InWrit Petition (Civil) No. 1281 of 2021 -SC- Supreme Court upholds constitutionality of Sections 95 to 100 of Insolvency and Bankruptcy Code
Chief Justice Dhananjaya Y Chandrachud, Justice J B Pardiwala & Justice Manoj Misra [09-11-2023]

Read Order: Dilip B Jiwrajka V. Union of India & Ors

Chahat Varma

New Delhi, November 24, 2023: The Supreme Court has upheld the constitutionality of Sections 95 to 100 of the Insolvency and Bankruptcy Code 2016 (IBC), rejecting a batch of petitions challenging their validity.

In the case at hand, the petitioners, in a batch of three hundred and eighty-four petitions under Article 32 of the Constitution, had contested the constitutional validity of Sections 95 to 100 of the IBC.

A three-judge bench of Chief Justice Dhananjaya Y Chandrachud, Justice J B Pardiwala and Justice Manoj Misra highlighted a fundamental distinction between Part II and Part III of the IBC. It was noted that Part II, specifically Chapter II, was dedicated to the resolution of insolvencies of corporate entities, while Part III dealt with insolvency resolution and bankruptcy for individuals and partnership firms. The observation emphasized that these parts addressed distinct processes tailored to the resolution of insolvencies in different contexts, with Part II focusing on corporate entities and Part III addressing the insolvency concerns of individuals and partnership firms.

The bench further observed that the resolution professional in the context of individual or partnership insolvencies, as outlined in Chapter III of Part III of the Insolvency and IBC, did not possess an adjudicatory function according to Section 99. The resolution professional's role, as specified in Section 99, was to gather relevant information based on the application, conduct necessary processes, and submit a report recommending the acceptance or rejection of the application. The expressions ‘examine the application’, ‘ascertain and satisfy the requirements’ and ‘recommend the acceptance or rejection of the application’ made it clear that the resolution professional's role was purely recommendatory and did not involve performing adjudicatory functions or arriving at binding conclusions on facts.

The bench also observed that Clause (b) of sub-section (1) of Section 14 empowered 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. Importantly, the moratorium under Section 14 operated based on the order passed by an adjudicating authority. The purpose of the moratorium under Section 96 was protective in nature, aiming to insulate the corporate debtor from the initiation or continuation of legal actions or proceedings concerning the debt.

The bench expressed the considered view 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 significantly contributes to its efficiency. The bench highlighted two key aspects: firstly, the resolution professional is only entitled to seek information strictly relevant to the examination of the application for Insolvency Resolution Process (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, imposes an obligation on the resolution professional to ensure the confidentiality of all information related to the insolvency process.

The bench held the view that the submission advocating for an adjudicatory role to be introduced at the stage of Section 97(5) cannot be accepted. The authority bestowed upon the adjudicating authority at the application filing stage is for the appointment of a resolution professional. This appointment serves a facilitative purpose outlined in Section 99, culminating in a report that either recommends the acceptance or rejection of the application. Considering the statutory scheme, the bench deemed it impermissible for the court to allow adjudicatory intervention by the adjudicating authority to determine what is described as a jurisdictional question at the Section 97(5) stage.

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With the above observations, the Court concluded that no judicial adjudication was involved in the stages outlined in Sections 95 to Section 99 of the IBC. The resolution professional appointed under Section 97 played a facilitative role, collating relevant facts for examining the application for the commencement of the insolvency resolution process. The report submitted to the adjudicatory authority was recommendatory in nature, suggesting whether to accept or reject the application.

Further, the argument that a hearing should be conducted by the adjudicatory authority for determining jurisdictional facts at the stage of appointing a resolution professional under Section 97(5) of the IBC was rejected. It was noted that no adjudicatory function was contemplated at that stage, and introducing such a requirement would have amounted to rewriting the statute. The resolution professional could use the powers under Section 99(4) of the IBC to examine the application for insolvency resolution and gather information relevant to the application to facilitate the submission of the report recommending its acceptance or rejection. There was no violation of natural justice under Sections 95 to 100 of the IBC, as the debtor was not deprived of an opportunity to participate in the examination process by the resolution professional. No judicial determination occurred until the adjudicating authority decided under Section 100 whether to accept or reject the application. The report of the resolution professional was merely recommendatory and did not bind the adjudicatory authority when exercising its jurisdiction under Section 100.

The bench held that the adjudicatory authority had to observe the principles of natural justice when exercising jurisdiction under Section 100 to determine whether to accept or reject the application. The purpose of the interim-moratorium under Section 96 was to shield the debtor from further legal proceedings. The provisions of Sections 95 to 100 of the IBC were not unconstitutional as they did not violate Article 14 and Article 21 of the Constitution.

Consequently, the present writ petitions were dismissed.