2024 (1) TMI 33 - SC - IBC

Supreme Court validates Sections 95-100 of Insolvency and Bankruptcy Code 2016 constitutional validity upheld

The SC upheld the constitutional validity of Sections 95-100 of the Insolvency and Bankruptcy Code 2016. The court ruled that no judicial adjudication ... Natural justice (audi alteram partem) - Role and functions of the resolution professional under Section 99 - Appointment of a resolution professional under Section 97(5) - Interim moratorium under Section 96 (debt-focused) - Moratorium under Section 14 (corporate debtor-focused) - Adjudicatory role of the Adjudicating Authority under Section 100 - Constitutionality of Sections 95-100 of the IBC vis-a -vis Articles 14 and 21Role and functions of the resolution professional under Section 99 - Appointment of a resolution professional under Section 97(5) - The resolution professional under Section 99 performs a facilitative, recommendatory role and does not exercise an adjudicatory function; appointment under Section 97(5) is for facilitation and not for judicial determination of issues of jurisdiction or of the existence of debt. - HELD THAT: - The Court contrasted Part II (corporate insolvency) and Part III (individual/partnership insolvency) and found the statutory language and scheme deliberate: Section 99 requires the resolution professional to 'examine', 'ascertain' and 'recommend' within fixed timelines, and the report is recommendatory only. Unlike the interim resolution professional in Part II who assumes management powers, the resolution professional under Chapter III is not empowered to take over assets or make binding adjudications; the appointment at Section 97(5) is to enable collation of facts for the adjudicating authority and to avoid inundating the Tribunal with low-value claims. [Paras 54, 55, 56, 61, 86]The resolution professional's role is facilitative and recommendatory; no adjudicatory function is vested in the resolution professional under Sections 97-99.Natural justice (audi alteram partem) - Adjudicatory role of the Adjudicating Authority under Section 100 - There is no requirement to read in a judicial hearing by the Adjudicating Authority at the stage of appointment of the resolution professional; the obligation to observe principles of natural justice arises when the Adjudicating Authority exercises jurisdiction under Section 100 to admit or reject the application. - HELD THAT: - The Court held that the adjudicatory decision-making function commences under Section 100 after receipt of the resolution professional's report. Principles of natural justice are flexible and must be observed by the adjudicating authority at the stage of admission or rejection; but reading a pre-Section 100 adjudicatory hearing into Section 97(5) would re-write the statute, disrupt the tightly drawn timelines and render the statutory intermediary process under Section 99 otiose. [Paras 72, 73, 74, 80, 86]No requirement for a pre-appointment adjudicatory hearing; the Adjudicating Authority must observe natural justice when deciding under Section 100.Interim moratorium under Section 96 (debt-focused) - Moratorium under Section 14 (corporate debtor-focused) - The interim moratorium under Section 96 operates in respect of the debt (to stay legal proceedings in respect of that debt) and is distinct in nature and effect from the moratorium under Section 14 which operates on the corporate debtor and its assets. - HELD THAT: - Section 96's interim-moratorium commences on filing and ceases on admission; its language 'in respect of any debt' shows parliamentary intent to protect the process concerning the particular debt rather than to freeze the debtor's assets or management. By contrast Section 14 (Part II) operates on the corporate debtor, suspending management powers and restraining alienation of assets. The differing effects justify the differing procedural roles of resolution professionals and adjudicating authorities in Parts II and III. [Paras 57, 58, 59, 60, 86]Section 96 interim-moratorium is debt-focused and distinct from Section 14 corporate moratorium; its protective effect does not amount to the asset-freeze consequences of Section 14.Power of the resolution professional to seek information under Section 99(4) - Right to privacy and proportionality under Article 21 - A resolution professional may seek information or explanations relevant to examination of the application under Section 99(4); such power is subject to relevance, confidentiality obligations and Article 21 proportionality constraints and does not by itself violate privacy rights. - HELD THAT: - The Court read Section 99(4) as permitting requests for information 'in connection with the application' and not as empowering roving enquiries. Regulatory provisions and the Board's oversight impose confidentiality duties on resolution professionals. Applying the K.S. Puttaswamy proportionality framework, the Court found seeking personal financial information in aid of a legitimate insolvency process is a lawful, legitimate aim and proportionate where limited to material relevant