2024 (1) TMI 33 - SC - Insolvency and Bankruptcy

Constitutional validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code 2016 - time bound resolution of insolvency - comparison between the stages of Part II and Part III of the IBC - role of the resolution professional in corporate as opposed to individual insolvency - impact of a moratorium under Section 14 of Part II, on one hand, and an interim-moratorium under Section 96 of Chapter III of Part III - role of the adjudicating authority in applications under Part II, on one hand, and Part III, on the other. HELD THAT - The conclusion of this judgment is summarised below (i) No judicial adjudication is involved at the stages envisaged in Sections 95 to Section 99 of the IBC; (ii) The resolution professional appointed under Section 97 serves a facilitative role of collating all the facts relevant to the examination of the application for the commencement of the insolvency resolution process which has been preferred under Section 94 or Section 95. The report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application; (iii) The submission that a hearing should be conducted by the adjudicatory authority for the purpose of determining jurisdictional facts at the stage when it appoints a resolution professional under Section 97(5) of the IBC is rejected. No such adjudicatory function is contemplated at that stage. To read in such a requirement at that stage would be to rewrite the statute which is impermissible in the exercise of judicial review; (iv) The resolution professional may exercise the powers vested under Section 99(4) of the IBC for the purpose of examining the application for insolvency resolution and to seek information on matters relevant to the application in order to facilitate the submission of the report recommending the acceptance or rejection of the application; (v) There is no violation of natural justice under Section 95 to Section 100 of the IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional; (vi) No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The report of the resolution professional is only recommendatory in nature and hence does not bind the adjudicatory authority when it exercises its jurisdiction under Section 100; (vii) The adjudicatory authority must observe the principles of natural justice when it exercises jurisdiction under Section 100 for the purpose of determining whether to accept or reject the application; (viii) The purpose of the interim-moratorium under Section 96 is to protect the debtor from further legal proceedings; and (ix) The provisions of Section 95 to Section 100 of the IBC are not unconstitutional as they do not violate Article 14 and Article 21 of the Constitution. Petition dismissed.

Summary

Issues Involved:
1. Constitutional Validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code (IBC) 2016
2. Role and Functions of the Resolution Professional
3. Applicability of Principles of Natural Justice
4. Impact of Moratorium under Section 96

Summary:
1. Constitutional Validity of Sections 95 to 100 of the Insolvency and Bankruptcy Code (IBC) 2016
The 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 Professional
The 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 Justice
The 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 96
The 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.