DILIP B. JIWRAJKA VS UNION OF INDIA,2023 SC 1530.

Author: Jaskeerat Singh, Law student at Christ University, Bangalore

Edited by: Jahnvi Goel, Law student at Amity University.

  1. ABSTRACT / HEADNOTE

In the landmark case of Dilip B. Jiwrajka vs Union of India[1], the Supreme Court of India affirmed the constitutional validity of Sections 95 through 100 of the Insolvency and Bankruptcy Code (IBC), 2016. This ruling addressed legal challenges regarding the constitutionality of these sections under Articles 14 and 21 of the Indian Constitution, specifically concerning the commencement of insolvency procedures, the function of the resolution professional, and the handling of debtors during the process. The petitioners argued against the necessity of insolvency resolution procedures specifically for individuals, contending that existing procedures for corporations were sufficient and constitutionally sound. They also raised issues regarding the resolution professional’s broad powers to access information and the automatic imposition of a moratorium upon filing an insolvency application, suggesting these measures could harm the debtor’s creditworthiness and infringe upon natural justice. The respondents, however, defended the IBC’s structure, emphasizing its efficiency and the facilitative role of the resolution professional, who is not bound by their recommendations. They also highlighted the distinction between the moratorium under Section 96 and similar provisions, asserting it protects the debtor from legal actions but not the debt itself.

The Supreme Court’s decision reaffirmed the constitutionality of the IBC’s provisions, noting that the process under Sections 95-99 involves no judicial adjudication and that the resolution professional acts in a facilitative capacity. It clarified that the adjudicatory authority, while not bound by the resolution professional’s recommendations, must adhere to the principles of natural justice when deciding on the application. The court also underscored the interim moratorium’s purpose to safeguard the debtor from further legal proceedings.

This judgment is crucial for the insolvency regime, aiming to clear a backlog of pending applications against guarantors, thereby facilitating debt recovery for creditors and enhancing their trust in the system. However, critics argue that the judgment overlooks potential violations of natural justice and could hinder credit flow if personal guarantors’ rights are insufficiently protected, posing risks to Indian corporations.

  1. CASE DETAILS

 

        i)            Judgement Cause Title / Case Name Dilip B. Jiwrajka v. Union of India and Ors.
      ii)            Case Number Writ Petition (Civil) No 1281 of 2021
    iii)            Judgement Date November 9, 2023
    iv)            Court Supreme Court of India
      v)            Quorum / Constitution of Bench Division Bench- three-judge bench
    vi)            Author / Name of Judges Justice Dr. D.Y. Chandrachud, Justice J.B Pardiwala, and Justice Manoj Mishra
  vii)            Citation Dilip B. Jiwrajka v. Union of India, 2023 SC 1530.
viii)            Legal Provisions Involved Constitution of India, Arts.21, Arts. 14, Arts. 32, Insolvency and Bankruptcy Code, 2016, S. 95, S. 96, S.97, S.98, S.99, S.100.
  1. INTRODUCTION AND BACKGROUND OF JUDGEMENT

Introduced in 2016, the Insolvency and Bankruptcy Code (IBC) of India revolutionized the way insolvencies among businesses, corporations, and individuals are handled by establishing clear deadlines and integrating various existing laws into a single, modern framework. This legislative overhaul replaced outdated practices that often resulted in prolonged procedures. Specifically, Part III of the IBC deals with insolvency resolution and bankruptcy processes for individuals and partnerships, with Chapter III titled “Insolvency Resolution Process” covering Sections 94 through 120. Prior to the IBC, the management of individual insolvencies was governed by the Presidency Towns Insolvency Act of 1909 and the Provincial Insolvency Act of 1920, both of which have since been repealed.

Under the IBC, the insolvency process starts with a creditor submitting an application to the National Company Law Tribunal (NCLT), specifying the amount of unpaid debt under Section 95.

Once filed, a moratorium is placed on legal proceedings related to debt under Section 96. Debtors cannot be heard at this stage.

Under Section 97,NCLT appoints a resolution professional nominated by the Insolvency and Bankruptcy Board of India (IBBI) to examine the application.

The resolution professionals prepare a report recommending accepting or rejecting the application as authorized under Section 99. Debtors are not involved in this process.

Based on the report, Under Section 100 NCLT formally accepts or rejects the application.