to the application. [Paras 71, 75, 77, 81, 86]Requests for information by a resolution professional are permissible if relevant to the application, subject to confidentiality and Article 21 proportionality.Constitutionality of Sections 95-100 of the IBC vis-a -vis Articles 14 and 21 - Sections 95 to 100 of the IBC are not unconstitutional and do not contravene Articles 14 or 21 of the Constitution. - HELD THAT: - On the scheme and guarantees provided by the statute - the recommendatory nature of the resolution professional's report, the time-bound adjudicatory role under Section 100 with an obligation to observe natural justice, the limited and relevant scope of information-gathering under Section 99, and safeguards of confidentiality - the Court concluded there is an intelligible differentia between Parts II and III and proportional limits on privacy intrusions. Consequently, the impugned provisions do not manifest arbitrariness nor disproportionate invasion of privacy. [Paras 80, 81, 82, 85, 86]Sections 95-100 are constitutionally valid under Articles 14 and 21.Final Conclusion: Writ petitions challenging Sections 95-100 of the Insolvency and Bankruptcy Code, 2016 are dismissed. The Court upholds the statutory scheme: a resolution professional under Section 99 performs a facilitative, recommendatory role and may seek information relevant to the application subject to confidentiality and proportionality; no adjudicatory hearing is required at the stage of appointment under Section 97(5); judicial adjudication and the obligation to observe natural justice arise when the Adjudicating Authority decides under Section 100; and Sections 95-100 are not unconstitutional under Articles 14 or 21. Issues Involved:1. Constitutional Validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code (IBC) 20162. Role and Functions of the Resolution Professional3. Applicability of Principles of Natural Justice4. Impact of Moratorium under Section 96Summary:1. Constitutional Validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code (IBC) 2016The petitioners challenged the constitutional validity of Sections 95 to 100 of the IBC, arguing that these sections are invasive and prejudicial. They contended that a judicial body must determine the existence of a debt before initiating insolvency proceedings and appointing a resolution professional. The Supreme Court held that the provisions are not unconstitutional and do not violate Articles 14 and 21 of the Constitution. The Court emphasized that the resolution professional's role is facilitative and not adjudicatory, and the adjudicating authority must observe natural justice principles when deciding to accept or reject an application under Section 100.2. Role and Functions of the Resolution ProfessionalThe Court distinguished the roles of resolution professionals under Part II and Part III of the IBC. In Part III, the resolution professional's role is limited to examining the application and submitting a recommendatory report to the adjudicating authority. The resolution professional does not have the power to take over the debtor's assets or business. The Court clarified that the resolution professional's function is to gather relevant information and recommend whether the application should be accepted or rejected, without binding the adjudicating authority.3. Applicability of Principles of Natural JusticeThe petitioners argued that the IBC provisions violate natural justice by not providing a hearing before appointing a resolution professional. The Court held that the principles of natural justice are flexible and must be tailored to the situation. The debtor is given an opportunity to engage with the resolution professional during the examination of the application. The adjudicating authority must observe natural justice principles when deciding under Section 100 whether to accept or reject the application. The Court found that the statutory framework does not result in a violation of natural justice.4. Impact of Moratorium under Section 96The Court analyzed the interim moratorium under Section 96, which takes effect upon filing an application and ceases upon admission of the application. The interim moratorium restrains legal actions in respect of the debt but does not affect the debtor's assets or legal rights. The Court distinguished this from the moratorium under Section 14, which has a broader impact on the corporate debtor. The interim moratorium is intended to protect the debtor from further legal proceedings while the application is being examined.Conclusion:The Supreme Court dismissed the writ petitions, holding that:- No judicial adjudication is involved at the stages envisaged in Sections 95 to 99.- The resolution professional's role is facilitative and recommendatory.- The adjudicating authority must observe natural justice principles when deciding under Section 100.- The interim moratorium under Section 96 protects the debtor from further legal proceedings.- Sections 95 to 100 of the IBC are not unconstitutional and do not violate Articles 14 and 21 of the Constitution.