-by Hanshika Tiwari
UPES, Dehradun
- Citation: 2023 INSC 1018.
- Case Number: W.P.(c) 519/22
- Judges: CJI D.Y. Chandrachud, J.B. Pardiwala J, Manoj Misra J
- Petitioner: Anil Dhirajlal Ambani
- Respondent: Union of India through Secretary Ministry of Law and Justice, Union of India through Secretary Ministry of Corporate Affairs, State Bank of India, Jitender Kothari Resolution Professional
Facts
The petitioner challenged several sections of the Insolvency Bankruptcy Code, 2020 (the Code or IBC), concerning to the personal guarantor to the corporate debtor. The petitioner was a personal guarantor in two loans taken by the Reliance Communications Ltd. and Reliance Infratel Ltd. that amounted to Rs.1200 Crores from State Bank of India. As per the laws, the personal guarantor is pay back to the creditors if the corporate debtor fails to repay.
The loan was of 2016, and on 26th August 2016, the loan accounts were classified to be a Non-Performing Assets (NPAs), meaning by a loan account on which principal amount has not been paid for a long period of time
Under IBC (the Code) the creditor can initiate Corporate Insolvency Resolution Process (CIRP) to recover the debt amount as per section 95. When the CIRP is initiated, the assets of both the corporate debtor and the guarantor are placed under interim moratorium as per section 96. The transfer, sale or any legal proceeding on the moratorium property is prohibited under the code, under section 97, a Resolution Professional is appointed to come up with a Resolution plan and pay the debts.
In the present case, SBI, the creditor filed for CIRP against the Reliance in the early 2020.
The NCLT Mumbai, on 20th August 2020, allowed the appointment of an interim resolution professional (RP) to recover debts. The tribunal also stated that actions may be taken the personal guarantor. For which the petitioner challenged the sections 95-97, 99 and 100 of the code, saying that, the sections are unconstitutional and violative of fundamental rights.
Issues Raised
- Do the debtor and personal guarantor have a right to know the grounds for accepting or rejecting an insolvency application under S.95?
- Does an order of interim moratorium by the resolution professional (under S.96) amount to an arbitrary exercise of power?
- Does the submission of the RP’s report under S.99, without providing a copy to the debtor and PG, violate principles of natural justice?
Contentions
Petitioner
Counsel, representing the petitioners, argues that before appointing a resolution professional under Section 97(5) of the IBC, the adjudicating authority must determine its jurisdiction by giving the debtor or personal guarantor a chance to be heard. This involves assessing whether a debt exists and whether it has been effaced. Also, the judicial determination should occur before the RP has begun their duty under section 99, to curb the wide powers they posses for getting the information from the debtor and the third parties as well.
The counsel, on behalf of the petitioner, has presented the case from two perspectives. Firstly, it is necessary for the decision authorities to establish a jurisdiction requirement for determining the existence of the debt and continuity before the resolution. A professional is involved. Secondly, it highlights that after appointing the resolution professional under the IBC, he gets extensive powers to obtain information from the debtor, and hence the judicial determination before reaching the outlined stage mentioned in Section 100 is crucial. The petitioner’s counsel also argues that a preliminary hearing is necessary to avoid arbitrariness or any violation of Article 14 through the provisions of Sections 95 to 100.
Respondents
The counsel, on behalf of the respondents, emphasized the importance of how insolvency resolution should be timely managed. The counsel distinguished between Part II, which deals with corporate insolvency, and Part III, which addresses individual and partnership firm insolvency. Under Sections 7 and 9, initiating corporate insolvency resolution triggers a Section 14 moratorium, impacting the corporate debtor’s asset management and requiring early adjudicatory involvement. On the contrary, the interim moratorium under Section 96 benefits the guarantor or debtor without imposing asset restrictions, unlike Section 14.
The counsel on behalf of the of the respondent emphasised that the role of the RP under Section 99 is not adjudicatory, but only to report the facts. The debtor has a role in stating the facts, so the RP may collect proof of debt payment and application compliance. The report by RP is non-binding in nature for the adjudicating authority. Natural justice principles are fully observed when the adjudicating authority decides under Section 100, which includes a hearing and potential adverse consequence.
Counsel for the respondents argued that natural justice must adapt to specific situations. Through highlighting the distinct objectives of CIRP under Part II, which involves removing existing management and potentially leading to liquidation, and Chapter III of Part III, which focuses on repayment plans, Chapter III provides provision for appointing a resolution professional before any adjudicatory function and preventing redundancy at the Section 99 stage. The resolution professional gathers information and examines the application without adjudicating. Sections 99(3), (6), and (9) ensure debtor involvement, upholding natural justice. It is also contended that the different provisions for corporate and individual insolvency are justified, meeting Article 14 of the Constitution’s requirements.
Judgement
The supreme court held that, there cannot be any judicial adjudication during the stages outlined in section 95 to 99 of the IBC. The RP is appointed to facilitate the application compliance via gathering the facts and debt existence under section 94 or 95. The report submitted by the RP is recommendatory, and non-binding. The requirement for a hearing to determine ‘jurisdictional facts’ when appointing a resolution professional under Section 97(5) is dismissed as no adjudicatory function is intended at this stage, and imposing such would exceed judicial review.
There exists no violation of natural justice principles under section 95 to 100, as debtor can participate in the examination process. Judicial determination only occurs when the adjudicating authority decides under Section 100, adhering to natural justice principles. The interim moratorium under Section 96 protects the debtor from further legal proceedings. Sections 95 to 100 of the IBC are constitutional, not infringing Articles 14 and 21. The writ petition was dismissed.
Rationale
In the judgement the justice(s) have analysed and stated in para 54, The resolution professional under Section 99 does not have an adjudicatory function. In Chapter III of Part III, which addresses individual or partnership insolvencies and bankruptcies, the legislature has interposed the resolution professional before the adjudicating authority’s function begins under Section 100. Unlike in Part II, the resolution professional in Part III does not have the power to take over the assets or business of the individual or partnership. The resolution professional’s role is purely facilitative, involving the collection of relevant information based on the application submitted under Sections 94 or 95. They must then submit a report recommending the acceptance or rejection of the application after performing tasks outlined in sub-sections (2), (4), and (6) of Section 99. The terms “examine the application,” “ascertain,” “satisfies the requirements,” and “recommend” in the statute make it clear that the resolution professional’s role is not adjudicatory and their recommendations are not binding on the creditor, debtor, or adjudicating authority. Therefore, the legislature is right on choosing the fit position of RP and IRP for the facilitation of the CIRP. Furthermore, the principles of natural justice are expandable and is applied with respect to facts and circumstances, in the present case the IRP has duty to report to the tribunal and there is chance be heard in later stage, in court of law or the tribunal.
Defects of law
The laws protect the creditors, as they were exploited for a long period and also, they are one losing money, however there might be some relief given to the debtors and the personal guarantors.
Inference
The case upheld the constitutionality of the IBC and relied upon various decided cases, also referring to the Lalit Kumar v. Union of India, the law has protected the creditors from exploitations, however, the personal guarantors are not relieved as the debtor in some manner.