In this scenario, individuals invoking Article 32 of the Indian Constitution submitted a total of 384 petitions. Despite this, the Supreme Court maintained that the regulations pertaining to the Insolvency Resolution Process were neither capricious nor violated the fundamental rights to natural justice as outlined in Article 21, according to Article 14 of the Constitution.

  1. FACTS OF THE CASE

The Union Government implemented the provisions of Part III of the IBC (excluding those related to the “Fresh Start Process” for specific individuals. IBC extends its provisions to personal guarantors of corporate debtors. Following the authority granted under Section 1(3), the Union Government’s Ministry of Corporate Affairs issued a notification on November 15, 2019, activating several sections including Section 2(e), Section 78 (excluding aspects related to the fresh start process), Section 79, Section 94 through 187, Sections 239(2)(g), (h), and (i), Sections 239(2)(m) to (zc), Section 239(2)(zn) to (zs), and Section 249. This notification faced legal challenges in the case of Lalit Kumar Jain v Union of India[2], where a two-judge panel clarified that the release of a corporate debtor does not automatically absolve a guarantor of their obligations.

Through the enactment of Amendment Act 26 of 2018, Parliament made changes that expanded the jurisdiction of the National Company Law Tribunal (NCLT) under Section 60. These modifications empower the National Company Law Tribunal (NCLT) to manage situations involving the insolvency of either a corporate guarantor or a personal guarantor linked to a corporate debtor.

Concurrently, several Writ Petitions have been submitted to the Supreme Court questioning the constitutionality of specific clauses based on allegations that they violate the principles outlined in Articles 14 and 21 of the Indian Constitution.

  1. LEGAL ISSUES RAISED

i)Does Section 95 through Section 100 of the Insolvency and Bankruptcy Code (IBC), which outlines the procedure for initiating the insolvency resolution process against an individual debtor by a creditor, constitute an arbitrary action in violation of Article 14 of the Indian Constitution?

  1. ii) Are the principles of natural justice, as enshrined in Article 21 of the Indian Constitution, applicable to the proceedings governed by Sections 95 to 100 of the IBC?
  1. PETITIONER/ APPELLANT’S ARGUMENTS

The Petitioner challenged the validity of Section 95 to 100 under Part III of IBC on the following grounds:

  • The counsel for Petitioner argued before this esteemed court that the Insolvency and Bankruptcy Code (IBC) requires the Adjudicating Authority to first establish the existence of a debt before initiating insolvency procedures, such as filing for insolvency, designating a resolution professional, or authorizing any actions by the resolution professional. Neglecting to perform this preliminary assessment would contravene the principles of natural justice. It is imperative for the adjudicating authority to verify, at the outset, both the validity of the asserted debt and its potential discharge before advancing with further steps.
  • The counsel for Petitioner submitted that separate insolvency resolution procedures for individuals under IBC are unnecessary as procedures for corporations are already well-established and constitutionally valid.
  • The counsel for Petitioner submitted that the resolution professional’s powers to access information from guarantors and third parties are unfettered and can adversely impact the creditworthiness of the debtor.
  • The counsel for petitioner argued against the immediate imposition of an automatic stay and provisional measures such as designating a resolution professional and permitting them to present a report simply upon the submission of an insolvency petition. They advocated for these steps to be delayed until the court confirms the presence of a genuine debt and debtor-creditor relationship.
  1. RESPONDENT’S ARGUMENTS
  • The counsel for the respondent argued that incorporating an adjudicative phase to verify the presence of debt upon the appointment of the Resolution Professional (RP) could compromise the efficiency of the insolvency resolution process, which is fundamentally aimed at being time-sensitive according to the Insolvency and Bankruptcy Code (IBC).
  • Additionally, they contended that the protective period granted under Section 96 of the Code differs substantially from those outlined in Sections 14 and 101, implying varying practical effects.
  • The counsel for Respondent submitted that Under Section 101(2), the debtor gets an opportunity to be heard before the adjudicating authority while it considers the RP’s report.
  • The counsel for Respondent submitted thatthe RP’s job during the interim phase is merely facilitative and not adjudicatory.The adjudicating authority is not bound to follow the RP’s recommendations.
  • The counsel for Respondent submitted that The RP’s inspection powers under Section 99(4) are limited and only “in connection with the application”, narrowing its scope of inquiry.

