement of the IBC, the field was governed by the Presidency Towns Insolvency Act 1909 and the Provincial Insolvency Act 1920. With the enactment of the IBC, the insolvency resolution process in relation to individuals and partnership firms is governed by Part III of the IBC. Thus, the IBC cannot be held as operating in a retroactive manner to violate Article 14 of the Constitution.
Therefore, the Court held that provisions of the IBC do not suffer from any manifest arbitrariness to offend Article 14 of the Constitution Supreme Court
[Dilip B. Jiwrajka v. Union of India, 2023 SCC OnLine SC 1530 , decided on 09-11-2023]
Judgment Authored by: Dr. DY Chandrachud, Chief Justice of India