On Thursday, 9th November, the Supreme Court upheld the constitutional validity of the provisions of the Insolvency and Bankruptcy Code (IBC), 2016, relating to Personal Guarantors’s Insolvency Resolution. The petitioners including Reliance ADA Group chairman Anil Ambani challenged on the grounds of violating principles of natural justice and absence of due process.
A bench comprised of Chief Justice of India (CJI) DY Chandrachud, Justices JB Pardiwala and Manoj Misra issued a ruling on a batch of more than 200 petitions challenging Sections 95(1), 96(1), 97(5), 99(1), 99(2), 99(4), 99(5), 99(6), and 100 of the IBC. The Supreme Court rejected the challenge and reaffirmed that the IBC was constitutionally valid and that its provisions were not arbitrary, as the petitioners claimed.
“IBC cannot be held to be operating in a retroactive manner in order to hold it violative of the constitution. Thus we hold that the statute does not suffer from the vices of manifest arbitrariness,” the Court said.
The Supreme Court bench ruled that it could not read an adjudicatory role into these rules and that changing the adjudicatory role would render the entire chronological procedure null and void. Changing the Court’s adjudicatory role under these clauses would amount to “rewriting the legislative functions.”
The Court stated that the implementation of natural justice principles cannot be considered as a straightjacket and that it might vary depending on the situation.
“In one case, it can be full-fledged evidentiary hearing and in some, a bare minimum is given to explain the nature of allegations,” the Supreme Court said.
The bench stated that “sufficient safeguards” have been read into the way a resolution professional (RP) functions during an insolvency proceeding.
“Parliament has not contemplated a roving enquiry by the resolution professional, but an enquiry for recommendation. The resolution professional, after carrying out process, is required to make an ascertainment in terms of clause (6). The process which takes place before the resolution professional is not ex parte and the legislature has ensured that even for a recommendation made, there is explanation taken from the debtor for the purpose,” the Court said.
The Court agreed with the Central government’s submissions made by Solicitor General Tushar Mehta, that the IBC provisions putting a stay on other legal procedures against corporate debtors were for the interest of the debtors.
Back in 2021, the Supreme Court affirmed the rules of the Insolvency and Bankruptcy Code relating to the insolvency of personal guarantors, which went into effect in 2019.
Notably, the Insolvency and Bankruptcy Code (IBC) 2016, is a bankruptcy law in India brought by the Narendra Modi-led NDA government seeking to consolidate the existing framework by creating a single Law for Insolvency and Bankruptcy. The Code provides a time-bound process for resolving insolvency in companies and among individuals resulting in much-needed impetus to solving the problem of stressed assets and NPAs in the financial sector of the country.