 

  1. RELATED LEGAL PROVISIONS
  • Constitution of India
  • Article 21:-“Protection of life and personal liberty. No person shall be deprived of his life or personal liberty except according to procedure established by law”.[3]
  • Article 14:-“Equality before the law, The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex, or place of birth”.[4]
  • Article 32:-“ Remedies for enforcement of rights conferred by this Part.The right to move the Supreme Court by appropriate proceedings for the enforcement of the rights conferred by this Part is guaranteed.

The Supreme Court shall have the power to issue directions or orders or writs, including writs like habeas corpus, mandamus, prohibition, quo warranto, and certiorari, whichever may be appropriate, for the enforcement of any of the rights conferred by this Part.

Without prejudice to the powers conferred on the Supreme Court by clause (1) and (2), Parliament may by law empower any other court to exercise within the local limits of its jurisdiction all or any of the powers exercisable by the Supreme Court under clause (2)”.

The right guaranteed by this article shall not be suspended except as otherwise provided for by this Constitution.[5]

  • Insolvency and Bankruptcy Code, 2016

 

  • Section 95- “Application by a creditor to initiate insolvency resolution process”.[6]
  • Section 96- “Interim moratorium”.[7]
  • Section 97- “Appointment of resolution professional”.[8]
  • Section 98- “Replacement of resolution professional”.[9]
  • Section 99- “Submission of report by resolution professional”.[10]
  • Section 100- “Admission or rejection of application”.[11]

 

  1. JUDGEMENT

The Supreme Court’s judgment can be summed up in the following sub-points:

Nature of the Process under Sections 95-99 IBC

  • No judicial adjudication is involved at the stages under Sections 95-99 of the Insolvency and Bankruptcy Code (IBC).
  • The resolution professional plays a facilitative role in collating facts and submitting a recommendation report to the adjudicatory authority.

Role of the Adjudicatory Authority

  • No need for the adjudicatory authority to conduct a hearing to determine “jurisdictional facts” when appointing a resolution professional under Section 97(5).
  • The adjudicatory body has the ultimate say on decisions made under Section 100, regardless of the recommendations presented by the resolution professional. Additionally, when deliberating on accepting or rejecting applications under Section 100, the adjudicatory authority must adhere to the principles of natural justice.

Powers of the Resolution Professional

  • The resolution professional can exercise powers under Section 99(4) to examine the application and gather relevant information for the recommendation report.

Participation of the Debtor

  • No violation of natural justice as the debtor can participate in the examination process by the resolution professional.

Purpose of Interim Moratorium

  • The purpose of the interim moratorium under Section 96 is to protect the debtor from further legal proceedings.

Constitutionality

  • The provisions in Sections 95-100 of the IBC are constitutional and do not violate Articles 14 and 21 of the Indian Constitution

 

  1. CONCLUSION & COMMENTs

The Supreme Court judgment on the insolvency regime for personal guarantors is significant for all stakeholders, as it aims to facilitate the disposal of a large number of pending applications against guarantors, aiding creditors’ debt recovery and boosting their confidence in the system. However, I argue that the judgment fails to address the logical flaws in the Scheme under Part III of the Insolvency and Bankruptcy Code and its potential violation of the principle of natural justice, which could pose a serious hindrance to the flow of credit in the future if the rights of personal guarantors are not sufficiently protected, as this may prove detrimental to Indian corporates.

  1. REFERENCES
  • Lalit Kumar Jain v Union of India, (2021) 9 SCC 321.
  • Insolvency and Bankruptcy Code, 2016.

[1] Dilip B. Jiwrajka v. Union of India, 2023 SC 1530.

[2] Lalit Kumar Jain v Union of India, (2021) 9 SCC 321.

[3] INDIA CONST. art. 21.

[4] INDIA CONST. art. 14.

[5] INDIA CONST. art. 32.

[6] Insolvency and Bankruptcy Code, 2016, §95, No. 31, Acts of Parliament, 2016(India).

[7] Insolvency and Bankruptcy Code, 2016, §96, No. 31, Acts of Parliament, 2016(India).

[8] Insolvency and Bankruptcy Code, 2016, §97, No. 31, Acts of Parliament, 2016(India).

[9] Insolvency and Bankruptcy Code, 2016, §98, No. 31, Acts of Parliament, 2016(India).

[10] Insolvency and Bankruptcy Code, 2016, §99, No. 31, Acts of Parliament, 2016(India).

[11] Insolvency and Bankruptcy Code, 2016, §100, No. 31, Acts of Parliament, 2016(India).