On November 9, 2023, a 3-Judge Bench of the Supreme Court reviewed over 350 writ petitions and upheld the constitutionality of Sections 95 to 100 in Part III of the IBC, which govern the insolvency resolution process for individuals and partnership firms. These sections allow either a debtor (under Section 94) or a creditor (under Section 95) to initiate insolvency proceedings. An interim moratorium begins from the date of filing, and a resolution professional (RP) is appointed under Section 97 to assess the application and make recommendations to the adjudicating authority. The adjudicating authority then issues an order under Section 100 to accept or reject the application.
The petitions argued that the automatic imposition of an interim moratorium and appointment of a resolution professional (RP) based solely on applications under Sections 94 and 95 of the IBC, without a personal hearing for the debtor, violated natural justice and was arbitrary, thus contravening Article 14 of the Constitution of India. The petitioners requested that principles of natural justice be applied before these measures are enacted. The petitioners further argued that the process under Part III of the IBC should include a determination of jurisdictional issues, such as the validity and collectability of the debt, before appointing a resolution professional (RP) as outlined in Section 99. They compared this with Part II of the IBC, which involves judicial adjudication before imposing a moratorium and appointing an interim RP, arguing that the discrepancy between the two parts is arbitrary and violates Article 14 of the Constitution. They also criticized the broad, unrestricted powers given to the RP to request information, including from third parties, without a prior personal hearing for the debtor. The petitioners further contended that the automatic moratorium under Section 96 harms the debtor’s reputation, creditworthiness, and fundamental rights under Article 19(1)(g) of the Constitution. They noted that such a moratorium could trigger defaults in lending agreements, leading to significant legal and financial repercussions.
The Supreme Court examined Sections 95 to 100 of the IBC and upheld their constitutionality, finding no violation of Article 14. The Court clarified that, under Section 97, the adjudicating authority's role is limited to appointing a resolution professional (RP), who is responsible for gathering information and preparing a report under Section 99. The adjudicating authority's decision-making role begins only under Section 100. The Court noted that requiring jurisdictional determinations or personal hearings before Section 100 would disrupt the IBC's timelines and render Sections 99 and 100 redundant. It emphasized that the RP’s role is facilitative and that Section 99(2) ensures the debtor’s right to representation. The Court also clarified that the RP’s inquiries must be relevant to the application and not overly broad. Judicial review under Section 100 must follow principles of natural justice, including providing a personal hearing. The Court supported the view that the IBC’s timelines and structures are intentionally distinct for corporate entities and individuals, with the interim moratorium under Section 96 serving the debtor’s benefit and reflecting the legislature’s careful differentiation between corporate and individual cases.
Dilip B. Jiwrajka v. Union of India
2023 SCC OnLine SC 1530.
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