Dilip B Jiwrajka Vs. Union of India: Supreme Court upholds validity of Section 95 -100 of  IBC

Three hundred and eighty four petitions had been filed before the Supreme Court challenging the validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court held valid those provisions in Dilip B Jiwrajka vs. Union of India & Others (Writ Petition (Civil) No 1281 of 2021).

Section 95 -100 falls under Chapter III of Part III of the Code providing for Insolvency Resolution Process for individual and partnership firms. These provisions came into prominence when Central Government notified various provisions for initiating insolvency and bankruptcy proceeding against personal guarantors of Corporate Debtor in 2019 which was challenged in Lalit Kumar Jain Vs. Union of India  (Transferred  Case (Civil) No. 245/2020)  and which was upheld  by the Supreme Court.

Section 95 empowers a Creditor to file application for initiating Insolvency Resolution Process either by himself or through a Resolution Professional. Section 96 provides for Interim Moratorium from the date of application under Section 94 or 95. Under Section 98, the Adjudicating Authority can appoint the Resolution Professional through whom the Application has been filed or Resolution Professional recommended by the Board in case the Application has been filed by Creditor or debtor himself. The Adjudicating Authority has been empowered under Section 98 to replace the Resolution Professional. Section 99 empowers the Resolution Professional to examine the application within 10 days of his appointment and seek relevant information from the Debor, Creditor or any other person in connection with the application. After examination of the Application, the Resolution Professional has to prepare a report recommending the Adjudicating Authority for acceptance or rejection of the Application.

Grounds of Challenge

Aforesaid provisions were challenged before the Supreme Court  interalia on following grounds:

• Judicial aspect is involved even before the Resolution Professional begins the task outlined in Section 99, for determining the jurisdictional requirements for the existence and continuity of a debt.
• Following the appointment of the resolution professional under Section 97(5), wide-ranging powers are granted by Section 99(4) to demand information not only from the debtor but also from third parties
• Without incorporating a requirement for a hearing before the adjudicating authority prior to the appointment of a resolution professional, the provisions of Sections 95 to 100 would be arbitrary and violative of Article 14.

Findings of the Court

The Supreme Court rejected the constitutional challenge to the Code on following grounds.

The Supreme Court noticed thatPart II of the IBC, on one hand, and Part III, on the other, deal with distinct processes for the resolution of insolvencies. The former deals with resolution of insolvencies of corporate entities, whereas the latter deals with the resolution of insolvencies of individuals and partnership firms.

The Supreme Court observed that the Resolution Professional does not perform any adjudicatory function. The power of Resolution Professional under Part III is not as comprehensive as in the case of his counterpart under Part II. The role under Section 99 which is ascribed to the resolution professional is that of a facilitator and is to gather relevant information on the basis of the application which has been submitted under Section 94 or Section 95 and after carrying out the process which is referred to in sub-section (2), sub-section (4) and sub-section (6) of Section 99, to submit a report recommending the acceptance or rejection of the application. Significantly, the statute has used the expression “examine the application”, “ascertain” and “satisfies the requirements” and “recommend” the acceptance or rejection of the application. The use of these expressions leaves no manner of doubt that the resolution professional is not intended to perform an adjudicatory function or to arrive at binding conclusions on facts. The role of the resolution professional is purely recommendatory in nature and cannot bind the creditor, the debtor or, the adjudicating authority.

The Supreme Court noted that default amount for initiating   insolvency proceedings  in case of Individual and Partnerships is one thousand rupees or any amount which the Central Government may specify, not exceeding one lakh rupees. The Adjudicating Authority will be inundated if all such defaults are judicially determined. Relevant para is as under:

55. This distinction between the role of the resolution professional in a CIRP under Part II, and an IRP under Part III is of crucial importance. The reason why the legislature has chosen it fit to interpose the function of the resolution professional even before the adjudicating authority under Section 100 comes, is that the application under Section 94 or Section 95, is sought to be moved principally against an individual or a partnership. In terms of Section 78, Part III applies to individuals or partnership firms where the amount of default is not less than one thousand rupees or any amount which the Central Government may specify, not exceeding one lakh rupees. The adjudicating authority would be inundated if all amounts of alleged defaults as low as one thousand rupees were to be judicially determined. Bearing in mind the nature and context of the insolvency resolution, the legislature has stepped in by providing an intermediate stage where the resolution professional will collate and compile the relevant materials and submit it in the form of a report to the adjudicating authority recommending either the acceptance or the rejection of the application for initiating insolvency.

The Supreme Court further observed that the purpose of interim moratorium under Section 96 is protective. 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.

The Court also held that the difference in  the role of resolution professional, the imposition of moratorium and role of adjudicating authority under Part III  is 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

The Court noted that there is no violation of principles of natural justice as Debtor is engaged at various levels. Relevant para is as under:

The legislature has evidently made provisions in Section 99, as we have construed earlier, to allow for the engagement of the debtor with the resolution professional before a report is submitted to the adjudicating authority. The process under Section 100 before the adjudicating authority must be compliant with the principles of natural justice. The adjudicating authority is duty bound to hear the person against whom an application has been filed under Section 94 or Section 95 before it comes to the conclusion as to whether the application should be admitted or rejected. The duty of the adjudicating authority to furnish a hearing attaches to its role and function as an authority which is entrusted to decide questions of law and fact and to arrive at a conclusion on either to admit or reject the application filed by the debtor or the creditor under Chapter III of Part III.

The Court finally concluded that the impugned provisions of the IBC do not suffer from any manifest arbitrariness so as to offend Article 14 of the Constitution.

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