Supreme Court upholds constitutionality of Sections 95 to 100 of IBC

Supreme Court upholds constitutionality of Sections 95 to 100 of IBC

States that the provisions did not violate Articles 14 and 21 of the Indian Constitution

The Supreme Court has upheld the constitutionality of Sections 95 to 100 of the Insolvency and Bankruptcy Code (IBC), 2016 while rejecting the petitions that challenged their validity.

In a batch of 384 petitions, the petitioners had contested the legality of the Sections under Article 32 of the Constitution of India.

A three-judge bench comprising Chief Justice Dhananjaya Y Chandrachud, Justice JB Pardiwala, and Justice Manoj Misra highlighted a fundamental distinction between Part II and Part III of the IBC.

It explained that Part II (Chapter 2), was dedicated to the resolution of insolvencies of corporate entities, while Part III dealt with insolvency resolution and bankruptcy for individuals and partnership firms. These addressed distinct processes tailored to the resolution of insolvencies in different contexts.

The Court observed that in the context of individual or partnership insolvencies, as outlined in Part III (Chapter 3), the resolution professional (RP) did not possess an adjudicatory function according to Section 99. His role was to gather relevant information based on the application, conduct necessary processes, and submit a report recommending the acceptance or rejection of the application.

It added that from the expressions ‘examine the application’, ‘ascertain and satisfy the requirements’, and ‘recommend the acceptance or rejection of the application’, it was clear that the RP's role was purely recommendatory and did not involve performing adjudicatory functions or arriving at binding conclusions on facts.

The bench held that Section 14, Clause (b) of sub-section (1) empowered the adjudicating authority (AA) 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.

Importantly, the moratorium operated based on the order passed by the AA. Under Section 96, its purpose was protective in nature. It aimed to insulate the corporate debtor from the initiation or continuation of legal actions or proceedings concerning the debt.

The judges stated that the RP, operating under the regulatory oversight of the Board, played a vital role in the effective functioning of the insolvency process and contributed to its efficiency.

They highlighted two key aspects. One, the RP was only entitled to seek information strictly relevant to the examination of the application for the Insolvency Resolution Process (IRP). Two, regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with para 21 of the First Schedule, imposed an obligation on the RP to ensure the confidentiality of all information related to the process.

The bench stated that the submission advocating for an adjudicatory role to be introduced at the stage of Section 97(5) could not be accepted. The authority bestowed upon the AA at the application filing stage was for the appointment of an RP. This served a facilitative purpose outlined in Section 99, culminating in a report that either recommended the acceptance or rejection of the application.

Thus, considering the statutory scheme, the Court held that it was impermissible to allow the AA’s intervention to determine what was described as a jurisdictional question at the stage of Section 97(5).

The judges pointed out that no judicial adjudication was involved in the stages outlined in Sections 95 to Section 99. The RP 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 AA was recommendatory, enquiring whether the application should be accepted or rejected.

The bench rejected the argument that a hearing should be conducted by the AA to determine the jurisdictional facts at the stage of appointing an RP under Section 97(5) of the IBC. It noted that no adjudicatory function was contemplated at that stage and introducing such a requirement amounted to rewriting the statute.

The Apex Court added that the RP could use the powers under Section 99(4) to examine the application for insolvency resolution and gather information relevant to the application. This was to facilitate the submission of the report recommending its acceptance or rejection. There was no violation of natural justice under Sections 95 to 100, as the debtor was not deprived of an opportunity to participate in the examination process.

The bench expressed that no judicial determination occurred until the AA decided under Section 100 whether to accept or reject the application. The RP’s report was merely recommendatory. It did not bind the AA when exercising its jurisdiction.

Thus, while dismissing the writ petitions, the top Court held that the AA needed 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 were not unconstitutional, as they did not violate Articles 14 and 21 of the Indian Constitution.